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Millennials were teenagers or young adults when the worst financial crisis since the Great Depression hit, and our lives since have been marked by it. The crisis has been blamed, whether correctly or incorrectly, for everything from our growing student loan debt to our refusal or inability to buy houses. As a result, there’s long been a sense of “never again.” Millennials in particular have expressed a desire for corporate responsibility and to work for ethical companies.

And the American pushback against the 2008 financial crisis has led to an increase in regulations that financial institutions are held to. As a result, there’s been an increased need for compliance officers. It’s one of the fastest-growing fields within financial services, and Boston University School of Law recently launched a Certificate in Financial Services Compliance program to help you get started. The certificate program is housed in the School of Law’s Graduate Program in Banking & Financial Law, the oldest banking LL.M program in the country. Read on to learn more about the need for financial compliance officers and how BU Law could set you up for a rewarding, compelling, and fulfilling career in the field.

Financial Compliance Officers Wanted

Financial compliance officers essentially make sure that the institutions they work for play by the rules, and they’re currently in high demand. It was estimated by the Bureau of Labor Statistics that between 2008-2018 the total number of compliance officers will increase by 31 percent–a notable jump from 260,000 to 341,000. They’re employed by financial services institutions, corporations, and consulting firms. Many companies created new positions and allocated new budgets to account for this increased need. While demand has slowed down somewhat from the initial rush after the financial crisis and subsequent passage of increased regulations, it’s still a field that’s poised to see steady growth for the next few years.

So where do all these new financial compliance officers come from? Lawyers, especially those who have backgrounds that involve experience with regulatory mechanisms like the Dodd-Frank Act, are desirable. And so are other players in the financial sector, especially when they are able to gain that knowledge of regulations, and learn how to guide their institutions in their compliance with them.

It’s Complicated: The Dodd-Frank Act

One of the reasons that financial compliance officers are in such high demand is because of the rise in regulations after the financial crisis. In the 1980s there was a trend of deregulation on the part of the U.S. government when it came to financial institutions. In 2007 and 2008, when the financial crisis began, that deregulation was blamed by some.

So, when the question of “how do we make sure this never happens again” was raised, stronger financial regulations quickly materialized as one of the answers. In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act–best known as just the “Dodd-Frank Act”–was passed and signed into law by President Barack Obama. The act massively changed the face of financial regulations in the United States, including attempting to prevent banks from growing so large that they’re deemed “too big to fail.” New regulations wrapped into Dodd-Frank mandated things like how much money certain kinds of banks need to keep in reserve and subjected many of them to stress tests to ensure they could survive another crisis. It created a whole host of new agencies to oversee financial institutions, and reformed many parts of the financial system as a whole.

Put simply: Dodd-Frank created a lot of new rules and tests for banks and financial institutions. According to Thompson Reuters, at one point in 2013, 110 regulatory changes happened each day. Financial compliance officers are tasked with keeping on top of these constant changes, and they need to be up to the task. As James Scott, director of BU Law’s Graduate Program in Banking & Financial Law points out:

Perhaps more important than the growth in the number of compliance personnel required in the area of financial services is the greater demand for professionalism. The scope of substantive knowledge required, as well as the increased breadth of risk management, monitoring and testing, policy drafting and implementation and training of business personnel has resulted in a dramatic rise in the professional stature of financial institution compliance officers.

Why is BU Law the Right Place to Study Financial Services Compliance?

BU Law recently announced a new certificate in financial services compliance; the program will begin with its inaugural class in Fall 2017. Here are some of the benefits:

A World Class Faculty and Program 

BU Law is home to the only financial services LL.M program in the United States that has its own faculty and curriculum. The new certificate is housed within that program. The faculty includes James E. Scott, who has had a long and impressive career working in banking and regulatory law. Scott is the Director of the Banking and Finance Law Program.

Online and Part Time 

The 12-credit program is part time and the classes are partially or completely online, so you don’t have to be in Boston to take advantage of the opportunity. There’s flexibility in the program too–students can complete it in two or four semesters, depending on their schedules. And the classes are offered asynchronously, meaning that a student can complete course work like lectures and assignments according to their own schedules. All of this makes it ideal for a working adult–someone who has a background in law, in financial services, or in a related field–to add to their resume while continuing their career.

Conclusion

Financial compliance officers are in high demand. It’s also a rewarding and challenging job–its growth was spurred on by the financial crisis of 2008 but continues to be a needed role in many companies. Getting a certificate in financial services compliance could be the next step you need to get started–and BU Law offers the perfect fit for someone with a law degree or related experience in the financial services field. Get more information here:

Resources

Primary

Bureau of Labor Statistics: Employment Projections: 2008-18 News Release

U.S. House of Representatives: Dodd-Frank Act

BU Law: BU Law Launches Certificate in Financial Services Compliance 

Additional

NPR: Corporate Ethics In The Era Of Millennials

Financial Times: The age of the compliance officer arrives

New York Times: Reagan Did It

CNBC: Dodd-Frank Act: CNBC Explains

Quartz/Thomson Reuters: How the rise of modern regulation is changing the finance industry

Boston University School of Law

Boston University School of Law is a top-tier law school with a faculty recognized nationally for exceptional teaching and preeminent scholarship. At BU Law, you can explore virtually any area of the law in 200+ classes and seminars, 21 clinics, externships, and practicums, 21 foreign study opportunities, and 17 dual degrees. You’ll also be part of a supportive, collegial law school community while experiencing the professional, social, and cultural opportunities that the city of Boston has to offer. Boston University School of Law is a partner of Law Street Creative. The opinions expressed in this author’s articles do not necessarily reflect the views of Law Street.

The post Is a Certificate in Financial Services Compliance the Next Step for You? appeared first on Law Street.

As new platform companies like Uber and Lyft have people talking about the nature of work in the gig economy, the concept of employment has become more difficult to define. Recent research has shown that the number of workers who aren’t technically employees has increased significantly in recent decades. While this might not seem like a bad thing on its face, employment status has traditionally been tied to important protections and benefits, which may be eroding as these shifts affect a growing group of workers. While new tech companies get most of the attention as we debate the changing nature of work, it’s also important to realize that they are only playing a small part in larger trends. Read on to see how employment is changing, who is affected, and what that means for workers.

How Many People Are We Talking About?

While platform companies like Uber have gotten most of the attention lately, particularly in the context of labor disputes, it’s important to look at the scope of employment trends and the role that technology companies, and many others, currently play. Unfortunately, there isn’t a lot of available data on the growth of individuals with what are called “alternative work arrangements”–temporary workers, on-call workers, freelancers, contract workers, and independent contractors. What’s notable about these work arrangements is that they differ from traditional employment status, as they are typically less stable and include fewer protections and benefits.

The Bureau of Labor Statistics hasn’t conducted its Contingent Worker Survey (CWS) since 2005, which is where we would traditionally look to for a better understanding of how many Americans have non-traditional employment situations. However, economists Alan Krueger and Lawrence Katz sought to make up for the gap in data by partnering with the Rand Corporation to conducting a survey of their own, which could be compared with past versions of the CWS to see how things have changed.

Krueger and Katz designed their survey to mirror the CWS so that they could accurately track how the share of workers with these alternative work arrangements has changed over time. In their research, they find a significant growth in the number of these workers from 2005 to 2015 in terms of their share of the total labor force–from about 10 percent in 2005 to nearly 16 percent in 2015.

Importantly, the researchers note that the increase in workers with alternative arrangements, 9.4 million between 2005 and 2015, is actually larger than the total increase in total employment (9.1 million). This means that the number of people who have traditional jobs actually decreased slightly over the last decade, while the number of people who work as independent contractors increased–by a lot. As Katz and Krueger put it, “A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements.” In 2015, the total number of these workers had grown to 23.6 million.

All Because of Uber?

While online platforms that match workers with temporary gigs–like Uber, Lyft, Task Rabbit, etc.–have brought the issue of nontraditional employment into the forefront, these companies actually play a relatively small role in the overall trend. In fact, Katz and Krueger estimate that these companies accounted for just 0.5 percent of the total workforce, or about 600,000 people, in 2015. While it’s likely that as these companies have grown that share has increased, they remain a small part of the shift toward alternative work arrangements.

Although technology platform companies account for a small share of alternative employment they have been at the center of the debate. Some see these companies as a great opportunity for people to use the resources that they have to easily and quickly make some money on the side or even full time. Others see the rise of companies like Uber as a problem–attributing their success to their ability to skirt or work around employment laws, not a triumph of new technology. There’s a notable segment of the population who may have an opinion about the quality of these services but haven’t given much thought to what they mean for their workers. Finally, it’s important to note that a significant percentage of people haven’t experienced or aren’t familiar with these services. According to a Pew Research Center survey from 2015, only 15 percent of Americans had used ride-hailing apps like Lyft and Uber, and one-third of Americans hadn’t even heard of them. While those numbers include important caveats–they focus on ride-hailing apps, not the gig economy as a whole, and more people have likely become familiar with these services since then–it’s important not to overstate the size of this phenomenon.

While the share of workers rose for all four of the alternative work arrangement classifications, there was a notable increase in workers hired by contract firms and temporary help firms, which according to Katz and Krueger account for more than half of the total increase between 2005 and 2015. Independent contractors still account for the largest percentage of people in these work arrangements at an estimated 8.4 percent of the labor force.

What Does it Mean to be an Employee?

In light of all of this, we should take a look at the differences between employee status and independent contractor status. Workers who have formal employee status with their employer are entitled to a range of benefits and are protected by several workplace-related laws. They can also collect unemployment benefits, disability insurance, and workers compensation. Contractors typically do not have these same protections and benefits and are responsible for the full share of their payroll taxes, while employers pay half of the tax burden for employees.

Being an independent contractor has its benefits, notably more control over your work, but that comes with fewer protections and benefits. There are several ways to determine if you are an independent contractor or an employee, but a lot of it boils down to how much control your employer has over what you do. Some people may prefer the freedom provided by contract work and freelancing, while others might prefer the stability and benefits involved with traditional employment.

Potential Challenges

While some may be willing to make the tradeoffs when opting for an alternative work arrangement, not everyone has that choice. In an effort to keep costs lower and more predictable, many companies have started to outsource tasks that would traditionally be done by employees to independent contractors. As a result, people looking for traditional employment may only be able to find contracting jobs, creating greater uncertainty for workers. While Katz and Krueger approximate that the shift to alternative work arrangements has been larger for high-income workers, examples of low-wage contracting abound and further research needs to be done to identify how the shifts contribute to wage inequality.

Work simply isn’t as steady and as reliable when you are freelancing or working as a contractor, and importantly, it is much more difficult for contractors to get benefits that are widely available to employees. These workers are also not protected by minimum wage and overtime laws and are typically unable to collectively bargain. And when businesses need to cut costs, they are more likely to reduce contracting expenses before they fire employees.

Many people actively decide to forgo those protections in order to have more control over their schedule and work, but given that this change has occurred during a period of high unemployment, workers may be taking these positions out of necessity rather than choice. While we don’t know exactly what prompted these larger trends, it’s fair to question whether workers in alternative arrangements would prefer to be traditional employees if they had the option.

Addressing Changes in the Nature of Work

As more and more people find themselves without the benefits and protections of traditional employment, many advocates and policymakers have proposed solutions to protect these workers. Some have called for the creation of an intermediate classification to help workers that are not considered employees. Alan Krueger, this time with Seth Harris, proposed a new classification that they call the “independent worker.” Sitting in between the existing classifications, independent workers would be able to take advantage of some, but not all, of the protections provided to employees. They would be allowed collective bargaining rights and could pool together to fund insurance programs. They would also be able to benefit from tax withholding in their paychecks and would have their employer pay its half of their payroll taxes. While this classification would give them civil rights protections, minimum wage and overtime laws would not apply to them. Proponents argue that amending employment laws could give employers more flexibility while still ensuring important benefits and protections to workers.

Absent a new classification, some local governments have already made efforts to expand certain protections to independent contractors. In 2015, the Seattle City Council passed legislation to expand collective bargaining rights to drivers who work for transportation network companies as well as online platforms like Uber and Lyft. This allows drivers in the city to form unions and negotiate for better wages and benefits with the companies that they work for. However, that legislation was temporarily blocked by the courts before it took effect.

Other proposals focus on creating portable benefits, which are not tied to employment status. An example of this came from the Affordable Care Act, which created exchanges for individuals to buy health insurance on their own. The law also provides premium subsidies to reduce costs for those with incomes below 400 percent of the federal poverty line. Additional efforts like President Obama’s proposed MyRA program would allow people in alternative work arrangements to have access to a simplified retirement account untethered from an employer. There is a range of proposals that would create systems for contract workers to buy benefits on their own or with the help of their employer.

Conclusion

As more and more people find themselves in alternative work arrangements, the traditional concept of employment  is changing. Many workers now have to manage work that is less stable and provides fewer benefits and protections relative to traditional employment. While these shifts likely reflect, at least in part, the changing preferences of workers, as people desire more flexibility and control, it is also likely that many people would prefer traditional employment.

Most of the recent discussion of these trends have focused on the rise of technology platform companies, which allow individuals to find short-term gigs as a new form of work. But that debate tends to mask the larger trend, as technology companies still account for a small share of the total labor force. In order to address this shift help the affected workers, policymakers will need to rethink how employment is connected to important benefits and protections. Proposals ranging from an entirely new employment classification to portable benefits, seek to address the needs of workers while ensuring that new companies have the flexibility they need to grow.

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

The post The Gig Economy and the Changing Nature of Work appeared first on Law Street.

For many families in the United States, hunger can be a daily struggle. According to Feeding America, in 2015, about 13 percent of households were food insecure. In total, 42.2 million Americans lived in food insecure households, including 13.1 million children. There are also concerns that many lower-income Americans are overweight or obese–there is plenty of scientific evidence to suggest that low-income children are more likely to be overweight or obese than children in higher-income households. One concept that gets talked about a lot when it comes to hunger and health in the United States is the idea of a “food desert.” But what is a food desert, where are they, and what impact do they have on food insecurity?

What Exactly is a Food Desert?

While there are a number of different definitions that can be applied to the concept of a food desert, it’s generally defined as an area in which it is difficult to find fresh fruit, vegetables, and other “whole” foods that when combined, contribute to a well-balanced diet. In many cases, nearby supermarkets aren’t easily accessible by public transportation, and oftentimes, the residents don’t have access to cars. Essentially, a food desert just means an area in which it is difficult to come by wholesome and nutritious food.

Food deserts are usually located in lower-income areas, often neighborhoods in which most residents are people of color. According to the Food Empowerment Project, a non-profit that works to provide food to low income areas, wealthy areas have almost three times as many supermarkets as lower-income areas. And neighborhoods that are predominately white have four times as many supermarkets as majority black neighborhoods.

What’s a Food Swamp?

In addition to the concept of a food desert, you may hear the term “food swamp” thrown around occasionally. A food swamp is usually defined as an area where there is access to healthy food, but there is easier access to unhealthy foods, like junk food and fast food.

The concepts of food desert and swamp are closely related. In fact, there are arguments that “food swamp” is a more accurate term than food desert altogether, because many lower-income neighborhoods have plenty of fast food restaurants and convenience stores that carry unhealthy foods.

Where Are Food Deserts Located? 

There are multiple measures that can be used to determine whether or not a place is a “food desert.”

Redfin, for example, determined food deserts by calculating the percentage of people in a given city who can walk to a grocery store within five minutes. Using those metrics applied to 2014 data, the five American cities with the lowest percentage of people who can walk to a grocery store in five minutes are, in this order: Indianapolis at 5 percent; Oklahoma City at 5 percent, Charlotte at 6 percent, Tuscon at 6 percent, and Albuquerque at 7 percent. In contrast, the five American cities with the highest percentage of food access within five minutes were New York City at 72 percent, San Francisco at 59 percent, Philadelphia at 57 percent, Boston at 45 percent, and Washington D.C. at 41 percent.

That’s not to say that all food deserts exist in cities. In fact, rural areas are hard hit as well, although they need to be classified slightly differently. The metric usually applied to rural food deserts is if there’s no grocery store within 10 miles of a high-population area. In some rural areas, this is exacerbated by population shifts, as more people are moving to urban and suburban areas. When people move out of an area, grocery stores close, sometimes creating food deserts.

And certain areas are harder hit than others–for example, many Native American reservations fall under the definition of food deserts. Navajo Nation is almost 30,000 square miles, but only has 10 grocery stores. A study conducted by the Diné Policy Institute concluded that “a majority of participants from the communities represented in this study travel at least 155 miles round trip, while others regularly drive up to 240 miles to access foods.”

In 2011, the United States Department of Agriculture created an online, interactive map tool that measures food deserts across the country. The tool uses the following definition to measure what a food desert is:

A food desert is a low-income census tract where either a substantial number or share of residents has low access to a supermarket or large grocery store. ‘Low income’ tracts are defined as those where at least 20 percent of the people have income at or below the federal poverty levels for family size, or where median family income for the tract is at or below 80 percent of the surrounding area’s median family income. Tracts qualify as ‘low access’ tracts if at least 500 persons or 33 percent of their population live more than a mile from a supermarket or large grocery store (for rural census tracts, the distance is more than 10 miles).

According to then-Agriculture Secretary Tom Vilsack, the tool is intended to:

Help policy makers, community planners, researchers, and other professionals identify communities where public-private intervention can help make fresh, healthy, and affordable food more readily available to residents. With this and other Web tools, USDA is continuing to support federal government efforts to present complex sets of data in creative, accessible online format.

You can check out the tool for yourself here.

How Can the Problem of Food Deserts Be Solved?

There have been a lot of proposed solutions for food deserts. One prominent figure working to eliminate food deserts is former First Lady Michelle Obama, who made it one of the primary focuses of her activism. The Obama Administration put forth the solution of funding and equipping grocery stores in low-income neighborhoods, as well as providing financing for other options for healthy food, like farmers markets and co-ops.

There have been other, more unique solutions proposed as well. In some places, volunteers work to transport healthy food that would otherwise be disposed of from grocery stores in other areas. Some areas have taken to promoting urban farming and community gardens to combat food deserts. There are also efforts to put healthier, whole foods into already-existing institutions, like introducing more produce options into convenience stores and neighborhood corner shops.

Do Food Deserts Actually Need to be “Solved?”

There are also questions of whether food deserts are actually the issue, or at the very least the whole issue. There’s an argument to be made that obesity and poor nutrition aren’t necessarily caused by a lack of access to whole food, but rather issues with people’s shopping and eating habits.

Some research indicates that the increased presence of supermarkets in food deserts doesn’t do much to improve the shopping choices that locals make. In addition to a lack of education about nutrition, other factors go into play, like convenience, habit, the fact that unhealthy food is sometimes the cheapest, and strong advertising pushes from junk food producers.

As a result, some efforts to counter food deserts have focused on improving nutrition education. For example, there is a preschool in Memphis, Tennessee, that works with its students, many of whom live in food desert areas, to teach them the importance of a healthy diet from a young age.

Conclusion

Food deserts are such a fluid concept that it’s difficult to pinpoint exactly what they are, where they are, and what exactly they mean for the American population. Some argue that food deserts are a myth, and that our concentration should be focused on providing more nutrition education, not more choices of shopping venues. But one thing that is certain is that the rates of hunger and obesity in the United States–one of the richest countries in the world–are downright unacceptable, and food deserts are one concept that will continue to be brought up to combat those concerning trends.

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

The post What is a Food Desert? appeared first on Law Street.

Earlier this week, the Canadian province of Ontario announced it would be conducting a pilot program for 4,000 of its residents, guaranteeing each person minimum income even if they did not work. While the idea of giving away “free money” may draw criticism from some, this is not a new concept. In fact, programs similar to this have been around for nearly 50 years, with the ultimate goal of eventually replacing the welfare system as we know it.

Read on further to find out more about guaranteed basic income (otherwise known as universal basic income or basic income), its purpose, the history behind it, and how it might impact the future of welfare programs worldwide.

Guaranteed Basic Income?

So what is guaranteed basic income (GBI)? According to the Basic Income Earth Network (BIEN), this type of payment has five key characteristics: it is paid in intervals instead of all at once, the medium used allows the recipient to use it any way they want (it is not a Food Stamp card, for example), it is paid on an individual basis only, it is paid without a means test, and those that receive it are not required to work.

Everything else, such as the amount of money in each payment or longevity of payments varies based on the proposal. (In the Ontario test case it does have an income threshold and is paid to only the 4,000 included in the program; the rest of the principles still apply.)

The Purpose of GBI

Guaranteed basic income is not really “free money,” as some may claim; it does serve a few important purposes. An article from Law Streeter Eric Essagof already does a great job of explaining the GBI’s use in fighting poverty. Namely, the income encourages people to keep working, while also ensuring that if their income rises, they won’t automatically lose the benefits they rely on (also known as the “poverty trap”). In addition, in the United States at least, it could streamline a complicated system where someone who needs benefits has to sign up for five different programs that all fall under one welfare system.

There are other potential benefits associated with a guaranteed basic income. If people were assured of at least some income, they might be more likely to go to school for more education or training or even take a chance and start their own business. They could also pursue passions (such as writing, for example) that they are harder to take on when their time is dictated by the necessity to make money. For individual workers, a guaranteed income would also enable them to bargain more effectively with their employers and force employers to agree to concessions in order to keep their workers.

History of GBI

The Ontario GBI pilot program is certainly not the first of its kind; in fact, it is not even the first in Canada. The first program was conducted in the province of Manitoba in the 1970s, and led to societal health improvements while simultaneously not discouraging work participation. The idea for a universal basic income can be traced even further back than that–much further, in fact. In 1797 Thomas Paine, a pamphleteer famous for his work “Common Sense” in support of the American Revolution, stated that in exchange for social consensus among the people, the government should offer yearly payments to its citizens.

Since then there have been numerous debates between thinkers on all sides of the political spectrum, but generally basic income has been viewed as a positive. The accompanying video looks at the evolution of the basic income idea:

This type of program and the philosophy behind it have been embraced outside of Canada as well. The most recent effort was in Finland: earlier this year, the Finnish government selected 2,000 unemployed people at random to begin receiving a guaranteed basic income of €560 for two years instead of the unemployment benefits they had been receiving. The major advantage to this for the participants would be that if they found jobs they would still get to keep their basic income, as opposed to losing unemployment benefits.

Through the Finnish trial, which is still ongoing, the government wants to see whether this type of program can help the country’s ailing economy by encouraging part-time work. In addition to this trial, other similar programs worldwide have proven successful, such as one in Brazil in 2004 and another in Namibia in 2007. There was also a similar cash transfer pilot program in India from 2011 to 2012 that led to increased test scores and improved health in participating villages.

Despite the success of many of these programs, there seems to be a perception that they can only be successful in poorer countries and would never work in an “affluent” country like the United States. However, even the United States has some history with the guaranteed basic income. One of the earliest efforts, the Negative Income Tax Experiments, took place between 1968 and 1990 in New Jersey, Pennsylvania, Iowa, North Carolina, Indiana, Washington state, and Colorado. Although these experiments had successful outcomes, they were not politically popular and they lost their momentum. Arguably the most successful experiment so far concerning guaranteed basic income in the U.S. is currently ongoing, and can be found in Alaska.

In 1976, a permanent fund was set up in Alaska to preserve profits made by the oil industry to ensure that the wealth would benefit future populations in the state. This fund was allocated for a basic income program in 1982, and ever since then anyone living in the state for at least six months is eligible to receive a dividend from the state. At its peak in 2008, the fund annually paid out more than $2,000 per resident.

The following video looks at how the program is playing out in Finland and other places:

Future of GBI

With more and more places willing to at least launch guaranteed basic income pilot programs, the future of the measure seems bright. This is especially true given the benefits that it so far has offered, along with the fact that automation is increasingly making many jobs obsolete. Currently, along with Finland, there are also ongoing guaranteed basic income trials occurring in Italy and the Netherlands, with Scotland considering a trial of its own as well.

While a basic income has been advocated by some philosophers, researchers, and other individuals, overall there has not been a tremendous groundswell of support. Even in places where pilot programs have been launched, these are usually only reserved for a few thousand people in countries with tens if not hundreds of millions of citizens. So, if this program has repeatedly proven so successful and could replace faulty welfare programs, why are countries not more willing to try them?

The answer starts with cost. In 2016, Swiss voters rejected a basic income for the country’s citizens, and while Scotland is considering adopting such program, the rest of the UK in general is resistant. This opposition comes even when polls show that up to 64 percent of Europeans approve of a basic income. Part of that, however, might be attributed to how the survey questions were worded, in that they do not mention tax increases necessary to provide that income.

Aside from cost, there are other considerations, such as the fear of automation. Although some fear this trend could lead to a dearth of jobs, some economists are quick to point out this same thesis has been made before with regard to past trends, and has been proven wrong by new innovations that, in fact, created more jobs. Additionally, while some want to use basic income to replace existing safety nets, there is no proof yet that exchanging one for the other is actually superior. Even some of the protections basic income is supposed to offer can be turned on their head, with a basic income convincing some employers they can pay lower wages. There’s also the argument that basic income will lead to people choosing simply not to work. The video below looks at basic income, highlighting some pros and cons:

Conclusion

Guaranteed or universal basic income as an idea has been around for hundreds of years. As an idea put into practice, it has been around for at least around half a century. Moreover, in seemingly every case, pilot programs incorporating basic income guarantees have been successful in a number of measures, from raising GDP and improving test scores to ensuring nutrition. Furthermore, these types of programs have been lauded by leaders on all parts of the political spectrum as everything from a panacea for solving the broken welfare system to necessary in a world that is increasingly automated.

However, for all its success stories, guaranteed income has never become widespread nor long-lasting. The reasons for this apparent contradiction are manifold and run the gamut from high costs to exaggerated benefits. Additionally, for every country that has adopted and embraced the idea there are others that have rejected it.

What is basic income’s outlook then? In a world that is increasingly feeling budget cuts and squeezes, it seems unlikely a major initiative to expand the program is possible, especially given the ascendance of more conservative leaders who rose to power partially on attacks of the social welfare system. Basic income, then, is unlikely to be guaranteed or universal anytime soon, yet continued successful trials indicate that when conditions are more favorable, it could become the norm.

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post A Right to Life, Liberty and a Basic Income?: The History of Guaranteed Basic Income appeared first on Law Street.

Last November, India began a campaign to eliminate large bills from its currency by removing 500 and 1,000 rupee notes from circulation. The goal was to go after criminals guilty of everything from tax evasion to drug trafficking by eliminating their means of accumulating wealth. This is not just a limited effort, however, as other countries, including the United States, are monitoring the situation in India and considering following suit. Read on to see if the U.S. is ready to actually scrap the $100 bill, what impact it will have on the country, and if the rest of the world is likely to follow suit.

India’s Move

The move by India’s Prime Minister, Narendra Modi, was aimed at recouping some of the estimated $460 billion in untaxed wealth, which is equal to as much as 20 percent of India’s GDP. Modi was also seemingly attempting to fulfill a campaign promise to go after so-called “black money” in the economy. Despite these motivations, this led to a massive cash shortage that instead ended up affecting the poor the most and caused the IMF to slash their growth forecasts for India by a full percent. Nonetheless, even though the government failed to take these factors into account, some people hid their wealth in items such as gold, and the fact that the 500 rupee is not really a large bill, the move was still widely popular. The video below looks at the impact of the Indian government’s decision to eliminate the 500 and 1,000 rupee notes:

U.S. Efforts

There have also been calls in the United States that large bills should be eliminated, although the exact methods with which the nation would do so are unlikely to copy those used by India. The charge here is being led by Harvard economist Kenneth Rogoff, whose plan calls for eliminating any bill larger than $10 over a 15-20 year time period. The goal would be similar to that of India, namely to target tax evaders and money launderers. Rogoff claims this would be an especially effective move on the part of the U.S. because 75 percent of the $100 bills worldwide are actually held abroad, many by Mexican cartel leaders and Russian oligarchs. Rogoff believes that, since most transactions in the United States are done electronically, unlike in India, eliminating these bills would not be a major change.

While Rogoff and other Harvard economists such as Peter Sands have suggested making the change, there is still no plan to eliminate big bills as of yet; in fact, there is actually strong pushback against the idea. A group of government agencies that include the Treasury, the Federal Reserve, and the Drug Enforcement Agency are opposing the move for a number of reasons.

The first reason that people are opposed to the move is cost: removing $100 bills and replacing them with twice as many $50 bills would wipe out any profit made by the government through printing money. Second would be usage: while many people do not carry $100 bills, about 5.2 percent of the U.S. population still do, which equals millions of people. Lastly, although criminals may be inconvenienced by having to literally carry more bills, eliminating $100 bills would just force them to use other bills or find other means to accumulate wealth. In fact, cash shipments in smaller bills have already been seized at the border. The following video looks at whether or not the U.S. is likely to eliminate the $100 bill, and some of its potential effects:

Impact on Economy

Economically, a switch to smaller bills or to no cash altogether is also a mixed bag. As mentioned earlier, by eliminating larger bills, the government would lose out on profit made from the difference in printing the bills versus the cost of printing, because higher bills generate more revenue. The term for this is seigniorage. The estimated cost would be roughly $6 billion annually, which may seem like a lot but pales in comparison to what the government alternatively spends fighting crime funded by cash and large bills.

A potential positive economic impact of the move would be in regards to monetary policy. During recessions, central banks lower their interest rates, which makes keeping money in savings accounts less appealing and instead encourages spending. However, there is something known as the “zero lower bound,” where the interest rate actually becomes negative and banks start charging people to save their own money. At this point, rational people would withdraw their money and keep the cash until interest rates were raised. This would be much harder to do with many smaller bills and impossible if there were no bills at all.

A Global Movement?

Whether or not the United States decides to follow India’s lead in eliminating large bills, the movement is not dead on arrival. Nearly two decades ago Canada eliminated the $1,000 bill from its currency to combat the very same criminal activities India is targeting. Singapore is eliminating its $10,000 bill as well. India is not even the only nation in the developing world doing away with large notes, as Venezuela recently outlawed its $100 bill with the goal of fighting crime. There is even some precedent in the United States: in 1969, the United States did away with $500, $1,000, $5,000 and $10,000 bills because of lack of use, as they were almost entirely utilized for moving money between different Federal Reserve branches.

It is in Europe, however, where the most aggressive steps have already been taken. Last march, the European Union announced it will discontinue using the 500-euro note and stop replacing it entirely by 2018. While other large currency notes are often used by criminals, the 500-euro note had become so ubiquitous among criminals that it had garnered the unflattering nickname “the Bin Laden” after the former terrorist leader. But some critics are quick to point out, as they have in other countries, that eliminating big bills just forces illicit funds into other venues. Some also contend that this is a way to force people to spend more, because banks would be forced to use negative interest rates to reduce the larger number of bills in their safes. The accompanying video looks at the impact of eliminating the 500-euro bill on Europe:

Some countries in Europe have gone even further: in Sweden, for example, there is an unofficial yet concerted effort to do away with cash entirely. In that country, only 2 percent of national wealth is held in bills or coins and only about 20 percent of total transactions are processed in cash, so the move makes some sense. However, a switch of this magnitude and nature does not come without consequences. People who do not have access to the apps that are replacing cash and cards, such as older individuals and refugees, may find themselves unable to pay for basic necessities if the transition is made. Additionally, if all transactions are made electronically they are more susceptible to hacking and government oversight. Nevertheless, Sweden is not alone in this push, with Denmark and Norway also following suit.

Conclusion

Reducing the supply of big bills or even eliminating cash altogether comes down to a simple cost benefit-analysis. Having smaller bills will force much of the money associated with the black market economy out into the open, and at the very least it will make it harder to carry. However, as had been mentioned, there are numerous alternatives to keeping illegal funds in cash.

Conversely, while by making transactions increasingly with cards or electronic forms of payment may make it harder to hide crime, it also makes everyday purchases easier to track. This includes not only tracking by the government, but also by websites or corporations. It would make it more likely that information will get stolen by hackers or other nefarious groups as well, simply because there are more opportunities. This is not even factoring in the effort it would take to acquaint many people with the new form of payment or the effect it could have on monetary policy.

In some places this trade-off has seemingly been deemed acceptable, but for the most part it has not caught on worldwide. Cash, even in large bills, is likely to remain king until security and privacy concerns are considered less of an issue compared to concerns over how criminals are hoarding their ill-gotten gains.

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Not About the Benjamins: Is the United States on the Verge of Eliminating the $100 Bill? appeared first on Law Street.

In modern society, we have devised mechanisms to help us manage risk. Health insurance, for example, is a risk management system for health care costs that uses small payments, pooled from a large community, to cover those members who happen to become sick. The complications with risk management pools often do not relate to the idea of insuring people against risk. After all government itself is, in some ways, the same idea. Rather the complications arise from trying to decide who is included in the risk, in the payouts, and how the system is funded.

The Washington, D.C. city council recently passed a risk management pool, similar to health insurance, to provide family leave to district workers. There are significant benefits to workers from this system but there are also some drawbacks, which critics say will harm employers and may even harm the types of workers that the policy is designed to benefit the most.

The D.C. Universal Paid Leave Amendment Act would be a significant increase in the benefits due to D.C. employees. It will be particularly important to younger, female employees who are statistically the most likely to want to take family leave time. However it does impose significant costs on employers and other workers, and the balance between those competing interests may need to be adjusted. Now that the bill has passed the D.C. City Council, it will need to be signed by Mayor Muriel Bowser and make it through a 30-day congressional review.

D.C. Paid Leave and How It Works 

Take a look at this report from PBS that aired last year that explains some of the benefits of family leave and how it works in other countries. It is expensive to provide this benefit to employees but it can also keep employees in the workplace.

In the United States, there is no national policy for paid family leave. Federal law provides for unpaid leave, but only for companies with over 50 employees. And only to full-time workers. Only 12 percent of Americans are offered any kind of paid leave by their employers.

The D.C. Universal Paid Leave Amendment Act is the most generous family leave policy in the country, extending benefits by both duration and payout beyond family leave policies in other states. California and New Jersey, for example, only provide six weeks of leave and up to 60 percent of pay. The D.C. plan provides for eight weeks at up to 90 percent of pay. The program would guarantee six weeks of leave to care for a sick family member as well as two weeks of paid sick leave and eight weeks for new parents. The structure of the payouts is also progressive, meaning that lower wage workers will benefit more from the plan. The first $46,000 in wages are replaced at the 90 percent rate, but after that reimbursement is only 50 percent. The benefit payments are capped at $1,000 per week, and those benefits are taxed.

The program is only for private employees, not district or federal workers, and will be funded by an increase in payroll taxes on employers. D.C. already has a high tax rate, one of the highest in the region, and this law would be an increase of 0.62 percent. It does not sound like a large increase but many businesses operate on thin margins, and an almost 1 percent increase could be a significant burden. The tax increase would create a $250 million a year fund to pay out benefits. But estimates suggest that a one-time cost of $80 million would be needed for the technical administration of the program alone. To many critics, this high proportion of funding going to administration is unacceptable.

Another problem with the proposed plan is the beneficiaries. The new tax will only apply to employers who are within the district. But the benefits will be paid out to workers regardless of whether they live in the district or in surrounding states. Estimates suggest that about 65 percent of the benefits would be paid to commuters living in Maryland and Virginia, a facet of the plan that has drawn criticism from city council members and the local Chamber of Commerce.

Is Family Leave A Good Idea? 

This video explains some of the pros and cons of the new family leave act.

As the video explains there are several different angles to consider. The first issue is the incentives that it creates for employers. The employees most likely to take advantage of this policy are young women since they are the most likely to care for a newborn or an ailing family member. Under a structure that requires employers to pay for only the leave taken by their own employees, as was proposed in one version of this legislation, this can create an incentive to not hire young female workers. But because employers are paying into a common fund for the benefits, rather than providing the benefits directly, this particular incentive is reduced. The employer does not increase their risk of losing money to paid leave when they hire an employee who is likely to take that leave. That risk is spread out over all of the employers in the pool.

The fear that an employer may have to pay for, on its own and not through a fund, an employee’s leave only to have that employee not return to work is also eliminated. If an employee does not return to work after his or her leave, that would be a cost to the business, but the individual employer isn’t on the hook for the cost of the benefits that were collected. All the employers share that cost so that for each individual company it is drastically reduced.

The main problem that most have with the bill is that it may encourage employers to cut back on workers in general or move their business out of Washington in order to save money. This is a very real concern since payroll expenditures are often a large part of a company’s budget and one of the elements an employer can most easily control. A company may try to cut staff so that it owes less in taxes, even if that would make it less productive. Other family leave programs in other states have not led to that result, but this program is untested. The question of whether the benefit to all workers is worth a general hiring freeze or a reduction in the labor force can’t be answered until we know how many workers it will affect.

Additionally, the D.C. leave package is so generous it may do too much to allow workers to stay home. A worker who gets up to 90 percent of their pay doesn’t feel nearly as much pressure as one who is only receiving 60 percent, or none, of their paycheck. Although most people support some kind of paid family leave many might want a policy that encourages employees to come back as soon as they can. This could be accomplished by reducing the size of benefits paid out in subsequent weeks. But part of the rationale for the law is not only to relieve families in an emergency, but also provide work-life balance for new parents. The program is by its very nature supposed to incentivize workers to take time when they need to.

Family leave also benefits employers. The ability to take family leave can encourage workers to choose one specific employer over another. Therefore a system that guarantees paid leave to all private sector employees in a given job market levels the playing field for businesses that might not be able to offer this benefit on their own. It also encourages workers to take leave when they have a child or an emergency, rather than quit work altogether if they know they will need several weeks of time off. This keeps talented workers in the job pool and reduces the costs of training new employees.

Conclusion 

Ultimately, support for family leave, however it is organized, comes down to who we as a society want to invest in and how we are going to finance those investments. Most Americans, 82 percent, believe that there should be some sort of paid family leave for workers. Both to cover parental leave and also for workers who become ill or have a loved one who becomes ill. But devising a system that is able to finance this leave presents many challenges. In order to provide the benefit, employers, other workers, or consumers need to shoulder some of the burden.

The D.C. bill places the burden for this on employers, who may end up passing on some of the costs to consumers and to their employees. But for the workers who have a family emergency or the arrival of a new child, these benefits are critically important. Here in the United States, these family leave provisions are still in their experimental phase, and this one is more generous than the others, so it may be necessary to adjust the balance further. There is also a strong argument to be made for finding an alternate way to administer the benefits that is more cost effective, which could help lower the tax cost for employers.

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Family Leave In D.C.: Are the Costs Worth the Benefits? appeared first on Law Street.

In November, the monthly jobs report released by the Bureau of Labor Statistics told us, among other things, that the unemployment rate dropped down to 4.6 percent, the lowest it has been since 2007, before the Great Recession. While that number seems to speak glowingly of both the job market and the efforts of the Obama Administration, others contend the opposite. President-elect Donald Trump, for one, is not convinced by the statistic and claims the actual number is much higher. Who is right, are they both right, or are they both wrong? Read on to find out the backstory behind the unemployment rate and what it can tell us about the economy.

History of Unemployment and Methods to Address it

While there were several ways that policymakers attempted to determine the unemployment rate in the early 20th century, the unemployment measure that exists today was not created until the 1940s, when the Census Bureau began administering the Current Population Survey. Estimates suggest that the unemployment rate reached an all-time high of 23.9 percent. This was followed by a record low of 1.2 percent in 1944 during World War II. The lowest rate not during a time of war was 2.9 percent in 1953.

Since 1948, there have been 11 observed recessions and there have been a variety of means to combat resulting high levels of unemployment, many of which have varied by president. During the second term of Harry Truman’s presidency, the first one with reliable data, unemployment was very low except for a brief recession as the economy adjusted after the war. Truman left office with an unemployment rate below 3 percent. The rate rose though during the following administration under President Dwight D. Eisenhower but passing the Federal Aid Highway Act in 1957, which paved the way for the National Highway System, helped bring the rate back down.

President John F. Kennedy inherited an unemployment rate around 6 percent and was unable to do much to affect it before his assassination, despite expanding Social Security and cutting taxes. The story of Lyndon B. Johnson’s presidency was the complete opposite, with a large decrease in unemployment. This success under Johnson was the result of wartime hiring and new government projects from the War on Poverty, including Medicare and Medicaid. Following Johnson, the administrations of both Nixon and Ford saw continuously rising unemployment with the rate reaching a new post-war high of 9 percent in 1975. President Ford actually had the highest average unemployment of any president since data was officially collected, at 7.8 percent.

Jimmy Carter succeeded Ford and saw an initial decline in the unemployment rate. However, that was reversed following an oil crisis at the end of his term. This trend continued into the Reagan presidency which saw the highest unemployment rate since the Great Depression at 10.8 percent at the end of 1982. Nevertheless, President Ronald Reagan was ultimately able to reduce that number by half when he left office. Overall, Reagan actually had the second highest average unemployment rate, barely edging out Barack Obama. Taking the reins from Reagan was the first President Bush, who watched the unemployment rate rise steadily during his tenure.

In 1992 George H.W. Bush was replaced with President Clinton who, like Johnson thirty years earlier, saw the unemployment rate steadily decline. Under George W. Bush, the unemployment rate ticked up at the beginning of his presidency after the 9/11 attacks and a mild recession. It eventually ticked back down before starting to rise dramatically at the beginning of the Great Recession. This carried over into President Obama’s time in office, peaking at 10 percent in 2009 before steadily declining to where it now sits at 4.6 percent.

The Meaning of Unemployment

The unemployment rate is calculated with the hope of learning who does not have a job and why to help policymakers understand the state of the economy and make informed decisions. The data for calculating unemployment is derived from surveys conducted by the Bureau of Labor Statistics. If a person has a job they are obviously counted as employed. The real discrepancy is in the unemployed category, which there are actually several different ways to measure. If someone is looking for work, but does not have a job, they are considered unemployed. However, if they are not looking for  work they are considered outside of the labor force and thus not included in unemployment figures. People living in institutions and those in the military are excluded from the survey.

The goal of the survey is to classify people age 16 and older into one of the two groups. Generally the divisions are pretty clear, however, there are a few gray areas. For example, people who are unpaid but work more than 15 hours a week for a family business are considered employed. In the case of unemployed people, the clarification is over whether they are actively pursuing a job within four weeks of the survey or would like a job but are not looking for one. Those who have looked for a job in the four weeks and are available to work are considered unemployed. The labor force, for the purpose of the unemployment measure, is considered those who are employed and those who are unemployed. Passive job searchers are not counted as part of the labor force,

Of those not included in the labor force, some are discouraged workers–those who do not think they can attain a job. A marginally attached worker is someone who has looked for a job at some point in the last 12 months but has not done so in the past four weeks. Within the marginally attached worker category is the subcategory of discouraged workers, who have not recently looked for work because they do not think they can get a job, either because they are unqualified or for another reason related to the state of the job market. The rest of the people in this category are generally out of the labor force for another reason such as attending school or taking care of a family member. In total, there are six measures of unemployment, ranging from the U1 to the U6. Of those, we use the U3, which measures the amount of people who do not have jobs as a percentage of the labor force.

The following video looks at exactly how the unemployment measure works:

How is Unemployment Measured?

Some assume the government uses the number of people on unemployment insurance each month or surveys every household to determined how many people are unemployed, but that is not actually how it works. Using unemployment insurance would only count people who are eligible or have applied for insurance, so if a person does not qualify in either of those categories they would not be counted. On the other extreme, surveying every household every month, in a process similar to the census, is impractical.

Instead, the unemployment rate is actually measured using the Current Population Survey, which started in 1940 and was taken over by the U.S. Census Bureau in 1942. In total, there are 60,000 households each month that are eligible for the survey and are organized into 2,000 physical areas. The Census Bureau then creates a survey that will incorporate 800 of these areas in order to create a representative sample to reflect the variety of people and job types across the United States. Each month, a quarter of the households in the sample are changed to ensure no household is interviewed for more than four consecutive months. These households are then taken out of the sample for eight months, before being interviewed for another four month period. In other words, three-fourths or about 75 percent of the sample remains the same from month to month and one-half or about 50 percent stays the same from year to year.

Every month, the included households are contacted and asked questions to determine whether they are employed, unemployed, or not looking for work. These interviews are done either in person or over the phone, generally the week of the 12th day of the month. During the first interview, demographic information is collected through a computerized database, which is then used to create a representative sample. Because this measure is derived from a survey and not a count of every person in the country, there is room for error. But the margin of error calculated by the BLS finds that 90 percent of the time the survey will yield an unemployment number that is within 300,000 of the results that you would find if you counted every single person. The measure also takes into account seasonal employment with rate adjustments. In no case over the last decade has the margin of error been large enough to skew the actual unemployment rate.

Neither the people asking nor those answering the questions actually determine what classification they fall under. Instead, that is determined when the answers are put into the computerized form. Critical to successfully measuring unemployment is ensuring comparable results. Due to this requirement, the interviewers are extensively trained.

Criticism of the Unemployment Rate

While the unemployment rate has steadily gone down over the last few years, and although it seems very cut and dry mathematically, the measure still has its critics. These critics include people from both sides of the political spectrum, from President-elect Trump to former presidential candidate Bernie Sanders. Their criticisms extend beyond the trite example that discouraged workers should also be included in the unemployment rate.

These people point to another major flaw with the rate in that it excludes many job seekers. Namely, while a person may have a job, that does not mean they are fully employed, in essence, working a full-time job that can support them. Unfortunately for these people, there are also not enough jobs that could fully employ them either. Instead, if they are employed at all, they are often forced to cobble together multiple jobs or rely on the social safety net. Moreover, while the government does measure various forms of unemployment, only one, the U3 unemployment rate, tends to get most of the attention.

Conclusion

Since the unemployment rate is calculated using data and sophisticated sampling techniques, some might think the measure is beyond partisanship. Unfortunately, that is not the case. While some of that may be political, the unemployment rate itself deliberately excludes a large portion of people to measure a very specific thing. While many do criticize the definition, it is still important to measure the number of people who do not have a job and are actively looking for work.

Despite the ambiguity, purposeful or not, the unemployment rate has been one of the most consistent barometers for measuring the health of the United States’ economy since the end of World War II. Undoubtedly better measures either exist or could be formulated, although the practicality of compiling more in-depth numbers that would have to be gleaned from a 300 million plus population is more dubious. Thus, candidates and activists can debate and denounce the merits of the unemployment rate but for now, we seem to be stuck with it, even if it does not take many of us into account.

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post The Unemployment Rate: What the Measure Tells Us appeared first on Law Street.

Recently, the European Union determined that Apple must pay $14.5 billion in back taxes to Ireland. Unsurprisingly, Apple is challenging the ruling and claiming that its arrangement with Ireland was perfectly legal. What is surprising is that Ireland may actually support Apple’s appeal and claims it doesn’t want the money, a concept that many in the United States support as well.

Read on to find out what this scandal has revealed about the tax policies in Ireland and the E.U., how corporations avoid paying higher taxes, and what the likely ramifications would be for Apple if is ultimately forced to pay the taxes in Ireland and other nations around the world.

Apple, Ireland, and Unpaid Taxes

The decision against Apple was handed down by Margrethe Vestager, the head of the E.U.’s competition committee. The competition commission has taken it upon itself to go after corporations and countries that strike unfair tax deals, with companies such as Starbucks and Amazon also under investigation. However, this is the first major case brought against a company operating in Ireland.

Ireland, for its part, already has one of the lowest tax rates in the world at 12.5 percent, something it uses as a comparative advantage to attract companies to relocate there. However, that rate is actually significantly higher than the tax rate it agreed to with Apple. In 2013, a United States’ Senate committee discovered a deal between Ireland and Apple that called for a 2 percent or lower tax rate for the company. Both parties have seemingly taken the “lower” option, though, as Apple was allegedly being taxed at a rate of 50 euros for every 1 million euros made or 0.005 percent. While that number is up for dispute, it is clear that the effective tax rate that Apple faced was remarkably low.

This remarkably low tax rate was what the E.U. had taken issue with. The E.U. argues that when countries like Ireland give special tax rates to certain companies they are engaging in anti-competitive behavior that unfairly punishes companies without these deals. But regardless of the ruling, the United States would not be able to tax the money Apple stashed overseas unless it is brought it back into the United States.

In the video below, Margrethe Vestager explains the recent E.U. ruling:

Tax Havens

For its role, Ireland has been labeled a “tax haven.” However, countries serving as tax havens, while unscrupulous, are not necessarily breaking any laws. In fact, many corporations who take advantage of what these nations are offering have made dodging taxes into a virtual art form. Individuals can use tax havens to legally refrain from paying a variety of taxes such as inheritance, capital gains, and even regular income tax while companies take advantage of low corporate tax rates.

While Ireland gets the most attention for its low tax rates because of the situation with Apple, it’s deservedly so as a quarter of Fortune 500 companies had offices there which they may use to pay lower taxes. There are a number of places, mainly in Europe and the Caribbean, in which low tax rates, lax enforcement, or protective banking laws make for attractive spots to place wealth and profit.

Companies are able to avoid paying U.S. taxes by booking their profits in countries with particularly low tax rates. We can tell that companies do this because these countries are often small, yet the profits from large multinational companies are quite big. In some cases reported profits in certain countries actually surpass the GDP there. The following quote from the Citizens for Tax Justice, a left-leaning think tank, sheds light on what is actually happening:

It is obviously impossible for American corporations to actually earn profits in a given country that exceed that country’s total output of goods and services. Clearly, American corporations are using various tax gimmicks to shift profits actually earned in the U.S. and other countries where they actually do business into their subsidiaries in these tiny countries. This is not surprising, given that these countries impose little or no tax on corporate profits.

Corporations Not Paying their Share?

Just as Ireland is not the only country with a low corporate tax rate and a willingness to strike a deal with American companies, Apple is not alone in moving its profits abroad in order to avoid paying the high U.S. tax rate. As of this year, American companies had $2.4 trillion in income that has not been repatriated and instead is being held outside the United States. If that money was brought back to the United States, the subsequent taxes would amount to nearly $700 billion. While Apple has over $200 billion in profits held overseas, it is hardly alone. High-profile companies such as Microsoft and Pfizer also hold substantial amounts of cash outside the United States.

The main culprit for all of this is allegedly the U.S. corporate tax rate, which at 35 percent is one of the highest in the developed world and one of the highest overall. While some companies have discussed moving their money back to the United States–particularly if there were a window or a temporary tax holiday like the one in 2004–many are pursuing another course. Namely, many large companies have resorted to corporate inversions, in which an American company merges with another, often smaller, company located in a country with a low corporate tax.

Companies employ other, similar techniques as well. One is something known as earnings stripping, where a U.S. subsidiary issues debt to their foreign parent company, thereby lowering its taxable income.

The following video looks at how companies relocate to reduce their tax burden:

Ramifications of E.U. Ruling

With all the ways corporations avoid paying taxes and past efforts to close loopholes, perhaps the most surprising aspect of the European Commission’s decision to make Apple pay back taxes is who is opposed to the ruling: Ireland. Shortly after the commission made its decision, Ireland announced it will appeal. Obviously, the immediate question is why a country would be willing pass on $14.5 billion. The answer is that while Ireland would be passing up a lump sum in tax revenue, keeping Apple’s taxes low ensures the company’s continued presence there and the benefits that come with it, like jobs. If Ireland were to raise Apple’s taxes, Apple may be compelled to move somewhere else as Ireland would be less appealing. It could also have the effect of scaring away other companies who viewed Ireland as a good place to do business.

This decision is complicated further because it is not made in a vacuum. Ireland has had some notable fiscal issues and was bailed out by the E.U. and IMF in 2010. But Ireland may not want to risk losing the jobs that Apple brings as well as its reputation as a business friendly country.

Another surprising group opposed to the European Commission’s ruling is a collection of U.S. lawmakers. The members of both parties in the United States are opposed ultimately because that money would otherwise be paid to the United States. Lawmakers feel that if Apple is forced to pay Ireland it will complicate tax matters between the E.U. and the United States. If Apple ends up paying the $14.5 billion it will actually be able to use that as a credit against other taxes that it owes in the United States.

While the fight seemingly boils down to who gets the money and whether Ireland can keep Apple’s headquarters, it also has the potential to raise an even larger question. Specifically, by forcing Ireland to tax at a certain rate, the E.U. is entering the murky waters of Irish sovereignty. While the E.U. is not concerned with Ireland’s low tax rate specifically, its problem is with the special tax deal it offered Apple–the ruling does amount to the E.U. intervening in a country’s private affairs. This is a particularly awkward position given that the U.K. just voted to leave the E.U., in part, over concerns of overreach by Brussels. While talk in Ireland has certainly not approached that level yet, some people have already broached the topic with names like “Irexit.”

Conclusion

As of February, Apple was the most valuable company in the world with a market value of approximately $534 billion. It’s is not surprising that even the most basic effort to reduce Apple’s tax burden would become news. Of course, the news tends to snowball when its tax deal with Ireland violates European Union rules. While Apple’s actions are not necessarily illegal as much as they are a profit-driven company taking advantage of a terrific deal, the situation certainly raises eyebrows, particularly when it’s not unique to one company.

Whether or not the E.U. will allow Apple’s current tax arrangement in Ireland to persist remains to be seen, as an appeal would take some time to sort out. Either way, it has shone the spotlight on a very common practice by major corporations. While Apple may have the most cash and be the most egregious case, the other companies doing the same thing reads like a who’s who of major corporations.

Unfortunately, the climate is such that instead of lauding the E.U. for trying to recover owed taxes and protect competition, there was an immediate backlash against the ruling. Ireland tried to refuse $14.5 billion out of fear of losing jobs and other investment and American politicians criticized the E.U. for targeting American companies. Many questions remain in the United States. In order to really address the underlying problems, U.S. lawmakers will need to reform the corporate tax code to truly prevent American companies from engaging in international tax avoidance.

Resources

The New York Times: Apple Owes $14.5 Billion in Back Taxes to Ireland, E.U. Says

CNN Money: Ireland doesn’t want $14.5 billion in tax from Apple

The Washington Post: How U.S. companies are avoiding $695 billion in taxes

The Motley Fool: 10 Best Tax havens in the World

Yahoo Finance: US taxpayers could end up covering Apple’s back taxes in Ireland

Forbes: These Are the 10 Most Valuable Companies in the Fortune 500

Bloomberg: Pfizer-Allergen Deal may Be Imperiled by U.S. Inversion rules

The Washington Post: How the E.U.’s ruling on Apple explains why Brexit happened

Citizens for Tax Justice: American Corporations Tell IRS the Majority of Their Offshore Profits Are in 12 Tax Havens

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Overseas and Undertaxed: How Companies Avoid Paying Taxes appeared first on Law Street.

Affordable, safe housing is a huge concern for all populations. Traditionally, neighborhoods have been segregated along socioeconomic lines. However, even in modern cities, policy attempts to integrate communities through equal access housing have failed. Housing lotteries, through neighborhood preference programs, are now being employed by cities across the country to keep families in their neighborhoods.

Unfortunately, those same lotteries are meeting a pushback from the Department of Housing and Urban Development (HUD), which has stated that neighborhood preference and housing lotteries violate federal fair housing laws. In an interesting turn of events, the populations that fair housing laws are designed to protect are now being utilized to keep them out of their home neighborhoods. This comes as a surprise to many supporters of these anti-displacement programs, as the legislation was created to assist victims of segregation, not perpetuate it.

Federal Fair Housing Laws

In 1968, shortly after the assassination of Dr. Martin Luther King, Jr., Congress passed the Fair Housing Act (FHA) in response to concerns about racial segregation. The statute sought to address the issues created by residential segregation, while moving cities and towns away from unequal housing and economic conditions. It was initially enacted under Title VIII of the Civil Rights Act of 1968 and then ultimately codified under 42 U.S.C. §3601-3619. A 1968 Supreme Court ruling, Jones v. Alfred H. Mayer Co., held that the Civil Rights Act of 1968 prohibits racial discrimination by private and governmental housing providers. These policies established a framework for eradicating segregated housing.

Under the FHA it is unlawful to “refuse to sell or rent […] or otherwise make unavailable or deny, a dwelling to a person because of race, color, religion, sex, familial status, or national origin” or “to discriminate against any person in” making certain real-estate transactions “because of race, color, religion, sex, handicap, familial status, or national origin.”  Since the passage of the FHA in 1968, many cities have become more diverse. The FHA plays an integral part in avoiding the Kerner Commission’s grim prophecy that the “nation is moving toward two societies, one black, one white–separate and unequal.” The Act was later amended in 1988 to create certain exemptions from liability and expanded protected characteristics, including discrimination on the basis of disability or families with children.

“Fair housing protest, 1964” Courtesy of [Seattle Municipal Archives via Flickr]

Equal Housing and Discrimination

Problems regarding fair housing and discrimination are pervasive in communities across the country. HUD estimates that there are roughly two million cases of housing discrimination annually, but the actual number may be much larger. Many cases of housing discrimination are not reported. Moreover, studies conducted by HUD show that many residents are unaware of what activities are illegal under the FHA.

Despite all of the efforts to diminish segregation and discrimination in housing access, very little progress has occurred nationally. While the country has become more diverse than ever, residential housing patterns remain stagnant. Even with the passage of the FHA and the expansion of state laws protecting residents from housing discrimination, improvements in socioeconomic and racial seclusion have made few advances.

What is Gentrification?

No matter where one travels, there are segregated neighborhoods all over the U.S., particularly in metropolitan areas. Gentrification, or the arrival of  wealthier people in an existing urban district, has become common practice. This causes a litany of problems for the current residents of that community, including increased rents and property values, in addition to drastic changes to the community’s culture.

Researchers have been quick to note that the practice of gentrification is not inherently bad. Seeing a neighborhood with decreased crime, new investments, and increased economic activity are desirable, positive traits for any community. Conflicts occur because usually wealthier, white populations are given significant credit for “improving” neighborhoods, while simultaneously displacing poor, minority residents.

Gentrification has some common characteristics, though there is no technical definition for it. First, there is a change in demographics, leading to an increase in median income, decrease in household size, and a decline in racial minorities. Second, the real estate markets transform, increasing property values and the number of evictions. Third, there is a shift in land use, usually a decrease in industrial uses and an increase in offices, high-end retail, and restaurants. Lastly, a variety of character and cultural attributes change, such as landscaping, public behavior, noise, and nuisance.

Neighborhood and Community Preference

Many cities are facing serious roadblocks for making affordable housing available to low-income and middle-class residents. As property and rent increases, the ability of certain families to stay in a particular neighborhood decreases. Thousands of minority populations are being displaced by gentrification across the country. To combat this growing problem, some cities, like San Francisco, have tried to utilize neighborhood preference and housing lotteries.

Essentially, the program allows current residents to participate in a lottery for affordable housing units partially financed by the federal government. This gives those who currently live in a neighborhood a preference, a right of first refusal. Rights of first refusal are contractual rights that give a particular person or business entity the opportunity to enter into a transaction before a third party. Participants must still compete against other residents, but they have a better chance of remaining in their home neighborhood. In San Francisco, this meant setting aside 40 percent of units in subsidized developments for residents already living in the district or a half mile away. This would allows residents first dibs at living in the brand-new, partially federally-financed building.

Why Does Neighborhood Preference Violate Fair Housing Laws?

While neighborhood preference can be viewed as a noble program, it technically violates HUD’s fair housing laws. The fact that laws designed to assist minority populations are now being used to not keep them in their home neighborhoods creates an extreme incongruity. By employing neighborhood preference, HUD states that it actually maintains segregation rather than eradicating it and limits equal access to housing.

The main issue with these programs is that they give a priority to those already living in a particular district. In these specific areas, residents tend to be low-income minorities. Allowing those residents a preference continues to segregate neighborhoods. It also allows race to be an integral factor in the process, as the effect of allowing current residents to have a preference means that black tenants are more likely to receive the new units.

HUD noted via a spokesperson that the agency takes great care when reviewing programs that have noble intentions but end up with negative consequences. However, it was also noted that there was no record of HUD ever approving a neighborhood preference program.

San Francisco is not the only city experiencing these roadblocks in assisting low-income residents. In New York, a fair housing group has filed suit alleging that the city’s policy of using community preferences for affordable housing units perpetuates segregation. The pattern is national, with urban neighborhoods becoming increasingly whiter and more affluent.

Conclusion

While there are many positive aspects to transforming a neighborhood, the social, economic, and physical impacts of some changes may have negative consequences for current residents. Federal fair housing laws exist to eliminate segregated neighborhoods, but often come at a cost to current residents. The laws designed specifically to protect certain classes of citizens are now being utilized to push those same people out of their homes.

On September 22, 2016, HUD came back with a different answer after placing the San Francisco program under review. In a letter to the mayor, HUD decided that while the city cannot give priority to neighborhood residents for spaces in affordable housing projects, it will allow 40 percent of the units to be prioritized for residents who are at a high risk of displacement. Race will not be a factor for consideration in the selection process. This announcement immediately affects the Willie B. Kennedy senior apartment complex, which has roughly 98 units and more than 6,000 applicants. The lottery for this particular property had been delayed pending HUD’s decision.

This change demonstrates HUD’s willingness to acknowledge the serious consequences of displacement. It may not be the most ideal way to combat issues of equal access, but it certainly shows a sensitivity to keeping citizens in their neighborhoods. While neighborhood preference programs are out, it seems that “anti-displacement” preference programs are in.

Resources

Primary

U.S. Department of Housing and Urban Development: Fair Housing and Equal Opportunity

The Kerner Commission: Report of the National Advisory Commission on Civil Disorders

Legal Information Institute: Fair Housing Act

Additional

NPR: How ‘Equal Access’ Is Helping Drive Black Renters Out Of Their Neighborhood

PBS: What is Gentrification?

CivilRights.Org: Fair Housing Laws

SF Gate: Federal Agency OKs Preferences at New SF senior Housing Complex

Investopedia: Right of First Refusal

Nicole Zub

Nicole is a third-year law student at the University of Kentucky College of Law. She graduated in 2011 from Northeastern University with Bachelor’s in Environmental Science. When she isn’t imbibing copious amounts of caffeine, you can find her with her nose in a book or experimenting in the kitchen. Contact Nicole at Staff@LawStreetMedia.com.

The post Equal Access?: Neighborhood Preference and Housing Lotteries appeared first on Law Street.

In August, Walmart purchased the online-only retail website Jet.com for $3 billion. Before the sale, Jet.com forecasted that it would be losing money until at least 2020, as it attempts to establish itself prior to becoming profitable. That raises the question of why the world’s largest retailer, with an online presence of its own, would decide to buy a fledgling retail site that didn’t plan on making money for several years. Read on to find the answer to that question and how it is influenced by the changing retail marketplace, where online presence is more important than brick and mortar stores and is necessary to compete against online behemoths like Amazon and Alibaba.

Walmart and Jet.com

Walmart bought Jet.com for $3 billion in cash and $300 million worth of shares for people high up in the company. Although Jet.com CEO Marc Lore will take over the online business of both retailers, they will remain separate entities. This is partly to retain Jet.com’s potential appeal to new users, such as millennials, who might view the site differently than they would Walmart. Jet.com’s business model was originally similar to its major competitors such as Amazon, which charges annual fees for membership while offering special deals and services. However, that plan was scrapped in October 2015 when Jet.com’s discounts became available to everyone at no additional cost.

The hope for many at Jet.com–including its CEO, who also founded another online retailer startup that was purchased by Amazon–is that with Walmart’s economy of scale it can ramp up sales and turn a profit sooner than expected. The company also hopes to expand beyond the United States, where it currently operates.

The video below looks at Jet.com’s initial business model and how it sought to compete with Amazon:

The Why

While Jet.com has the potential to improve Walmart’s e-commerce presence and its overall sales, why did it decide to make this move and spend $3.3 billion on a startup that is years away from making a profit? The answer is that the retail market itself is rapidly shifting. In January, Walmart announced that it will be shutting down 269 stores, including 154 in the United States. The Walmart downsizing was just a precursor to a bigger change within the retail industry. In June, another wave of major retailers, including the likes of Macy’s and J.C. Penny, announced huge layoffs of their own. In total, as many as 38,000 jobs have been lost in retail so far this year, second only to the crude oil industry.

All these layoffs point to the fact that the way Americans buy their goods is shifting from brick and mortar stores to an online marketplace. Indeed, last quarter the nationwide e-commerce market in the United States grew by 15 percent. Walmart is certainly part of this growth, as its online sales grew by 7 percent during that period but that was slower than the industry as a whole and considerably slower than competitors like Amazon. The pace of Walmart’s online growth has slowed for nine consecutive quarters while its competitors continue to post large gains.

Although Walmart managed to make $14 billion in 2015 through online sales, that was only a paltry 3 percent of its total revenue. While Walmart has made efforts to improve its own online sales–such as expanding the number of products listed and allowing merchants to provide descriptions of their goods–the move to incorporate Jet.com may make sense as it tries to keep up.

While Jet.com’s revenue doesn’t come close to the amount of money made by Walmart’s e-commerce efforts, it has grown relatively quickly with about 400,000 new customers each month. It has sustained this growth by offering lower prices than Walmart and others like Amazon, by linking the buyers directly with the sellers while not accumulating a massive warehouse of inventory. Jet.com’s different style of business and the demographics that it caters to are likely why Walmart found the company so attractive. The following video looks at why Walmart purchased Jet.com:

Competing Against Amazon (and Alibaba)

Walmart’s overall goal is to compete or at least challenge Amazon’s dominance in the American e-commerce market. While Walmart made more in total revenue, Amazon made far more in online sales, pulling in $107 billion (including the web-services component) to Walmart’s previously mentioned $14 billion. Not only did Amazon make more in total, its growth in sales increased at a far greater rate, 31 percent to Walmart’s 7 percent last quarter. Amazon’s growth was also twice as much as the industry as a whole.

Walmart has already taken shots at its online retail rival. On top of recent investments, like its purchase of Jet.com and other efforts to improve its own e-commerce presence, Walmart has also been mimicking some of Amazon’s best practices. Namely, in response to Amazon’s Prime’s free two-day shipping for members, Walmart announced its own Shipping Pass promotion. Shipping Pass provides Walmart shoppers with the option to buy free two-day shipping for a year at about half the price of an Amazon Prime membership. However, unlike Amazon, this deal does not also include a wide range of other benefits like video and music streaming.

One thing that Walmart is unlikely to copy is Amazon’s new strategy of opening physical stores. Seemingly running counter to the emerging conventional wisdom, Amazon recently opened a brick and mortar store in Seattle and plans to open another in San Diego. While the exact rationale behind this decision remains unknown, Amazon founder Jeff Bezos told the Wall Street Journal that the company is experimenting with a lot of new ideas to maximize its revenue. As of now, it looks like Amazon is alone in its decision to open additional physical stores.

International Competition

Although Amazon has established itself as the big fish in the U.S. e-commerce industry and in much of the rest of the world, an even greater threat may be emerging in China. There, a company known as Alibaba controls about 80 percent of the market. Walmart has already taken steps to counter this threat with 400 locations in China and it recently partnered with JD.com to expand its influence in the Chinese market. The accompanying video looks at Alibaba’s business model:

Alibaba is slightly less of a threat to Walmart now because it is primarily focused on China. Additionally, its first foray into the U.S. market failed. However, it does hold a stake in other American companies, namely Groupon, and at one point it even owned a stake in Jet.com. The company’s focus in the near term seems to be learning the nuances of the American market, which could make it a serious challenger in years to come.

Conclusion

Walmart’s purchase of a company that planned to lose money for at least the next four years is indicative of the changing reality of the retail industry. Namely, while retail has long been the domain of brick and mortar physical stores with Walmart leading in sales, things are changing. While physical stores still account for a large proportion of all sales, retailers continue to put an emphasis on e-commerce.

While Walmart is still one of the largest if not the outright largest retailer in the world, in the e-commerce sphere, it lags behind. When it comes to online sales, it finds itself behind the reigning heavyweight Amazon and up against other stiff competitors, such as Alibaba, in developing markets. This explains Walmart’s recent purchase of the fledgling startup, Jet.com, and partnership with other e-commerce sites operating only in China. While $3 billion may seem like a lot, if it gives Walmart an edge online it could be worth much more. But most importantly, this purchase provides more evidence that the future of the retail industry is in online sales. This purchase reflects this trend and illustrates some of the challenges that traditional companies with physical stores may have as they try to adjust.

Currently, none of these three retail titans seems to have outright control over the online market. Walmart appears to be trying to figure out how to fully tap this market like it has the traditional retail industry. Going forward, whichever company is able to most effectively harness these trends will likely be the most successful. Walmart’s purchase of Jet.com may reflect its desire to succeed in a market where it has, so far, fallen behind.

Resources

Tech Crunch: Confirmed: Walmart Buys Jet.com for $3B in cash to Fight Amazon

USA Today: List of the 154 stores Walmart is Closing

CNN Money: Layoffs in Aisle 4! Retailers are Big Job Killers

Wall Street Journal: Wal-Mart to Acquire Jet.com for $3.3 Billion in Cash, Stock

The Street: Walmart’s New Alliance to Take on Alibaba and Amazon

USA Today: Walmart vs. Amazon: Walmart offers Free Trial of 2-day Shipping Program

Wall Street Journal: Amazon Plans More Stores, Bulked-Up Prime Services

Forbes: How Alibaba is Working Toward Establishing Itself in The U.S.? 

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post What Walmart’s Purchase of Jet.com Says About the Retail Industry appeared first on Law Street.

The U.S. government uses incentives in its tax policy to promote charitable giving. Most people are aware that they can deduct donations that they make to charitable institutions from their taxes. For small amounts, some people may not take advantage of this. Others might prefer to send the money that they would owe in taxes to a favorite charity, which is more in tune with their values. As a result, they try to diminish their tax burden as much as possible in favor of donating to charity. But very wealthy individuals can take it to a whole new level.

One strategy to reduce your tax burden that you can use is the creation of your own charitable trust. Charitable trusts allow the wealthy to preserve their asset value by not paying capital gains taxes on assets they sell through the trust, deducting the value of the gift that was made from their personal income tax, and taking advantage of other tax benefits designed to encourage charitable giving.

The charity gets a taste and the donor, who otherwise might not have given to charity at all, is incentivized to give. So is this a situation where greed is morally good?

Bet To Live Strategy

Take a look at this video about one of the most popular kinds of charitable trusts that you can create, the charitable remainder trust. Assuming of course that you have a million dollars. It gives a simple explanation of how the process works but, more importantly, a glimpse into why the process works.

As you saw in the video, the fact that the beneficiary is a charity can be irrelevant. In fact, the commenter goes out of his way to explain that you don’t actually need to care about being charitable in order to take advantage of this setup. What you should care about is whether you and your spouse have a long life expectancy. Because if so you then will be able to get the maximum amount of utility out of your trust.

This is why the charitable remainder trust, and other ways that the government incentivizes charitable giving by providing tax benefits to donors, is thought of as a good idea. Not because it rewards people for giving to charity but because it incentivizes people who otherwise wouldn’t into donating as well.

People who are motivated by their conscience to give money to charity–particularly those who have an issue of critical importance to them and a charity that focuses on that issue–are going to give money anyway. They have a built-in incentive to do so and may even give whether they could claim a tax benefit from it. But those only make up a portion of donors all charitable donors in the United States. The other portion includes those who are pushed to donate to charity because they want the financial benefits that donating provides. Of course, there is likely some overlap, those who get satisfaction or social benefits as well as a tax deduction for their actions, but there is a subset for whom it is all about the money. And if they weren’t benefitting themselves they wouldn’t be giving to charity.

By providing a financial motivation to donate we are capturing a donor class for charities that we otherwise would not have. What we want is to maximize the donor pool and by appealing both to greed and to altruism we can get the most donors possible. So what is the problem here?

Institutional Dynamics

One problem that exists with this setup is the amount of benefit that charities actually receive. Incentivizing the wealthy to give to charity through greed may be a great idea–but only if those charities actually get the money–or enough money to justify our privileging a charitable donation over what government would collect in the form of taxes. People who want to take advantage of the tax benefits that we use to encourage charitable giving will often set up a private foundation, which will, in turn, donate money to various charitable endeavors. But the IRS only requires the private foundation to spend 5 percent of its assets annually. Further, it doesn’t require that 5 percent to go to the actual mission of the charity they are donating to, it can go to things like administrative costs.

The individuals setting up these private foundations are receiving very generous benefits in the form of a tax deduction, but the charities that are supposed to ultimately benefit from these foundations may not be.

The amount that each institution needs to spend to be considered charitable–5 percent–is an arbitrary number that does not really represent what is the best amount for these institutions to spend. Especially when that percentage is so small. And while foundations could spend more than the required 5 percent, they rarely do.

It might be a good idea to treat different types of charitable giving in different ways. For example, a donor who is setting up his or her own private foundation versus one who is giving to an already established one. Allowing a donor who creates their own charity to label that activity as “charitable” when it only needs to spend 5 percent of the gift on that purpose may be unfair. Whereas we may want to allow academic institutions managing large endowments to be fiscally conservative to preserve their resources. It may make sense for us to treat different types of foundations differently and not have a blanket 5 percent expenditure rule in order to qualify. What should be prioritized is the benefit received by the recipients of the foundation, not the potential benefits to a donor.

We also might want to take a look at just how good a deal a charitable remainder trust is for the donor and how good a deal it is for the charity. It isn’t a bad idea to incentivize charitable giving by appealing to greed–in fact, it may be a very good idea–but we can probably negotiate a better deal for the charities. In both the remainder trust and the lead trust, the charities receive a benefit but the donors arguably benefit the most. For example, with a charitable remainder trust, you can sell an asset, such as a stock, through the trust to avoid a capital gains tax. And then you can deduct from your taxes the value of the asset that you gave to the charitable trust. Over the term of the trust (which can be in years or for your or someone else’s lifespan) you receive payments from those assets. Whatever is left at the end of the term goes to the charity but the donor, if they were fortunate to live for a long time after its creation, may have taken the bulk of those assets in annuities in addition to the tax benefits they received for forming the trust in the first place.

The lead trust operates in the reverse, giving the charity annuity payments and then the remainder of the assets to the creator of the trust (or their heirs). But it is still a good deal for the donor, especially those of extreme wealth. In some cases, a lead trust can result in a profit beyond the initial tax deduction that will eventually go to its recipient.

Another concern with this incentive is: what qualifies as a charity? The definition of charity can go beyond what we might think of as traditional charitable pursuits such as clothing the naked or feeding the hungry. There seems to be a wide range of what can be included as a charitable activity, including groups that act primarily as political special interest groups.

How the Wealthy Use Charitable Trusts

The Koch brothers’ charitable giving provides a prime example of how a charitable trust can be used to protect generational wealth. In this case, the trust established by Fred Koch, the father of Charles and David, was a charitable lead trust. A charitable lead trust allows a donor to give money to the beneficiary tax-free as long as the interest that accrues on the original amount is donated to charity for a period–in this case 20 years. This allows the heirs to keep more of the fortune left for them while at the same time ensuring a steady stream of income charity. For the Koch brothers, the charitable trust is not only protecting generational wealth, it is also used to promote a specific political ideology. A tax subsidy for this may go beyond what most Americans are willing to support, which is one reason why these methods may be worth revisiting.

Another example of estate planning to protect generational wealth can be found in the Walton family, the heirs to the Walmart empire. The Waltons have used a variety of trusts, including charitable trusts, to avoid paying estate taxes on their wealth, thus preserving it in the Walton family for future generations.

The trust most famously used by the Waltons is the so-called “Jackie O Trust,” which is a charitable lead trust. For a family with a lot of wealth and a lot of time this can be a useful tool. For example, Helen Walton, Sam Walton’s wife, set up four trusts in 2003. When she set them up the IRS set a rate of 3.6 percent, which is based on the interest rates for U.S. Treasury bonds at the time the trust is formed and how much the trust is likely to go to charity versus the heirs. But because interest rates on U.S. Treasury bonds are so low–and they have been for a while now–investments into these trusts easily beat those rates. In fact, the trusts returned 14 percent a year from 2007 to 2011. Which means that the Waltons pay 3.6 percent of this money in estate taxes, but the extra 10.4 percent that the trust earned went back into the pile and eventually go to the Walton family. They are making more money for their future estates than they are giving away.

Conclusion

Charitable trusts have a worthy goal–to promote charitable giving–and use an effective strategy to try to achieve it. It is the kind of appeal to self-interest that the original federalists would have been proud of. One that acknowledges the dearth of altruism in human nature and makes the best of it. But the balance of funds given to the charity versus the financial benefit to the donor may not be sufficient to justify the loss of tax income to the government. The regulations on this kind of giving could do more to ensure that charities get a higher percentage of the gift and that the gift is specifically used for tangible charitable activities, not for administrative costs and salaries. Appealing to a wealthy family’s self-interest in order to promote charitable giving is smart. But it can and should be a better deal for charities than it is now to justify foregone tax revenue.

These regulations also could do more to define what qualifies as a charity in the first place. Political discourse is a worthy goal in and of itself. But it may not be one that Americans want their government to promote through a tax incentive. Or, if we decide it is, then that should be separate from the promotion of charitable contributions. We can be careful about how money that we allow to go to charity rather than to government projects is being spent by taking another look at what we define as charitable. The rules for what is charitable are murky–donations to a 501(c)3 that engages in “education” are deductible, while a donation to a 501(c)4 that engages in politics is not, but the line between the two is not clearly defined. The requirements for the kinds of donations that we want to allow exemptions for should be clearer and more stringent.

If we are going to siphon tax dollars away from important government functions, through charitable tax deductions, the charities that are eligible should be ones that do charitable work that is similar to those goals. That way individuals who don’t want their taxes to support policy X but have no problem with policy Y can give to a charity that does something similar to policy Y. They are still incentivized to give but lost government revenue should not be done in vain.

Resources

Fidelity: Charitable Giving That Gives Back

Salon: 10 Tax Dodges That Help The Rich Get Richer

Mother Jones: Exposed: The Dark Money ATM of The Conservative Movement

Daily Kos: Jane Mayer’s “Dark Money” Exposes Charles Koch’s Campus Lobbying Scheme

Goodreads: Dark Money: The Hidden History of the Billionaires Behind The Rise of the Radical Right

Money Crashers: What Is A Charitable Remainder Trust- Definition, Rules & Taxation

Inside Philanthropy: Dept. of Murky Money: What the Heck Is a Charitable Trust?

Bloomberg: How The Waltons Maintain Their Billionaire Fortune: Taxes

The New York Times: Minding Your Business: The Jackie Onassis Trust, and a Variation On It

Daily Kos: 501(c)(3)s, 501(c)(4), and the Rest. A Primer

The Sunlight Foundation: The Difference Between Super PACs and Dark Money Groups

The Washington Post: How Is The IRS Supposed to Vet 501(c)(4) Groups Anyway?

Grantspace: What is a Foundation?

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Charitable Trusts: Can Greed Ever Be Good? appeared first on Law Street.

By now, most people have become familiar with the additional hoop they have to jump through when buying things at the store. When you get to the checkout counter you do an awkward dance: do I swipe my credit card, do I put it into the chip reader, do I need my PIN, can I pay with my phone? The United States is currently in the middle of an update to its credit card infrastructure, an update that has been difficult for many consumers to navigate. What’s behind the recent changes and why have they just started now?

History and Background

The technology behind the original magnetic strip card was developed as early as the 1960s, but credit cards didn’t become a mass technology until the 1980s. Before then, their use was largely limited to business people and frequent travelers. The main issue originally holding plastic back was the cost. Namely, in the United States transaction costs were relatively low, a few cents each, because they were conducted over phone lines. In Europe, however, transactions were not done this way, leading to much higher costs. And using phone lines was actually a step up from the initial way credit cards were authorized, through carbon papers. When that was the case, people could commit credit card fraud by simply digging through dumpsters.

The video below gives a detailed account of the history of credit cards:

Because the European credit card system was so susceptible to fraud, European companies needed a more secure way to process transactions. Stakeholders got together and began to develop an alternative. This alternative, chip card technology or the formal name, EMV, was unveiled in 1994 and became widespread by 1998 in Europe (EMV stands for Europay MasterCard Visa). Despite widespread usage of EMV technology in Europe and other parts of the world, it has been slow to gain traction in the United States. It was only in 2015 that American companies and merchants began a concerted effort toward adopting EMV.

Adoption in the United States

So why did the United States ultimately decide to switch to EMV cards in 2015 when the technology had been readily available since the 1990s? The primary answer is the recent surge in credit card fraud, starting with the massive hack at Target in 2013 in which millions of credit cards were stolen. This hack, along with several other high-profile incidents, revealed the truth. Namely, companies were trying to secure customers’ data in the 21st century with cards from the 20th. The accompanying video looks at why the United States switched to EMV and what it means for cardholders:

However, the recent change was not the result of a top-down mandate from the government. In fact, the effort was led by a private group of credit companies including American Express, Discover, MasterCard, and Visa. The 2015 deadline was not a concrete point of no return, but one created by the same credit card companies. While companies did not have to meet the deadline by law, the liability for card-present fraud would shift to those who do not comply with the new technology. In other words, if a company or a bank did not adopt the EMV technology by that date and was the victim of fraud then it was on the hook for the cost.

While retailers had until 2015 to comply, automated gas dispensers have until 2017. Likewise, ATMs also have a little extra time–Mastercard and Visa ATMs must make the shift by October 2016 and 2017 respectively.

Advantages of Chip Enabled Credit Cards

Aside from following in Europe’s lead and satisfying the requirements of credit card companies, the EMV cards offer a number of advantages over traditional cards. First and foremost is security. Whereas traditional cards have one magnetic strip that can be easily copied onto a fake card, EMV cards do not. Instead, the EMV cards utilize the chip embedded in the cards, which creates a different transaction code for each purchase. As a result, if someone manages to get that transaction data, the code is unique to a specific transaction and cannot be used again for future purchases.

EMV cards work in two ways. They can be dipped into a machine, where they have to be held for a few seconds longer than it takes to swipe a traditional card. The card can also be held up to a contactless device, however, these devices are more expensive and less likely to be available as the technology is only now entering the American market.

Another distinction for these type of cards is the actual transaction process. Most of the models in the United States will be the traditional swipe or dip and then sign. Currently, most new credit cards have both a chip and a magnetic strip in case a store’s technology has not yet been updated, but in the future, cards will likely only have chips in them. There is an even more advanced version that requires consumers to enter their PIN numbers after dipping the card, but it costs more and is less likely to be seen in the United States anytime soon. In fact, this type has almost been discouraged as the major credit card companies that initiated the switch to EMV cards did not require them to be “Chip and PIN” models.

The video below from Mountain America Credit Union looks at the chip card and some of its advantages:

Disadvantages of Chip Enabled Credit Cards

Even with the deadlines, adoption of the EMV cards has been a slow process. By 2015, 25 percent of new cards issued were EMV. By the end of 2016, a year after the deadline, that number is projected to be only 75 percent. While part of this is due simply to technological limitations and the difficulty small banks can have when switching up their technology, there is more to the story that just that.

Namely, the switch will be very expensive. Updating the millions of traditional card readers will cost approximately $7 billion. On top of that is the cost to replace the cards already out there, which is estimated to be another $1.4 billion. Last, there is the cost  to replace ATMs and old software so that they can read the new cards, a change that may cost up to $500 million.

Although the chip cards’ chief advantage over traditional cards is safety, they are far from hacker-proof. Now instead of targeting the cards themselves hackers can target the machines that read them. Specifically, criminals can drill or even insert devices into card readers that are able to read the information protected on the cards. Using this information, thieves have been able to make counterfeit cards with magnetic strips and use them in places that do not have the new technology.

On top of security is also the issue of privacy, as the new cards also transmit a large quantity of data. Information, like a person’s present location, may become available if the card is hacked. Lastly, the cards are slower to process and many of the merchants required to make the shift either do not understand the technology or its benefits.

Finally, while it is not the fault of the cards themselves, experts suggest that stiffer security from the new cards will lead to greater rates of card-not-present fraud like online transactions. While these cards may improve security for in-person transactions, fraud may simply move elsewhere.

Conclusion

EMV cards have long been popular in Europe and other markets, yet Americans have been resistant. But that resistance crumbled when a series of hacks revealed how easily credit card information could be obtained. The new chip cards do offer advantages, most notably in terms of security. However, they also have a number of disadvantages and will not get rid of fraud altogether.

Not surprising then, even following deadlines for adoption required by credit cards companies, many American merchants have been slow to endorse them. Additionally, American consumers have also been slow to embrace the new technology due to its slower transaction times. Nevertheless, EMV technology is likely here to stay and will soon become the dominant form of credit purchasing. There will undoubtedly be a number of hiccups in the short term as the technology’s flaws are exposed. But ultimately, those same flaws are likely to be addressed and, in the end, just might make the average American’s wallet a safer place.

Resources

Iovation: The History of Credit Cards and How EMV Will Change Things

USA Today: Where is the EMV Card 10 Months Later?

CreditCards.com: 8 FAQs About EMV Credit Cards

Nerd Wallet: What Are the Downsides to EMV Technology?

Payments Source: EMV Tech in the U.S. Is Still Too Slow and Expensive

Gizmodo: How Criminals Can Easily Hack Your Chip & Pin Card

Computerworld: EMV Smartcards Offer Security Benefits Even Without PIN, Visa Says

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Chip Cards: Making Credit Cards Safe Again? appeared first on Law Street.

When I last worked in an office (many moons ago) I was one of the millions of workers who are exempt from overtime. I did have some managerial responsibilities but I would not have characterized my job as “executive” or “professional.” Anyone with some common sense and a calendar could have effectively done the work I was doing. But because I was above the $23,660 per year threshold I was not eligible for overtime pay for the extra hours I worked. Depending on the season (my work ebbed and flowed dramatically based on the school calendar), I could work 60 hours a week and still be scrambling to get it all done; I could also be hunting for projects outside of my department just to make up a full work day. I started to think that I MIGHT be better off as an hourly wage worker because then at least I would be getting paid for how much I was working. But under the system, I was sometimes working 20 hours a week for free.

The recent changes in overtime rules are designed to address this concern for many employees who find themselves in a peculiar middle place. They are working more than 40 hours a week, but instead of being paid time and a half for the time they put in over 40 hours, they are barred from compensation for those hours because they make more than $23,660 a year or $455 per week. They are working for free. The recent changes to overtime rules–which will go into effect late this year–will raise the threshold from 23,660 to $47,476 per year. Meaning that all the workers who earn between $23,660 and $47,476 will now be eligible for time and a half–one and a half times their regular wage–for each hour they work beyond the 40-hour work week.

Are these workers going to be better off? Or are we going to place such a burden on employers that we actually do harm to these employees?

All About That Base

Nothing is more exciting than the phrase “let’s do some math!” but to understand the debate surrounding overtime we have to look at the numbers.

The previous $23,660 threshold, which was established in 2004, works out in the following way. Let’s say you have a job where you are right at the $23,660 and not eligible for overtime. If you are working 40 hours a week then the magic of math breaks that down $11.38 an hour gross ($23,660 a year divided by 52 weeks per year divided by 40 hours each week). That’s better than the federal minimum wage. But if you are working 60 hours a week for that same salary with no overtime eligibility, you’re only making $7.58 an hour. That’s barely more than the $7.25 federal minimum wage and in many states it’s actually lower than the required minimum.

If your $23,660 a year job is being a manager at a retail store and you’re working 60 hours a week with no overtime, there is a good chance that you are making less than the employees that you manage. Which seems inconsistent with the whole idea of managers being worth extra pay for their expertise and responsiblities and unfair that you are working for less than the minimum wage or working for free. Either way, you slice it that’s a fairly raw deal.

Under the new rules, which raises the threshold to $47,476 per year or $913 per week, many salaried workers are now entitled to overtime pay. In the same scenario as before–with a worker earning $23,660 per year–he or she would be paid the same 11.38 for a 40 hour work week. But for a 60-hour work week, that worker would make an average of 13.27 per hour, when you include the 20 hours of time and a half pay. That is a considerable improvement from the $7.58 per hour that he or she would earn without overtime.

In the video below, PBS NewsHour gives a brief explanation of how the overtime regulations currently work and what the proposed changes will do for workers.

How Businesses Might Respond

There are a few points to unpack from that video in terms of the arguments and counter-arguments for overtime. The reason that some people don’t think this is a sound policy is because employers are likely to react in several ways which could have negative consequences for employees.

The first way they might react is by reducing hours for workers who would be newly eligible for overtime and hiring multiple part-time workers instead in order to keep their labor costs about the same as they were before the change in the rules.

But is this necessarily a bad thing for the existing workers? Maybe not. Currently, a worker who is putting in 60 hours a week for a salary of $36,000 a year won’t be losing any money if their company reduces them to 40 hours a week and then hires someone else to work for 20 hours a week to avoid paying overtime. In fact, if you think about your time as having a monetary value you are getting more money because you are getting 20 extra hours a week back in time. The trickier scenario is a company that decides to change from one employee working 60 hours a week to two employees working 30 hours each–while also reducing the salary of the original employee or paying them on an hourly basis. This would, in fact, be a reduction in that worker’s total wages from $36,000 to about $27,000 per year (assuming that the hourly rate was the same).

That’s a significant decrease and a trade that many employees might not want to make for 30 extra hours a week. In a job market that had more positions available, those individuals would be able to get a second job for 30 hours a week. If it had a comparable salary they would actually be doubling their income. But in an economy where there isn’t a second job to take on with your extra time, this could be financially devastating.

In fact, some economists argue that increasing the threshold for overtime eligibility would be a good thing overall because it will help create jobs. Some employers will choose the second option of splitting one job into two. This change could be a mixed blessing for workers–a source of more jobs even if it might depress wages.

Another way employers might respond is by increasing salaries for workers to the new $47,476 per year cap, thereby rendering them ineligible for overtime. For workers who are close to that level, it may just be cheaper for employers to pay an extra few thousand dollars a year than to deal with the added hassle of calculating overtime pay or the added expense of paying it. Workers in that situation will get a raise.

In the video below, the Department of Labor explains the history of overtime as well as the recent rule change:

Obviously increasing labor costs places a burden on employers and some employers will have difficulty accommodating. The argument against increasing the overtime threshold essentially boils down to not wanting workers to lose what they already have in an effort to get a deal that is fairer. Instead of elevating worker wages, changes in overtime may decrease worker pay overall and alter the flexibility that some workers enjoy.

One of the benefits of being overtime exempt, some argue, is that you have more freedom from your employer to work a 30-hour week to make up for the 60-hour week you had to work. That was my experience when I was working–although culturally at the office it may breed resentment when other employees see you leaving early or not working Fridays if they don’t also see you working late or doing some of your tasks from home on the weekends. But for many workers, the mythical 30-hour work week never comes and so employees have essentially just charitably donated hundreds of hours of their time to their employers. Or they have worked as “managers” for less than the minimum wage.

The greatest danger that this change in overtime rules presents is that employers may cut workers and not replace them, making the unemployment situation worse. For some companies that will undoubtedly be the case and these businesses will take hits in productivity and be run by skeleton crews. But it is unclear whether, on balance, the changes will do more harm than good or more good than harm. And it is hard to anticipate how many workers will be cut versus how many will get raises. It’s even harder to know beforehand whether this change will be worth it for the overall health of the economy.

Conclusion

If you look at the numbers an increase in overtime benefits is undoubtedly helpful for those workers who currently are putting in more than 40 hours a week at their jobs. They will be more fairly compensated for the hours they work. But the larger effects on the economy are tricky to determine. Depending on how employers react, and how much of an increase in labor costs employers can absorb, this change can have serious negative impacts as well.

There will undoubtedly be some job loss and wage depression, as well as job gains and wage increases. As we get closer to the December 1 deadline when this change will go into effect, there will probably be more predictions about how this will ultimately shake out. But the fairness argument that workers should be paid for the time that they work when they aren’t actually making the high salaries for an executive or professional role is hard to refute.

Resources

U.S. Department of Labor: Final Rule: Overtime

U.S. Department of Labor: Questions and Answers

US News: Are The New Overtime Rules About To Boost Your Paycheck?

The Atlantic: Overtime Pay For Millions of Workers

Bloomberg: Obama’s Overtime Rule Defies Econ 101

The Hill: Senate GOP Files Motion To Roll Back Obama Overtime Rule

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Overtime Changes: Is it Time for More Time and a Half? appeared first on Law Street.

Back in the day, entering into a profession could be very challenging for newcomers. This was particularly true in European countries during the Middle Ages when each profession developed its own organization for members to mutually assist each other and control entrance into the field. These organizations were called guilds and functioned as part union/part cartel. Those lucky enough to belong to a guild reaped benefits like a pension for his family and networking opportunities. This also regulated the quality of the services the profession had in a given locality, which benefitted consumers. For people who wanted to become part of a profession but were not born into a family that held a spot or were otherwise well-connected, guilds functioned as a barrier to entry. This kept competition tightly controlled and promoted the interests of existing members at the expense of customers and those seeking entry.

Today there are many professions that require licenses and testing in order to gain entry–most of us are familiar with the licensing requirements for doctors and lawyers. Take an example I’m intimately familiar with–there are many hurdles to jump through in order to become an attorney. First law school, which can carry a hefty price tag. You then need to take an ethics exam and the bar exam if you would like to practice. The fees for these exams, if you count a review course as part of the cost, can be thousands of dollars. After that, you have to pay for the license, which varies by state, and bar dues, which also vary. The license also doesn’t easily transfer from one state to another. So if you wanted to join the bar in a new state and you haven’t been practicing for a number of years, you would have to take the bar exam again and pay the fees to enter into that state’s bar. For many, the cost of getting licensed in multiple states is prohibitively expensive.

The rationale behind occupational licensing is to control the quality of the services for the customer. With the medical profession, this argument is particularly compelling because of the amount of knowledge required to practice medicine safely and the nature of the risks involved. Consumers can’t really comparison shop for a doctor the same way they can for other services so it is critically important that all doctors have a minimum level of competency. And since other doctors are the only ones who would know if a doctor is competent or not, the medical profession to a large extent controls entry and polices itself. The same is true of many other professions.

But the argument in favor of occupational licensing requirements and regulations, made in the name of consumer safety, makes less sense for some other professions. It may take years of training to become a good interior designer but it probably does not require multiple years of training, multiple exams, and licensing fees to become a safe one. And in an aesthetically based profession like interior design, customers are very well suited to comparison shop for what they want and bargain for less than ideal services at a better price if they choose to. For some of these professions, licensing laws may be functioning not to keep customers safe but to protect profits of the profession’s existing members.

Increasing Requirements

According to a White House paper, there has been a dramatic increase in the number of professions that now require some form of licensing. About one-quarter of all workers in the United States now need a license to practice their trade, which is a five-fold increase from the 1950s. But this increase isn’t because Americans are working in different professions than they used to–rather, more fields are now requiring licenses.

The video below should be taken with several grains of salt, as it is designed to advocate against occupational licensing requirements, but it provides a good framework for the kinds of professions that now need licenses.

Licensing requirements for many professions can have a significant impact on the people seeking to join them. If you want to be a security guard, for example, it matters a great deal which state you are looking for work in. If you live in Michigan, it will take you three years to obtain your license while in other states it will only take you 11 days. For people that move across state lines–take military families, for example–they need to meet the licensing requirements in their new state, which can cost them time and money. As this video from John Stossel suggests, licensing requirements may also price out minorities and the poor from entering professions that require a license and are not always tied to protecting consumer safety.

These regulations can also depress wages for the workers who are not part of the profession and increase the cost of services to consumers. The White House paper cited earlier estimates a 10 to 15 percent decrease in wages and a 3 to 16 percent increase in pricing. This increase in pricing does not necessarily correlate with an increase in safety or the quality of the services. The fact that many of these licensing requirements do not necessarily have a positive impact on services is one of the strongest arguments for eliminating or reevaluating certain licenses.

Why Do We Have Occupational Licensing?

If these licensing requirements are not promoting safety and controlling quality, why do we have so many of them? Take a look at this explanation:

In the case of the medical profession and other professions that really do present safety concerns, these licensing requirements can be beneficial for consumers. Most people do not have the expertise to evaluate whether an electrician is safely performing the work in their home or if it has been done well. The ability to research a company on the internet before you employ its services gives you access to its reputation, but it is still helpful for people looking to hire an electrician to know that the candidates have had some training. It allows a consumer to be confident in the electrician’s ability to safely provide the service.

But for a profession like hair braiding, the consumer’s ability to assess the quality of the services and its safety is very high. You can immediately determine if you are pleased with the quality and there is very minimal risk to your safety. Any risk is probably one that a consumer would be able to identify and avoid. And in an industry like this, the ability to find out a professional’s reputation for quality and safety on the internet or elsewhere beforehand can eliminate a lot of providers who give poor service.

Many of these licensing requirements are not related to consumer safety or the quality of services but to the advocacy power of the professions that require licenses. As Milton Friedman points out in his speech, the best way for the profession to keep the cost of their services high is by limiting the number of people providing those services. By creating laws that fine individuals operating without a license, the cost of providing that service may be too high for outside competitors. This lack of competition protects the existing companies. It is often the professional associations who lobby to have these licenses imposed and fight efforts to take them away, not consumers.

In some cases, members of a profession are the best-qualified people to determine if another practitioner is performing the work safely. Using the medical profession once again as an example, in cases that are highly technical (such as a surgical procedure) it would be difficult for someone without medical training to figure out if the procedure was done negligently or not. For this reason, doctors often work as expert witnesses when they review themselves or in court. A lay person just would not have the knowledge to make those determinations.

Because of this, members of the profession are given considerable leeway to determine the requirements to obtain a license. The professional associations in each state lobby for the regulations that they think are necessary and may even help legislators craft the language of licensing requirements, or take charge of them entirely. This gives the professions a tremendous amount of control over their industries. It is also one reason why licensing requirements vary widely across different states. It isn’t that the process of braiding hair is much more dangerous in states where licensing is required than it is in states where it is not; it is because the states that require licensing have a more concerted effort by existing hair-braiders to impose and maintain a licensing requirement.

Conclusion

Some occupational licenses make a lot of sense to have. Professions where safety is an important concern and where it is difficult for consumers to judge the competency of the people they are hiring are ones that should have a base requirement for those entering the profession. But many of the professions that require licenses are ones in which those licenses do not protect consumers. Instead, they protect the members of that profession from more competition at the expense of job seekers and at a cost to the public. Licenses that are not tied to consumer safety should be reevaluated in order to ensure that they are necessary and that their purpose is to promote safety and quality.

For example, a license for a cosmetologist that requires 2,000 hours of training has probably exceeded whatever legitimate safety concerns may exist in the field. The same goal of promoting consumer safety could perhaps be met with a much less onerous requirement–such as a shorter certification process that focuses just on hygiene and safety practices. Licensing fees that are paid to state professional associations but are not payments for the costs of classes and tests could also be eliminated without adversely affecting public safety.

Reevaluating these licenses and eliminating the ones that do not benefit consumers will create new opportunities for workers to enter professions and for entrepreneurs to start businesses. It would also decrease the prices consumers face for many services. If there are safety concerns in an industry that do require regulation they should be dealt with, but many of these licenses and requirements could likely be eliminated or reduced without reducing consumer safety.

Resources

The Institute for Justice: License to Work

WhiteHouse.gov: Occupational Licensing: A Framework for Policymakers

FiveThirtyEight: Licensing Laws Are Shutting Young People Out of the Job Market

U.S. News: Short Sighted Policy: Studying Opticians Shows Occupational Licensing Doesn’t Help Consumers

Bureau of Labor Statistics: The De-Licensing of Occupations In the United States

Foundation For Economic Education: Does Occupational Licensing Protect Consumers?

Politico: It Takes 890 Days to Become a Barber in Nevada 

Forbes: Citing Adam Smith and Milton Freedman, Obama’s Economic Advisors Back Occupational Licensing Reform

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Have Occupational Licensing Laws Gotten Out Of Control? appeared first on Law Street.

We spend more money making pennies than pennies are worth. Right now making a penny costs 1.7 cents. Yet we continue to mint more pennies every year, costing the government millions of dollars. Both pennies and nickels cost more than their face value to produce. In 2014, the United States spent $132 million on manufacturing 8 billion pennies. That does not even take into account the added costs of using pennies, like the time it takes to find them in the bottom of your purse or pocket and for the cashier to count them. According to the organization “Citizens to Retire the Penny” the economic drain every year from the penny is almost $900 million dollars.

So why on earth are we still making pennies? The two main arguments for continuing to produce the penny are the impact that eliminating them would have on pricing and the penny’s role in charity fundraising. If there were no one-cent coins in circulation, businesses would likely round the prices of their goods up to the nearest nickel, raising costs for consumers. And charities that promote penny drives would suffer because there would no longer be coins that people don’t want and are therefore willing to give to charities. The third argument, which is more sentimental than practical, relates to President Lincoln–many simply don’t want to eliminate the coin because it commemorates him.

Throughout our history, the coining of money has had political ramifications that go far beyond whose face we put on our currency. Changes in the supply of money and who has access to it have the power to promote the interests of a particular class and stimulate sectors of the economy. Eliminating the penny may be efficient, but it could also have unforseen consequences for the economy.

The Penny Debate

The video below does a great job of being both an educational and entertaining introduction to the many practical, efficiency-based arguments in favor of eliminating the penny. Featured on Freakonomics.com by Stephen J. Dubner–who seems to be on an economic-moral crusade to denounce the penny–it not only shows the base numbers of how much money we are wasting by manufacturing pennies but also the added costs of keeping them around.

The numbers in favor of eliminating the penny are pretty clear. Firstly, pennies cost more to produce than they are worth, which right there should give those who are at least neutral on the penny some food for thought. Secondly, they aren’t even worth your time to bend over and pick them up, let alone the 120 million of hours of time per year that are spent counting pennies in cash transactions. In fact, when John Oliver delivered his own anti-penny rant he looked at news stories with people who actually would not bother to pick up free pennies. At first glance, one might think these people are wasteful and foolish to not pick up free money. But they are actually making a smart economic choice because the small amount of time it would take to pick up the penny is worth more to them than the penny itself.

Some people even throw pennies in the trash. Actually, a lot of people will throw pennies in the trash (2 percent actually admit to it, which makes me think that the number may actually be higher). Even for those who don’t literally throw pennies away, many will still not spend them. This means that pennies, once created, don’t circulate as much as other coins. It also means that we make more of them so that businesses can continue to have shiny new ones.

Proponents of the Penny

The penny does have its advocates. The group Americans For Common Cents advocates for the continued manufacturing of the penny. According to a 2006 Gallup survey, 55 percent of Americans said that pennies were useful, versus 43 percent who said they were not; 2 percent had no opinion (they could be the same 2 percent who end up throwing them in the trash). But Gallup broke this down even further by income per household. Lower-income groups are more likely to think the penny is useful. For example, households that make less than $30,000 a year have a 65 to 34 split in thinking pennies should be kept, while households that make $75,000 a year or more had a 45-53 split in favor of eliminating the penny. It isn’t until you reach that income strata that the anti-penny opinion takes the lead.

Americans For Common Cents cites the effect on consumers, particularly low-income Americans, as a reason for keeping the penny. Businesses would have to round to the nearest nickel if there were no pennies and therefore consumers would have to pay more. Some people might not notice, but to low-income Americans, that might actually make a difference. In its own research, Americans For Common Cents found that 73 percent of Americans were concerned that eliminating the penny would increase prices.

There is also a concern about the potential effect on charitable giving. Most of the arguments focus on gifts to charitable organizations, rather than giving to individuals, but panhandlers and homeless individuals receive loose change from people and might be adversely affected by pennies going out of circulation. Large charities like the Salvation Army also collect loose change and rely on people donating in pennies. The unpopularity of the penny may actually be a good thing for these charities, prompting people to donate them rather than throw them away or spend them. Other countries that have abandoned the penny, notably Canada, have not seen a drop in charity donations, but they may have other customs that don’t rely as heavily on penny donation to support charities.

Lincoln, Lobbying, and REAL Money

Keeping the penny has as much to do with preserving the great American tradition of specialized lobbying groups as it does with promoting the image of Abraham Lincoln. In this CBS Morning News segment, the reporters interview the head of Americans For Common Cents, which uses the mystique of Lincoln to promote the pro-penny position.

Americans For Common Cents gets a lot of its funding from Jarden Zinc, which manufacturers the zinc discs that become pennies. (fun fact: pennies are made of zinc and only covered in copper since copper is much too expensive). Jarden Zinc. has a very real financial interest in the United States continuing to produce pennies, so it spends money to promote this position. It spent $140,000 on lobbying efforts and was later awarded a contract by the federal government worth $48 million.

Lobbying efforts like this are found on nearly every issue in American politics, many of which involve much more money. When it comes to getting rid of the penny, Jarden Zinc is very passionate, while most of us have not considered the issue much at all. And if we have, we don’t feel that it is an issue of grave national importance and so no action is taken on it, allowing the status quo to continue.

There may be another compelling reason to keep pennies that Americans for Common Cents hasn’t touched on much in their advocacy efforts. Our monetary system was initially based on precious metals. Paper money (fun fact: paper money is actually made out of linen and cotton–not paper) became a stand-in for precious metals like gold and silver, but early on the money was still backed by gold and silver. Paper money was more convenient to use than carrying around bars of gold with you but the money had a bar of gold somewhere that gave it value. A dollar was actually worth something tangible.

Our currency is no longer backed by precious metals, except for pennies and nickels because those are actually made from semi-precious metals. But these are substances with value. It’s illegal to do it, but you could melt down a bunch of pennies and get zinc out of them (and a small amount of copper), which you could then sell. And because the zinc in the pennies is worth more than the pennies themselves that would be a great idea–if the government hadn’t made it illegal precisely because people started doing that.

Keeping pennies avoids the potential issues for charity donations and price increases but it also, according to Brian Domitrovic of Forbes, is a symbol of a monetary policy that we should encourage. One that responds to market signals and promotes a more healthful economy. In his view, keeping the penny, even if it is inefficient, is worth doing for that reason.

Conclusion

The penny has great sentimental value to many Americans. We have countless aphorisms about pennies. About picking them up, which we don’t do. About saving them, which we also don’t do. Even about giving them to people for their thoughts–which Stephen Dubner from Freakonomics considers to be an insult. But what we don’t have for pennies is a policy that deals in rational economic terms with the cost-benefit of producing and using them. Concerns about the impact on charities and on pricing are hurdles that our neighbors to the north and around the world have dealt with when abolishing their one-cent coins. We merely lack the political will to confront it as an issue because to most Americans pennies are unimportant, but to some, they are worth millions. It is literally a case of being penny wise and pound foolish.

Resources

Primary

United States Mint: 2015 Annual Report

Additional

History Matters: Cross of Gold Speech

Freakonomics: Pennies

Huffington Post: Get Rid Of The Penny 

The Odyssey Online: Why Are Pennies Still A Thing?

The Wall Street Journal: Easy To Lose and Expensive To Produce: Is The Penny Worth It? 

Fortune, Don’t Mess With the Penny Lobby

Retire The Penny

Americans For Common Cents

Gallup: Penny Worth Saving Say Americans

Forbes: Don’t You Dare Eliminate The Penny

 Editor’s Note: This post has been updated to make the cost of producing a penny clear. 

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Should We Get Rid Of The Penny? appeared first on Law Street.

Transportation Secretary Anthony Foxx recently promised to close the Washington D.C. Metro system unless it complied with safety requirements. How did it get to this point where the nation’s second-largest mass transit system is on the verge of being shuttered due to safety concerns and a series of mishaps?

Read on to find out more about the history of the Washington D.C. metro system, how safety concerns have been postponed, the recent spate of issues leading up to its current situation, and the future of the Metro in this uncertain climate.

The History of the Metro

The Washington Metropolitan Area Transit Authority, known locally as the Metro, was an ambitious project dreamed of by local residents going back all the way to the beginning of the 20th century. Residents hoped for a public transit system on par with other major northeastern cities. This hope finally started to come to fruition in 1959 when the first concrete plans for a rail system in the nation’s capital were drafted. After a bill allowing its construction passed Congress in 1965, work was finally under way.

Initially, the system was meant to serve only the capital so as not to compete with new freeways, however, it was later expanded to parts of the neighboring states of Maryland and Virginia as well. Completion of the first segments occurred in 1976, but tracks and routes were changed to meet proximity requirements for important areas like the National Mall. Only in 2001 were all the originally planned tracks finished. Upon completion, the Metro became one of the largest public works undertakings ever completed, stretching 103 total miles and serving the second most people of any rail system in the U.S., following only New York City. The completion of the Metro required the input of politicians, architects, construction workers, and engineers with the end goal of creating a system acceptable to everyone while also being aesthetically pleasing.

One of the Metro’s important goals was the ability to expand and modernize as time went on. Aside from incorporating automated technology, the area covered by the system also expanded to 117 miles served by 91 stations. In addition, the Metro operates a bus system with 1,500 buses, which enables it to serve the region 24 hours a day, seven days a week. The combined system now services an area of approximately 1,500 square miles with as many as 4 million residents. The Metro also recently completed the first phase of the new Silver Line, which will eventually connect the system to Dulles International Airport in Virginia with the second phase currently under construction. Although continued expansion and additional services have been proposed, the system is now faced with a series of long-delayed safety challenges that it must also tackle.

Success Over Safety?

While the Metro was an unqualified success in its first few decades of operation, after that, problems with the system became more apparent. First, was the structure of its governing body–elected officials from each of its four regions control the WMATA and often do not have experience with subway operations.

Also not helping matters is the Metro’s long-term funding plan, specifically, that it has never really had one. In most major cities a large portion of a system’s funding comes from dedicated taxes, often well over 30 percent. In the case of the D.C. Metro, dedicated funding amounts to just 2 percent of its budget. The lack of dedicated funding has essentially left the leadership with the task of fundraising every year to keep the system funded. Raising money became increasingly difficult after the system stopped rapidly expanding, as funds were needed to simply cover costs and maintain the tracks. While funding did continue to increase it was also increasingly siphoned off for other aspects of the Metro system such as the bus network.

As funding became harder to come by, the Metro started to become political. Representatives on the Metro’s board fought for new stations or services in their districts so as to appease their constituencies. They also worked to keep Metro open longer and later, which was met with approval by the riding audience but made routine maintenance harder and harder to complete. The D.C. Metro lacked an additional track as well, something other major systems have to allow trains to bypass maintenance work. Without additional tracks, the Metro is forced to single-track trains while doing maintenance and construction, which causes delays and decreases customer satisfaction.

Incidents

With all these issues plaguing Metro it is no surprise to critics that they started to manifest themselves in the form of accidents. In the early years, these accidents were rare. In 1982, the first major tragedy occurred when a train derailed killing three riders. It was not until 1996 when in another incident occurred when a train skipped a track in the ice and collided with another train, killing the operator. As time went on and the Metro failed to address these issues, the regularity of high-profile accidents began to increase. In 2004, 20 people were injured in a collision. Shortly after, in the span of two years between 2005 and 2007, four workers were killed in accidents. Again in 2007, 23 more passengers were injured in a derailment. The worst accident came in 2009, however, when nine people were killed and over 80 were injured in a crash on the Metro’s Red Line.

This series of embarrassing incidents forced Metro’s hand. The Metro was able to at last secure additional funding to address many of the problems haunting the system. Nevertheless, for all that was seemingly done, the true depth of the problems became clear after track issues continued to plague the rail system. An incident at the L’Enfant Plaza station in 2015 left passengers stuck on a train as it filled with smoke. As a result, one woman died and more than 80 people were taken to a hospital for smoke inhalation. This was followed by a number of different episodes including derailments, oil spills, and more fires.

The situation was so bad, in fact, that the D.C. Metro became the only major rail service in the United States to have its oversight be placed under the direct control of the Federal Transit Administration. Even after this step, though, the problems have endured, with at least eight separate incidents of either smoke or fire causing evacuations or service halts since April 23.

Recent Developments

These repeated episodes seem to have been enough to force authorities to act, but the impetus for the dire threats from Secretary Foxx were not just the incidents described above. After a fire at the McPherson Square Metro stop on March 14, safety inspectors became increasingly concerned that parts of the rail system were unsafe for operation. In an unprecedented move, the entire system was shut down on March 16 in order to conduct emergency safety inspections.

The results of the inspections prompted system administrators to consider drastic action to ensure track safety and on May 6, the Metro introduced a preliminary SafeTrack plan to complete urgent repairs. The plan, which will begin in June, calls for a series of extended repair surges and the shutdown of several stretches of track for weeks at a time. Just a day before that plan was announced, a third-rail insulator cast doubts on the system. Despite the explosion, the station was not closed until hours later and safety inspectors were not allowed access, raising concerns over the safety training of Metro workers. Unsurprisingly, incidents such as this, along with worsening service and decaying facilities, have led Metro’s weekday ridership to decline by as much as 6 percent since the end of the 2015 fiscal year.

The following video looks at the severity of the problem:

The Future

Some see a silver lining with the SafeTrack plan; the decisive action may mark an important shift in the system’s management. A major aspect of the plan is a series of safety surges, where portions of the system will be aggressively repaired for extended periods of time, meaning either single-tracking or outright closures of entire stations. The plan also calls for a roll back on operating hours, meaning stations and their corresponding lines will be closing earlier, and weekend and special event hours will be rolled back in order for workers to have more time to address issues plaguing the system. As a means to offset all these closures and service reductions, bus service will be expanded and used to service stations during temporary closures.

The accompanying video gives a brief summary of the plan:

But before these plans could even be implemented (in typical Metro fashion) they were put on hold. In this case, the decision came at the discretion of the Federal Transit Administration. Specifically, the FTA is calling on Metro to begin immediate work on three sections in particular. The impetus for this call was the recent track explosion and Metro’s botched handling of it; while these three sections were scheduled for maintenance later in the year, they will now become priorities. While it is reassuring to see work finally underway to address Metro’s core problems, these new contradictory directives also raise more questions over who is in charge and whether there is a complete plan in place going forward.

Conclusion

The Metro was once the pride of Washington D.C., admired by visitors from all over the world. However, due to poor initial planning and an even worse maintenance record, that is no longer the case. Now the Metro is faced with a potential $2 billion shortfall by 2025 due to budget cuts and lost ridership. Couple this with all the accidents, injuries, and even deaths, the Metro now finds itself in a very unenviable position.

But not all is necessarily lost. Other cities such as Chicago and New York faced similar problems and resorted to efforts like town hall meetings and extended track closures to address their problems. Going forward, the Metro can incorporate these methods along with its own ambitious maintenance and rehabilitation plans. Ultimately, the Metro needs to find leadership that is willing to make unpopular decisions and then follow through with them. In the short term, customers will be unhappy about delays and closures, but a late train is still better than one that never arrives at all.

Resources

USA Today: Transportation Department threatens D.C. Metro shutdown if safety doesn’t improve

Center for History and News Media George Mason University: Building the Washington Metro

Metro: Washington Metropolitan Area Transit Authority

Washingtonian: The Infuriating History of How Metro Got So Bad

The Washington Post: At Least 6 killed in Red Line Crash

The Washington Post: 5 facts about Metro’s ‘Safe Track’ Plan

Greater Greater Washington: The Feds Tell Metro to Rearrange its Maintenance Plan

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Trouble Below: The Problems Plaguing the Washington D.C. Metro appeared first on Law Street.

Ferrero, the chocolate company that manufactures international favorites such as Nutella and Ferrero Rocher, is on track to reach over $10 billion in profits this year, making it the world’s third largest chocolate producer. This growth is especially impressive considering that in 2006, Ferrero’s turnover stood at only 5.6 billion. But in light of this news, there is a problem that Ferrero is still working on addressing: child slavery on cocoa farms.

It’s important to note that Ferrero is not alone in this issue. In 2001, leading companies of the chocolate world made a collective promise to eliminate child labor from their supply chain by 2005 but the year came and went without an end to abusive labor practices. The deadline was pushed back to 2008, then to 2010. Ferrero appears to be the only one of those companies that set a secondary deadline for the project. In 2012, Ferrero pledged to end slavery on the farms where it harvests cocoa by 2020. Other leaders in the industry followed this pledge, but chose to amend their commitment to reducing child labor in Ivory Coast and Ghana by 70 percent by 2020 (rather than eliminating it entirely). Ferrero made a bold commitment in 2012–but is it one that the company can feasibly deliver on? Read on for a look at the company and the controversy over eliminating child labor in the chocolate industry.

What is Ferrero?

History

In 1946, Pietro Ferrero invented a cream of hazelnuts and cocoa. Hazelnuts were a creative addition to confectionery during wartime rationing, which limited the use of chocolate. Together with his brother, he launched a company to sell the product, which was eventually taken over by his son, Michele. Michele re-branded the spread as “Nutella,” opening production and sales offices worldwide in the wake of World War II.

Nutella became integral to Italian life, even sponsoring the national soccer team for three years beginning in 1988. Nutella was central to the “Made in Italy” brand but Ferrero also operated the Ferrero Rocher line of pralines, Kinder chocolate bars, and Pocket Coffee chocolates. By the time of his death, Michele Ferrero had unseated Silvio Berlusconi as the richest man in Italy–he had a net worth of an estimated $23.4 billion. In 1997, Michele’s sons Pietro and Giovanni took over the company and ran the brand successfully, but after Pietro’s death in 2011, sole responsibility fell to Giovanni.

A Media Shy Chocolate Megalith 

The family was, and still is, private to the extreme. Michele Ferrero did not hold press conferences or engage at all with the media, even going so far as to block tours of the company’s factories.  Ferrero has cultivated an almost mystical brand reinforced by the control the Ferrero family holds directly over the recipe, the production, and the marketing of their products. Although the company is headquartered in Italy and operates largely from its base in Alba, it is still reliant on West Africa for cocoa. Nutella, interestingly enough, also relies on sugar from Brazil and palm oil from Malaysia, which means West Africa may not be the only place where brutal labor practices have been a concern.

Child Labor and Slavery in the Chocolate Industry

The world’s largest chocolate producers rely on West Africa–especially the Ivory Coast and Ghana–for cocoa. The combined GDP for both countries is just a fraction of the billions of dollars in sales that international chocolate companies like Nestle pull down annually. Cocoa is generally produced by farmers living in extreme poverty, and child labor is common on the majority of cocoa farms. Children are often sold into slavery by their parents or kidnapped. The average work week can last from 80 to 100 hours and while working on the farms, these children receive no salary or education. The living conditions are brutal, as children are often beaten and rarely well fed.

Tulane University conducted a study in the 2013-2014 growing season that revealed approximately 2.1 million children were involved in objectionable labor practices on cocoa farms in both the Ivory Coast and Ghana. In 2015, three California activists filed a lawsuit against Hershey, Mars, and Nestle for not advertising that their products were made using child labor but the likelihood of that civil action suit coming to fruition is slim. This past September, Nestle commissioned a report from the Fair Labor Association (FLA) which presented the following results:

Researchers visit 260 farms used by the company in Ivory Coast from September to December 2014. The researchers found 56 workers under the age of 18, of which 27 were under 15…Researchers from the FLA, which was commissioned by Nestlé to investigate workers rights on its west African farms in 2013 amid international pressure, found child workers at 7% of the farms visited. Nestlé’s code of conduct prohibits the use of child labour in its supply chain.Though researchers found Nestlé had made substantial efforts to inform farmers about its code of conduct, awareness of the code was low among farmers, with farmers sometimes unable to attend training sessions due to either “lack of interest or time”. The FLA also found that farms lacked any kind of age verification system for workers.

Ferrero has not commissioned a similar report but because almost all of the major chocolate providers rely on the same farms within Ivory Coast and Ghana, concerns from critics allege that conditions are similar on its farms. Ferrero has called out for an end to child slavery and forced labor, but if farmers are ignoring that call to action, like those interviewed for the FLA report, then the company may not be on track to meet its 2020 goal.

 Conclusion

Ferrero has officially displaced Nestle to become the third largest chocolate producer in the world, which means that the company will be centered in the international spotlight like never before. The Ferrero family may have historically been secretive about their business to protect it from corporate espionage but that does not mean they should be allowed to be anything less than transparent when it comes to their labor practices. There are dozens of smaller chocolate companies that have successfully eliminated child and slave labor from cocoa production on their farms, and particular light is being shed on Ferrero (and other leading chocolate companies’) practices. The moment may have come for Ferrero’s leadership to divert attention and resources to reforming the cocoa farms behind their famous chocolate.

Resources

The Local: Italian Chocolate Giant Ferrero to Eclipse €10bn Turnover

Reuters: Michele Ferrero, Owner of Nutella Empire, dies at 89

CNN: Ferrero Sets Date to End Cocoa Slavery

BBC: News; How the World Went Nuts for a Hazelnut Spread

New York Times: Michele Ferrero, Tycoon Who Gave the World Nutella, Dies at 89

Fortune: Was Your Easter Chocolate Made with Child Labor?

Fortune: Inside Big Chocolate 

The Daily Beast: Lawsuit: Your Candy Bar Was Made By Child Slaves

The Guardian: Child Labour on Nestlé Farms: Chocolate Giant’s Problems Continue

The Huffington Post: Chocolate and Child Slavery: Say No to Human Trafficking this Holiday Season

Jillian Sequeira

Jillian Sequeira was a member of the College of William and Mary Class of 2016, with a double major in Government and Italian. When she’s not blogging, she’s photographing graffiti around the world and worshiping at the altar of Elon Musk and all things Tesla. Contact Jillian at Staff@LawStreetMedia.com

The post Chocolate Company’s Growth Puts a Spotlight on Child Labor in West Africa appeared first on Law Street.

If you are tempted to take out a payday loan you might want to take Sarah Silverman’s advice and try literally anything else. The trouble is, there are rarely other options and here in the United States there are 40 million Americans who are “unbanked,” without access to the formal financial system. Shockingly, these Americans spend the same amount just to use their own money as they do to purchasing food–10 percent of their income.

Payday loans may be an evil but unless and until they are replaced with a better alternative they continue to be a necessary one. Eliminating payday lenders would prevent borrowers from taking on that particular pernicious type of debt but does not solve the underlying concern that many unbanked Americans do not have access to credit.

One of the proposed solutions to provide access to banking services for the unbanked is to use the United States Postal Service. Progressive politicians are advocating this method as an efficient way to reach low-income citizens in their neighborhoods. But some are uncomfortable with a government agency, one which is facing some financial difficulties of its own, taking on a problem that should be dealt with by market forces.

So is the existence of the “unbanked” really a problem? If so should we be using the post office to combat it?

A Solution for the Unbanked?

For a primer on the issue of how many Americans are currently unbanked and would benefit from an alternative to payday loans, check out this TedTalk by Mehrsa Baradaran.

As Baradaran explains, postal banks are actually something we already had and used to great success. From 1910 to 1966, the U.S. Postal Savings system provided a place for Americans to deposit funds in order to save money and have a way of paying their bills other than with cash. That is one of the chief problems facing the unbanked–the inability to have easy access to their own money and the high percentage of their money spent on just using their own funds. Paying a fee to access your own money or even just check your account balance is a significant financial burden and a service that the banked get access to for free.

With the advent of community banks, which offered a more attractive interest rate to depositors, the postal banking system seemed unnecessary and was eventually abolished in 1966. But the community banks–which were also proposed as a solution to the problem of the unbanked–removed themselves from low-income neighborhoods and contracted the number of people they provided services for. Nature abhors a vacuum and payday lenders went into that space, which is why people in low-income neighborhoods are often forced to rely on these types of lenders as substitutions for the banking services that the banked take for granted.

For the unbanked, there is simply not a banking location that they can go to. And one of the beauties of using the postal system for banking is that convenient locations already exist. Fifty-nine percent of post offices are in zip codes where there is either zero or only one bank. Other industrialized nations already have postal banking. In the U.K., the postal service does not actually provide financial services but allows third-party providers (like the Bank of Ireland) to conduct business there. France has actually converted its postal service into a financial institution.

The postal banking systems have been imperfect. In Japan, the postal banking system drew heavy criticism for its inefficiency. Yet 80 percent of Japanese citizens over the age of 15 had a postal bank account. China and India are also seeking ways to increase micro-lending and financial services to their nations’ poor through the use of postal banking services.

Potential Concerns

The concerns regarding postal banking fall into two main camps. First, there is the question of whether a postal banking system would help and whether the U.S. Postal Service could operate it efficiently and fairly. The second concern is less a practical question of ability and more an assessment of whether we want to use the postal service to promote a specific financial ideology.

The U.S. Postal Service seems to think it would be able to provide this service. The American Postal Workers’ Union makes the argument that postal workers are already in the very places that community banks have abandoned and they currently provide some financial services, like money orders. They would be able to provide small loans as well–like a payday lender but without extremely high interest rates.

The video below outlines the case made by the American Postal Workers’ Union for postal banks.

But the argument goes beyond the mere logistics of whether post offices can provide these services. The core concern is whether they should. Whether we want a government institution to be providing a service that is traditionally left to the private sector. After all, should the government really be involved in trying to undercut the payday lending industry based on a largely moral argument about “fairness”?

True Competition 

The private sector might argue that payday lending is actually fair. It provides a needed service–credit–at a rate that people are willing to pay. With so many of these financial institutions out there it is hard to argue that the industry is not competitive and given that these rates are still being accepted by many borrowers that must be what the credit is worth.

But that argument may misconstrue what true competition, one that will actually produce a fair price for something in a healthy market, consists of. Critics of payday lending would argue that true competition involves choices between meaningfully different options, not the illusion of choice between virtually identical competitors. A person living in an area where there are 10 payday lenders and no banks is not truly living in a competitive market. The individual lenders may vary their terms slightly but from the perspective of the borrower, they are still going to have to choose a payday lender. QuickCash versus KwikKash does not, at the end of the day, matter very much to the borrower or to the pernicious effects of the system.

The implementation of postal banking would provide meaningful choices to borrowers and create a true alternative to the payday lending industry. Then, when faced with that actual competition, they will be forced to either adapt or die. If a 400 percent interest rate really is a reasonable price to pay for the service they are offering then payday lending will survive the introduction of postal banking.

When you discuss postal banking there are two main ways that it can be structured–a postal bank that provides access to credit and one that does not. In the past, postal banks did not provide the type of micro-loans that would compete with payday loans. While a modern version of the postal bank could include small loans it doesn’t necessarily need to. Postal banks can provide other valuable services; most importantly post offices can serve as a place to save and access your money. If postal banking was re-instituted without lending, it would likely go a long way in solving the problem of access for the unbanked and underbanked.

Currently, people who live in a community where there is no bank have three main options to cash their paycheck. Payday loan providers that usually charge a 10 percent fee, check cashing services (some are part of larger retailers like Walmart) that typically charge a lower flat fee, and prepaid card accounts that allow you to deposit your money into the account but then charge a monthly fee for you to use the card. Those of us with bank accounts can get all of these services for free.

The Government’s Role

Postal banking would, of course, involve the government taking on a role that is now filled by the private sector. One fear is that this will stop the development of private sector alternatives to payday lending and stifle innovation in the provision of financial services. We may hate payday lending, but many feel that if it is going to be replaced that should be done by the private sector–through innovation in technology or some other form of financial institution. The government’s role should be contained to regulating industries, not replacing them.

But the postal bank did not, when it existed, kill other banks. In fact, the opposite happened. The rate of interest for the postal banks was capped at 2.5 percent to weaken their ability to compete with other banks. When community banks offered better rates, not surprisingly, depositors moved there–choosing a private sector institution that they felt better suited their needs. Postal banking also would not eliminate advances in technology and electronic banking. Those advances are driven by thinking of better ways to provide services to already banked people.  Applications that transfer money instantly between bank accounts for a minimal fee on your smartphone only benefit people who have smartphones and bank accounts. To the unbanked, these advances are meaningless–21st-century innovations in banking don’t assist people who are still stuck in the 20th. Creating a postal banking system would help the millions of unbanked Americans enter into the formal financial system, but it may not have much effect on companies seeking to further cater to those who are already included.

Conclusion

Postal banking may seem to some like a governmental overreach into an arena where the forces of the market should be in charge. Undercutting a private sector industry in favor of a government run charity-bank makes some people uncomfortable. Some may ask where we should draw the line between public good and social engineering. But postal banking already worked once in our nation’s history. And while it is not a complete solution to the problem of the unbanked and underbanked it could be used as part of that solution.

Resources

NerdWallet: Where To Cash A Check Without Paying Fees

Huffington Post, Postal Banking : An Idea Whose Time Has Come Again

The Washington Post, Should The Post Office Be A Bank?

Bloomberg QuickTake, Postal Banking

Slate.com, A Short History of Postal Banking

Goodreads, How The Other Half Banks

The Ultimate History Project, Postal Savings Banks

The Atlantic.com, Bernie Sanders’ Highly Sensible Plan To Turn Post Offices Into Banks

The American Interest, The Return of Postal Banking

Salon.com, Two Words For Hillary…Postal Banking

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Should We Bring Back The Postal Banking System? appeared first on Law Street.

Access to credit is a necessity for individuals who are faced with a sudden financial emergency. But for the “unbanked” and “underbanked,” there are very few options to get that access. To cover an unexpected expense, even a relatively modest one, that they can’t pay for with their savings or by selling something, these individuals often turn to payday loan providers. It’s an industry that generates billions of dollars a year and is characterized by many as being unconscionable. The interest rates on the loans are often as high as 400 percent per year (though the loans typically last two weeks) and users of payday loans are often trapped in a cycle of loan renewals that result in paying thousands of dollars to borrow hundreds.

High Interest Rates

The terms of payday loans are terms that most of us would never consider signing on for. An interest rate of 400 percent is by any definition, usury. But for the unbanked and the underbanked who desperately need that credit to get them through whatever emergency they are facing, those terms are agreed to. Contracts like this are sometimes referred to as “contracts of adhesion.” A contract of adhesion is one that involves a stark difference in the power of the two parties–where the stronger party is the drafter and the weaker party is unable to modify or negotiate the contract. Usually, these contracts are found in large transactions, like purchasing a house or a car. Courts are willing to take a closer look at these contracts because of the differences in bargaining power and if they find the contract, or a provision of it, to be “unconscionable” they will invalidate it.

The court’s ability to invalidate these contracts is meant to protect the weaker parties with little bargaining power. Just as stricter regulations on payday loan providers would be an attempt to protect the unbanked and underbanked from “predatory” lending practices. But calls for regulation do not address the underlying concern that if the payday loan industry were eliminated and nothing replaced it the unbanked and underbanked might actually be worse off than they were before. They would have no access to emergency credit. And while the majority of people who use payday loans get caught in a trap of debt some people are able to use these loans and benefit from them. If payday loans are going to be regulated to extinction or outright eliminated there needs to be some instrument for emergency credit to replace them.

By The Numbers: How Do PayDay Loans Work?

So what exactly are the terms of a payday loan? How bad are they really? Pretty bad, as it turns out. They are designed to not be paid back, which is why some states have banned them altogether. But that is, from the lenders’ point of view, the beauty of the system. Here is how it works. The borrower takes out a loan to pay off a debt. Often that debt is fairly small–the typical payday loan is for a few hundred dollars–and the term of the loan is usually two weeks. Borrowers often can’t pay back their loan within that two week period, which is not surprising given that they had no savings to fall back on, causing them to take out the loan in the first place. Borrowers then often end up “renewing” the loan. This is where loan providers make much of their money, from the frequent renewals. More than 80 percent of payday loans are renewed at least once and 22 percent are renewed six times or more, ultimately costing borrowers more in fees than the amount they borrowed in the first place.

Let’s use some of the numbers from Mehrsa Baradaran’s book “How The Other Half Banks” as an example. If someone takes out a loan of $325, a typical amount, and renewed it eight times (or took four months to pay it off) would cost the borrower $793. That number reflects a principal of $325 combined with additional interest of $468. In a very short time, the interest added up to almost 1.5 times the initial loan.

It actually gets worse. When the borrowers take out payday loans they sign over their paychecks or give a lender permission to withdraw money directly from their account. So when they get their paychecks the money they owe is taken directly from them, taking, according to a report from Pew Charitable Trusts, 36 percent of the borrower’s paycheck before they even get their hands on it to pay for other expenses–automatically.

Take a listen to this for an audio recap of how some of these numbers work out.

Given how high these interest rates are, what kind of borrowers would agree to them? It may not be the individuals you think. It isn’t the completely destitute who take out payday loans because they can’t offer their future paychecks to pay the loans back. According to a survey conducted by the Pew Charitable Trusts, “there are five groups that have higher odds of having used a payday loan: home renters, those earning below $40,000 annually, those without a four-year college degree, those who are separated or divorced, and African Americans.”

This PBS segment on the issue does an excellent job of showing the kinds of individuals who might take out a payday loan and some of the effects that it has on them and on society as a whole.

Unconscionability And Solutions

The numbers for the unconscionability argument against payday loans certainly seem damning at first glance. But just because the fees are high does not mean that they are unfair from an economic perspective. According to the economists at Liberty Street Economics, the unfairness argument shouldn’t necessarily depend on what the fees are but rather on whether those fees are being determined by a competitive market. A competitive market will produce a fee that is “fair,” but will still allow companies to cover the costs of doing business. One could make the argument that the costs of running this business are so high because these debtors are bad credit risks (likely to default) so higher fees are justified to cover the costs of those defaults. Providing credit isn’t a charity and we shouldn’t be writing policy as though it were.

Payday lenders will point to the high default rate on payday loans, and therefore the increased risk to the lender, as an explanation for high interest rates. If you look at the default rate for payday loans they are pretty high–studies in different states have found default rates of between 44 and 56 percent. This is not surprising when you are lending to a segment of the population that has no savings and limited access to banking options.

But the rate of default is more complicated for payday lenders. Payday lenders have the unusual and critical advantage of being able to draw funds directly from the borrower’s account.  This means that while the borrower may “default” because they don’t have enough money to pay back their debt in their account the lender can take the money anyway and subject the borrower to an overdraft penalty on their account. So the lender is still getting repaid even though they are categorizing it as a default. The Center for Responsible Lending calls this “Invisible Default.” In fact most borrowers (66 percent) who “default” actually do end up paying their debt back. The default rates on payday loans is often used to explain why lenders charge such high interest rates, but if lenders are still able to recover most or all of the money, these invisible defaults may not be as financial damaging as it may seem.

Potential Alternatives

There are several potential ways to reform payday loans but the two main ways, other than eliminating them altogether, are capping the amount of interest that can be charged and putting a cap on the number of times the loan can be renewed. A 36 percent cap is what is often proposed, but that is effectively viewed as a ban on payday lending, as lenders claim that they would not be able to cover costs. Even though 36 percent is much higher than the average credit card interest rate, the loan amounts are so small and the risk of default is so high that it probably would kill off payday lending, at least as it currently operates. A cap on renewals would also be costly for them but perhaps not to the same extent, depending on how many renewals were allowed per loan. If the number was very high it might not present much of a deterrent to either lenders or borrowers.

It is possible for a borrower to use a payday loan and not become ensnared in debt, as long as that borrower is able to avoid renewing that debt repeatedly. For those borrowers who need that credit and who believe they will be able to pay it back in two weeks, it seems unfair to eliminate their ability to borrow money at all. The inability of other people to borrow responsibly shouldn’t hinder their ability to enter into contracts that they think will benefit them, even if they end up being wrong.

The main premise for nullifying a contract of adhesion is that the parties weren’t on equal terms, and often, it is based on the notion that if the weaker party really knew what they were signing up for they wouldn’t have done so.  But in the case of payday loans, the borrowers do understand that they are signing a contract that is skewed entirely in the lender’s favor–the evidence suggests that they know what they getting into and are choosing to sign up for it anyway. Eliminating payday lenders without presenting another option is taking away their ability to make financial choices and preventing them from accessing credit.

The answer to an individual contract of adhesion may be to nullify the contract if there really is evidence of foul play and manipulation. But the answer to millions of those contracts isn’t to assume that each one was made by predators and prey. It’s to come up with a better kind of contract; one in which the terms are not seen as unconscionable by outside parties.

Borrowers are always going to need access to credit. Payday loans, as awful as they are, exist because that need is not being met by any other lender. But it could be–there are several different solutions to the problem of credit for the unbanked and the underbanked that we could implement here in order to eliminate the majority of the demand for payday loans. One such solution is one advocated in the book “How The Other Half Banks,” which is the institution (or actually re-institution) of the U.S. Post Office as a banking service. If you would rather listen to a discussion of the idea, you can listen to Mehrsa Baradaran, the book’s author, talk about it here. As discussed in both the podcast and the book, post offices reach even very remote communities and could be used as a place to deposit funds and could even be used to provide emergency credit.

Another solution Barandaran discusses is a British style overdraft where you are allowed to have a negative balance on your checking account (for an interest fee) without paying the high overdraft fees that many banks currently charge. If there were other options for borrowers who utilize payday loans to access the credit they need, such loans may not be necessary.

Conclusion 

Payday loans can be a spectacularly bad idea for borrowers, especially if they are not able to pay off their balance after the loan’s two-week period. The problem is that for the people who need them, a spectacularly bad idea may still be better than the alternative. The solution to the problem is not to eliminate a service, that despite its flaws may still be necessary, without replacing it. Rather a better solution for borrowers is to create an option, or a combination of several options, that gives them access to credit.

Resources

Goodreads: How The Other Half Banks

Pew Charitable Trusts: Payday Loan Facts and the CFPB’s Inpact

Liberty Street Economics: Reframing The Debate About PayDay Lending 

International Business Times: Payday Loans: Study Highlights Default Rates, Overdrafts As Groups Debate CFPB Regulations

Cornell Law School: Contract of Adhesion

Freakonomics: PayDay Loans 

SlateMoney: PayDay Loans, Postal Banking and Pre-paid Credit Cards

Huffington Post: PayDay Loans: The Worst Abuse is not Regulated

The Center for Responsible Lending: Payday Mayday: Visible and Invisible Payday Lending Defaults

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Payday Loans: Predatory or Necessary? appeared first on Law Street.

Tipping is a cultural practice that is deeply ingrained in the American service industry, particularly food service, that most of us have not stopped to consider. If we eat at a restaurant, we leave a tip for the person waiting on us. There are dozens of social rules about how and when to tip and being a “good tipper” is considered a positive social trait.

Tipping also allows restaurant owners to defray some of their labor costs onto the customers who use their services. The rules in each state are different but organizations like the National Restaurant Association lobby for a lower minimum wage for wait staff, which is then supplemented by tip income. Their rationale is that lowering the costs for employers allows them to hire more wait staff and increase their profitability, which in turn puts their workers in a better position.

So what are we actually doing when we leave a tip for a waiter at a restaurant? Are we encouraging efficient service or subsidizing the profits of restaurant owners?

Topping Off

The most common tipping scenario we come across is tipping wait staff at a restaurant, so let’s use that as an example for how tipping actually works in practice. In many states, wait staff employees are exempt from being paid the usual minimum wage. Instead, they are paid a much lower wage by their employer, the restaurant, and make the rest of their money in tips. In theory, the restaurant is supposed to pay the waiter more if their tips plus their base wage do not equal the minimum wage. For example, if the minimum wage is $7 an hour and the restaurant pays $2 as the base wage, if the employee isn’t getting $5 an hour in tips the employer is supposed to “top off” and pay them extra. For a breakdown of which states require employers to “top off” and how much take a look at the Department of Labor chart here.

There are basically three kinds of states: full credit, partial credit, and no credit. These terms indicate whether employers are able to get a tax credit for topping off their employees’ wages to meet the minimum requirements. Full credit states follow the federal minimum wage for tipped employees, which is $2.13 an hour and then rely on customer tips to raise the wage of those employees to the state minimum wage. Workers in partial credit states earn somewhere above the federal $2.13 minimum but below whatever that state’s minimum wage is. So the cost of labor is still being subsidized but not quite as much. In no credit states (there are seven including D.C.) tipped workers and non-tipped workers are paid the full minimum wage, meaning that employers cannot take a credit for topping off their employees’ wages because their base wages already meet the state requirement.

Poverty Among Tipped Workers

How do these policies affect the actual workers involved? Nationally, the poverty rate for all workers, in general, is 6.5 percent but for tipped workers the poverty rate is 12.8 percent. The subcategory of tipped workers who are waiters and bartenders experience a poverty rate of 14.9 percent.

But when you break this down for the three different kinds of states (full, partial, and no credit) there is a difference in poverty rates. According to the Economic Policy Institute, tipped workers, waiters, and bartenders fare much better in the no credit states–where base wages for all employees must meet the state minimum. For example, in no credit states the poverty rate for waiters and bartenders is 10.2 percent and in full credit states, the poverty rate for these workers is 18 percent. The poverty rate among waiters and bartenders in partial credit states falls in between at 14.4 percent. The evidence suggests that tipped workers, which includes waiters and bartenders, experience less poverty when employers pay a higher percentage of their wage and experience the least poverty when employers are responsible for the full amount.

The chart below from the Economic Policy Institute shows how poverty rates correlate to state requirements for tipped workers.

So while raising the minimum wage may be a worthy goal to help non-tipped workers, doing so will not actually affect tipped workers in most states. Even though these workers may be the people who need an increase the most, given that they experience higher rates of poverty and receive higher rates of government assistance than non-tipped workers.

An added problem with the “topping off” policy is that it doesn’t always happen. A compliance sweep of 9,000 restaurants by the U.S. Department of Labor’s Wage and Hour Division found that 83.8 percent of these restaurants were in violation. This resulted in $56.8 million dollars being collected in back wages for the employees at these businesses. Because employees have to insist upon it and the actual calculations are complicated, businesses may not consistently pay these employees what they are supposed to and these employees end up earning less than the minimum wage.

For a more thorough explanation of the concept and how it can affect wait staff, take a look at this segment from PBS:

Is Tipping Fair?

For a waiter in a state that allows this practice there are a lot of potential problems. Tipping is often based not on the quality of service but on race and perceptions of attractiveness. This can lead to employees who are working the front of the house on the same shift–covering the same amount of tables with the same level of efficiency–making vastly different wages because one is white and one is black. There is also a $4 per hour wage gap between white workers and workers of color in the restaurant industry due to the positions workers of color can get–they may work as bussers versus servers, for example.

The restaurant industry has, by far, the highest rate of sexual harassment in the workplace. For women, the rate of sexual harassment in restaurants is five times the rate of sexual harassment in other industries. This can lead to servers being subjected to unwanted sexual advances that they feel obligated to put up with because they’re working for tips. This motivation is also present in states that pay the same minimum wage for all types of employees but is particularly strong when the tips are necessary to even earn the minimum wage.

Most restaurants do not split the tips that are received between “front of house” (the wait staff) and the “back of house” (the kitchen staff). So the people who prepare the food are not rewarded at all in the tip. They aren’t given a higher base salary to compensate for this either. In fact, there is a gross disparity in pay between workers in the front and back of the house, even though working in the kitchen requires training and is arguably just as difficult as working in the front of the house.

This is even stranger when you consider that the tip for the wait staff is calculated as part of the cost of the meal, which typically depends on the quality of the ingredients and the cooking. But the staff responsible for that increase in quality doesn’t get rewarded. If a restaurant runs a special on a particular dish, reducing its price and therefore the tip, it does not make the waiter’s job any easier yet they are paid less. Tipping and the wage disparity that it creates can lead to a shortage of labor in the back of house and resentment between the staffs.

Why Do We Still Tip?

If tipping is so unfair to the wait staff and to the back of the house why are we doing it? Basically, tipping is a subsidy for the restaurant business. It allows restaurants to offer their potential wait staff less money than they otherwise would have to in order to attract workers. Restaurants are also able to pay their employees below the minimum wage because they are supposed to earn the difference in tips. And if tipped employees still make below the minimum wage, restaurants can get a tax credit for paying the difference.

Requiring that restaurants pay their workers a higher base wage rather than relying on tips to make up the difference would, according to advocates of the current structure, cause restaurants to close, cut staff, or increase prices–all of which have economic consequences. The restaurant industry supports many Americans and their families. If they are forced to pay the full minimum wage they would need to cut labor costs by firing workers or raise their prices to make up the difference. Raised prices would ultimately reduce their profits because a reduction in demand and that would be catastrophic to the families that rely on these restaurants.

However, the restaurant industry is also not supporting many American families. When workers aren’t taking home a reasonable living wage they end up relying on government services to meet their needs or foregoing those necessities. This effectively creates a second subsidy by the public for the restaurant industry, allowing them to pay their workers less than they need and then having taxpayers pick up the rest of the cost.

Conclusion

Tipping industries effectively split the responsibilities of the employer between business owners and their customers. It creates a divided loyalty from the staff to please their bosses and their customers, which sometimes leads to conflict and sometimes to abuse and discrimination. Tipping artificially lowers the cost of operating the business so that employers will be able to make a profit in a competitive industry, rather than letting capitalism take its course and eliminate an industry that may not otherwise survive.

That may not be a bad thing. Or at least not entirely a bad thing. An effort to eliminate tipping to help the workers in the restaurant industry, and correct the unfairness that tipping creates, might help them right out of their jobs. And deciding that you no longer wish to tip at restaurants will only get you some dirty looks. Even if tipping is unfair and a system of a higher base wage would be preferable for workers, it would only be preferable for employees who work for businesses that can afford to pay their employees more. Others could potentially lose their jobs because of an increase in labor costs.

Resources

Economic Policy Institute : Twenty-Three Years and Still Waiting For Change – Why It’s Time To Give Tipped Workers The Regular Minimum Wage 

Department of Labor: Minimum Wages for Tipped Employees

The Washington Post: I Dare You To Read This And Still Feel Good About Tipping

Freakonomics Podcast: The No-Tipping Point

Slate: What Happens When You Abolish Tipping

Economic Policy Institute: Twenty-Three Years and Still Waiting for Change

Department of Labor: Tipped Employees Fact Sheet

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post The Trouble With Tipping appeared first on Law Street.

The city of San Francisco recently approved a measure guaranteeing fully paid parental leave for the birth or adoption of a child for up to six weeks. With this new policy, San Francisco becomes the first city in the United States to offer 100 percent of a worker’s salary during parental leave. While this is a major step for the “City by the Bay,” the fact that San Francisco is the first to make paid leave mandatory is also a troubling sign for the rest of the country.

Read on to find out what exactly San Francisco’s law means, who is following the city’s lead, and why the United States lags so far behind other countries.

San Francisco’s Parental Leave Policy

San Francisco’s policy guarantees an employee his or her full salary during the six-week parental leave period. However, this policy actually builds on a plan that already exists within the state of California. California’s state policy guarantees 55 percent of an eligible worker’s salary for the same period, funded using employee contributions and administered using an insurance fund. Essentially, San Francisco’s policy promises the other 45 percent, but this time, the employer pays the cost.

Like minimum wage increases, San Francisco’s new policy will not take effect immediately. Instead, it will be phased in beginning in 2017, when companies with 50 or more employees will be required to meet the new standard. Companies with 35 employees will follow in July of the same year and finally those with 20 or more employees in 2018. Eligible workers will have to work at least eight hours a week, spend at least 40 percent of their work week in San Francisco, and wait 180 days after being hired in order to be covered by the policy.

The video below provides some additional detail on San Francisco’s new policy:

Similar Programs

While San Francisco and California’s system is the most comprehensive, other states and cities have similar plans. Three states have long had their own policies in place: New Jersey, Rhode Island, and Washington. Like California, New Jersey’s policy covers six weeks while Rhode Island’s guarantees only four.

Like California, these states, with the exception of Washington, created their policies as an extension of existing short-term disability programs. The programs are largely based off of short-term disability programs that only five states have in place. The programs are funded by withholding a small portion of employee wages each paycheck, much like Social Security. Washington  passed a law for paid family leave but state legislators have yet to fund the effort, which has prevented its implementation.

In addition to these states, New York recently passed a program of its own. New York’s policy covers employees, both part-time and full-time, for up to 12 weeks. Furthermore, there will be no exemptions for small businesses and employees will only need to be with a company for six months to be covered. The program is funded through an insurance model, which involves taking small payments for the program from each worker’s paycheck. In this sense, the policy is a lot like the ones in states that built on existing short-term disability insurance programs.

New York’s paid leave plan will, like San Francisco’s, be implemented gradually–the full 12 weeks of leave and 67 percent of pay will not be guaranteed until 2021. One of the New York plan’s greatest strengths is its job protection component, which prevents someone from losing his or her job for taking leave. This expands on current federal law, which guarantees full-time employees’ job protection and 12 work weeks of unpaid leave.

The accompanying video looks at New York’s policy:

While these programs are a start, only five states have them and the programs that do exist still leave the United States behind most of the developed world. Even Bangladesh, which is not a country typically associated with progressive social rights, has a mandatory 16-week policy. However, for stronger programs to be enacted in the United States, it will likely have to start on the federal level and right now that doesn’t seem probable.

Problems with the System

There are several problems with the current state of family leave in the United States beyond the lack of paid leave in most places. This starts at the federal level with the Family and Medical Leave Act (FMLA), which was passed back in 1993. While the FMLA does guarantee up to 12 weeks of leave for parents for childbirth or adoption, to care for an ill family member, and for an illness that prevents someone from working, the leave is unpaid. Even this unpaid leave comes with caveats, as it only applies to employees who have worked at their current company for over a year, have worked more than 1,250 hours in the past 12 months, and work at a company with more than 50 employees.

Democrats in Congress have proposed a law that they hope will fill in the holes left by the FMLA. Senator Kirsten Gillibrand introduced the Family and Medical Insurance Leave Act last year. This bill calls for the federal government to guarantee up to 66 percent of a worker’s income for 12 weeks in the case of serious illness or a new child. This would cover all workers regardless of how long they have been employed, the size of the business, or any of other existing limitations. To fund this leave the bill proposes a new payroll tax of 0.2 percent, which would be about $1.50 for a typical worker based on an estimate from the National Partnership for Women & Families.

Unfortunately, it is pretty unlikely that this bill will make its way through Congress, especially with a Republican majority in control of both houses that seems unlikely to take up the bill. Even a Republican alternative, proposed by House leader Paul Ryan, seems unlikely to gain traction due to Congressional Democrats’ criticism that it would attack essential worker’s rights.

The following video looks at some of the problems with the existing system:

Resistance

The United States is the only industrialized country and one of just three countries in the world to not guarantee some type of paid parental leave. Attempts to change the status quo in the United States have often been met with backlash. In California, for example, the Chamber of Commerce labeled it as potentially the number one killer of jobs when the bill was passed. The National Federation of Independent Businesses and the Society for Human Resources management are also opposed to forcing companies to offer paid leave. This sentiment has been echoed all over the U.S. by many small businesses as well, where fears of costs are too great to garner support.

All this negativity, though, may not be well-founded. A 2011 survey in California, taken six years after the state implemented a family leave program, found that 90 percent of companies felt that the policy had either a neutral or positive impact on the work environment. Even more telling, this positive effect was seen at higher levels among small businesses relative to large ones, despite fears of overwhelming costs.

Gender Bias

Another major issue in the fight over paid parental leave is that it is seen as a women’s issue, and not an issue for both parents. Unsurprisingly, in a country that does not offer paid leave to mothers, the United States does not give the option to new fathers either. This is another characteristic that sets the United States apart from the rest of the world–47 percent of countries offer leave to fathers as well as mothers.

Giving men time off allows them to help with childcare duties and also enables women to improve their health and sustain their careers, as evidenced in countries with well-established programs like the ones in Norway and Sweden. Without paid leave for men, most of the childcare responsibility is placed on mothers, often forcing them to take more time off from work, which can make returning to the labor force even more difficult. Unpaid leave also has a significant effect on single mothers who must both care for their children and work in order to make ends meet.

Without the option to take paid leave, some women and men are forced to put off having children until a later age when they are more financially established. However, waiting longer to have children risks increasing fertility problems. While these concerns have been somewhat reduced through improved egg-freezing methods, which companies like Facebook have promised to help pay for, in-vitro fertilization is still not always effective and can be particularly expensive.

Conclusion

Efforts to implement a more comprehensive family leave system have regularly run into a number of arguments for why it should not be done–it will hurt small businesses, it is too expensive, and so on. The issue has also become increasingly gendered, as opponents claim that only women need time off. However, none of these arguments hold water. Paid time off is important for both men and women and most plans also seek to cover medical and family emergencies as well.

Yet the resistance remains, and the United States remains an outlier among developed countries. Part of this is due to an antiquated piece of federal legislation that offers time off but little else, including no pay. While many state and local governments have taken it upon themselves to address the issue, these policies are far from widespread in the United States. In order to implement a comprehensive paid family leave program, Congress will need to take action at the federal level. This will inevitably require more taxes, but a program of this nature may be necessary to ensure the United States remains competitive in the world economy.

Resources

Proskauer: San Francisco Approves City Ordinance Providing For Fully Paid Parental Leave

United States Department of Labor: Family and Medical Leave Act

New York Magazine: New York Just Created a Revolutionary New Family-Leave Policy

NPR: Is It Time To make Medical and Family Leave Paid?

Govtrack: Summaries for the Family and Medical Insurance Leave Act

Time: Company-Paid Egg Freezing Will Be the Great Equalizer

Bustle: Paid Paternity Leave Is Essential For Gender Equality. Why Is The United States Taking So Long To Catch On?

The Atlantic: Work in the Only Industrialized Country Without Paid Maternity Leave

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post It Takes a Policy: The Fight Over Paid Family Leave in the United States appeared first on Law Street.

President Obama touched down in Cuba last week, making him the first sitting president to visit the nation in eighty-eight years. As the President and the First Family toured the historic center of Havana, they likely witnessed the stunning old city filled with the vintage cars and delicious cuisine that make Cuba unique. As a result of the embargo, Cuba sometimes seems like a land forgotten by time. However, the Cuba that the Obamas are witnessing this week  is very different than the Cuba the average tourist may experience in the next ten years.  As more opportunities for investment and travel open up in Cuba, foreign investors are making moves–especially within the hospitality sector. Consider that Marriott CEO Arne Sorenson is accompanying President Obama on his visit to Cuba–Marriott may be interested in investing on the island. Read on to see which companies are investing in Cuba and why.

Hotels and Hospitality

Starwood Hotels, the company which owns Westin, Sheraton, and W Hotels (just to name a few), made headlines by announcing that it will open three hotels in Cuba.  At the moment, all Cuban hotels are state-owned but Starwood has the financial and organizational power to build hotels that meet the state’s standards. The location of the third hotel has not been made public but the company has stated that the Hotel Inglaterra, which is owned by a Cuban state tourism company, will become one of Starwood’s Luxury Collection hotels and the Quinta Avenida, which is run by a Cuban military-run tourism group, will become a Four Points by Sheraton hotel.

The potential Starwood-Marriott merger that is currently on the table could have a major impact on how these new hotels will be built and run.  On the heels of the Starwood commitment, AirBnB has announced it will open listings on the island by April 2. AirBnB has in fact been planning for the opening of the country for some time now–last year, the company claimed the right to represent all private residences in Cuba. AirBnB’s chief executive Brian Chesky referred to Cuba as the fastest-growing country that AirBnB has ever launched in. Physical accommodation is not the only segment of the tourism sector that is expanding into Cuba: online booking website Priceline, Western Union, and Carnival cruises have all thrown their hats into the ring (Carnival will begin sailing cruises to the island in May). Multiple U.S. airlines have filed for permission to fly commercial flights into Cuba. At the moment, American citizens cannot travel to Cuba on a tourist visa but visas falling under the following twelve categories have been opened:

Family visits, official business of the U.S. government, foreign governments, and certain intergovernmental organizations, journalism, professional research, educational activities, religious activities, public performances, clinics, workshops, athletic and other competitions, and exhibition, support for the Cuban people, humanitarian project, activities of private foundations or research or educational institutes, exportation, importation, or transmission of information or information materials and certain export transactions that may be considered for authorization under existing regulations and guidelines.

Travelers must provide itineraries that justify their visa, but they no longer have to apply for a formal travel license from the government. Ease of travel is drawing a steadily increasing number of Americans to the island. According to  Jose Luis Perello Cabrera, an economist at the University of Havana, there was a 36 percent increase in the number of Americans visiting Cuba between January and May of 2015 alone.

American investors for the most part are flocking to the hospitality industry but there are a handful of cases of more specific investments. Consider Alabama-based Cleber LLC, a tractor company which was the first company to receive joint approval from the Cuban government and the U.S. Department of the Treasury. Cleber LLC is looking to produce tractors in the newly built port of Mariel just outside of Havana, claiming that these tractors will deliver both a financial profit and an ethical good–improving the quality of life of Cuban farmers. Tractors are just one element of machinery that Cuban farms and factories are clamoring for and as the market continues to open, an increasing number of small businesses like Cleber LLC will be given the opportunity to sell their specialized products on the island.

Chinese Investment in Cuba

American companies are not the only investors chomping at the bit to launch projects in Cuba. Venezuela has historically been Cuba’s largest trade partner but in recent years, China has been vying for that position. Cuba has long been reliant on Venezuela for oil but the regime has now turned to China for its technology and infrastructure needs.

American companies such as AT&T have projects in Cuba waiting in their pipelines but Cuban authorities have resisted American telecommunications investment. Instead, they have turned to Chinese operators such as Huawei Technology Co. Ltd., which was tasked with installing fiber-optic connections in Old Havana. Professor William M. LeoGrande of American University has said that “partly that’s a result of the fact that historically we’ve tried to use telecommunications as an avenue to undermine their government, and so consequently they really don’t trust our hardware.”  Silicon Valley tech companies are getting left behind as Huawei installs dozens of Wi-Fi hot spots around the island. Huawei has also partnered with the Cuban telecom company Etecsa to distribute smartphones, further anchoring its brand with the Cuban public.

The economic exchange between the countries has also led to Cuban efforts to break into Asian trade: Cuba’s Havana Club rum has launched major marketing campaigns targeting the Chinese market, hoping that it will be a gateway to Asia as a whole. In 2015, airlines began operating direct flights between Beijing and Havana as both Chinese investment and tourism in Cuba soared. Although Chinese investors have not paid as much attention to the hospitality sector as American companies, China’s Suntine International-Economic Trading Company has partnered with Cuba’s Cubanacan hotel group to launch a new “Hemingway Hotel”–a luxury hotel with a price tag of at least $150 million. If the Hemingway Hotel project succeeds, then Chinese corporations may commit to more hospitality projects–putting them in direct competition with companies like Starwood and AirBnB.

Conclusion

Although foreign investment appears to open up new opportunities for the Cuban people, it has been argued that foreign companies will only further entrench the power of Raul Castro rather than aiding the general Cuban populace. American (and other foreign) companies hiring Cuban workers will not necessarily be allowed to hire employees directly. Instead, they may only be permitted to hire people through state agencies, effectively blacklisting anybody the regime has deemed unacceptable. Foreign investors will pour their money into the regime itself rather than into the individual bank accounts of Cubans who they hire at their enterprises. Cuba is a nation with a rich cultural heritage that travelers have been drawn to for centuries but many Americans are unfamiliar with the island’s government and its approach towards controlling the population. As diplomatic relations between the U.S. and Cuba expand, American investors are trickling into the country, hoping to prepare it for a potential flood of tourists in the coming years.

While Americans seem to have gained the upper hand regarding early investment in hospitality services, Chinese and Venezuelan companies have been positioning themselves to win the contracts on Cuba’s largest infrastructure projects. Tech investment could be a battleground, as Cisco has already committed to a training institute and Google is interested in working on Cuban connectivity but Chinese investment in Cuba’s internet has already put them at a significant advantage. The swell of foreign investment in Cuba may not provide the stability and equality that optimists hope for, but it should not be dismissed outright. Allowing open commerce and investment in Cuba will allow the nation to engage in the global economy in a way that it has never before–but it is, at least at the moment, unclear who will truly benefit from this expansion.

Resources

VOX: Airbnb and American Hotels Aren’t Wasting Any Time Ppening up in Cuba

USA Today: Starwood: 1st U.S. Company to Run Cuba Hotels in Decades

New York Times: American Firm, Starwood, Signs Deal to Manage Hotels in Cuba

CNBC: Marriott, Starwood Team up to Take on Airbnb in New Merger

New York Magazine: Discovering Cuba, One Airbnb at a Time

Financial Times: No Flood of Investment Despite US-Cuba Thaw

ATTN: 12 Ways You Can Legally Visit Cuba

NPR: U.S.-Cuba Ties Are Restored, But Most American Tourists Will Have To Wait

AP News: Stunning 36 Percent Rise in US Visits to Cuba since January

Worker’s World: U.S. Investment in Cuba: How a Little Red Tractor Jumped to Front of the Line

American Enterprise Institute: Why US Investment Won’t Bring Change to Cuba

Wall Street Journal: U.S. Competes With China for Influence in Cuba

Jillian Sequeira

Jillian Sequeira was a member of the College of William and Mary Class of 2016, with a double major in Government and Italian. When she’s not blogging, she’s photographing graffiti around the world and worshiping at the altar of Elon Musk and all things Tesla. Contact Jillian at Staff@LawStreetMedia.com

The post The New Cuba: Who is Investing in the Island? appeared first on Law Street.

There is not a lot that Donald Trump and Bernie Sanders agree on in their current presidential campaigns, but one thing the two do seem to share is a general disdain for free trade. The notion of free trade has joined the lexicon of despised things in the United States right next to bank bailouts and tax breaks for the rich. The clearest evidence of this is all the candidates’ desperate efforts to move as far away as quickly as possible from free trade agreements like NAFTA and the Trans-Pacific Partnership.

But is this much ado about nothing? Is free trade really gutting the economy and costing millions of jobs as suggested? More to the point, what does free trade mean? Read on to learn more about what free trade is and to find out if it is really as bad for Americans as some argue.

What is Free Trade?

Free trade does not mean that goods are given to other countries for free. It’s the idea that, for the sake of economic efficiency, tariffs, quotas, and trade barriers should be lowered or removed altogether, which economists argue will make goods cheaper for consumers. The process is aimed at improving efficiency by focusing on what is known as a country’s comparative advantage. Comparative advantage is the idea that a country should produce and export goods that it can make better, faster, and cheaper than other countries. By removing barriers to trade, two countries are left to compete with each other on their natural footing and whichever country can produce a good most efficiently has a comparative advantage for that good.

Comparative advantage is essential to free trade and is generally why economists like the concept of trade in general. Without barriers to trade, countries begin to specialize in products that they have a comparative advantage to produce, which ensures that all goods are made as efficiently as possible and lowering prices for everyone. The video below clarifies further what free trade is:

Globalization and Free Trade

Globalization and free trade are often seen as synonymous, but the two are not quite the same thing. According to the World Bank, “‘Globalization’ refers to the growing interdependence of countries resulting from the increasing integration of trade, finance, people, and ideas in one global marketplace.” Put simply, it’s the increasing inter-connectedness of every country and person on the planet.

Free trade, on the other hand, is a major driver in making globalization happen. By eliminating things such as tariffs and quotas, countries are encouraging exchange and, as a result, more people are coming into contact with each other and new connections are being made, further integrating the global system. Free trade, then, is just one part of the larger globalization puzzle.

History of Free Trade

Globally

While the constant battle over free trade seems to be an American issue, this is certainly not the case. While earlier theorists may have touched on its concepts, it was Adam Smith who first articulated the concept of free trade in his book “The Wealth of Nations” back in 1776. David Ricardo later introduced the concept of comparative advantage in 1812. The idea of free trade was rapidly adopted by economists after that as the preferred method of economic interaction. It was also embraced by the British Empire who, as the world’s dominant power for over a century, used its power to spread free trade internationally. Today, there are several free trade blocs across the world most notably the European Union as well as Canada, Mexico, and the United States, all of which are part of NAFTA, the North American Free Trade Agreement.

Domestically

Free trade, while not an America invention, does have a long history in the United States. However, for much of that history, the inclination was to resist it. In fact, from the inception of the United States, economic leaders such as Alexander Hamilton advocated for protective tariffs to help the nascent nation’s industry grow, instead of promoting free trade. This movement continued with the number of goods and the size of tariffs fluctuating over time.

Beginning in the early 20th century, a series of events played a major role in altering this narrative. In 1913 the United States government adopted the federal income tax, which became the country’s new largest source of income, supplanting the money made from trade tariffs. With the new guaranteed revenue stream, the government could change tariff rates without fear of forgoing necessary income.

The second major event was the passage of the Smoot-Hawley Tariff in 1930. This tariff was unique because it united industries like agriculture and manufacturing around one policy. It was also unique in the sheer amount of opposition that it faced. The debate following the tariff was whether it directly caused the Great Depression or just intensified it. While common wisdom now points to the latter, the tariff reduced trade and produced reactive tariffs from other nations during the worst period of economic contraction in U.S. history.

The tariff quickly became unpopular and was a major issue during the 1932 presidential campaign when Franklin Roosevelt ran on a platform opposing it. Once elected, Roosevelt made good on his promise, virtually eliminating the effects of the tariff by 1934 through a number of laws such as the Reciprocal Trade Agreements Act. Roosevelt and his advisors had their eyes on a post-war future in which free trade would be the dominant philosophy at last.

Following WWII, the United States finally adopted its free trade stance. The United States was under pressure to support free trade because many other nations were desperate following the war and wanted greater access to U.S. markets. This move was codified by the creation of the General Agreement on Tariffs and Trade (GATT) in 1948. This organization later transformed into its current iteration, the World Trade Organization (WTO) in 1995. While the United States did not embrace free trade for much of its history, it was already benefitting from the concept. This is because the United States was such a large market itself that trade between states was a lot like free trade enjoyed by countries in places like Europe.

Trade Agreements

NAFTA

NAFTA or the North American Free Trade Agreement is an agreement between Canada, Mexico, and the United States that took effect in 1994. Unlike other free trade agreements, this did more than eliminate tariffs and quotas, it effectively synced the policies of the three nations. It was also notable because of the economic differences between the three countries. NAFTA faced a lot of criticism because it sought to create uniform trade laws among the three countries involved. As a result, countries ended up changing their laws to meet the agreement’s requirements even if the same policies had been rejected at a local level in the past.

Namely, while treaties are supposed to require a two-thirds majority to pass in the Senate, according to the Treaty Clause, NAFTA received only a simple majority–more than 50 votes–and was still able to be signed into law. The question at hand was whether NAFTA was a treaty or an international agreement, which would not require a two-thirds majority in the Senate. As a result, NAFTA it was challenged in court but the case was eventually dismissed. The constitutionality of NAFTA was also challenged for its binational trading panels, which review the enforcement of U.S. trade laws and could even override such enforcement.

TPP

The TPP or Trans-Pacific Partnership is another free trade agreement like NAFTA but on a much larger scale. In this case, the deal includes 12 countries bordering the Pacific Ocean, notably excluding China. This deal again has many of the traditional criticisms and promises. Unlike NAFTA, however, the TPP has not yet been approved by Congress and may face significant opposition given the current backlash toward free trade.

Read more on the Trans-Pacific Partnership and its potential impact on intellectual property rights.

The accompanying video looks at free trade and free trade agreements following the switch in focus to free trade following WWII:

Criticisms of Free Trade

While free trade has been lauded in the past by economists, politicians, the media, and corporations, it has also drawn a lot of criticism. Most of these criticisms center specifically on its effects–namely that while free trade promises to be the rising tide that raises all boats, opponents claim that it actually does the opposite. First, by reducing tariffs and other protective measures a country is not only eliminating its own trade barriers but is doing the same thing for another country. If the two countries were operating on equal footing this would not be a problem, however, that is generally not the case.

In the case of a developed nation, like the United States, it has the economies of scale to put less efficient, smaller operations out of business. This is what happened in Mexico as large American agricultural companies started competing with small Mexican farmers, forcing them from their livelihoods and leading, in part, to their migration to the United States. Conversely, in countries where workers’ rights and environmental regulations are less developed these too can be exploited. In these countries, companies can lower the cost of production and undercut advanced nations with stronger regulations and higher standards.

In this sense then, the notion of comparative advantage is turned on its head. Instead of rewarding the best producer it can reward the cheapest or the least concise. This problem alone would be bad enough, but the critique continues. During this process of racing to the bottom, free trade has eliminated jobs in wealthier countries that pay more and created them in less advanced nations that pay less. Unfortunately, these newly employed workers are not wealthy enough to buy more goods and the now unemployed workers in the developed country are also buying less. According to critics, instead of creating a mutually beneficial society, free trade has brought about reductions in trade.

A major issue is that comparative advantage is supposed to move laborers from unproductive endeavors to more useful ones. But instead of seeing their efforts refocused in a more prosperous industry, workers in developed countries typically have to find jobs in different sectors of the economy. In countries like the United States, many factory workers have lost their jobs due to international competition. But instead of getting a different factory job they tend to move to the services industry, which typically involves lower wages.

There is some empirical support for these criticisms as well, with workers in the United States seeing a loss of manufacturing jobs since their height in the 1970s, rising trade deficits despite free trade, and low or negative wage growth. The question then is why would anyone support a concept that hurts the American worker while rewarding countries with loose regulations and low wages? The answer and the primary culprits in the criticism of free trade are the people who run multi-national corporations. According to the critics of free trade, the process naturally benefits these people as it allows companies to cut costs by paying its workers less while facing fewer regulations. The following video details some of the effects of free trade:

Despite all of its criticism and shortcomings, free trade is not all bad. The concept of competitive advantage increases the efficiency in the global economy. Aside from that, free trade offers a number of other potential benefits including reduced inflation, economic growth, greater innovation, increased competition, and greater fairness. Proponents of free trade also argue that turning to protectionism now won’t really solve the problem and may even be impossible. Finally, although manufacturing jobs have left the United States, many of those who gain jobs in other countries have been lifted out of extreme poverty.

Conclusion

Throughout U.S. history, Americans have grappled with whether protectionism or free trade is in their best interest. While free trade means more markets it also means greater competition, especially from places where things such as workers’ rights and environmental concerns are less prevalent. And it means doing away with protections that may very well have helped the nation develop and become a dominant world power.

However, trade policies, like anything else, move in waves. For the majority of the nation’s history, this wave has crested with protectionism on top. In fact, it took the greatest depression and largest war in the history to finally create a global system that favored free trade. While the Bretton Woods agreement and other deals such as NAFTA or TPP have continued, free trade policies have never been universally accepted. In an election where it seems like voters and candidates can hardly agree on anything across party lines, the current backlash against free trade may bring people together for at least a brief moment.

Resources

WBUR: Free Trade Fact-Check: NAFT Becomes Campaign Issue

Common Dreams: What’s The Problem With ‘Free Trade’

Foundation for Economic Education: Free Trade History and Perception

World Bank: Globalization and International Trade

CATO Institute: The Truth about Trade in History

The Fiscal Times: Free Trade vs. Protectionism: Why History Matters

The Economist: The Battle of Smoot-Hawley

BBC News: A century of free trade

Public Citizen: North American Free Trade Agreement (NAFTA)

BBC News: TPP: What is it and why does it matter?

Reference for Business: Free Trade Agreements and Trading Blocs

Law Street Media: What’s Going on With The Trans-Pacific Partnership

Law Street Media: Trans-Pacific Partnership: Why is the IP Rights Chapter Receiving So Much Criticism?

Los Angeles Times: Court Rejects Challenge to Constitutionality of NAFTA

PR Newswire: Recent U.S. Supreme Court Decision Reinforces Doubts About Constitutionality of NAFTA Chapter 19 Panel System

Mercatus Center: The Benefits of Free Trade: Addressing Key Myths

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Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post The Costs (and Benefits) of Free Trade appeared first on Law Street.

As of 2015, each NFL team was worth at least $1.4 billion according to Forbes. Despite these massive valuations, three teams–the Oakland Raiders, St. Louis Rams, and San Diego Chargers–hoped to leave their current cities and move to Los Angeles. The reasoning behind the desire to move was a yearning for a new, higher revenue stadium to play in. Each team was eager to leave its current city because of the failure of the local government to fund similar sites. This has increasingly become an issue in the NFL, as with other major sports leagues. It has even made international events like the World Cup and Olympics less appealing to host cities.

Read on to find out more about the real cost of having a hometown team, why the public keeps giving in to team demands, and how this problem has spread around the globe.

The Cost

The cost to taxpayers to renovate or build new stadiums has been enormous, particularly when it comes to America’s most popular sport, professional football. Over the last 15 years, the NFL has received $12 billion in public funds. These funds are not isolated to a few teams either, 29 of the 31 stadiums in the NFL (the two New York teams play in the same stadium) have used public financing to build new arenas. Public support for pro sports teams comes in the form of tax breaks, loans, and grants offered primarily by a city or county and occasionally the state.

Despite this funding, most cities and voters have little, if anything, to show for it. In fact, some reports suggest that using subsidies to pay for stadiums can negatively affect metrics like poverty rates and median income levels. Robert Baade, a researcher of these stadiums and their economic consequences, disputes the clear connection between the two, but his own research suggests that new stadiums almost always fall short of delivering the promised economic uptick suggested when they are funded.

Even stadium-related costs for things like renovation go to projects such as luxury boxes or seat licenses, which are not typically accessible to the casual fan or those with less disposable income. These same fans also do not see any sort of break on the cost of tickets or concessions. In fact, the only group that really seems to make out well in all this is the owners. Not only do the owners get to keep most of the revenues from the stadium, minus a very modest rent, they also pay very little in upkeep costs.

The video below goes into detail about what goes into building these stadiums:

Pay… or Else

Since most economists agree that there are very little, if any, benefits to using public funds to build these stadiums, it may be worth considering why people agree to finance them at all. Sometimes, it may simply be because the public doesn’t know about the plans. In 2013 for example, the Atlanta Braves organization agreed to move the team out of the city and into Cobb County. The move was done in secrecy and all information about the deal was kept from the public because otherwise voters could have rejected the plan.

While the Braves left Atlanta to get funds from a nearby county, the city was already building a new stadium for its NFL team as well as a practice facility for a new MLS team. This move is also unfortunate because the original stadium, which was built for the Olympics and would become the Atlanta Braves’ home, was initially financed without any public money. Making matters worse, that stadium they are so desperate to move out of is not even 20 years old.

In the recent fight for the St. Louis Rams, the court voided a law requiring a public vote to approve stadium funding only to watch the Rams leave for Los Angles anyway. But when citizens actually do get the chance to vote on how their tax dollars are spent, sports teams have mastered an invaluable tactic to keep the money flowing. That tactic is the threat of relocation, or basically taking the hometown team hostage to see if the city and the taxpayers will pay up. Once again, the Rams are not the first to use this threat or to follow through with it. The Baltimore Ravens and Indianapolis Colts, two high-profile teams that have won Super Bowls in the last 10 years, both left the cities they originally played in when their demands for new stadiums were not met.

The following video gives a lighthearted look at how teams use the threat of relocating to get new stadiums:

Case Study: The St Louis (now Los Angeles) Rams

While the Rams are clearly not the only team to move or used the threat of relocation in an attempt to leverage a city for a better stadium deal, it is the most recent. The Rams originally moved from Los Angeles in 1995, lured to St. Louis with a $250 million stadium paid for exclusively with public funds. However, as the stadium aged, Rams owner Stan Kroenke, the 63rd richest person in the United States, worth $7.6 billion, exercised an opt-out clause that let him flee St. Louis for Los Angeles and its much bigger media market.

This decision came even after St. Louis agreed to offer the Rams an additional $158 million while the new site in Inglewood, California offers no public funds at all. This may seem foolish, but as the owner of the new site–which includes amenities beyond just a football stadium–and landlord for whichever other teams play in Los Angeles, Kroenke is likely to make back his initial investment and more. Although Kroenke ultimately opted for a venue that does not utilize public funds, the Rams managed to get a remarkable offer from St. Louis. In the negotiation process, the owner, and to an extent the local government, utilized many of the classic leveraging techniques such as removing the influence of voters, threatening relocation, and ultimately following through on a threat to move.

A Global Epidemic

While NFL stadiums are the biggest and most public culprits of the stadium financing problem, there are a number of high profile examples around the globe. These often come in the form of stadiums built for the World Cup and the Olympics.

After less than two years, many of the sites for the Men’s World Cup in Brazil sit idle, barely being used. Some of the stadiums are only now being finished while others are put up for sale so that the government can make back some of its investment–an estimated $3 billion spent on building and refurbishing the facilities. Brazil is also scheduled to host the Summer Olympics in 2016, a move that comes with similar problems but on an even grander scale.

The abandonment of Olympic stadiums has also become a major issue for host countries. Facilities in places like Beijing, Seoul, Athens, and Montreal sit abandoned or are rarely used just years after costing the cities that built them hundreds of millions of dollars. This is especially disconcerting because it comes with the additional cost of hosting the Olympics. In what makes the NFL’s demands look like pocket change, the cost of the Olympics has averaged $3.6 billion from 1968 to 2010 and $16.2 billion after that. As bad as these costs are, the fact that they have an average cost overrun of 167 percent is even more concerning.

In fact, due to the ever-rising costs of holding the Olympics, many cities now are hesitant to host future events. In the run-up to the selection of the site for the 2022 Winter Olympics; Poland, Germany, Switzerland, Sweden, and the Ukraine withdrew their bids when polls showed it would have been incredibly unpopular. Boston similarly followed suit when it withdrew its bid to host the Summer 2024 Games. Ironically, one of the best examples of a city actually repurposing one of its old Olympic stadiums comes from Atlanta where the recently abandoned Turner Field Baseball stadium was created by repurposing the 1996 Olympic Stadium. The accompanying video gives a chilling look at a number of stadiums used for the Olympics and then just abandoned:

Conclusion

Professional sports teams, like any business, are always seeking to maximize their profits and it is unrealistic to expect them to do otherwise. Even though the public usually pays a large portion of the cost for a new stadium, they rarely pay all of it. Instead, that cost is usually spread out between the owner–in the case of the NFL, all the owners by using something known as the G4 Fund. Sports leagues are not the only corporations utilizing these tax breaks and deals offered by local governments. Many companies take advantage of these opportunities and there is often less of an outcry when cities, counties, or states offer huge tax breaks to lure other organizations. While these teams and businesses may have a lot of bargaining power, the decisions to use public funds remain up to local governments, and in some cases, voters.

However, while there is certainly enough blame to spread around, only the owners of these teams or their partners tend to benefit from them. This is particularly true for NFL owners, as they not only benefit from stadiums but media deals as well. Until recently, the NFL was also considered a non-profit organization, giving it even more tax breaks.  All the public has to show for this is more debt, empty stadiums, and the knowledge that the next threat of a move could happen at any time. The situation is increasingly frustrating and begs the question: what can be done?

Unfortunately, there may not be much that cities can do. In his recent budget proposal, President Obama included a plan to end tax-free bonds for teams, but that has a long way to go before it becomes law. Other suggestions have included anti-trust lawsuits, but these too gained little traction. The ultimate problem is that there are more cities than teams, meaning the teams will always have leverage of some kind and cities are often interested in getting a new team.  The real lesson in all this is while we root for our favorite hometown teams we should remember those teams will likely only remain in our hometowns if the price is right.

Resources

Forbes: The Business of Football

City Lab: The Never-Ending Stadium Boondoggle

The Huffington Post: “Taxpayers Have Spent A ‘Staggering’ Amount of Money On NFL Stadiums

Buffalo Rising: New Stadium Prospectus: Finance-Truth, Misconceptions, and Consequences

The Wire: Voters Don’t Want to Pay for Sports Stadiums Anymore

Curbed: How Atlanta’s Stadium-Building Madness is Nothing New

WBUR: Nearly 20 Years Later, The Legacy Of Atlanta’s Olympic Venues Is Still being Written

The New York Times: In Losing the Rams, St. Louis Wins

St. Louis Business Journal: Kroenke (Stan and Ann) are some of America’s richest

The New York Times: World Cup Stadiums Leave a Troubled Legacy in Brazil

The Wire: Turner Field Is the Latest In a Long Line of Abandoned Olympic Stadiums

Business Insider: The cost of hosting the Olympics is getting out of control

Slate: How to Stop the Stadium Wars

The Atlantic: How the NFL Fleeces Taxpayers

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Stadium Deals: The High Price of Your Home Team appeared first on Law Street.

My most recent job was working as what I affectionately refer to as a “wage-slave” at a Trader Joe’s. As far as wage-slave jobs go it was a very upbeat environment, I was paid $13 an hour and treated respectfully by all the “mates.” However, on my first day, they explained to me that we are not supposed to talk to our fellow employees about how much we make. It did not seem like a suggestion. Prior to working at Trader Joe’s, I managed a team of psychologists, teachers, service providers, and secretaries at a company that provided services to preschoolers with special needs. The policy there, directly from Human Resources and our bosses, was not to discuss our salaries with each other. I had similar warnings when I worked for Starbucks at the age of 16 and later when I worked for the coffee chain again at the age of 26.

None of these warnings ever stopped me from discussing my wages with my co-workers at any of these jobs but warnings like this do silence many people. Most employers would argue that silence is a good thing. Co-workers discussing their pay with each other could lead to a hostile work environment and pay secrecy protects workers’ privacy. But being able to discuss pay without fear of retaliation is seen as an essential tool to combat discrimination and promote fairness in pay. As Justice Brandeis once said, sunlight is the best disinfectant and allows workers to learn that they are being discriminated against and do something about it.

But who is correct? Should employers be allowed to set policies that prohibit the discussion of pay in the workplace?  Or should employees be allowed to freely discuss what they are paid with each other?

Pay Secrecy vs. Pay Transparency

Discussing pay in the workplace is, actually, already protected by federal law.  There are carve-outs and exceptions but employees are generally protected from retaliation for discussing pay with their co-workers. It’s just that nobody knows about it. This article from NPR gives an explanation of the federal law that gives employees this right and how it works.

The federal law that establishes this protection, the National Labor Relations Act (NLRA), was designed to encourage collective bargaining, which necessitates that employees have the ability to get together and discuss the issues they face at work. But those who think we should be encouraging workplace pay transparency argue that the law does not have enough teeth. One glaring omission is that agricultural workers are not protected. Since many agricultural workers tend to be less educated than office employees they may deserve additional protection, not less.

Policies that try to prohibit employees from discussing their pay are widespread, both in hourly jobs and in salaried positions. According to the Institute For Women’s Policy Research, it is pretty clear that pay secrecy policies are widespread throughout the United States. Some of these are cultural prohibitions and some are in employee handbooks and other written policies. In the private sector, 62 percent of women and 60 percent of men work for a company with pay secrecy policies. For all workers, 51 percent of women and 47 percent of men report that discussion of pay is either discouraged or prohibited.

For an employer, pay secrecy can be an important tool for keeping peace in the workplace. The fear is that pay inequality, even when it is justified, could lead to jealousy between employees when made public. It also is in the employer’s best interest to keep the workplace stable; keeping pay rates secret may help to limit turnover because employees are less motivated to leave if they are not certain they are being underpaid. Secrecy also increases privacy for employees who may not want to discuss their salaries with other co-workers, as that may be something that they want to be kept personal. That is often because talking about money is considered socially taboo. Pay secrecy also lets employers compete for top talent by offering them a financial incentive. Employers might not want to offer their most green workers more money than their existing employees if salary information is publicly available.

Employers who want to be able to keep their pay secret would argue that the practical costs of revealing rates outweigh the potential benefits. It would be difficult to maintain cooperation in the workplace among employees, especially in situations where there was a wide disparity in what similarly situated employees made. Even if those differences were justifiable they would be so unpopular with the employees who received less compensation that it would cause dissension. It would also be difficult, if not impossible, to both publish pay rates for employees and be respectful of the privacy of those who may not want their personal salaries advertised to their co-workers. Finally, there is no proven cause-effect relationship between discrimination by race or sex and pay secrecy. Such discrimination does exist but it is not necessarily because of pay secrecy but rather other social factors at work. Disclosing pay rates would increase acrimony  between companies and their employees.

Case Study: Lilly Ledbetter 

New laws to increase the effect of penalties for violating the NLRA with “gag rules” that keep pay rates secret have many supporters. And laws such as the Paycheck Fairness Act, which was ultimately defeated, seek to go even further. There may be practical concerns with making pay more transparent, but it is ultimately necessary to combat discrimination based on both race and gender. Pay secrecy does not necessarily cause discrimination but it creates a culture in which it is allowed to flourish.

In her book “Grace and Grit: My Fight For Equal Pay and Fairness at Goodyear and Beyond” Lilly Ledbetter gives her account of how she was discriminated against on the basis of her sex. Had she not been discouraged from discussing pay with her fellow employees she would have discovered this injustice much sooner. The culture of maintaining silence was so powerful that she only discovered the discrimination through an anonymous note–despite the fact that both her employer’s insistence on that silence and how it compensated its employees were illegal. You can watch her discuss her experience on CSPAN-2 here.

In the video below Ledbetter discusses her Supreme Court battle over the same issue on the Rachel Maddow Show.

Her story indicates that people on both sides of the pay transparency debate are correct. When Ledbetter learned about her pay it greatly upset her, caused conflict with her employer, and ultimately led to litigation. That litigation was, however, necessary because learning about her pay in comparison to her colleagues revealed a pattern of discrimination. Had she learned about the difference in pay sooner she would have been able to confront the issue immediately. Litigation might actually have been avoided entirely if a transparent culture was in place at Goodyear from the start–she probably would not have accepted a position where she was paid 40 percent less than her similarly situated male colleagues. The company would not have been able to attract female workers and the market would have forced them to change their pay structure before a lawsuit did so. In the long run, transparency would have been more efficient.

Other Potential Benefits To Pay Transparency

Pay transparency may also positively impact morale, rather than destroy it as the conventional wisdom would suggest. When employees feel trusted to make decisions and weigh information intelligently they may be more likely to have a positive view of the company they work for. The main predictor of job satisfaction and whether an employee will seek to leave is based on their perception fairness. According to research done by Payscale, employees who think they are being paid less than they are worth (even in some cases where that is not true) may look to leave while employees who know they are being paid less but feel the reason is legitimate (such as the company being newly formed) are willing to stay. People also may be more eager to apply to work for companies that advertise pay transparency as a policy or core value. If companies want to retain and attract new talent, then keeping pay a secret may not be the best strategy.

Pay transparency would also require that employees take into account factors that justify disparities in pay as well as ensure that such disparities only exist for justifiable reasons. When pay rates are secret, employees may feel that they have something to hide or that the employees are not trusted to make reasoned judgments given the facts–both of which could have a negative impact on worker morale. But when companies make pay transparency their policy it may have an opposite effect–making workers feel like they work for a company that is not keeping secrets about their compensation and that the company values discussion in its culture.

Conclusion

There are benefits to the employer that pay secrecy provides. It can increase privacy and an absence of what many would find to be socially awkward, or even hostile, encounters in the workplace. Making pay rates transparent could lead to problems for employers who would have to change their cultures and deal with the economic and political consequences of sharing this knowledge.

But pay transparency has its benefits as well. Workers cannot hope to speak out against discrimination and fight for their right to equal pay if they are barred from even finding out if they are being wronged in the first place. Pay secrecy effectively keeps them from finding out and, therefore, prevents them from ever being able to do something about it. And to a certain extent, pay secrecy is already against the law in many cases, as most employers are not allowed to discourage or punish open discussion of wages.

Pay secrecy versus pay transparency is ultimately a cost-benefit analysis between the interests of capital and labor. Companies must figure out whether the stability and workplace harmony that pay secrecy can provide is more important than the opportunity for an open dialogue to shine a light on potentially discriminatory practices.

Resources

National Labor Relations Board: National Labor Relations Act

Additional

Institute For Women’s Policy Research: Pay Secrecy and Wage Discrimination

Psychology Today: Pay Secrecy: Do You Want To Know What Your Colleagues Are Paid?

National Bureau of Economic Research: Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence

The Atlantic: When The Boss Says, ‘Don’t Tell Your Coworkers How Much You Get Paid

Goodreads: Grace and Grit: My Fight For Equal Pay and Fairness At Goodyear and Beyond

Fortune: How Pay Transparency Can Keep People From Quitting

Quartz: After Disclosing Employee Salaries, Buffer Was Inundated With Resumes

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Talking About Pay In The Workplace: Is Sunlight The Best Disinfectant? appeared first on Law Street.

After a two year investigation into complaints of civil rights and health violations, the Equal Employment Opportunity Commission (EEOC) announced a $4 million settlement for former employees at the Sara Lee factory located in Paris, Texas. This case marks the largest settlement in EEOC history involving a hostile work environment. The EEOC took on the case after twenty-five workers filed complaints against the company during their time at the now-shuttered factory, which closed in 2011. Attorneys now estimate that over seventy employees stand to benefit from the settlement. In addition to financial reparations, the company will be required to implement measures to prevent workplace discrimination and to submit regular reports to the EEOC. Read on for a look inside the landmark case.

The Allegations Against Sara Lee

The EEOC’s two year investigation found that black employees were targets of intimidation and were denied promotions that went to their white peers. Black employees reported racial slurs and graffiti during their time at the factory, incidents which were corroborated by the EEOC. A lawsuit filed separately from the EEOC complaint revealed that the graffiti included racial slurs, threats, and crude drawings of apes and black men with nooses. A large portion of the alleged abuse came from white supervisors within the factory and several Sara Lee officials have been accused of ignoring complaints from black employees about the conditions within the factory. In addition, workers were reportedly exposed to black mold asbestos and other toxins during their daily work. The working conditions were so hazardous that:

One of the cake lines was nicknamed the ‘cancer line,’ because so many people were getting sick, said Sara Kane, one of the workers’ attorneys, of the law office Valli, Kane & Vagnini.

According to the investigation, black employees were exposed to these conditions while their white colleagues were promoted to positions located in safer areas of the factory. These white employees were allegedly often less-experienced than their black co-workers but they received promotions nevertheless.

According to the EEOC’s report, several black employees contracted cancer and other diseases as a direct result of their exposure to toxins in the workplace. When black employees reported their diseases to management, their complaints were either ignored or dismissed as being unrelated to working conditions within the factory. The closure of the factory in 2011 meant that the EEOC had relatively limited exposure to the physical conditions of the factory, so the investigation did rely heavily on interviews with employees.

 The Role of the EEOC

The EEOC enforces federal laws against discrimination in most companies with 15 employees or more (although this can vary according to certain jurisdictions and circumstances). The EEOC processes both private sector and federal sector violations of discrimination laws, although it takes a more active investigative role in private sector cases. There are two distinct private sector and a federal sector mediation programs, which each offer dispute resolution with EEOC cooperation. If conciliation cannot resolve a private sector dispute, the EEOC has the right to pursue litigation and also has a right to participate in an ongoing lawsuit. According to the EEOC website,

The EEOC has the authority to investigate charges of discrimination against employers who are covered by the law. Our role in an investigation is to fairly and accurately assess the allegations in the charge and then make a finding. If we find that discrimination has occurred, we will try to settle the charge. If we aren’t successful, we have the authority to file a lawsuit to protect the rights of individuals and the interests of the public. We do not, however, file lawsuits in all cases where we find discrimination.

The EEOC may handle tens of thousands of complaints every year, but they very rarely escalate to the heights that the Sara Lee case has, which makes the future of Sara Lee critically important. If Sara Lee complies with the EEOC regulations and actively changes its workplace environment in the coming years, it will serve as a model for other companies that have had large-scale reports of discrimination. The successful transformation of the Sara Lee case will lie with its parent company–Tyson Foods.

A New Name and a New Brand

In 2012, so chronologically after the alleged abuse occurred, Sara Lee went through a major re-branding, effectively splitting the business in two. The food side of the business was labeled Hillshire Brands while the tea and coffee end of the company (centered in Europe) was named D.E. Master Blenders 1753. The name change was speculated to have been prompted by lackluster sales of meat products.

In 2014, Hillshire Brands completed a merger with Tyson Foods, Inc. which The Wall Street Journal referred to as the “meat industry’s biggest deal.” After the merger, Hillshire’s chief executive Sean Connolly stepped down, clearing the way for new leadership. However, the Sara Lee discrimination case did not disappear with the name change. Although headlines associate the case with Sara Lee, Tyson is now liable for the settlement and for rebuilding the brand’s image in the wake of the EEOC investigation. In an interview with Buzzfeed News, Tyson Foods spokesperson Worth Sparkman said the company is

‘Committed to treating our team members with dignity and respect and have a policy against harassment and discrimination,’ noting Tyson Foods requires annual training and offers a toll-free help line for workers to report any concerns without fear of retaliation. ‘While we don’t agree with all of the allegations in this case, we oppose any unlawful discrimination in the workplace and believe it makes sense to resolve this matter,’ Sparkman wrote in an email. When asked which allegations the company disagrees with Sparkman said, via email, ‘We’ll point out that any alleged conduct in this case occurred before portions of Sara Lee were acquired by Tyson Foods in 2014.’

The Tyson brand has also had a series of legal skirmishes over working conditions over the past few years. This November, the Supreme Court heard a case against Tyson in which employees argued that Tyson unlawfully failed to pay for the time it took them to put on and then remove safety equipment during their daily tasks. In a lower court, employees were awarded half of what their counsel requested. The case has raised interesting questions about collective action lawsuits, as the case involves more than 3,000 workers in total: Should that many employees be allowed to file their complaint at one time, in a single case?

The Supreme Court has approached the case less as an issue of wage violations and more as a debate over what the threshold should be for the number of participants in a collective action lawsuit. Yet, if the Supreme Court rules in favor of the employees, Tyson may pay out even more than they it in the Sara Lee case–approximately $6 million.

Conclusion

The Sara Lee case is a unique one in that a significant number of workers were courageous enough to file complaints and patient enough to wait for the legislative process to work over several years. Not every discrimination case is investigated by the EEOC, either because there is not sufficient evidence or because victims do not feel safe reporting misconduct. Hopefully, the Sara Lee case will inspire other companies to enact preventative measures to disband discrimination. The EEOC has delivered a decisive victory for the employees of the Texas factory, and we’ll have to see what effects it might have in future discrimination cases.

Resources

CBS Dallas Forth Worth: $4M Settlement Awarded In Sara Lee Discrimination Case

The Chicago Tribune: Sara Lee Discriminated Against Black Employees, Attorneys Say

Dallas Business Journal: EEOC Wins Record Settlement for Former Texas-based Sara Lee Factory Workers

Buzzfeed: Sara Lee Will Pay $4 Million To Settle Racial Discrimination Suit

Business Insider: Turning Sara Lee Into Hillshire Brands Is A Perfect Example Of How Not To Name A Company

The Wall Street Journal: Tyson Completes Acquisition of Hillshire

EEOC: Overview

JD Supra: United States Supreme Court Hears Argument in Tyson Foods’ FLSA Collective Action

The New York Times: Supreme Court Hears Case for Tyson Foods Class-Action Lawsuit

Jillian Sequeira

Jillian Sequeira was a member of the College of William and Mary Class of 2016, with a double major in Government and Italian. When she’s not blogging, she’s photographing graffiti around the world and worshiping at the altar of Elon Musk and all things Tesla. Contact Jillian at Staff@LawStreetMedia.com

The post The EEOC and Sara Lee: A Landmark Discrimination Case in Texas appeared first on Law Street.

The middle class has been many things to many people, but more evidence indicates that it continues to get smaller. Many view the middle class as a key component to the American identity and a driver of economic expansion over the past several decades. For politicians, it is the group they campaign on helping the most in an increasingly contentious election.

But the middle class is shrinking–according to a recent Pew Research Center report, for the first time since the 1970s the middle class does not make up the majority of people in the United States. Read on to see how the all-important cohort is changing with the times, how it developed, what is rising to fill its place, and why all of this matters to the United States going forward.

What does the Middle Class Look like Today?

The first step in evaluating the middle class is to determine who actually meets that qualification. Unfortunately, there is no universally-agreed upon definition for the middle class. To categorize Americans, experts have looked at a variety of factors including demographics, income level, wealth, what people consume, and even their personal aspirations, but no standard has been agreed upon.

The Pew Research Center study focused on income, defining the middle class as those who earn two-thirds to two times the median income in the United States. Pew then adjusts its statistics for household size, using a three-person household as the benchmark. Those that fall in the lower-income bracket have an adjusted household income of $31,000 dollars or less per year. Americans who makes more than $188,000 annually are considered upper-income. At the edges of these groups are two more distinctions, dubbed “lower-middle income” and “upper-middle income.” The lower-middle group is defined as earning between $31,000 and $42,000 per year. On the other side, the upper-middle group’s income ranges from $126,000 to $188,000 per year. Those in between that range make up the middle-class.

As the demographics of the United States have changed over the past 40 years, so has the makeup of the middle class. For one, the middle-class today is far more educated than ever before. The proportion of people with at least some college experience increased and those with a high school diploma or less plummetted. Looking at trends over the past several decades, college-educated adults are currently much more likely to be in upper-income than in the past. While college-educated adults managed to maintain their economic status, those with less education fared much worse. As Pew points out, “Among the various demographic groups examined, adults with no more than a high school diploma lost the most ground economically.”

The middle class has also gotten older, much like the country at large, with a smaller proportion of people 44 years of age and younger and a greater percentage of people 45 and older. The middle class has also diversified, with Asian, black, and Hispanic populations taking on a bigger percentage of the pie. In the same vein, foreign-born citizens’ share of the middle class has also increased. The following video looks at the difficulty in defining the middle class:

Why the Middle Matters

The definition of what the middle class is is contested, but so is whether or not the middle class even matters.

Inequality and the Middle Class

One of the most widely discussed trends in recent years is the growing wealth gap between upper-income Americans and the rest of the country. The problem is not necessarily that the rich are getting richer, but whether they are doing so disproportionately and at the expense of the economy and everyone else.

Some argue that inequality is the result of actions by the federal government, namely through decreasing tax rates for the wealthy starting during the Reagan administration. Others contend that the effects of tax decreases are not nearly enough to account for the massive disparity that exists today. While many debate the exact causes of this inequality, its effects on the middle-class are important.

Several studies show that developing a strong middle class is the ideal recipe for economic success. This is true for several reasons, which the Center for American progress outlined in a recent report. One is that a strong middle class means more access to education and subsequently better trained human capital. Second, a stronger middle class creates a larger and more stable market for demand, especially in relation to a small elite that can only consume so much. Third, a strong middle class is a hotbed for the next generation of innovators; job growth comes primarily from expanding small businesses, not large corporations. Finally, a powerful middle class demands the necessary political and social goods required to improve an economy–from infrastructure to fair regulations that may be overlooked when politicians cater only to a small elite.

The Middle Class in Politics

In light of this growing inequality, it’s important to ask: does the middle class still matter? While terminology on the campaign trail may be changing, the middle class as an issue and the middle class as a group remain at the heart of American politics. Politicians from both parties have made courting the middle class essential to their electoral success–every 2016 candidate from Bernie Sanders to Rand Paul is working for the support of this elusive group. The question then is why, given that people with higher incomes are more likely to vote than those with lower incomes and the middle class is shrinking. The real reason why the middle class seemingly gets such an out-sized share of attention may have to do with how it formed and what it means to American ideals.

Origins of the American Class System

In the United States there originally existed two main groups of people, the proverbial haves and have-nots, an entrenched elite and everyone else. Beginning in the 19th century, however, this began to change as members of the lower class began to split into two separate spheres. In one sphere was the traditional manual laborer, or the working class. In the other was a new group, which would become the middle class. While manual workers moved from the farm into the factories, the burgeoning middle class worked white-collar jobs as clerks and small business owners.

In the process, these middle-class workers became better educated and skilled, which allowed them to rely more on ability and less on social networks. Thus, they were able to develop an individual identity while the working class was not. Additionally, they no longer had to rely on large social networks to achieve significant gains, which the working class did through means such as unions and strikes. Along with severing close community ties, the developing middle class also began buying homes, experienced shifts in gender norms, and managed to provide a better education for their children. This group, along with the working class, experienced a huge boom following the end of WWII. However, like any rush, it was short-lived and beginning in the 1970s the middle class began to stagnate.

Rise of the Margins

What started as stagnation has eventually led to decline. Since 1971, the middle class has shrunk from 61 percent of the population in 1971 to 50 percent this year. This decline has been gradual with no single defining moment. The people exiting the middle class, however, had to go somewhere and coinciding with this group’s reduction is a rise in people at the margins, in the low and high-income brackets. According to the Pew Research Center study, the percentage of Americans living in the lower income bracket rose from 16 percent in 1970 to 20 percent in 2015, the higher income group rose from 4 to 9 percent. While these two groups have grown at similar rates the amount of national income going to the upper income group has increased dramatically more, from 29 percent in 1970 to 49 percent in 2015. The video below highlights the plight of the middle class:

Aside from shrinking, the middle class has lost a significant amount of its wealth. Since 2000, this group has lost 4 percent of its median income. Additionally, due in large part to the housing-related effects of the recession, the wealth of the middle class has dropped an additional 28 percent. Those among the middle class who saw the biggest losses since the 1970s were Hispanics, people with only high school diplomas, young adults, and men. However, the changes within this cohort were not bad for everyone, as the elderly, women, blacks, whites, and married couples saw their positions improve.

Social Mobility

The changes within and outside of the middle class have not been the same for everyone. The main concern, however, is not so much whether you are in the middle class now, but whether can you reach or even surpass it. In the United States there has long existed the notion that through hard work, education, and possibly luck you can move up the class ladder; this concept is known as social mobility. More exactly, social mobility is the “movement of individuals, families, or groups through a system of social hierarchy or stratification.” If a person changes positions, typically by switching jobs, but does not change their class, that’s called horizontal mobility. If the changing role also leads to a change in class, either up or down, it’s vertical mobility. While the belief in social mobility remains strong, how realistic is it in the United States today?

Unfortunately, a recent study paints a troubling picture. As the Atlantic notes, the study found that roughly one-half of parental income advantage is passed on to children. The impact actually increases as people get wealthier, growing to two-thirds. What this means is that if someone has rich parents he or she is much more likely to be financially successful as well. This effect is greater for men and married couples than women and single people. Put simply, as the middle class is shrinking, the chances of improving one’s economic status also decreases.

Conclusion

While politicians continue to focus on helping middle-class voters, the number of people who fit that description, as well as their wealth and income, continue to shrink. Exactly what is driving this decline remains a subject of debate, but most argue that it is a combination of factors. The middle-class has been a culturally and economically important group for the United States for over a century, but as it shrinks its significance may fade. Recent economic changes identified by the Pew Research Center report highlight the importance of education to the American economy and the middle class. While people with college degrees maintain their economic status, those with less education have not fared nearly as well.

While the two major parties have debated the best course of action to take in fixing the middle as it has declined since the early 1970s, it is hard to argue that the middle does not matter. Not only has it been shown to be the engine of a growing and prosperous economy but it increasingly symbolizes the nation as a whole. Perhaps it would be prudent to address the challenges facing this all-important American bedrock before it is gone.

Resources

Primary

Pew Research Center: The American Middle Class is Losing Ground

Additional

Education Action: Social Class in the United States A Brief History

The Atlantic: America is Even Less Socially Mobile Than Most Economists Thought

CNN Money: What is middle class, anyway?

Pacific Standard: The IMF Confirms That ‘Trickle Down’ Economics Is, Indeed, a Joke

Center for American Progress: Middle-Class Series

New York Times: Middle Class is Disappearing, at Least from Vocabulary of Possible 2016 Contenders

Al Jazeera America: Most Americans Don’t Vote in Elections

The Atlantic: 60 Years of American Economic History, Told in 1 Graph

Encyclopedia Britannica: Social Mobility

NPR: The Middle-Class Took Off 100 years Ago…Thanks to Henry Ford?

Encyclopedia Britannica: Social Class

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Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post The Middle Class is Shrinking: Why Does it Matter? appeared first on Law Street.

The Organization of Petroleum Exporting Countries (OPEC) recently met in Vienna to discuss an official output quota. By the end of the meeting, however, the member countries did not agree on a quota and oil production remains near record levels. While this may not seem like breaking news, the group’s decision will have major ramifications far beyond its members. That is because this decision comes at a time when the price of oil is falling to lows not seen since the Great Recession. It is also coming at a time when a massive over-supply of oil exists in the market.

Read on to learn more about OPEC’s decision based on its past and future plans. Why does the group refuse to turn off the pumps when the wealth of supply seems to be hurting the bottom line?

History of OPEC

OPEC was founded in 1960 by its five original members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since then, nine members joined the group: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, and Gabon. The organization’s stated objective is to “co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers,” but the group has historically faced criticism for trying to control the price of oil for political and economic reasons. OPEC’s members meet regularly to agree upon oil production quotas, which in turn influence the price of oil internationally.

While many have a negative perception of OPEC, the organization’s roots were generally good-intentioned. The group formed shortly after many oil producing countries emerged after colonial empires were split up. Its inception, in part, explains OPEC’s desire to set a price as a means to control and benefit from its member nations’ natural wealth.

Criticism of the group peaked in the 1970s after two high-profile events: namely, its 1973 embargo on oil exports to the United States and the fallout from the 1979 Iranian Revolution. Oil prices eventually dropped dramatically in the 1980s only stabilizing in the 1990s. This happened because of a variety of factors including a burgeoning interest in the environmental impact of oil. Oil experienced another boom in the late 90s through to the mid-2000s. However, it once again experienced a sharp decrease as a result of the 2008 Global Recession.

Following the recession, oil prices started rising, reaching a peak in 2014. Since the middle of last year, the price of oil has dropped precipitously, causing a flurry of responses from countries that are dependent on the oil industry for survival. The video below provides a detailed history of OPEC:

What is OPEC up to?

The most recent drop in oil prices brings us to where we are now. On December 7, oil prices hit their lowest levels in seven years. In fact, since June 2014 when the price of oil peaked at $108 per barrel, the price of oil has lost two-thirds of its value. The underlying driver behind the recent price drop is primarily an over-supply of oil. One explanation for the drop is the American shale boom, which significantly increased oil production in the United States. Another is the decision by OPEC not to cut its production but to keep it at near record output levels.

If a good’s supply increases but demand stays the same or decreases then its price will go down. The overall goal then is to find the equilibrium somewhere in the middle, where sellers can offer their goods at a price they feel is reasonable and at which consumers are willing to pay. OPEC’s recent decision to continue to keep production levels high has contributed to the massive drop in the global price of oil. Doing so challenges OPEC members’ ability to cover their expenses and profit off of high prices.

The question then is why? The simple answer is market share and scale of production. Saudi Arabia, a major player in OPEC, is willing to take a loss on oil in the short-term in an effort to disadvantage its competitors. The relatively long period of high oil prices that occurred over the past few years made new, more expensive means of getting oil profitable. This led to a rise in oil extraction methods like deep-water drilling and shale oil production (including fracking) in the United States. This method of getting oil is notably difficult and expensive, but with high oil prices, companies were able to spend more to extract oil because they could still turn a profit. Now that the price of oil has fallen dramatically, such efforts are becoming too expensive and shale oil production has gone down. If the price of oil stays low for a long period of time this could significantly hurt the shale industry helping OPEC countries like Saudi Arabia in the long run. This would play into the Saudis’ long-term goal of gaining back its market share, once the playing field has been thinned. But while a decrease in U.S. production has already started to happen oil prices have not yet gone back up, putting oil producers in a tricky place. The accompanying video gives a look at OPEC’s actions:

In the meantime, Saudi Arabia and the rest of OPEC also have to contend with other established nations in the oil industry, namely Russia. While the Saudis have started to make their way into traditional Russian oil markets, Russia has fired back by temporarily becoming the largest supplier to Asia, an area typically dominated by OPEC.  The struggle between these two has also added to the oversupply in the market, as neither wants to concede its customers.

Further Trouble Ahead

OPEC’s strategy is decidedly risky for reasons beyond temporary loss in revenue due to lower prices. First, there’s the return of Iran to the forefront of the global oil market. Iran is currently under sanctions and its oil exports are limited to roughly 1.1 million barrels a day–about half of its peak production in 2012.  However, international sanctions on Iran are now going away in light of the Iran nuclear deal, and the country plans to produce 500,000 more barrels a day with the ultimate goal of reclaiming its market share–as Saudi Arabia and Russia are doing–no matter the cost.

Second, demand for oil could also start contracting next year, as some analysts think demand could shrink by up to as much as one-third. While drivers typically do more driving when oil is cheaper, the economic slowdown in Asia, particularly in China, threatens to cause an even larger over-supply of oil on the world market. But foreseeing changes in demand can be particularly difficult. Other analysts argue that the recent changes in China could lead to even greater demand for oil as the country shifts to a more consumer-driven economy.

Ramifications

OPEC

The concerns listed are less true for Saudi Arabia, OPEC’s de facto leader, which the IMF estimates can last about five years with oil prices at current levels before it needs to make significant changes to its budget. The Middle Eastern countries in the worst shape, however, are Iran and Iraq. While Iran’s refining costs are not particularly high relative to other countries, its economy suffered a significant blow from international sanctions. Its neighbor, Iraq, is in even worse shape, facing not only mounting debt but also the specter of ISIS operating and controlling a large swath of its territory. Forgone revenue from unusually low prices could start to hurt oil-exporting countries without large cash reserves.

The consequences of low oil prices could be just as bad, if not worse, for members of OPEC outside of the Middle East. Countries such as Ecuador, Venezuela, Nigeria, and Algeria are extremely reliant on oil for government revenue, often for the majority of their budgets. Low prices have already sparked fear of unrest in areas such as Nigeria and Venezuela, which like Saudi Arabia use oil revenue to maintain social and economic stability. In Ecuador, these fears have already been realized–thousands have gone to the streets to protest government cost-cutting as a result of the falling price.

Russia

Outside of OPEC, perhaps no country is feeling the effects of the declining value of oil as much as Russia. Like many of the OPEC nations, it is very dependent on oil for income. In fact, oil and gas make up roughly two-thirds of Russian exports and half of all government revenue. With prices dropping so low, the nation has subsequently felt the effects–Russia’s economy will contract by about 3.8 percent this year and is expected to shrink further in 2016.

United States

Unlike Russia and the OPEC nations, the United States is not particularly dependent on oil production for government revenue, but the drop in prices will have some impact. If OPEC and Saudi Arabia hope to keep prices low to eliminate American competitors, evidence suggests that may be working. The number of oil rigs in the United States has fallen slightly and domestic production has decreased. In fact, for some U.S. states that rely on the oil industry for jobs and revenue, like Texas, Alaska, North Dakota, Oklahoma, and Louisiana, falling prices can pose a notable economic challenge.

However, the price plunge is certainly not all bad news for Americans. The average price of gasoline per gallon is now considerably lower than this time last year. Additionally, according to the United States Energy Information Administration, the average household is also likely to save $750 on gas this year. These savings are especially helpful for lower-income people who spend more of their income on gas and heating. Similar savings will likely occur in many European countries as well. The following video looks at some of the effects of low oil prices:

Conclusion

The members of OPEC, particularly Saudi Arabia, are taking a notable gamble with their decision to keep oil production high despite low prices. If oil-exporters reduce their production they could lose their market share, but if oil prices remain low they could face fiscal crises and possibly unrest. Yet the decision could pay off in the long run as more expensive forms of oil production slow down and prices go back up.

While OPEC is notably pumping too much oil, an issue that will likely become worse when Iran increases its exports, nearly all oil producing countries find themselves in a race to the bottom. Oil producing countries are already experiencing the consequences of low prices, but that will likely worsen if the status-quo continues. Meanwhile, the United States and most oil-importing Western nations stand to benefit.

Resources

CNN: OPEC is at War and it’s Sending Shockwaves Around the World

OPEC: Brief History

CNN: Oil prices dive below $37 to Lowest Level in Seven Years

Library of Economics and Liberty: Supply

Bloomberg View: Saudi Arabia’s Oil War with Russia

U.S. News and World Report: Iran to Add 500,000 Barrels of Oil Exports After Sanctions are Lifted Through Nuclear Deal

The Wall Street Journal: Global Demand Growth for Oil May Fall by a Third in 2016

CNN Money: Saudi Arabia to Run Out of Money in Less Than 5 Years

New York Times: From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest

Reuters: Russian Government Sees 2015 GDP Down 3 percent, More Optimistic Than Other Forecasts

International Business Times: Oil Price 2015 Russia Forced to Make Additional Spending Cuts, Official Says

Guardian: OPEC Bid to Kill off U.S. Shale Sends Oil Price Down to 2009 Low

New York Times: Oil Prices What’s Behind the Drop? Simple Economics

The Christian Science Monitor: Can Canada’s Oil Sands Survive Low Oil Prices?

U.S. News and World Report: Energy Stock Winners and Losers When U.S. Oil Exports Go Global

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post An Over-Supply of Underpriced Oil: Explaining the New Energy Crisis appeared first on Law Street.

Companies such as Uber, Lyft, Airbnb, and others are smashing the traditional models of business, making it easy for anyone with a smartphone or Internet access to instantly connect with other people to acquire and share goods and services. This trend has contributed to the creation of the “sharing economy” which is quickly becoming the norm in today’s society.

The sharing economy is formally defined as “an economic model in which individuals are able to borrow or rent assets owned by someone else.” On one hand, this new economy seems to offer flexibility and greater options to consumers, while allowing nearly anyone to participate and benefit; on the other, these companies are often subject to less regulation and scrutiny than traditional businesses.

Uber and Lyft’s taxi-like services jump-started a trend that has spread to start-ups in nearly every industry imaginable including clothing, alcohol, and even, as The Daily Show noted, chickens.

This new trend has the potential to be a major disruptor to the economy, as it has already impacted the way that business is done. The ability to rent nearly anything has made ownership much less desirable, especially for the millennial generation, who make up the majority of participants in this economy. When people have the ability to easily rent just about anything, there is much less need for people to make actual purchases. Additionally, many of the largest-growing companies today don’t directly provide the good or service they sell to their consumer base: Uber does not own the cars it drives, Airbnb does not own the properties it rents, and Grubhub does not make the food it delivers. They simply act as intermediaries to connect goods or services with consumers.

Despite its newfound dominance in the modern world of commerce, the sharing economy is still young and as it continues to expand at such a rapid pace, it may face some growing pains. Many companies are coming under fire for allegedly not obeying the laws set in place for traditional businesses to protect consumers and laborers. Additionally, the prevalent usage of contractors and temporary workers in their business models has led to many criticisms claiming that they lack respect for workers’ rights.

Read on for a look at the biggest issues facing the companies of today’s sharing economy.

Consumer Safety

A major issue facing these startups is whether consumers can trust these companies to provide the same level of safety as traditional businesses. Due to their peer-to-peer model, they are often not held to the same legal and regulatory standards put in place to protect consumers, leading to a litany of criticisms.

Airbnb

Airbnb, a company that allows people to go online and list or rent properties for short-term rental, is an alternative to traditional hotels for people traveling for leisure or business. The company is a major player in the hospitality industry, despite the fact that it doesn’t actually own any hotel properties of its own. A report by PricewaterhouseCoopers found that the company averages nearly 22 percent more guests per night than Hilton Worldwide.

However, critics are concerned about the safety procedures put in place by Airbnb. The service allows virtually anyone to put up a listing and become a host, and they do not routinely perform background checks on users. The company explains, however, that it has features in place to ensure safety, such as user reviews and a Verified ID process (in which identification is confirmed through a government-issued ID or social media profile). Still, the question remains, is that enough to ensure that both hosts and guests will have a safe experience?

This issue was put in a spotlight last month in a piece published by Matter, in which the author Zak Stone gave an account of his father’s death in a freak accident involving a rope swing in a Texas Airbnb rental. Stone’s piece is an extensive look at the legal and ethical controversies surrounding Airbnb, and includes stories such as one of a woman who died from carbon monoxide in a Taiwanese property. These stories highlight a large concern with the Airbnb business model, which is that the company cannot necessarily hold its listed properties to the same standard as a major hotel chain can with its properties. While hotels must operate under legal and regulatory standards, there are less restrictions on which properties can be posted. Whether user ratings are enough to ensure quality and safety for guests is an issue that can be debated.

Additionally, hosts cannot always be assured by the fact that their guests are trustworthy and will take care of their property. To address this, the company does offer Host Protection Insurance that protects against liability claims liability claims up to $1 million. However, anyone who chooses to become an Airbnb host would presumably be aware that they are agreeing to undertake a certain level of risk by letting a stranger stay in their property.

Uber and Lyft 

The safety concerns that plague Airbnb can also extend to ride-sharing services such as Uber or Lyft. In order to become a driver with one of these services, drivers must pass a background check, in addition to holding a driver’s license and meeting the minimum age of 21. Cars are not maintained by the companies, but must possess a certain level of insurance in order to operate. Despite this, there is a long list of incidents such as assaults, attempted kidnappings, and driver DUIs, among others. There are also allegations that the background checks are not extensive enough, and as such, they are more likely than taxi services to have such incidents take place.

However, taxi drivers have also been accused of similar offenses, so it seems that this issue is not unique to ride-sharing companies. A Cato Institute study found that ride-sharing companies were just as safe as traditional taxis, and also claimed that background checks for such companies often had stricter requirements than those for cabs in the U.S.’s biggest cities. Additionally, users of Uber and Lyft have the personal information of the driver on their phone, making it easier to report incidents (and the same is true if a driver is attacked by a passenger).

Labor Issues

Companies involved in the sharing economy have been held responsible for the emergence of the “gig economy,” which relies on contractors to make up the majority of its workforce. Because of this, they are not offered benefits such as health insurance and vacation. In fact, both Uber and Lyft are facing lawsuits for the “misclassification of drivers” in order to save on labor costs. Because they classify workers as contractors, federal law does not let them form unions to advocate for fairer treatment. Additionally, as noted earlier, drivers are required to use their own car, smartphone, and insurance in order to operate. This may affect the ability of lower-income workers to be able to participate in the first place.

Some may argue that Uber workers are not typically full-time drivers; they often hold other jobs and drive to make some extra money on the side. As such, do these companies need to be concerned about providing them with benefits? It is true that the vast majority of drivers fall in the 18-to-24 age group, and over half of drivers are part-timers. However, Uber and Lyft have been responsible for affecting the businesses of traditional taxi drivers who often do make their living off of their profession. The majority of New York taxi drivers are immigrants, with the median falling in the 50-54 age range. The disruption of car-sharing services on traditional taxi services has been immense, causing taxi drivers all over the world to protest Uber.

Another problem sharing economy startups bring to the forefront is whether or not their models will hinder future job growth. If apps and websites can eventually take over jobs done by people, what effects will this have on the future of the job market?

In a segment on his show, Bill Maher lamented that this sharing economy is a reflection of societal greed, and will lead to greater income inequality because it will decrease the number of jobs available. These concerns, however, are more so related to technological progress rather than directly the result of the sharing economy, so it seems unreasonable to blame the sharing economy. Hillary Clinton also cited the gig economy as dampening wage growth in the U.S., and “raising hard questions about workplace protections and what a good job will look like in the future.”

Conclusion

There is no doubt that the sharing economy has had a tremendous impact on the way that business is done, and will continue to do so for the foreseeable future. Many are still skeptical of this system because it is based on trust, and it is difficult to hold this trust without being ensured that your interests are protected by the law. The traditional legal system hasn’t caught up to these non-traditional ways of doing business, but as this business model becomes more and more prevalent, companies will need to continue to put regulations and protections in place for consumers and laborers.

Resources

Primary 

PriceWaterhouseCoopers: Consumer Intelligence Series-“The Sharing Economy”

Additional

Medium: Living and Dying on Airbnb

U.S. News and World Report: Who’s a Sharing Economy Worker?

The Seattle Times: The ‘Shared Economy’ is Further Hurting Workers’ Rights

The Guardian: Uber and the Lawlessness of ‘Sharing Economy’ Corporates

Mariam Jaffery

Mariam was an Executive Assistant at Law Street Media and a native of Northern Virginia. She has a B.A. in International Affairs with a minor in Business Administration from George Washington University. Contact Mariam at mjaffery@lawstreetmedia.com.

The post Uber, Airbnb: Is the “Sharing Economy” Dangerous? appeared first on Law Street.

On November 20, China Labor Watch released a report on labor conditions at five toy manufacturing companies in China. The nonprofit sent undercover representatives to a variety of factories. The toy companies investigated in the report are suppliers to both Hasbro and Mattel, two of the largest and most successful toy distributors in the world. While Mattel’s alleged labor violations should take center stage, the story has been crowded out by Mattel’s advertising campaign in preparation for the holiday sales season. Read on for a look at the recent competing stories on Mattel and the concerns over labor conditions at the company.

History of Mattel’s Alleged Violations

Mattel, based in California but with a variety of third-party contractors in China, is the world’s biggest toy company. Mattel is responsible for the design, production and marketing of toys sold to both consumers and larger vendors (such as Toys ‘R’ Us or Target). Besides its incredibly famous Barbie, Mattel is the parent company of Fisher-Price, Hot Wheels, Matchbox, and American Girl. China Labor Watch, a nonprofit which strives to increase transparency and advocate for workers’ rights, has accused Mattel of underpaying and overworking Chinese workers. China Labor Watch’s first formal report on Mattel was published in 2012, yet the nonprofit claims to have seen little change in labor conditions in the intervening years. After embedding numerous representatives in the factories and conducting hundreds of interviews, the nonprofit stated that:

Workers making Mattel toys are forced to stand for 10 to 13 hours, exceeding the nine-hour working-day limit stated in Chinese law. In some factories, fire escapes are blocked and emergency exits are locked, posing fire-safety concerns.

According to an interviewee protected by a pseudonym, workers in Mattel partner factories work up to 13 hours a day in unsafe conditions with no fire escapes. After hours, these workers share overcrowded dorms with no access to proper sanitation. Managers were accused of being abusive and forcing workers to build toys even when they were sick or struggling to reach their quotas. Those who protested risked losing their jobs. After China Labor Watch’s investigation, the French nonprofit Peuples Solidaires established an anti-Mattel petition protesting the labor conditions in the Chinese factories, but it had only minimal success.

Mattel claimed to be taking steps to improve working conditions and address the issues raised by the nonprofit, but the accusations continued to crop up during 2014 and 2015. Despite this constant stream of violations, Mattel has reportedly continued to operate with the same vendors in the same labor conditions.

China Labor Watch’s report could have encouraged a wave of protest against Mattel but instead, two other stories are dominating the media this month: Barbie’s first ad featuring a young boy and the company’s falling share prices as the holiday season approaches. While China Labor Watch’s report appears to have only been covered in depth by Fortune, dozens of web sites and TV shows covered the new Mattel ad and the company’s holiday earnings.

Commercial Attention

Earlier this month, Barbie ran its first ad for the new limited edition Moschino doll, featuring a boy playing with the doll. Mattel received praise for the ad campaign, which was hailed as a move for gender equality. Companies such as Disney have already made similar moves to encourage gender parity with their toys, removing “girls” and “boys” labels from their merchandise. However, major toy commercials have long aimed to incorporate both boys and girls, so Mattel’s doll advertisements are somewhat late to the movement.

Though Mattel was hailed as the architect of the campaign, in reality, it was Jeremy Scott, creative director of Moschino who masterminded the campaign–Scott modeled the young boy in the commercial after his own childhood self. The ad has been described by both Scott and Mattel as a “fauxmercial”–a creative statement not actually designed to be official marketing for the doll. The advertisement, real or not, has drummed up significant sales for the doll–it has already sold out of stores and can now be found Ebay and other resale sites for a massive mark-up. The advertisement went viral online but has not been moved to television.

Mattel’s Black Friday Conundrum

Barbie may be one of the most famous toys in America, but Mattel has been struggling with sales over the past several years. According to Forbes,

Sales of the fashion doll have slumped for the past four years, down 16 per cent in 2014 and showing no signs of improvement. Even American Girl, Mattel’s once-hot line of pricey historical collectibles, has disappointed in recent years. Sales were down 2 per cent in the third quarter of 2015. Starting next year, Barbie will be faced with new competition from rival Hasbro, which won Mattel’s long-held license to sell the hugely popular Disney Princesses line of movie tie-ins, including Frozen heroine Elsa.

As the holiday shopping season opens up, toy companies are counting on the months of November and December to make or break their sales portfolios. Mattel needs an incredibly successful holiday sales season to make up for the lack of growth in past quarters, but at the moment, short interest on Mattel is sitting at an all-time high. In order to impress investors, Mattel must make a major profit during Black Friday super sales but competition from Hasbro may make that difficult. Not only has Hasbro licensed Disney Princess toys, it has also cornered the market on Star Wars merchandise on the eve of the release of the new Star Wars film. The after-effects of Black Friday and holiday season may ultimately decide the fate of both toy companies, but at this moment, Hasbro’s success is virtually locked in.

However, Hasbro was also named in the China Labor Watch report for labor violations in the manufacturing of several of its toys (including the Star Wars line). According to a statement from Hasbro spokeswoman Julie Duffy,

We are aware of the China Labor Watch report and take their allegations very seriously. We require all Hasbro products to be manufactured in accordance with rigorous ethical standards, and that all third party facilities ensure employees have a healthy and safe working environment. Hasbro combines industry best practices, strategic partnerships, and strict auditing standards to respect the safety, well-being, and dignity of workers, and works continuously to ensure compliance with all third party facilities

Mattel also released a statement in the wake of the China Labor Watch report,

We are aware of the China Labor Watch report and take their allegations very seriously. We require all Hasbro products to be manufactured in accordance with rigorous ethical standards, and that all third party facilities ensure employees have a healthy and safe working environment

But all eyes are on both Mattel and Hasbro regarding their sales, so the alleged labor violations appear to have taken a back seat.

Lack of Attention on the Labor Violations

According to the report, Mattel’s third party companies have been consistently violating labor laws for several years. Over the past few weeks, Mattel has been associated with the Moschino ad and the battle over Black Friday sales but the labor violations discussed in China Labor Watch’s report have gone virtually unnoticed. Mattel’s frequent violations of Chinese labor laws could be inspiring outrage, but they are not well publicized enough to be making waves in the public discourse. Hasbro is guilty of the same infractions but it has kept its name largely out of the headlines this month.

Unfortunately, Mattel’s financial suffering only makes it increasingly likely that it will utilize Chinese labor in the future. With production costs soaring and little profit, the company will likely remain reliant on the cheap labor provided in China. Though there has been more scrutiny placed on Chinese labor oversight in recent years, the labor conditions are still, on the whole, deplorable. There may even be an increase in labor law violations as the company adopts a “nothing to lose” attitude to selling its toys at any cost.

There is some hope, however. In July of 2015, workers at the Jingyu Toy Products company in Shenzhen, China went on strike to protest minimal wages and long hours spent building Hasbro and Mattel toys. When the factory was relocated, 100 workers went on strike, asking for severance pay and retirement insurance. The strike was isolated, and did not inspire similar action across China, but it is important to consider how protest and public scrutiny can impact these companies.

Conclusion

Children across the world will spend their holiday unwrapping dolls, toy cars and building blocks that were manufactured in the harshest conditions. Companies that work with third party vendors must be held accountable for the actions of their third party vendors abroad. Mattel received positive coverage during the release of the fauxmercial for the Moschino Barbie that let the company circumnavigate a public discussion of labor violations. But in the coming weeks, it will be interesting to see if we open the dialogue on labor laws rather than just focus on sales during the holiday season.

Resources

Primary

China Labor Watch: The Other Side of Fairy Tales: An Investigation of labor conditions at five Chinese toy factories

Additional

Forbes: With Boy In Barbie Ad, Mattel And Moschino Aim To Bust Gender Stereotypes

Bloomberg: Bearish Bets on Mattel Surge Ahead of Black Friday

The Observers: The Barbie  Blues: Workers Describe Awful Conditions at Mattel Suppliers

IB Times: Labor Law Violations At Chinese Supplier To Hasbro, Mattel, Takara Tomy: Report

Dana C. Nicholas: China’s Labor Enforcement Crisis: International Intervention and Corporate Social Responsiblity

Jillian Sequeira

Jillian Sequeira was a member of the College of William and Mary Class of 2016, with a double major in Government and Italian. When she’s not blogging, she’s photographing graffiti around the world and worshiping at the altar of Elon Musk and all things Tesla. Contact Jillian at Staff@LawStreetMedia.com

The post A Tale of Two Barbies: Did Mattel’s Labor Law Violations Fly Under the Radar? appeared first on Law Street.

It’s been about a month since the Obama administration publicly announced that the negotiations on the Trans-Pacific Partnership (TPP) were completed, and just last week the full text of the agreement was released to the public. It will be the largest free-trade agreement in history, including 12 counties and roughly 40 percent of the global economy.

The umbrella agreement writes universal rules and standards for trade markets around the Pacific. Although all the countries involved still need to ratify the agreement, the release is an important step in that direction. In the United States, President Obama is now in the midst of securing Congressional consent, despite heavy criticism. This will likely be an uphill battle that comes down to one basic question: will the TPP benefit the U.S. economy and global markets? While the text of the 30-chapter deal was only recently made public, trade groups and labor unions are already entrenched in their support or opposition for the deal, which will become even more contentious in the coming months.

An Overview of the TPP

Who is involved?

In total, there are 12 countries involved in the Trans-Pacific Partnership, namely the United States, Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore, and New Zealand. Indonesia may also join in the future.

Why does the United States support the TPP?

According to the White House, the TPP will establish American leadership and influence in the Pacific. President Obama strongly supports the deal because he believes that it will strengthen the U.S. economy and national security. According to the U.S. Trade Representative, the deal is meant further U.S. interests and create an equal playing field for everyone “by requiring other countries to play by fair wage, safe workplace, and strong environmental rules that we help set.” The TPP will also cut over 18,000 taxes that countries have on American goods and services, which may help American companies gain additional access to global markets.

The Trans-Pacific Partnership is intended to make the United States highly competitive in the Pacific while prioritizing American interests and values. According to the White House, the TPP does this by eliminating preferential treatment of state-owned enterprises over American businesses, protecting trade secrets, ensuring open internet access, and creating fair markets between the United States and foreign countries.

What’s Covered by the TPP?

In short, almost everything. The pact will affect 12 countries and over 40 percent of the world’s economy and a massive amount of goods and services. For example, tariffs will be removed on textiles and clothing and potentially eliminated for carmakers. Tariffs on American cars are as high as 70 percent in Vietnam, making their removal a major win for the U.S. auto industry. Currently, American poultry is taxed up to 40 percent in some countries and soybeans are taxed as highly as 35 percent. Other foods that may be affected include dairy, sugar, wine, rice, and seafood. Major food-exporting countries like New Zealand and Australia stand to benefit from the removal of these barriers.

Removing tariffs is not the only potential consequence of the TPP; there are also notable, but controversial, patent protection provisions. The TPP would allow pharmaceutical companies eight years of protection on new biotech drugs. Doing so ensures that pharmaceutical companies can profit from new groundbreaking drugs, but may also keep prices high as competitors have to wait longer to make generic versions. The TPP intends to removal global internet barriers as well. For example, Google will be able to sell products in foreign markets that are currently restricted. The intended reduction of global roaming charges could cause an increase in competition among Telecom heavyweights. For more information on the intellectual property implications of the TPP check out Sam Whitsell’s issues brief explainer.

The TPP also creates new labor standards for all countries involved. Each country must adhere to the International Labor Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work. The TPP protects unions, prohibits child labor and forced labor, and standardizes minimum wage and work hours, along with a variety of other protections. The agreement also strengthens international environmental standards with new resource protections. The White House argues that these provisions will “level the playing field” between the United States and the other countries and President Obama has also called it the “most progressive trade deal in history.”

Where is China?

It’s called the Trans-Pacific Partnership, right? One could reasonably think that China’s massive economy would be involved–China is the largest exporter and second largest importer in the world. But China has, so far, not played a role in the negotiations and has no plans to join the agreement.

In fact, the White House argues that, “with the TPP, we can rewrite the rules of trade to benefit America’s middle class. Because if we don’t, competitors who don’t share our values, like China, will step in to fill that void.” The TPP specifically attempts to work around what some perceive to be obstructionism from China. Despite being part of the World Trade Organization (WTO), China has made free trade agreements more challenging to develop. The TPP ultimately allows for Chinese inclusion, but isn’t designed to “Chinese specifications” and cannot be vetoed by China. The agreement seeks to spread Western values to many of China’s important trading partners.

Some believe sidelining China is a mistake, even if the United States is trying to limit China’s control. Felipe Caro and Christopher Tang, business professors at UCLA, argue that the idea that China can be locked out of the agreement is naive, as China is the world’s leading trading nation. China has loaned money to and indebted a variety of countries, in an effort to spread its influence abroad. As of the end of 2014, China gave Bangladesh $3.8 billion and Pakistan $17.8 billion, which illustrates the power and influence that China has in many developing nations. Furthermore, China is aiming to create the Asian Infrastructure Investment Bank, an international bank that according to Caro and Tang “would help finance infrastructure projects across the Asia Pacific.” They further note that the bank has the support of “47 regional and 20 non­regional members, including TPP nations, such as Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam.”

China also has pre-established trade agreements with a number of TPP members. This could severely hinder the efficiency of the TPP in practice. China has a lot of leverage at its disposal and leaving China out of the negotiations may have unforeseen consequences.

TPP Lingo

While Congress has not yet decided on the Trans-Partnership itself, there have been a number of votes on related issues. Before we get into those, let’s go over some of the acronyms that get thrown around in discussions of the TPP.

The Transatlantic Trade Investment Partnership (TTIP): A separate trade deal that the United States is negotiating with the European Union. According to the U.S. Trade Representative:

T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

This agreement is related to the Trans-Pacific Partnership in that it will also utilize the Trade Promotion Authority that was recently passed by Congress–which brings us to our next definition.

Trade Promotion Authority (TPA): This simply means that Congress cannot amend or filibuster the TPP or TTIP. Congress must vote on each trade deal exactly as it is–yes or no. Trade Promotion Authority is what many refer to as the “fast track” method. It authorizes the president to formalize trade agreements with countries abroad, limiting Congress to simply voting to approve an agreement. In terms of Congressional oversite, TPA will give members of Congress access to read the negotiating text, receive briefings on negotiations, have time to review the deal, and outline objectives for the U.S. Trade Representative.

Trade Adjustment Assistance (TAA): Initially created in the Trade Act of 1974, it offers compensation to workers and companies hurt by trade agreements, along with job search and training assistance. According to GovTrack, the current TAA would give states more control over job assistance and reduce healthcare costs to workers affected by the TPP. Historically, trade assistance has always been associated with Trade Promotion Authority because it appeases Democrats, who worry about the effect of trade agreements on blue collar workers. Although TAA initially failed in Congress after it was separated from TPA, it was eventually included in the Trade Preferences Extension Act, which passed several days later.

Criticism of the TPP

There are many TPP supporters who believe that the agreement will stimulate economic growth in all countries involved. President Obama wrote in a press release that “if we can get this agreement to my desk, then we can help our businesses sell more Made in America goods and services around the world, and we can help more American workers compete and win.” However, there are many loud critics of the partnership in the United States.

A major fear is that American jobs will be shipped overseas to developing countries. The 1994 North American Free Trade Agreement (NAFTA), the TPP’s predecessor, remains controversial in the United States. Although some claim NAFTA boosted small to medium sized American businesses, others argued that the agreement resulted in the loss of thousands of domestic jobs to foreign countries. Free trade agreements inspire competition between international labor forces, which can cause jobs to move to where businesses can save money. For example, with increased integration under the TPP, the American labor force could be forced to compete with workers in Vietnam where the hourly wage is $2.75 and labor laws are less strict.

Others also argue that the politics of other nations involved are equally delicate. For example, Australia has a major problem with the TPP’s potential consequences for the pharmaceutical industry, as it will extend the length of patents for drug companies. Critics claim that these extensions will result in decreased competition, leading to inflated prices for name brand drugs. Poorer countries could have even less access to life-saving medicines due to the influence of intellectual property protections on drug prices.

It is also interesting to note that Presidential Candidate Hillary Clinton, a former supporter of the TPP as Secretary of State, recently came out against the deal after having supported it in the earlier stages of negotiations. When asked about her stance on the deal in the Democratic debate, Clinton responded:

It was just finally negotiated last week, and in looking at it, it didn’t meet my standards. My standards for more new, good jobs for Americans, for raising wages for Americans. And I want to make sure that I can look into the eyes of any middle-class American and say, ‘this will help raise your wages.’ And I concluded I could not.

She expanded on her position in an interview with PBS.

It seems that Democrats and Republicans alike have doubts on this agreement, despite its aggressive backing from the White House.

Conclusion

Although the text of the deal was only released recently, the fight behind it has become particularly heated over the past several months. As politicians, trade and labor groups, and the public continue to review the text it is likely that it will become even more controversial in the coming weeks. Congress will soon have to vote on the deal, which could have wide-ranging implications for the United States and other members of the protocol.

Resources

Primary

Medium: The Trans-Pacific Partnership

The White House: How the Trans-Pacific Partnership (TPP) Boosts Made in America Exports, Supports Higher-Paying American Jobs, and Protects American Workers

The White House: Statement by the President on the Trans-Pacific Partnership

The White House: The Trans-Pacific Partnership

Additional

BBC: TPP Trade Deal: Who are the Winners and Losers?

CNN Money: Why Everyone Hates Obama’s Signature Trade Deal

Fortune: Leaving China out of the TPP is a Terrible Mistake

The Atlantic: Why Americans Are Turning Against Free Trade

BBC: TPP: What is it and Why Does it matter?

Gov Track: How Congress Voted on Trade?

Politifact: What Hillary Clinton Really Said About TPP and the ‘Gold Standard’

USTR: Strategic Importance of the TPP

Jessica McLaughlin

Jessica McLaughlin is a graduate of the University of Maryland with a degree in English Literature and Spanish. She works in the publishing industry and recently moved back to the DC area after living in NYC. Contact Jessica at staff@LawStreetMedia.com.

The post What’s Going on With the Trans-Pacific Partnership? appeared first on Law Street.

Since Wikileaks released an early draft of the Trans-Pacific Partnership, a massive international free trade agreement, many groups have raised concerns about its potentially negative consequences, particularly when it comes to intellectual property. Most of the concern has focused on the potential expansion of copyright protections for pharmaceutical companies as well as the potential for stricter punishment for copyright infringement. A wide coalition of groups has since come out against the deal, including free internet groups, medical professionals, Youtubers, video game modders, and journalists.

The agreement involves 12 Pacific Rim nations (Canada, United States, Mexico, Peru, Chile, New Zealand, Australia, Japan, Vietnam, Malaysia, Brunei, and Singapore) which combine to make up about 36 percent of the global economy in terms of GDP. The objective was to lower trade barriers and access to goods in all countries involved, as well as to present a strong economic front against China.

Critics of the Intellectual Property (IP) Rights chapter see dangers to fair use of copyrighted works, corporate watchdogs, whistleblowers, and patients dependent on drug treatments. The new opponents to the TPP provide a contrast to the traditional opposition found in political and labor circles in the United States. Even Wikileaks founder Julian Assange criticized the IP chapter saying, “If you read, write, publish, think, listen, dance, sing or invent; if you farm or consume food; if you’re ill now or might one day be ill, the TPP has you in its crosshairs”

Political Objections to the TPP in the United States

In the United States, presidential candidates in both the Republican and Democratic parties have come out against the TPP deal signed by President Obama. Both primary front-runners Donald Trump and Hillary Clinton have spoken publicly against the TPP in the wake of its finalization. Despite the president’s signature, the bill still needs to pass Congress with a straight up-or-down vote. Congress voted away its right to amend the bill when it passed the TPP Fast Track Bill in June. Once they receive the document, members of Congress will have 90 days to read, debate, and ratify the treaty. According to the bill, the text of the agreement is to be made public within 30 days of the president’s decision to sign it.

Notable progressive figures like Bernie Sanders and Elizabeth Warren have a long history of protesting the TPP. Skeptics on the right claim that the treaty doesn’t do enough to reign in other countries’ use of tools like currency manipulation, which can give domestic businesses an advantageous playing field. Skeptics on the left point to the perceived failure of past trade deals like the North American Free Trade Agreement (NAFTA) and their consequences for American labor. People on both sides have also criticized the shroud of secrecy that has gone along with the negotiations.

Senator Sanders cited former trade agreements and the loss of American jobs as a result of the agreements. He also questioned whether any company would invest in the United States when they can freely go abroad to countries that allow for lower wages. He claims that the primary supporters of the agreement are large, multinational corporations and the primary victims of the deal will be American workers.

Those defending the TPP claim that the lowering of trade barriers will allow American companies to sell more of their products abroad, increase revenue, and provide for more jobs. President Obama argues that the deal will lead to the elimination of approximately 18,000 customs taxes from American goods.

The IP Rights chapter is designed to protect companies that invest in innovative products, treatments, and services and promote innovation. For countries like the United States and Japan, whose economies focus on technology and innovation, it is important to expand intellectual property rights internationally to maintain the competitiveness of domestic companies.

The TPP is also generally seen as President Obama’s attempt to level the playing field in the Pacific with China. While critics point out that China isn’t even involved in the deal, the TPP was intentionally left open-ended, which would allow it to join in the future.

Medical Objections to TPP

Doctors Without Borders voiced concern over the IP Rights chapter of the TPP, particularly when it comes to drug patents. The United States and numerous pharmaceutical corporations spent the negotiations attempting to export the current U.S. model, which allows for 12 years of data protection. For the most part, other signatories of the TPP resisted lengthy protections, but the most recent draft includes a five-year protection (Article QQ.E.16). Skeptics argue that this as a direct attack on the generic drug market and an attempt to limit competition, which could prevent other companies from potentially driving the cost of a drug down.

There is also debate over whether patent protection in the pharmaceutical industry actually promotes research and development or hampers it. Supporters of the trade deal say that these protections will ensure companies view such investments as less risky from a financial standpoint, as they provide a guaranteed period to make a profit on groundbreaking drugs. Critics suggest that the regulations will make it more difficult for scientists to build on the work of others and could stifle the exchange of information.

It is important to note that it often costs drug companies hundreds of millions of dollars to get a drug to the market. A controversial example of this is a hepatitis C drug that cost $500 million in private investment to get to market, in addition to publicly funded university research. That drug sells for $84,000 but only costs between $70 to $140 to produce.

Internet/Content Creator Objections to TPP

The IP Rights chapter also led to concerns among people whose internet habits are based around the United States copyright doctrine of Fair Use. In short, Fair Use is the concept that a copyrighted work may be copied and used in a transformative way for the purposes of comment, teaching, scholarship, or research without being in violation of copyright. While the TPP does encourage member nations to promote Fair Use-like protections for journalists, parody writers, and consumers, these protections are not mandated (Article QQ.C.4). Additionally, the TPP includes provisions that would criminalize the act of piracy or the divulging of trade secrets with fines and jail time.

These provisions have groups ranging from journalists to amateur manga writers concerned over the TPP. While there isn’t as much concern in the United States regarding fair use, there is the question of how violations of copyright and trade secrets would play out if an international corporation is involved. Gamers also fear that the provisions in the TPP could make game modding effectively a criminal offense, as software would fall under the category of “trade secrets.”

However, these fears seem somewhat unfounded given Australian Trade and Investment Minister Andrew Robb’s assurance that his country would only support the provisions that are consistent with the existing government. It seems unlikely that the TPP will force the wholesale change of member states’ copyright laws to the extent feared.

Views from Around the World

Canada

The recent election in Canada shed some light on where the country currently stands on the TPP. Former Prime Minister Stephen Harper viewed the deal as crucial, particularly for Canada’s auto industry. Current Prime Minister-designate Justin Trudeau’s main point of contention with the TPP is the secret nature of the negotiations. He hasn’t committed to approving or rejecting the agreement until he’s carefully evaluated the deal.

The TPP’s predicted beneficiaries in Canada are its agriculture industry and its consumers of foreign imports, particularly from Japan, as many tariffs will be removed over the next five years. Most of the deal’s partners view Japan as a major potential marketplace for agricultural products.

Australia

A major part of the TPP for Australians was the assurance that they wouldn’t be subject to additional penalties for online piracy. As stated above, it appears unlikely that the current Australian government will alter its piracy and copyright laws to criminalize offenses critics fear. However, the language in the IP Rights chapter still has some alarmed with the potential damages that film and television companies could seek for illegal downloads of their products.

New Zealand

Medical professionals in New Zealand responded to the leaked IP Rights chapter with concern over rising prices of pharmaceuticals and the installation of potential patent extensions. Potential cost increases could place a heavy burden on the country’s healthcare system and cost the government hundreds of millions of dollars. Currently, New Zealand has strong price protections for drugs in order to prevent high costs for consumers, but the agreement could lead to a challenge of those protections. The country’s prime minister acknowledged that under the TPP, drug prices will likely go up due to its data protections, but he argued that those costs would not significantly affect consumers.

Japan

The primary concern for Japan is how the TPP will impact the state of its agriculture industry. Prime Minister Shinzo Abe argues that the agreement will allow Japan to boost its agricultural production, despite Japan having to increase its annual imports of tariff-free goods from TPP members. Japan’s large corporations are also expected to benefit significantly from the agreement, perhaps most notably auto manufacturers who will benefit from new markets.

Conclusion

For now, the debate regarding the TPP will rage on in all 12 of the countries that hashed it out over the last five years. In the United States, the deal faces significant opposition from both parties, notably the Democratic party, as well as support from many Republicans and large corporations. Across the Pacific Rim, doctors and healthcare agents have raised concerns over the language found in the IP Rights chapter and are warning of rising costs in the drug market.

Journalists and other professionals who are dependent upon Fair Use view the punishments allowed for in the TPP for divulging trade secrets and copyright infringement as deterrents to doing their jobs. Concerns have even been raised in the gaming community, who feel threatened by the expansion of copyright protection internationally.

Given the language of the document and the assurances of political leaders across the Pacific Rim, it seems unlikely all of these fears will come to pass. However, the detractors also have reason for concern as international copyright laws will likely face some change.

Resources

Primary

Wikileaks: TPP Treaty: Intellectual Property Rights Chapter

Additional

Politico: Leaked: What’s in Obama’s Trade Deal

Electronic Frontier Foundation: Trans-Pacific Partnership Agreement

Office of the United States Trade Representative: Trans-Pacific Partnership: Summary of U.S. Objectives

Doctors Without Borders: Statement by MSF on the Conclusion of TPP Negotiations in Atlanta

NY Times: Trans-Pacific Partnership is Reached, but Faces Scrutiny in Congress

News.com.au: Wikileaks Releases TPP Agreement Which Gives More Rights to Film Studios over Copyright

The Sydney Morning Herald: No New Penalties for Australian Internet Pirates under Trans-Pacific Partnership

The Globe and Mail: The ABCs of TPP

The New Zealand Herald: Dr. Joshua Freeman: Free Trade Deal Sold us a Monopoly

The Japan Times: Too Early for TPP Cheers

Kotaku: Japanese Fan Comics Could Die Under New Trade Deal

BBC News: Trans-Pacific Partnership: What is it and What Does it Mean?

Senator Elizabeth Warren: Trade Deal Should be Public Before Congress Votes on Fast Track

Bernie Sanders: Sanders to Senate: No on TPP

UpTakeVideo: Obama Pitches Trans-Pacific Partnership to American People

Tarmack: The TPP Effect on the Video Game Industry

RT America: Sanders, Trump Lead Charge Against TPP

PBS NewsHour: Hilary Clinton says she doesn’t support Trans-Pacific Partnership

Samuel Whitesell

Samuel Whitesell is a graduate of the University of North Carolina at Chapel Hill having studied History and Peace, War, and Defense. His interests cover international policy, diplomacy, and politics, along with some entertainment/sports. He also writes fiction on the side. Contact Samuel at Staff@LawStreetMedia.com.

The post Trans-Pacific Partnership: Why is the IP Rights Chapter Receiving So Much Criticism? appeared first on Law Street.

You’ve probably heard the term gentrification before–the process in which college-educated, higher-income individuals move into low-income parts of a city in order to live closer to cultural centers. While most people argue that this process leads to new development and better government services, they also highlight how it can displace the existing residents of these communities.

While that narrative is pretty straightforward and easy to grasp, it is important to ask whether gentrification is responsible for many of America’s urban problems. Read on to see what the arguments for and against gentrification are and what studies actually say about the process. Is gentrification as bad as people make it out to be or are other developments just as problematic?

What is Gentrification?

Like any word, gentrification has a simple definition, but in practice the process tends to be much more complicated. The formal definition of gentrification is: “the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents.”

History

Prior to gentrification, there was white flight–the phrase used to describe the mass migration of whites out of inner cities and into suburbs. White flight started in the mid-20th century and continued for decades to create the many suburbs that we have today. In the wake of this migration, cities like Washington, D.C. took on a majority-minority character as minorities moved downtown and white people left for the suburbs. Gentrification is typically used to describe the reverse of this process, with affluent people, often white, trickling back into inner cities.

While dilapidated or unused properties have always been refurbished and repurposed over time, the term gentrification itself traces its roots back to 1960s London. In 1964, a British sociologist named Ruth Glass coined the term to describe what was happening in a run-down neighborhood of London. Working-class immigrants were being replaced by professional types, who wanted to be closer to the cultural centers of life. This follows the narrative of development associated with gentrification today as young, educated people seek affordable rent in new parts of a city.

According to the typical story of gentrification, this group is then followed by a second wave that is usually composed of young professional types who move in once a neighborhood becomes more established. After the second wave, the neighborhoods themselves also begin to improve aesthetically as more money pours in. New residents create a stronger tax base and increase investment incentives for companies. Infrastructure is repaired and rebuilt while new construction is started. All this new activity begins to raise the property value of everything from the corner store to the apartment complex down the street. As a result, the original low-income, typically minority residents are essentially priced out of their own communities and forced to leave for somewhere more affordable. The video below looks at several aspects of gentrification and how it is normally understood:

Who does gentrification affect?

The major criticism of gentrification is that the process boils down to affluent whites pushing poor minorities out of their own neighborhoods, in an effort to return to the inner city that their parents and grandparents abandoned years earlier. However, when you look at the evidence and research on gentrification, that narrative doesn’t always hold up.

According to several recent studies by economists and sociologists, the process of gentrification, as it is generally understood, is actually not always accurate. On average, there is little evidence to suggest that more gentrification leads to greater displacement among the original residents. This is not to say that no one ends up being displaced, but generally speaking, displacement is not a significant consequence of gentrification.

In fact, for those who stay in their neighborhoods, regardless of race, gentrification can actually have positive effects. While rents do rise as property taxes increase, residents also have more opportunities like better jobs. In fact, the whole narrative associated with gentrification is called into question as the studies also showed whites are not very likely to move into historically minority neighborhoods at all.

Regardless of whether gentrification is as bad as some people believe, a backlash against the perceived trend has already begun. There are examples in Brooklyn and Philadelphia, but arguably the most notorious backlash occurred against a store in London selling cheap cereal at high prices in a low-income neighborhood, which led to boycotts and protests. In a somewhat surprising turn of events, however, this backlash against gentrification has spawned a counter-backlash, with those accused of gentrification standing fast in the face of criticism.

What Does It All Mean?

While gentrification can affect poor communities, generally that is not the most significant problem. The new investment and diversity actually tends to improve a community. The real problem is that the process of gentrification might only affect certain communities, leaving others with extremely high rates of poverty.

In a study of Chicago’s poor neighborhoods, Harvard researchers found that gentrification only occurred or continued to occur in neighborhoods where the racial composition was at least 35 percent white. They found that the process would actually stop in places where 40 percent or more residents were black. In other words, affluent whites may not be forcing poor black people out of their neighborhoods, rather they are bypassing them completely. This is not to say that the influx of wealthy whites simply improves poor neighborhoods, rather historically black neighborhoods tend to be neglected when it comes to new investment and development. Not only does this challenge the conventional perception of gentrification, it also reinforces an older and more sinister problem in the United States: segregation.

The continuation of segregation is not being perpetuated only by whites returning to the inner city, but also in black migration out of cities. Recent evidence suggests that minority populations are increasingly moving to the suburbs. While individual neighborhoods may be integrating, new suburban trends are actually increasing segregation. On the suburban and town level within metropolitan areas, racial divisions are actually increasing. The following video gives a look at segregation in the US and the problems it leads to:

While the continuation of segregation is bad enough, it has yet another negative aspect associated it. Since gentrification or any other process of development are slow, if not completely non-existent in historically poor neighborhoods, those neighborhoods remain poor and disadvantaged. For all its own potential evils, gentrification may simply expose the familiar problems of segregation and perpetual poverty that are still going unaddressed.

The Government’s Role in Gentrification

The idea of outsiders coming into an inner city neighborhood with cash and plans for improvement is not a new idea and had a name before gentrification: urban renewal. Urban renewal, unlike gentrification, was a product of government policy, which was intended to revitalize various sections of cities. Housing reform movements began as early as 1901 but really gained momentum in the 1930s when zoning ordinances were passed separating housing and industrial areas.

The movement was crystallized in Title 1 of the Housing Act of 1949: the Urban Renewable Program, which promised to eliminate slums, replace them with adequate housing, and invigorate local economies. The act failed, however, in one of its other main goals: addressing segregation. Developers’ decisions to build high-income housing, large development projects, and highways that physically divided cities ensured the practice would continue. This disproportionately affected minority residents. Many were forced to move, often to other more crowded and/or expensive areas.

The government took another try at housing with the Fair Housing Act of 1968, which was meant to stop segregation in neighborhoods at all levels. Additional measures were put in place over the years such as the Housing and Community Development Act of 1974, which replaced the emphasis on the demolition of decaying urban areas with rehabilitation.

As these problems persist, and with the racial strife continuing to plague the United States, President Obama sought to create legislation to address housing once again. In his plan, which was announced in July, data would be compiled then given to local authorities who could use it to more accurately distribute Housing and Urban Development funds. These efforts are intended to end the negative aspects that gentrification perpetuates, including poverty concentration and segregation. The accompanying video below details Obama’s plan to address segregation:

Conclusion

Gentrification is a well-known issue in the United States, but when you take a closer look at what is going on the trend becomes much more complicated. While displacement and housing costs are significant problems for local governments, gentrification might not always be at fault. The traditional gentrification narrative says that as wealthy people move to poor urban areas housing prices and live costs rise, displacing low-income residents. Emerging research challenges that narrative but notes that many low-income communities still face significant challenges. While people are starting to question the traditional understanding of gentrification, backlashes against inner city development and its perceived effects continue.

Studies show that gentrification does not cause displacement at the rates that most people may think, but it does highlight new trends in segregation. While inner-city communities are becoming more diverse, urban housing prices in general are going up. As a result, many low-income residents are moving to suburbs, which face further racial division. Historic segregation and displacement from urban renewal has created areas of concentrated poverty, which have grown consistently over the past decade. This poverty also tends to disproportionately affect minorities. According to CityLab, “One in four black Americans and one in six Hispanic Americans live in high-poverty neighborhoods, compared to just one in thirteen of their white counterparts.” While most people think of the inner city when they think of poor neighborhoods, poverty and segregation are actually growing in many U.S. suburbs. Overall, the face of many American cities and towns are significantly changing.

Resources

Regional Science and Urban Academics: How Low Income Neighborhoods Change

US2010 Project: Separate and Unequal in Suburbia

Slate: The Myth of Gentrification

The Atlantic: White Flight Never Ended

City Lab: The Backlash to Gentrification and Urban Development has Inspired its Own Backlash

Harvard Gazette: A New View of Gentrification

The Hill: New Obama housing rules target segregated neighborhoods

Curbed: As ‘Gentrification’ Turns 50, Tracing its Nebulous History

Encyclopedia.com: Urban Renewal

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Gentrification: What is it Doing to Our Urban Centers? appeared first on Law Street.

We’ve all heard about the pay gap between men and women, but it seems that one specific statistic is used to illustrate this issue. Proponents of new equal pay laws claim that women make “77 cents for every dollar a man makes.” It’s a number that has been passed around for years by feminist groups, political organizations, and even many prominent politicians. Even President Obama used the “77 cents to a dollar” claim in his 2014 State of the Union address as an example of injustice against women.

Today, women make up about half our workforce. But they still make 77 cents for every dollar a man earns. That is wrong, and in 2014, it’s an embarrassment.

-President Obama, 2014 State of the Union address

While that statistic is accurate, further analysis indicates that it may not be the best way to capture the issue at hand. The available evidence suggests that there is a notable wage gap, but that evidence also suggests that the cause of the gap is due to a wide range of factors, which must be taken into account when talking about wage disparities.

Where does this “77 cents” statistic come from and to what extent is wage discrimination a problem for women in the workforce?

The Statistics

You get the 77 cents claim when you take the median, full-time, year-round wage for men and compare it to that of women using data from the census. While accurate based on that calculation, it may also be misleading. The statistic does not take into consideration differences in skills, education level, relevant experience, benefits, hours worked, or even occupation. According to the Washington Post, comparing wages based on weekly earnings narrows the gap to 19 cents and when you look at hourly wages the gap is 14 cents, but those measures also have drawbacks.

The variance between different wage gap estimates generally comes from how these statistics are gathered. Each survey and calculation use different methodologies and it’s very difficult to determine objectively how and if discrimination plays a role in wage differences.

So what’s the pay difference when you take all these into consideration? What other factors may also cause this gap?

Causes:

Hours and Family Care

According to the Center for American Progress, women work on average 35 minutes per day fewer than men. While this most likely will not have an impact on employees who are salaried, that difference will have a notable effect on workers receiving an hourly wage.

According to a Harvard Business Review Study, 43 percent of women with children leave the workforce at some point. There are many reasons why women drop out of the workforce after having children–unpaid maternity leave causes many women to leave their jobs to raise their children due to high childcare costs and time constraints. The statistics also show that once women leave the workforce, many never return. Of those who stop working, only three-quarters of them will eventually start again, and less than half will resume full-time jobs. Because many women don’t return to work in the same capacity as they left, their wages and experience levels are typically lower once they re-enter. Available evidence suggests that having children disproportionately affects women’s careers relative to their husbands. BLS data shows that women who are not married have a much smaller wage gap–earning 95 cents for every dollar a man makes.

Education and Occupations

Men and women also choose different career paths, which often can result in large income differences. In 2013, Georgetown University conducted a survey on the average wage by college major. The study found that nine of the ten best-paying majors were mostly chosen by men:

1. Petroleum Engineering: 87 percent male
2. Pharmacy Pharmaceutical Sciences and Administration: 48 percent male
3. Mathematics and Computer Science: 67 percent male
4. Aerospace Engineering: 88 percent male
5. Chemical Engineering: 72 percent male
6. Electrical Engineering: 89 percent male
7. Naval Architecture and Marine Engineering: 97 percent male
8. Mechanical Engineering: 90 percent male
9. Metallurgical Engineering: 83 percent male
10. Mining and Mineral Engineering: 90 percent male

On the other hand, nine out of ten of the lowest paying majors were dominated by women:

1. Counseling Psychology: 74 percent female
2. Early Childhood Education: 97 percent female
3. Theology and Religious Vocations: 34 percent female
4. Human Services and Community Organization: 81 percent female
5. Social Work: 88 percent female
6. Drama and Theater Arts: 60 percent female
7. Studio Arts: 66 percent female
8. Communication Disorders Sciences and Services: 94 percent female
9. Visual and Performing Arts: 77 percent female
10. Health and Medical Preparatory Programs: 55 percent female

These numbers show that women generally prefer careers that help serve the community or require a level of artistic ability. Men, on the other hand, are more likely to enter a field that involves engineering and manufacturing development. This may be the biggest factor for wage differences, as a community organizer would not make the same as a biochemical engineer.

But why are so few women entering these higher paying, male dominated fields? A study by Indiana University Bloomington shows that many women who enter these “sex-segregated” fields experience high levels of stress due to “coworkers doubting their competence,” “low levels of support from coworkers,” and even sexual harassment. Instead of outright wage discrimination–where women are given less money than men for the same work–this study suggests that different biases push women into lower-paying fields.

Women also tend to prefer jobs that have greater benefits (paid maternity leave and more vacation time) even if the pay is lower. According to a report from the Federal Reserve Bank of St. Louis, when benefits are included in a worker’s total compensation, the wage gap shrinks to 3.6 percent.

Overall Pay Difference

According to PolitiFact, when every factor is accounted for, the wage gap narrows to 93 to 95 cents per dollar. This does not indicate equal pay, but it also shows that 77 cent statistic can be overly simplistic. The evidence suggests that outright discrimination has decreased over the years, but it still exists and certain factors disproportionately affect women in the workforce. According to a survey by Glamour magazine, only 39 percent of women asked for a higher pay when starting a new job versus 54 percent of men.

But there is also a large chance that wage differences may be due to discrimination. For example, women may be denied raises or promotions over their male coworkers. According to a Gallup survey, 15 percent of women feel that they were wrongfully denied a promotion because of their gender.

There are other things to consider as well. Raising the tipped minimum wage would greatly benefit women as they make up 2/3 of tip workers. Pay transparency would allow women to discuss their pay with their co-workers, making it easier to identify pay discrimination. Paid and longer maternity leave would also encourage mothers to re-enter the workforce in stronger numbers.

Conclusion

It’s incredibly difficult to determine the exact size of the gender wage gap and the extent to which discrimination plays a role. Because each study uses different calculations, there are often significant disparities in gap estimates. But nearly all reliable and credible surveys do show there is some level of wage discrimination between men and women–whether it is 5 percent or 22 percent. Even if the gap is only one percent, that’s still an injustice.

Resources

Primary

Gallup: In U.S., 15 percent of Women Feel Unfairly Denied a Promotion

Federal Reserve Bank of St. Louis: Gender Wage Gap May be Much Smaller than Most Think

Georgetown University: The Economic Value of College Majors

Additional

Wall Street Journal: Washington’s Equal Pay Obsession

ARI.org: February 20 is White House Equal Pay Day

Washington Examiner: The ’77 Cents for Every Dollar’ Lie

Washington Post: The White House’s Own Wage Gender Gap

 FactCheck.org: Playing Politics with the Pay Gap

Washington Post: President Obama’s Persistent ’77-cent’ Claim on the Wage Gap Gets a New Pinocchio Rating

Washington Post: The ‘Equal Pay Day’ Factoid that Women Make 78 Cents For Every Dollar Earned by Men

TechRepublic: TechRepublic has Just Published its 2010 IT Skills and Salary Report

 Center for American Progress: Explaining the Gender Wage Gap

The Atlantic: Why 43 percent of Women With Children Leave Their Jobs

Medical Daily: Women Working In Male-Dominated Jobs Experience Higher Levels Of Stress And Health Problems

Mike Stankiewicz

Mike Stankiewicz came to Washington to follow his dream of becoming a journalist. The native New Yorker studied Broadcast Journalism and Law and Society at American University. In his leisure time he enjoys baseball, hiking, and classic American literature. Contact Mike at staff@LawStreetMedia.com.

The post Seventy-Seven Cents: The Statistics on Wage Discrimination appeared first on Law Street.

On Monday August 24, the main Chinese stock market, the Shanghai composite, fell 8.5 percent in one day. This massive drop set off losses worldwide, beginning in nearby Asian markets including Japan. However, the worry and lack of confidence quickly spread to Europe and to the United States. In the west, this led to massive sell-offs of stocks and the value of the American market dropping 10 percent below its record high, which was achieved only a few months earlier at the beginning of summer. While this was initially blamed on the volatility of the Chinese market and its slowing economic growth, the loss also revealed more issues in the other global markets. Read on to learn about the history of an up and down global stock market, the reasons for the recent crash, and what is expected in the future.

History of Volatility in the Global Stock Exchange

The recent stock market losses, while severe and brisk, are by no means the first and certainly not the worst that have occurred in history. Since ideas such as interconnected economies and even nations are relatively new concepts, to find the first major market crash one would only have to look back less than 400 years. This crash occurred in the Netherlands in 1637. Based on speculation, tulip prices in the country soared, leading many citizens to invest. But the prices eventually peaked and then plunged back to earth, causing many investors to lose everything.

Several more speculative bubbles grew and then burst over the ensuing years in economic powerhouses like Britain and France. The phenomenon would reach a head however, with the stock market crash in 1929 which ultimately led to the Great Depression. This stock market crash, like the ones before it, was the result primarily of speculation, which had been fueled by massive economic growth within the American economy during the 1920s.

However, when the economy began to stagnate, investors initiated a mass sell-off which caused the market to plummet. This was followed by a run on banks so severe that thousands were forced to close. The effects of this collapse spread beyond the borders of the United States to Europe, due to both places’ reliance on the gold standard. The Great Depression would play a major role in the lead up to WWII and it was not until after the war that the global economy recovered.

Despite the devastation of the 1929 collapse, major market meltdowns would continue to take place. In 1987 the U.S. market lost over a fifth of its value in just one day, a day known as Black Monday. The oldest bank in England, Barings Bank, was forced to close due to speculation. Meanwhile in Japan, following a thirty year growth spurt, the market collapsed beginning in 1989 and has left the country in a prolonged state of malaise ever since.

The two most recent crashes both originated in the United States. The first was at the turn of the millennium–the dot-com bubble. The bubble had built upon the belief that the internet was ushering in a new type of economy, which was not subject to the same issues as the past. This led to a number of unwise investments in companies mired in debt or with no value. The crash began in 2000 and continued into 2002. The bursting of this particular bubble cost the NASDAQ 80 percent of its value and led to a recession.

The most recent crash began in 2008.  From its pre-recession peak until the market bottomed out 18 months later in 2009, the Dow lost more than 50 percent of its value. This collapse was triggered by sub-prime mortgages, but spread to other industries such as automotives and was prolonged due to other connected issues globally, including the debt crisis in Europe. The economy was only saved and confidence only tentatively restored through massive bailouts.  The video below explains the 2008 crisis and the root of many of the stock market crashes:

Reasons for the Recent Crash

Like other crashes before it, the current crash is the result of a number of factors which have combined to cause speculation and panic on a global scale.

China

At the center of the most recent stock market crash is China. China had already been dealing with a declining market since at least June of this year. On June 12 the Chinese government stepped in to fill the void left by a bubble, which had been created by Chinese citizens investing money they did not have. While the government tried a variety of stop-gap measures, these appear to have had little effect. Compounding this problem more was China’s slowing growth. In fact, many of those who invested did so based on the prolonged growth of China’s economy for the last 20 years.

Additionally, confidence in China from the outside also appears to be faltering. This comes as a result of several recent events. The most glaring is the government’s inability to handle this current stock crisis. Even after intervening and devaluing the currency in an effort to make borrowing money cheaper, the market has continued to fall. Other events as well, such as the fiasco with a chemical plant explosion and China’s dubiously reported economic figures have caused foreign investors to lose confidence.

Commodities

Another area directly impacted by China’s recent crash is the commodities market. Commodities are things such as oil, gold, and copper. Many emerging markets, such as Brazil and Turkey, relied on selling commodities in order to build up their economies. However, with China losing vast tracts of wealth daily in its stock market, it can no longer buy as many commodities as in the past. This has resulted in less demand, which means reduced commodity prices and subsequent losses in the emerging markets reliant on them.

United States

Another area feeling a market correction, a loss of 10 or more percent, was the United States. Along with the news about China’s falling market, was the fear of the interest rate hikes in September, which would make borrowing money more expensive. While the United States is not the economic engine it once was, nor the borrower of last resort, it is still the world’s largest economy and any sudden crash in experiences would reverberate worldwide with even greater force than China.

Other Countries

Aside from the United States and emerging markets like Brazil, other places around the world also felt the crunch from China’s continued market crash. This included places like Europe, whose combined market had its worst losses since at least 2011. This also includes countries closer to home near China, such as Japan and Australia, each of whom saw sharp losses in the immediate wake of China’s loss. The accompanying video provides a thorough overlook of the recent Chinese Stock Market crash:

After the Drop

So with all the recent fluctuations in the stock exchange it bears asking, what is next for the world’s markets? The answer is seemingly more of the same. In the U.S. the Dow plummeted 588 points first on Monday, then another 204 points Tuesday. However, on Wednesday and Thursday the market rallied, gaining over 1,000 points in two days. The rally means that, for the week, the market is actually up. In fact the surge on Wednesday and Thursday marks the largest gain in any two-day period in the history of the American stock market.

Around the world, other markets were also experiencing a rebound on Thursday. In Europe and Japan, the stock market rose following dramatic losses earlier in the week. Even in China, the market rose more than five percent, ending a week of losses. In fact, even with all the recent losses, China’s market is still up 43 percent from a year ago.

However, even with markets quickly rebounding, China’s stock market crash cannot just be dismissed. The recent collapse has certainly shaken faith globally, for those who viewed China as the number one growth engine for the future. Furthermore, if this is unfortunately true, there is really no one to take China’s place. Emerging markets, such as Brazil, are overly dependent on commodities, Japan is still stuck in stagnation and Europe, as China’s largest trading partner, is too interconnected, especially as it still recovers from the 2008 crisis.

This leaves the U.S. as the world’s steadying force. While U.S. markets rebounded on the back of news that the GDP grew 3.7 percent in the second quarter, up from the original estimate of 2.3, and that jobless claims continued to fall, that status remains shaky.

Certainly, everything is not perfect in the American economy either. Following the recent market correction and due to the tumultuous world economy, the Federal Reserve has said it will probably not raise interest rates after all. This means that money can still be borrowed cheaply, however it also reveals the fear of weakness in the U.S. and global economies. This weakness is especially troubling because unlike before, when interest rates could be slashed, that option is no longer available. The following video looks at the future of the economy:

Conclusion

There is a saying that goes, “those who don’t learn from history are doomed to repeat it.” The history of the global stock market can offer many examples that attest to the validity of this sentiment. Throughout its history, the market has repeatedly surged and crashed, like waves against a beach. The recent case of China is just one more example of this situation. Luckily in this case though, the losses seem temporary and appear to offer no long-term threat to the global economy.

Nevertheless, the danger remains. This is due to the persistent existence of rampant speculation which falsely builds up the value of any market. When a market is then faced with stagnation or a correction, investors panic and begin selling off their shares or running on banks for cash. This cycle has repeated itself time and time again and shows no sign of stopping despite the numerous examples of markets failures and warning signs. This most recent crash again offers the opportunity to learn and stop repeating the same mistakes which have plagued people and nations as long as markets have existed.

Resources

Vox: The Global Stock Market Crash, Explained

The Economist: The Causes and Consequences of China’s Market Crash

Reuters: Markets Rebound from China Slump, Strong U.S. Data Helps

The Bubble Bubble: Historic Stock Market Crashes, Bubbles & Financial Crises

History: The Great Depression

About News: Stock Market Crash of 2008

International Business Times: China Stock Market Crash Explained in 90 Sseconds

The Wall Street Journal: China to Flood Economy with Cash as Global Markets Lose Faith

USA Today: Stock Leaps

The Guardian: China’s “Black Monday” Sends Markets Reeling Across the Globe

CNN Money: Dow sets a 2-day Record, Finishes up 369 Points

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Riding the Wave: The Tumultuous Global Stock Market appeared first on Law Street.

Recent shifts in the Chinese stock market make America’s subprime mortgage fiasco look run-of-the-mill. From January 2014 to June of this year the market rose 150 percent, but since mid-June, the Shanghai Composite Index has lost more than 30 percent of its value. In fact, the recent slide was only slowed through direct intervention from the Chinese government. Following the Chinese market plunge, a number of opinions regarding what the crash means have been expressed. The debate ranges from fears of a full-scale, 1920s-era depression mixed with a housing bubble, to a simple market correction. Read on to learn about China’s market, what it actually means, as well as what impacts it has had on China and the world economy.

The Chinese Stock Market

History

The Chinese stock market, known as the Shanghai Stock Exchange (SSE), was founded in 1990. The market is overseen by the Chinese Securities Regulatory Commission, which is essentially a Chinese version of the U.S. Securities and Exchange Commission. After its start, the SSE has risen above competing exchanges to become the dominant market in China. Its purpose, so far, has been to raise capital for companies, particularly those in the infrastructure and tech fields. The SSE’s current goal is to transform Shanghai into a leading financial center on par with New York and London.

Volatility

While the SSE’s recent crash has garnered headlines, it followed a huge upswing, meaning that despite the recent plunge in stock prices, the market is actually up this year. To accurately discuss the volatility of the market it must be divided into two parts: a rise and fall.

First was the rise. Since the beginning of 2014 to June 2015 the market’s value rose by 150 percent. In the first five-and-a-half months of this year alone, the value rose by nearly 50 percent. The rise in China led to the increased importance of its financial industry, at the expense of traditional manufacturing powerhouses. This was all part of the government’s plan, which hoped to transition to a more financially driven economy, as growth rates slowed and eventually fell below the 10 percent glory days. However, China’s plan for its stock market has a taken a significant hit.

The rise, of course, is followed by a fall, and that fall has been dramatic. In a single two-week span, the value of the market fell by 25 percent. To put it another way, in just two days the market lost 11 percent of its value, which in the United States would translate to a 2,000 point drop in the DOW. These recent losses can be attributed to investors who were in highly leveraged positions, meaning they accumulated much more debt than the equity that they held, leading them to sell when margin calls began. A margin call happens when a broker demands that an investor, who used margin to pay for his investment, put up more money or collateral to cover a potential loss. In other words, people were buying shares on the SSE in an effort to get rich quick. However, when the market began collapsing, many were forced to sell in order to cover margin calls, which led to plummeting stock prices and marketwide panic.  The following video explains the fall:

A Deeper Meaning?

Government Response

So what does the recent crash mean for China? The Chinese government did not wait to find out. Following the collapse, the government reduced regulations on margin buying, halted new IPOs, and encouraged several other efforts aimed at increasing stock sales. Additionally, it stopped trading on most stocks and put a moratorium on selling in place for six months for all large investors. Finally, it threatened individuals and groups known as short sellers–parties that make money when a stock price declines.

The results of all these efforts have been less than encouraging. Following the temporary ban on selling, the market began falling even further. This is a result of the market being reopened to a natural state where investors can sell when an investment looks bad, as much of the Shanghai market looks right now.

Should we be worried about the collapse?

In the best case scenario, the collapse was all just the result of panicked investors with little experience; they saw the value of their investments grow rapidly and were anxious to cash out before anything bad happened. On the other hand, it is possible that the market was experiencing a bubble. A bubble occurs when something is overvalued because of continuous investing and not actual results, or because of the influx of a new product that projects future growth–think housing or tech in the United States.

Unfortunately, if the latter is true things could get worse before they get better. Because the Chinese government prevented the bubble from completely bursting, it could essentially be lingering there, waiting to burst when the regulations ease up. Even if this is not the case, the perception of a bubble could lower stock prices and companies’ desire to invest. Corporations who invested, including foreign ones, are also barred from selling right now and this episode may make them less likely to invest in China going forward.

Currently, the final outcome is still unclear and opinions remain divided. Some companies, such as Bank of America, Merrill Lynch, and Credit Suisse, see China as a systemic bubble that can or will burst when the government removes its support. On the other hand, Goldman Sachs sees the recent plunge as a market correction, needed to reduce over-valued stock prices and push out the wrong type of investors.  The video below details the crash and the government’s reaction:

The Impact

Because China has the number two economy in the world, a stock market crash is likely to have an effect that will reverberate around the world. So, what exactly does the stock market crash mean?

China

It may be too soon to understand how the recent plunge will affect China’s economy in the long run. While the market lost nearly $3.5 trillion since mid-June, its value remains positive this year due to a massive upswing early on. It is also difficult to tell whether the recent volatility will continue or if the market will start to settle down.

What the crash shows most clearly, though, is the oversized role of the government in economics and the unclear nature of its actions. The government’s response, which involved a significant amount of intervention from regulators, may discourage future investment. That response and the apparent lack of regulatory coordination indicate that the Chinese government have many worrying that it will run into further challenges as it attempts to balance stability with a more market-driven system.

Worldwide

The international impact of the Chinese market collapse has been less noticeable than the effect on China itself. Since China remains relatively isolated from the global financial system, the effect of the losses has had little impact on other markets. In fact, the stock market crash in China had considerably less influence on the world economy than tiny Greece–simply because Greece was more plugged in.

The real significance, if anything, will come in the future. If China’s economy takes a nose dive it could mean less investment coming from the country as well as fewer opportunities to invest in its markets. Additionally, efforts to further incorporate China into the world system may be scuttled. The video below discusses the ramifications of the Chinese stock market crash:

Conclusion

Seeing the Chinese stock market lose 25 to 30 percent of its value in about a month is very unsettling, especially with the recent Greek crisis and the lingering memory of the United States’ 2008 meltdown. But it is important to note that despite all the panic, the Shanghai index remains positive this year.

The real impact of the crash focuses primarily on China itself. For the average investor,  the collapse could have wiped out a lifetime worth of income, and may be the first sign of a lingering bubble in the market. For China’s general population, the crash revealed, much like in developed nations, the growing gap between haves and have-nots. For the have-nots, the fiasco may also slow promised social reforms, which could further exacerbate the wealth gap.

Ultimately for China, the crash presents yet another crossroad. The stock market was supposed to be the avenue for future growth when the country’s manufacturing sector fizzles, as it did in the earlier Western model. But the crash raises doubt. If China ever truly wants to be a global economic actor or at least a regional one, it will have to learn to manage volatility without excessive intervention and control from the government.

Resources

Primary

Shanghai Stock Exchange: Brief Introduction

Additional

Business Insider: Goldman Sach’s on China’s Stock Market collapse

Fortune: China’s Wild Stock Market Ride in One Chart

Bloomberg View: China’s Tamed Stock Market Might Bite its Economy

The New York Times: Cooling of China’s Stock Market Dents Major Driver of Economic Growth

Business Insider: Here’s a Simple Explanation of Why Chinese Stock Markets are in Free Fall Right Now

Slate: China’s Stock Market is Falling Again

Business Insider: China Pays a Price to Avert Stock Market Crash

The Washington Times: No Worries about Impact of China Stock Market Crash on U.S. Economy Yet

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post A Crack in the Great Wall: Chinese Stock Market Takes a Tumble appeared first on Law Street.

Digital books have proliferated with the invention of e-readers and e-reading apps over the last decade. Many of these books come from self-publishing–authors who write and publish the books themselves, eschewing traditional publishing houses and print copies. Some people do it as a way to get their words out there, while others use it as a way to make money on the side.

Either way, it is a market that is quickly becoming oversaturated with books that aren’t always of the highest quality, and often contain typos, inaccurate information, and in many cases, are plagiarized from other sources. Facing negative feedback, Amazon is changing the way people pay for their books by creating a by-page payment system. Read on to learn more about Amazon’s latest self-publishing policy.

Self-Publishing on Amazon

Self-publishing represents a huge part of Amazon’s profits–nearly 31 percent of e-book sales come from self-publishing. Books start at just $0.99 and jump up from there, with many books offering free promotions or BOGO opportunities for serialized works, though most works hover around $2.99-$3.99. In Amazon’s current model, readers generally buy the books outright–that won’t change; however, what will change is the way the Amazon Lending Library works.

It isn’t just a huge opportunity for Amazon, but rather a huge opportunity for the writing and reading communities. People who may not have been able to find publishers or agents are now able to at least get their words out there. And who knows what will happen? Self-publishing was E.L. James’ first step toward huge success.

Problems

Amazon has said that the program wasn’t actually for the readers, but instead came from the outcries of writers, who previously were paid $1.29-$2.88 every time that their books were borrowed through Amazon’s Lending Library program.

We’re making this switch in response to great feedback we received from authors who asked us to better align payout with the length of books and how much customers read. Under the new payment method, you’ll be paid for each page individual customers read of your book, the first time they read it.

But certainly there were readers involved in the complaints as well. Many were complaining that books weren’t to the level they were expecting or that they weren’t quality publications. Many thought that the books were just packed with “key words” that would simply rank high on the search, but that the actual quality of the pages wasn’t high.

Pay by Page

The idea behind Amazon’s new policy of pay by the page is simple: authors will get paid simply for the number of pages that a person actually reads. The thought behind it is that books that aren’t quite up to the standards readers expect won’t have as many people reading them cover to cover, so authors are incentivized to raise their games. It also offers a great chance for writers to get feedback and see where people are leaving their work–which is great because authors can edit anything they’ve posted to Amazon.

Starting on July 1, authors who specifically publish through something called the KDP Select Program will start getting paid per page, which is quite a large change from what they used to do. With the old method of payment, Amazon would simply split up the money that they made among authors based on the number of times their books were borrowed through one of Amazon’s Kindle options–either Kindle Unlimited, which is a sort of library subscription that costs $9.99 a month, or the Kindle Lending Library, which is available to Amazon Prime members.

Now, however, authors are paid for the amount of time the screen remains up. Amazon isn’t forcing authors into the program, but they can choose to opt in.

Amazon has had to do some work to get everything ready for the new program, which is only available through the Kindle Lending Library, including a standardization of page lengths and text sizes. TechCrunch warns that long dedication pages or quotes at the start of your book won’t help earn you money, either:

We calculate KENPC (Kindle Edition Normalized Page Count) based on standard settings (e.g. font, line height, line spacing, etc.), and we’ll use KENPC to measure the number of pages customers read in your book, starting with the Start Reading Location (SRL) to the end of your book. Amazon typically sets SRL at chapter 1 so readers can start reading the core content of your book as soon as they open it.

The program, which does cap the amount of money an author can make at $3 million per month, is currently in the first few weeks of testing, and there have been few initial reactions.

Criticism of Pay by Page

The idea hasn’t exactly gone over well with some authors. Hari Kunzru, author of “The Impressionist,” revealed his thoughts that the new payment system “feels like the thin end of a wedge.” He later went on to explain that he felt like Amazon was trying to assert its dominance over small-time writers.

Peter Maass, author of “Love Thy Neighbor” and “Crude World,” offered up a valid point, writing, “I’d like (the) same in restaurants — pay for how much of (a) burger I eat.”

Authors may be making less per book. Inquisitr explains: “That means if a book has a KENPC of only 100 and someone reads it from front to back, an author make 60 cents for the entire download. If they only read the first 10 KENPs, then the author makes six cents.”

A nameless literary agent explained to the Guardian why this could be a problem: “A lot of self-published romance authors are disabled, stay-at-home mums, or even a few returned veterans who work in the field because a regular job just isn’t something they can handle. People are shedding a lot of tears over this.” The new model could very well mean that these people will get paid less, especially as they tend to be the people who writer longer, novel-length books instead of “how to” guides that many “Professional Self Publishers” work on.

Just like any other situation, there are likely to be people who are going to take advantage of the system. People may make books that are significantly longer to take advantage of the money, or they may post shorter chapters that have fewer words per page. Running with that thought, the Guardian highlights an interesting problem:

But now we’re getting into murky territory. It is impossible to write a book that every reader will enjoy. Donna Tartt’s “The Goldfinch,” close to 800 pages long, failed to keep many Kobo readers engaged all the way through; data showed that around 55 percent of readers did not finish it. Yet “The Goldfinch” won the Pulitzer Prize for fiction. Do the figures prove that Tartt needs to learn from her readers and write a “better” book next time, despite being awarded one of the highest literary honours? Should she follow the numbers, or write the books she wants to?

Which leads us right into another problem: Do certain books have an advantage over other books under Amazon’s new policy? It would appear so as it not only has to do with length, but also with the genre of story. Memoirs and thrillers–known as page turners–would have a clear advantage over historical books or criticism, as they tend to entice readers to stick around the longest.

Conclusion

So will Amazon’s newest system benefit writers and readers? It truthfully depends on who you are and your writing style. Readers have the most to benefit from the system, especially if they use the Lending Library and can just return the book. However, it could also push writers to become more serious about what they do.

As the program is still in its infancy, there is no data that can explain how the system is fairing for authors or Amazon; however, Amazon is likely not willing to give up a large piece of profit, so if there are problems, changes will be swift.

Resources

Inquisitr: Kindle Unlimited KENPC Explained: Self-Published Authors Could be Looking at Massive Pay Cut

Kindle Direct Publishing: Kindle Unlimited Pages Read

Live Mint: Thrillers at an Advantage in New Amazon Royalties System

Tech Crunch: Amazon Tweaks Kindle Publishing Royalties to Encourage Page Turners

Guardian: Pay-Per-Page: Amazon to Align Payment With How Much Customers Read

Business Journal: Self-Published Authors Hoping For a Real Page-Turner

Gizmodo: Amazon Will Soon Start Paying Authors Based on e-Book Pages Read

New Republic: Amazon’s Pay Per Page Deal is No Big Deal

Publishers Weekly: Surprising Self-Publishing Statistics

Reuters: Amazon to Pay Self-Published Authors Based on Pages Read

Smashwords: 2014 Smashwords Survey Reveals New Opportunities for Indie Authors

Atlantic: What If Authors Were Paid Every Time Someone Turned a Page?

Reader’s Digest: How Can the Average Writer Make Money Self-Publishing e-Books?

Noel Diem

Law Street contributor Noel Diem is an editor and aspiring author based in Reading, Pennsylvania. She is an alum of Albright College where she studied English and Secondary Education. In her spare time she enjoys traveling, theater, fashion, and literature. Contact Noel at staff@LawStreetMedia.com.

The post Is Amazon’s New Self-Publishing Pay-By-Page Policy Good For Writers? appeared first on Law Street.

The United States Postal Service has been in financial trouble for the better part of a decade. As a society, we rely on the postal service in our everyday lives. Although email and social media are today’s go-to communication methods, we still expect some things to show up at the door whether it be bills, college acceptance letters, or items ordered from Amazon. Many give an extra tip to the mailman or mailwoman during the holiday season in thanks to that integral service all year round. Perhaps we should no longer take that service for granted. The Postal Service is in hot water with an ongoing deficit. So what actions are being taken today to rectify the budget crisis and how could it affect the average American?

 The U.S. Postal Service

Here is a brief background on how the U.S. Postal Service (USPS) came to be the organization it is today. The government created the United States Post Office Department, headed by the Postmaster General, in 1872. It was elevated from its post as a cabinet department from 1872 to 1971. The Postal Reorganization Act of 1970, signed by President Richard Nixon, replaced the U.S. Post Office Department with the current USPS. The Act came as a response to the 1970 Postal Strike. On March 23, 1970, President Nixon called in the National Guard and armed forces to counteract the large wildcat strike. The strike called for higher wages, better benefits, and safer working conditions. For example, Congress had allocated a 41 percent raise for members of Congress, while Postal Department workers only received a 4 percent increase.

The 1970 Postal Reorganization Act redesigned the branch. The newly created USPS, as we know it today, became an independent body of the executive branch with a legal monopoly over mail service. The USPS was restructured to achieve financial independence through postage sales, mail products, and services. Taxpayer money is only used in providing mail services to the disabled and Americans overseas. Although the USPS is legally responsible for its own budget, it may borrow up to $3 billion a year from the U.S. Treasury and retain a debt ceiling of up to $15 billion. As an independent but federal organization, the USPS receives many perks including exemption from vehicle licensing requirements, sales tax, local property taxes, and even parking tickets. To ensure universal service and a six-day delivery service nationwide, the USPS is granted a monopoly over first class and standard mail delivery. Competition, such as UPS and FedEx, are not allowed access to mailboxes.

 What is Causing the Deficit?

USPS has accumulated $47 billion in operating losses since the 1971 reorganization. This is even more shocking when you learn that the USPS has generated more than $700 billion in revenue. From 2007-2010 alone, the “USPS lost $20 billion, and its debt increased from $2.1 billion to $12 billion.” It has only increased since then. The USPS lost $5 billion in the 2013 fiscal year and $5.5 billion in the 2014 fiscal year. The USPS reached its legal $15 billion deficit ceiling back in 2012.

The primary factor for this likely depends on who you ask because there are a few different pieces to this puzzle. One major reason: the USPS is legally bound by Congress to “prefund more than $5.5 billion annually for health benefits for future retirees,” since 2006. As of 2013, the USPS set aside about $44 billion for this specific allocation. Frankly, it’s something the USPS can’t afford. When the mandate was implemented in 2006, the USPS was financially strong. It was before the 2008 recession and explosion of other communication outlets. In 2012, it defaulted on this payment for this first time.

That brings us to our second reason for the default: lower volume. In 2006, the USPS delivered 97 billion pieces of first-class mail. In 2012, it delivered 68 billion pieces. The decline isn’t surprising with today’s innovative technologies that are only expanding. Everything seems to be going online from bills to keeping in touch. Other factors include competition from FedEx/UPS, ballooned operating costs, and the demands of the unionized workforce.

President’s Obama’s Proposed Solution

President Obama has a plan for the 2016 fiscal budget and the USPS that would potentially save $36 billion over the course of 11 years. The plan is similar to a bill introduced by Sen. Tom Carper (D-DE) and former Sen. Tom Coburn (R-OK), previously killed in Congress. For starters, Saturday delivery would be cut. This would be implemented when volumes drop to the predicted amount in late 2018. It would also replace door-to-door service with a centralized or curbside delivery service. This would perhaps ultimately be safer for mailmen and mailwomen. The plan offers the idea of “increasing revenue by providing postal management with more flexibility in creating new business opportunities, as well as boosting cooperation with state and local governments to offer services at post offices.”

The White House also addresses the mandated prefund healthcare benefits of retirees, deferring the 2015 and 2016 payments. The payments would ultimately be paid out under a 40-year amortization schedule beginning in 2017. This would bring in “$13 billion in relief to USPS through 2016.” The plan would reimburse USPS an estimated $1.5 billion in over-costs to the Office of Personal Management for federal retirement payments. It also calls for more future investments and faster technology.

Increased Rates

Lastly, the plan calls to make the emergency price increase of postage permanent. This, however, has been struck down multiple times. The price of mail increased by three cents in January 2014, the largest rate bump initiated in 11 years. The rate of inflation should have called for a 1.7 percent increase, but it set a 4.3 percent increase. The current stamp price is 49 cents. The price increase was granted to allow the USPS extra revenue and was set as a two-year term. When the USPS initially asked for the increase to be permanent, they were rejected by the Postal Regulatory Commission. They explained that the increase was meant to counteract losses from the recession, not to alleviate losses caused by the expanding electronic industry.

In a recent development, the U.S. Court of Appeals for the District of Colombia Circuit ruled on June 6, 2015 that the priced increase could not be permanent. Circuit Judge Patricia Ann Millet wrote the following:

The Commission sensibly concluded that the statutory exception allowing higher rates when needed to respond to extraordinary financial circumstances should only continue as long as those circumstances, in fact, remained extraordinary,” Circuit Judge Patricia Ann Millet wrote on behalf of the appeals court. “The Commission permissibly reasoned that just because some of the effects of exigent circumstances may continue for the foreseeable future, that does not mean that those circumstances remain ‘extraordinary’ or ‘exceptional’ for just as long.

This ruling does not favor this one aspect of the White House’s overall plan.

Other Possible Solutions

There are a plethora of ideas circulating for the USPS to generate extra money. One idea is the reincorporation of the Postal Savings System. It’s a basic savings account for those who don’t wish to use a private bank. Lower-income families that don’t currently use a bank and pay bloated prices for transactions like cashing checks could potentially benefit from this system. There are more than enough post offices around the country to make this convenient for customers. Another idea is for the USPS to catch up to its communication competitors and offer email/internet services. The USPS could offer an affordable rate compared to its potential competitors. Other ideas include “a notary service, selling fishing and hunting licenses, and ending restrictions on shipping wine and beer.”

The USPS could also remodel its system to more resemble postal services in Europe. Countries like Sweden, Germany, and Finland only allocate a certain percent of the market to their national postal services. For example, the Swedish service Posten only accounts for 12 percent of Sweden’s post offices. This allows it to streamline and focus on certain aspects of the market like digital mail products. Whether this is a viable option is up in the air, but could be an idea worth considering.

Conclusion

The financial issues of the U.S. Postal Service have massive effects on our country from the thousands of employed postal service workers to everyday citizens receiving and sending mail. An increase in stamp prices severely affects businesses that allocate a certain amount of their budgets to sending out materials. All in all, it is a national issue. With certain actions already in place, the USPS saw a $569 million revenue increase in the 2014 fiscal year. This by no means offsets the deficit, but it proves innovative ideas can make a difference. With any luck, revisions made to the 2016 fiscal budget will provide promising results.

Resources

CATO: Privatizing the U.S. Postal Service

Government Executive: As New Postal Leader Takes Charge, Obama Calls for Major USPS Reforms

Huffington Post: The Plight of the Postal Service

PBS: The Postal Service

Smithsonian: 197o Postal Strike

Time: How Healthcare Expenses Cost Us Saturday Postal Delivery

USPS: Despite Revenue Growth and Record Productivity, Postal Service Loses $5 Billion in 2013 Fiscal Year

USPS: U.S. Postal Service Reports Revenue Increase, $5.5 Billion Loss in Fiscal 2014

Washington Post: Postal Service Gets Approval for a Temporary Increase in Stamp Prices

Washington Post: USPS Cen’t Keep Rate Increase Forever, Court Rules

Editor’s note: A previous version of this article stated that the Post Office was created by the founding farmers in 1972; it was created in 1872.

Jessica McLaughlin

Jessica McLaughlin is a graduate of the University of Maryland with a degree in English Literature and Spanish. She works in the publishing industry and recently moved back to the DC area after living in NYC. Contact Jessica at staff@LawStreetMedia.com.

The post The USPS Deficit Crisis: What’s the Plan? appeared first on Law Street.

Chances are that if you buy merchandise online, you have probably made a PayPal account to streamline the process. Whether you just use it to pay for your iTunes purchases or to feed your late night Amazon habit, it can make your online shopping a little easier to handle.

PayPal is an online platform that allows users to connect their credit card or bank account information so that they don’t need to have their credit cards handy for purchases. Many online retailers allow users to sign in through PayPal. The online service also has its own credit card, which is at the center of a current controversy. Read on to learn about the controversy, what laws PayPal may have broken, and what’s next for the financial giant.

The Controversy

The Consumer Financial Protection Bureau recently filed a $25 million lawsuit in a Maryland district court against PayPal for deceptive practices; in particular, deceptive practices relating to the PayPal credit card. This agency’s main purpose is to “make markets for consumer financial products and services work for Americans–whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”

What PayPal Did

Complaints against the company aren’t exactly new. In fact, there are multiple websites, such as aboutpaypal.org and paypalsucks.com, that detail many of the problems that people have with the company; however, many of those complaints have to do with customer service issues or confusion. The complaints at hand are a little more serious: as detailed in the CFPB suit, the complaint includes the following six counts:

1. PayPal enrolled customers in its credit card without their consent or authorization;
2. Customers who used account funds were billed through that credit card instead of having it taken out of their connected card or bank account;
3. PayPal did not accept, process, or post payments made to the PayPal card, resulting in late charges and changes in credit scores;
4. Paypal lied to customers about what they were receiving when they signed up for the card;
5. Paypal did not provide adequate information about the balances posted (deferred interest) and the information about promotional content–even for customers who did sign up for the credit card willingly;
6. Paypal employed unfair billing dispute practices.

You may not even be safe if you only used PayPal to pay for things online or have some funds in there from online payments. According to CBS Money Watch, PayPal actually signed up many users for credit cards without letting them know or sending them a physical card–meaning that many people didn’t even know that they were actually charging to a credit card, because they didn’t know they had one.

The result was an abundance of charges for users, particularly charges that were sometimes just taken out of the funds they had loaded into the website. Some consumers were also hit with overage fines and interest charges.

Why it Was Wrong

While all of the counts are bad enough to warrant a dispute, number five is particularly abhorrent. In fact, the CFPB described the conduct as “abusive” in its report. However there was some debate over that–the National Law Journal reports on the difficulty:

In its complaint, the agency listed six charges against PayPal, including one that details the conduct the CFPB said was ‘abusive.’ The agency has declined to define abusive conduct—a standard that’s apart from long-established consumer protection terms ‘unfair’ and ‘deceptive’—through any regulation.

Instead, the CFPB is laying out what it means one enforcement action at a time. For lawyers and their clients, and even members of Congress, understanding the parameters of abusive practices has been unsettling.

‘How can companies comply with this law?’ Rep. Sean Duffy, R-Wisconsin, asked at a 2012 oversight hearing, calling it ‘a subjective standard with no bright line.’

What happened to customers really depended on when they signed up–or were signed up–for a credit card. A customer with a PayPal card could have two balances: one for the card that was free from interest and another that had an interest-accruing balance. Customers were told they could decide what payments went where, but that was not true. They were also lied to about the minimum payment due–and attempts to talk to customer service often resulted in the age old “we are experiencing an unusually large call volume” message.

What Rules Do Credit Card Companies Have to Follow?

There are several laws in place that help protect consumers from being taken advantage of with their credit cards. These laws are part of the reason that the Consumer Financial Protection Bureau even found the problem with PayPal. In 2010, President Obama signed something called the Credit CARD Act, also referred to as the Credit Cardholders Bill of Rights. According to the CFPB, the law has two key purposes:

Fairness – Prohibit certain practices that are unfair or abusive such as hiking up the rate on an existing balance or allowing a consumer to go overlimit and then imposing an overlimit fee.

Transparency – Make the rates and fees on credit cards more transparent so consumers can understand how much they are paying for their credit card and can compare different cards.

That is the law that this particular case focused on, but there are a few other laws that credit card companies have to follow that illustrate the issues with PayPal’s deception.

Truth in Lending Act

When you go to get a credit card or a loan from your bank, you are immediately on an uneven playfield. The Truth in Lending Act is supposed to shield you from unfair lending practices. This means that a bank or credit card company has to tell you orally and in plain written language the terms, interest rate, and any other hidden fees.

Fair Credit Billing Act

This law kicks in once you have a credit card and protects you against inaccurate billing. If you meet predetermined guidelines, this act limits your financial responsibility for unauthorized charges up to $50. It also assures that you don’t have to pay for merchandise you ordered but never received, goods and services you didn’t accept, and double charges.

Fair Credit Reporting Act

Credit companies, lenders, and banks report your credit activity to the credit bureaus. The Fair Credit Reporting Act, most recently changed in 2003, ensures that your information is correct. It gives you the right to dispute inaccuracies and to access your credit score and file. This law also protects who can see your credit file. The only people who have access are those with need: a creditor, a landlord, an insurer, or a prospective employer.

What Can Those Affected Do Now?

For its part, PayPal (and parent company EBay) now seems to be remorseful over the situation, and in an email to Bloomberg, a spokesperson for the company seemed hopeful that it would take care of everything and make it right:

Amanda Miller, a spokeswoman for PayPal, said the company ‘takes consumer protection very seriously.’

‘We continually improve our products and enhance our communications to ensure a superior customer experience,’ Miller said in an e-mail. ‘Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws.’

As for those who have been affected, $15 million will go right back into their pockets. PayPal is said to be sending out emails in the coming weeks to customers who qualify for reimbursement. There is also going to be a $10 million fine against the company.

Conclusion

At the end of the day, we have all signed up for things and haven’t read the fine print. However, it is a lot more difficult to read something when you don’t even know it applies to you. PayPal received a pretty hefty slap on the wrist, and the hope is that other credit card companies and money lenders see this and change some of their shady business practices.

Resources

Primary

Consumer Financial Protection Bureau: The Credit CARD Act

Federal Trade Commission: Fair Credit Reporting Act

U.S. Department of the Treasury: Truth in Lending Act

Additional

Credit Cards: Obama Signs Credit Card Reforms Into Law

National Law Journal: Why the CFPB Found PayPal’s Conduct ‘Abusive’

Bloomberg Business: PayPal Will Pay $25 Million to Resolve CFPB Bill Me Later Claims

CBS Money Watch: Feds Say PayPal Illegally Signed Consumers up For Credit

USA Today: PayPal to Pay $25M in Refunds and Penalties

SlashGear: PayPal Ordered to Pay $25 Million over Deceptive Practices

Wall Street Journal: PayPal Says it May Face U.S. Lawsuit by June

Wall Street Journal: PayPal to Pay $25 Million to Settle Online Credit Claims

Noel Diem

Law Street contributor Noel Diem is an editor and aspiring author based in Reading, Pennsylvania. She is an alum of Albright College where she studied English and Secondary Education. In her spare time she enjoys traveling, theater, fashion, and literature. Contact Noel at staff@LawStreetMedia.com.

The post Use PayPal’s Bill Me Later? You Might Get a Refund Due to Shady Practices appeared first on Law Street.

Recently an Amtrak train traveling the busy northeast corridor route near Philadelphia derailed at a high speed, killing eight people and injuring more than 200. While experts weigh in over the speed of the train, the state of the engineer, and whether the locomotive was struck by a foreign object, many other people are now concerned about a different matter: the safety of trains in the United States. Read on to learn about the development of the train industry in the U.S., the rules and regulations that trains must follow, and considerations moving forward in light of the recent, horrific Amtrak crash.

Locomotives: The American Backstory

The first charter for a railroad in North America was granted to John Stevens in 1815. The same man also tested the first steam locomotive in the United States, nine years later in 1826. A railroad boom began in 1840, stemming from the northeast. However, this initial expansion was beset by unregulated practices and differing track gauges, which kept the lines from unifying. Individual owners of regional charters fought over territory. This chaos led to dangerous conditions for passengers and cargo traveling by rail.

As track mileage continued to expand rapidly, the rail industry achieved one of its greatest moments with the completion of the transcontinental railway in 1869 in Promontory Point, Utah. Starting in the 1880s and continuing through the 1920s, rail companies enjoyed greatest success. This was in part due to owners finally agreeing to standardize track gauge size and the development of a number of safety features that also improved efficiency. Ultimately, 1916 served as a peak year, with rail mileage reaching an all time high in the United States and stretching a total of 254,000 miles.

This expansion would come to a halt in the 1930s however, with the rise of individual automobiles and continue to stagnate throughout the 1940s and 50s following WWII. In the 1960s train companies began merging or going bankrupt, as passenger and freight numbers continued to dwindle. In 1971 Amtrak, a government supported system that dealt primarily with passenger traffic, was created. Even with government support however, the train network nationwide would likely have collapsed without a move towards deregulation in 1980. This move allowed the remaining companies to negotiate better rates and drop routes that were unprofitable.

This renaissance has continued into the present, as companies have merged into larger and larger entities. Freight has also returned to rail in large numbers, so much so that it is actually in danger of overwhelming the current system. Passenger travel has also increased, as people seek to avoid traffic and relax during commutes. The following video gives an overview of the history and development of railroads in the U.S.:

Trains By the Numbers

People

In the 2014 fiscal year, 30.9 million people rode Amtrak trains. During that same year 11.6 million passengers rode along the Northeast Corridor route, where the recent accident occurred. This was a 3.3 percent increase from the year before. In fact, this route is so popular that it actually accounts for 77 percent of combined rail and air travel between Washington DC and New York. These numbers would likely be even higher, except that Amtrak suffers from outdated infrastructure and has its efficiency hampered by freight trains using the same rails.

Freight

So exactly how much freight do these cumbersome trains move each year in the U.S.? In 2010, approximately 1.7 billion tons of freight were transported on rails, the last year with complete data. This accounted for 16 percent of the total freight shipped within the U.S. and equated $427 billion dollars. The industry is dominated by seven major carriers that employ 175,000 people. The number is expected to grow in the future, but is currently stagnant due to old infrastructure and insufficient investment.

Incidents

With all these people and things being moved by rail, the next questions is how likely are accidents like the one outside of Philadelphia? The answer is extremely unlikely. In fact, a person is 17 times more likely to be involved in a car accident than a train accident. While some of this can be explained by the obvious fact that most people travel in cars more than they travel in trains, the accident rate is also lower. There’s just .43 accidents per billion passenger miles for train travel versus 7.3 accidents per billion passenger miles for cars.

In addition, when rail accidents do occur, they usually do not involve passengers, as most rail traffic is moving freight. Thus, while 1,241 derailments occurred last year, there were few injuries. Furthermore, while the number of derailments may seem fairly high, it is less than half the number seen just thirty years ago. Most of the derailments that do still occur are a result of track conditions like the ones being blamed in the recent high profile crash. Experts worry that these are a result of underfunding, especially when it comes to Amtrak. This is the case even with ridership growing in the Northeast corridor route because Amtrak must spread its revenue across all its routes and many of them don’t make a profit.

Rules and Regulations

Benefits of Deregulation

As touched on earlier, the railroad industry actually experienced deregulation in the 1980s. The railroad industry wasn’t doing well, and needed to become more flexible in order to survive. Thanks to two separate acts passed in Congress, in 1976 and 1980 respectively, a collapse of the railroad industry was avoided. Basically both these acts provided greater flexibility to railroad companies to negotiate rates, change routes, and merge to stave off insolvency. While fears grew of monopolies, these acts were also designed to lower the cost on entry into rail travel and transport, which was supposed to prevent any one company from dominating the industry. Since these acts went into effect, the rail industry has enjoyed a strong comeback. Additionally, deregulating the rail industry may have also improved infrastructure, as the large companies that have come to dominate rail traffic can afford to reinvest in improving safety and the technology that guides their trains.

Thus, while the technology and knowledge exists to improve safety and prevent accidents like the one in Pennsylvania, everything ultimately comes back to money. In 2008, Congress passed a bill requiring trains to implement a system known as positive train control. This utilizes a number of technologies to sense how fast a train is moving and slow it down if necessary. However while this system was in place on the tracks going the opposite direction it was not yet in position on the tracks heading northbound towards Philadelphia. The accompanying video explains some of the safety measures in place, particularly positive train control:

There are other measures in place to alert the conductor and slow down the train as well. If the conductor does not alter the train’s trajectory in any way for a certain amount of time, bells go off in the cabin to alert him or her. Additionally, the train is also supposed to slow itself down, but it was unclear if these safeguards were initiated before the crash.

Money Troubles

However, in its 2008 decision, Congress required Amtrak to bid for the communications channels required to send and receive signals. For an already cash-strapped system that was also facing major budget cuts, this was a deadly requirement. Implementing this technology costs $52,000 dollars per mile and must be universally applicable to a variety of trains that use different technology. Nonetheless, despite all these challenges, the Amtrak system was actually one of the leaders and was one of the few on pace to complete the required installation by 2018.

Following the crash however, Congress vetoed a bill being pushed by President Obama that called for $1 billion dollars in additional funding for Amtrak. This funding is clearly needed not just because of this crash but also because of how Amtrak compares to foreign train systems. In the UK for example, this type of braking technology has been in place for nearly ten years. This is also true in other more train-centric countries such as France and Japan.

Shipping Oil

Along with recent concerns over rail safety in general, there are long standing worries over trains carrying oil. Due to the nation’s energy boom, trains are increasing being relied upon to transport oil. For example, in 2012 trains shipped more than 40 times the amount of oil they did just four years earlier, an amount which doubled again in 2013.  The video below documents the rise and danger of shipping oil by rail:

This increased traffic has also led to an increase in the number of accidents. In 2014 there were 141 incidents termed “unintentional releases” of oil. The year before, while there were less individual incidents, even more oil was spilled, about 1.4 million gallons. For some perspective, that amount was more than all the oil that had ever been spilled by train transport to that point. These spills and accidents can lead to massive explosions, deaths and contaminated ecosystems. The increasing threat is so troubling that some people are calling for more pipelines to be built, rehashing the Keystone Pipeline debate.

Thus, while all trains are facing tighter rules and regulations, those carrying oil and gas are facing the most stringent changes to protocol. In new rules outlined at the beginning of May, more durable containers are now required for transporting fuel in the event of a crash. Additionally, trains are required to go no faster than 30 miles an hour unless they have electronic brakes. This action was part of a joint announcement in conjunction with Canada. It was also in the wake of a number of crashes involving fuel shipments, including four this year alone. This has also rekindled the argument over lack of funding and overly tight timelines.

Conclusion

The crash of an Amtrak train along the nation’s busiest passenger rail route has raised fears over train safety. These fears are compounded by a rail industry facing budgets cuts and relying on outdated technology. However, the rate of crashes and derailments remain low, especially in relation to other types of transportation such as cars. Nevertheless, in the future more investment and infrastructure improvements must be made in order to prevent accidents, like the one outside of Philadelphia, from repeating themselves. Greater efforts must also be made and continue to be made to regulate the usage of trains in moving massive quantities of oil, which has proven very dangerous. The rail system is the unsung and often forgotten cog of the transportation system in the U.S. But, it only takes one accident to put concerns over its safety back on America’s one mind.

Resources

American-Rails: Railroad History: An Overview of the Past

The New York Times: Amtrak Says Shortfalls and Rules Delayed its Safety System

Washington Post: Trains and Carrying and Spilling a Record Amount of Oil

CNN: Amtrak Installs Speed Controls at Fatal Crash Site

Amtrak: News Release

Guardian: Amtrak’s Northeast Corridor

Center for American Progress: Getting America’s Freight Back on the Move

Vox: 4 Facts Everyone Should Know about Train Accidents

Hofstra University: Rail Deregulation in the United States

Guardian: Amtrak How America Lags Behind the Rest of the Developed World on Train Safety

Wall Street Journal: U.S. Lays Down Stricter Railcar Rules

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Fatal Amtrak Derailment Casts Light on a Forgotten American Industry appeared first on Law Street.

The workers’ compensation system around the nation has been complicated for decades. Particularly in California, a measure from the early 2000s is now coming to light as more and more women are trying to get workers’ compensation. There’s a battle raging over whether or not there’s an inherent gender bias in the handling of workers’ compensation claims in California; the concern is that women who try to get workers’ compensation are “penalized” for gender-related conditions like pregnancies and menopause. Read on to learn about the gender bias in worker compensations claims in California, what’s being done, and a look at the discussions happening in other states.

What is workers’ compensation?

Workers’ compensation is a form of insurance provided in the workplace that can consist of wage replacements and medical benefits for employees who were injured while working. Usually by accepting these funds, employees acknowledge that they will not sue their employers for negligence. Workers who are permanently disabled while on the job receive compensation from insurers based on a calculation of the level of disability and what portion of the injury is linked to their jobs. Insurers may also weigh the worker’s previous health conditions or prior injuries. In California specifically, the process is overseen by the Division of Workers’ Compensation which:

Monitors the administration of workers’ compensation claims, and provides administrative and judicial services to assist in resolving disputes that arise in connection with claims for workers’ compensation benefits.

DWC’s mission is to minimize the adverse impact of work-related injuries on California employees and employers.

State of Workers’ Compensation

If you were to look at the statistics, it looks like fewer and fewer people nationwide are getting hurt at work, though that isn’t exactly the case.

A report came out recently about how the system is reporting very low numbers. The real reason? Changing the circumstances for what qualifies as a workplace injury, and the simple dissolution of programs that pay for such accidents. According to the Washington Post, the number of people injured at work is probably twice what is reported because people fear losing their jobs. Or people, like those in the construction industry, are misclassified as independent contractors.

The Washington Post recently discussed the national state of workers’ compensation problems, saying:

Since 2003, the investigation found, 33 states have weakened their workers’ compensation regulations, scaling back the procedures that will be covered and the duration for which benefits are offered. In addition, while businesses often push for reforms on the grounds that workers’ compensation costs are out of control, data shows that premiums are lower than they’ve been at any point since the early 1990s.

California’s Belabored Workers’ Compensation Program

Workers’ compensation programs have received complaints that they are inherently flawed throughout the United States. Lately the debate has been particularly focused in California. Complaints come from the fact that outside medical reviewers look at the cases and after brief exams or only by reading the medical records can deny recommended treatments or rule that injuries aren’t work-related.

Reform Under Governor Schwarenegger 

Some problems with the California system can be traced back to a bill that reformed the program, which was signed in 2004 by then-Governor Arnold Schwarzenegger. It changed what types of injuries qualified under the program, how long certain employees would receive coverage after being injured, and required the injured employees to choose from a specific pool of independent doctors. At the time, Schwarzenegger said:

This bill completes a process that brought together Republicans and Democrats, business and labor, and all the affected parties to produce billions of dollars in savings, protect workers, and root out fraud and waste in the system. No longer will workers’ compensation be the poison of our economy. Our message to the rest of the country and the world is that California is open for business. We are making our state once again a powerful, job-creating machine.

At that time, California employers were paying the highest workers’ comp rates in the nation: $6.33 for every $100 in payroll, compared to a national average of $2.46.

Although the bill was supposed to save Californians money, there were some problems with it. The new bill made it more difficult for workers to get in to see doctors and left them waiting for months without any answers to their problems.

Reform Under Governor Brown 

In 2012, Governor Jerry Brown put some of the power back in the hands of the state, deciding that disputes should be handled by independent medical reviewers whose decisions cannot be overturned. The law was a bit quirky, as this didn’t just apply to the new cases, but also retroactively to past requests, and it impacted everything from already-scheduled doctor’s visits to prescription refills. In some cases, treatments were stopped in the middle with little more than an official notice.

This new system also has problems, however, as in recent years reviewers have denied treatment in up to 91 percent of the cases. People who were receiving treatment for years suddenly found themselves left out in the cold, and many had to return to work to continue to pay for the medication they needed.

Christine Baker, who oversees workers’ compensation in California, has stated that the reform is “speeding up the decision making process” and taking the aid away from people who are using it for prescription abuse.

Many of the judges, including John C. Gutierrez, a workers’ comp jurist since the 1980s, are some of the biggest adversaries of the law. According to Gutierrez, “the only interest that’s being protected here is industry and I feel that their financial influence has had an impact on how this legislation came out.” He went on to say that he felt like workers “are losing their voice.”

This is a problem in the state regardless of gender, but when it comes to comparing women and men, there is an even bigger problem looming.

Gender Bias in Workers’ Comp Rulings

California Assemblywoman Lorena Gonzalez introduced a bill (AB305) on March 4, 2015 that aims to eliminate the gender bias in workers’ compensation rulings.

This comes after a Bay Area woman who suffers from Carpal Tunnel Syndrome, which damages the nerves in the hands and often limits movement, was denied workers’ compensation for a strange reason: she was postmenopausal, which meant that she was predisposed to nerve damage. 

The woman enacted the help of attorney Sue Borg who says that she sees many cases where a woman who is injured on the job and files a claim for compensation is “penalized” for things like pregnancies and menopause. “It seems like it should be obvious that we shouldn’t see this, but it happens in insidious ways all the time,” Borg said.

Gonzalez aims to ensure that being female does not constitute a preexisting condition, and hopes to stop the reduction of compensation for female workers based on pregnancies, breast cancer, menopause, osteoporosis, and sexual harassment. All of this discrimination is happening, even though there are laws against gender discrimination in the workplace.

Breast Cancer

One of the biggest problems facing women seeking workers’ compensation is breast cancer. There have been numerous reports of how breast cancer is treated among firefighters and police officers. According to the Corporate Counsel:

Gutierrez reports that the bill’s supporters claim gender bias in workers’ compensation is a big issue, and one that is “especially evident in the way breast cancer is treated among firefighters and police officers.” For instance, female police officers who have to undergo double mastectomies for breast cancer linked to hazardous materials on the job are considered 0 to 5 percent disabled, Gutierrez reports, whereas a male officer with prostate cancer is considered 16 percent disabled and would be paid for the injury.

One such case involves a San Francisco firefighter who was denied permanent disability after having to undergo a double mastectomy, as well as an Orange County hotel housekeeper who was injured on the job but only received two percent payment on her claim–despite doctors putting her disability level at 100 percent–due to prior conditions “related to childbirth, obesity, age and naturally occurring events.”

Pregnancy

Pregnancy has always been a fairly controversial issue when it comes to the workplace, but many women are now being denied workers’ compensation due to it, or facing claims that it is the “cause” of the problem. Things like back pain, muscle strain, and injuries caused by fatigue have all been attributed to pregnancy and not the workplace. “I’ve had a child, and if now being a mother is a pre-existing condition in California, I find that unacceptable,” said Christine Pelosi, chair of the California Democratic Party’s women’s caucus.

State Fires Back

The claims were immediately disparaged by the Workers’ Compensation Action Network, which said that payment decisions were never a result of discrimination. According to the Sacramento Business Journal: “A spokesman from Industrial Relations could not immediately produce data on gender-related bias or discrimination, but the agency will look into the matter and respond with its findings.”

Conclusion

The nation, and particularly California, has a lot of work to do in the coming months to try to look at reports and see if there is a problem. If there is, it could mean an inundation of old cases that may be able to be retried, meaning companies could owe a lot of money to women all over the state.

Surely California is only the beginning and more and more states, as well as the federal government, will have to look at their workers’ compensation laws and see if there are problems lurking in them. In the end, the people who don’t get covered by workers’ compensation won’t always work through their pain; many will end up on government subsidies, which means that the tax payers will have to cover the costs.

Resources

Primary

Department of Industrial Relations: Division of Worker’s Compensation California

Department of Industrial Relations: A Guidebook for Injured Workers

Additional

Corporate Counsel: Charges of Gender Bias in Workers’ Compensation

NPR: Injured Workers Suffer as ‘Reforms’ Limit Workers’ Compensation Benefits

Heartland Institute: Schwarzenegger Signs Workers Comp Reform

The New York Times: A Racy Silicon Valley Lawsuit and More Subtle Questions About Sex Discrimination

SF Gate: Gender Bias Rampant in Workers’ Comp Cases, Women’s Groups Charge

ProPublica: The Demolition of Workers’ Comp

NPR: As Workers’ Comp Varies From State to State, Workers Pay the Price

Property Casualty 360: California Workers’ Comp Bill Passes Legislature; Insurer Groups Cautious

BradBlog: Schwarzenegger’s Workers’ Comp ‘Reform’ Killed My Client

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Noel Diem

Law Street contributor Noel Diem is an editor and aspiring author based in Reading, Pennsylvania. She is an alum of Albright College where she studied English and Secondary Education. In her spare time she enjoys traveling, theater, fashion, and literature. Contact Noel at staff@LawStreetMedia.com.

The post California Workers’ Compensation: A Flawed System? appeared first on Law Street.

The ideal portrait of a middle class household in the United States usually consists of a steady income, a sizable house, a few cars, yearly family vacations, and weekend outings. This image is rooted in the stereotypical family of the 1950s–a nuclear family residing in the suburbs. Until recently, being middle class in the United States was still reminiscent of that post-war generation of American families. But things have changed, and dramatically so. The middle class is shrinking rapidly, with more people moving down the income ladder. Read on to learn more about the status of the middle class in America and the reasons for its decline.

How to Define the Middle Class

There is no universal definition of middle class, but households that make enough money to live comfortably, take vacations, indulge in entertainment, and save for retirement and college funds can be broadly considered to fit the bill. However, the description of “middle class” can include a broad range of figures, depending on the chosen measurement.

The most common measure used to define middle class is income. The New York Times  has chosen 50 percent above the poverty level ($35,000) for a family of four as the lowest threshold and $100,000 as the highest income for a middle class family. Pew Research Center presented middle class as households ranging from those who make two-thirds ($40,667) to twice ($122,000) the median income. The U.S. Department of Commerce gives a more narrow range, from $50,800 to $122,000. Meanwhile, the U.S. Census Bureau considers middle class families to be those who fall between $20,600 and $102,000.

Other possible measurements could include occupation, education, social values, or some combination of the above. In addition, regional cost of living is often taken into account when categorizing American households. Interestingly, those who make less than $20,000 or more than $150,000 a year still sometimes consider themselves a part of the American middle class depending on where they live and the expenses they have. Essentially, the cohort is almost impossible to define, as each household has different needs. While some can manage to save for retirement on $20,000 a year, other families that may have an income over $100,000 have to pay larger medical or college bills, resulting in zero savings.

How is the American middle class changing?

The U.S. Census Bureau started to track household incomes in 1967. With some ups and downs, the overall income levels tended to increase over the earlier decades. However, starting in 2010 the American middle class has begun to shrink. As of now, 61 percent of Americans live paycheck to paycheck, 36 percent don’t contribute anything to retirement, and more than 40 percent work in low-paying jobs in the retail and service sectors.

People ages 30 to 44 are less likely to be middle class, while those who are 65 years and older are more likely to be middle or upper-middle class. As many baby boomers are working past their retirement age, and most of them receive Medicaid and Social Security benefits, households containing those who are 65 years and older are the fastest growing share of the contemporary middle class. The number of adults in middle class households decreased from 61 percent in 1970 to 51 percent in 2013. At the same time, the number of adults who now live in upper-income households has gone up from 14 percent in 1970 to 20 percent in 2013. The share of younger adults, ages 18 to 29, who live in middle class households has fallen dramatically, with more of them moving to the lower class due to staggering unemployment rates.

In addition, family status is an important factor in association with income distribution among the American population. Two-adult households are more likely to be upper-middle class due to the fact that both adults are working, thus increasing the overall family wealth. One-adult households are disproportionately lower income for precisely the same reason. The traditional vision of American middle class families–two adults and children–is now on the decline, constituting only a quarter of middle class households. Some of them surely increased their income, moving to the upper-middle class, probably due to the increased number of women in the workforce.

White Americans are more likely than black Americans and Hispanics to live in middle- to upper-income families. In 2013, half of Black households and 43 percent of Hispanic households were lower income.

Location wise, the number of middle class households has decreased in the Northeast, especially in such states as Connecticut, Massachusetts, and New Jersey.

Overall, the dynamics of the middle class in America are changing. In 1967, 53 percent of households were middle class families; in 2010 that share decreased to 43 percent, with some people moving up or down the income ladder.

Why is the American middle class changing?

The middle class in the United States is shrinking for a broad range of reasons that collectively influence the changing dynamics of middle class membership.

The Great Recession 

First and foremost, the Great Recession of 2008 resulted in lower incomes, high unemployment rates, and increased numbers of home foreclosures. It’s estimated that the median net worth (the amount by which assets exceed liabilities) was at $120,600 in 2007; after the recession this number dropped to $77,300. Due to long-term stagnation in wages, median household income has decreased from $56,080 in 1999 to $51,017 in 2012. Simply put, after 2008, many middle class families became lower-income families.

Creation of Low-Income and Part-Time Jobs 

In the aftermath of the 2008 housing market collapse, many middle-income jobs were lost. In response, low-income jobs were created, adding little wealth to American households. Employment in low-skill jobs increased 110 percent between 1980 and 2009, while available middle-skill jobs have risen only 46 percent. At the same time, more and more Americans are working part time as they cannot obtain full-time employment. In 2012, more than 2.5 million Americans were working part time, the highest number since 1993. Clearly, proliferation of low-income and part-time jobs resulted in the overall drop of middle class incomes. Watch the video below to learn more about low-paying jobs in the United States.

The Growing Income Gap

But not all middle class families moved down the income ladder. On the contrary, some households’ incomes skyrocketed instead. The gap between high-income Americans and everybody else reached its apex during the years following the Great Recession. Simply put, the wealth of upper-middle-class households has increased, while middle- and lower-class families’ incomes have declined or didn’t change at all. The upper class is earning roughly 50 percent of the overall national income and is holding 83 percent of all U.S. stocks. At the same time, lower- and middle class families hold only seven percent of the liquid financial assets, and own less than one percent of the country’s wealth.

While the number of millionaires in the United States has increased 16 percent since 2009, the number of children who live in poverty accounted for 21 percent of all children in 2010, the highest percentage in the last 20 years. The growing income gap is especially evident as the wealth of middle class families has diminished, while upper class families experienced significant boosts in their earnings. Watch the video below to learn more about income gap in the United States.

Shift of Jobs Overseas

As multinational corporations are looking to minimize expenses while maximizing  profits, they are shifting their operations overseas. This prompts significant reductions in employment opportunities inside the country as corporations are hiring less in the United States and more in the less-developed parts of the globe. The reason for this is very simple: there are fewer regulations and labor is cheaper. In addition, American companies don’t have to adhere to minimum-wage requirements or pay benefits to the overseas workers, significantly reducing their expenses. It’s estimated that from 1999 to 2008, American companies hired 2.2 million people in other countries, while scrapping 2.1 million positions inside the United States. Not only is it more expensive and difficult to conduct business in the U.S., it’s also much cheaper and more convenient to run a large company abroad.

Increasing Use of Technology in the Workplace

Not only do middle class Americans have to compete with overseas workers, but now they have to compete with computers and machinery. As the use of technology in the workplace rapidly grows, more and more middle class jobs disappear. Now, computers are doing the same jobs that humans used to do decades ago, depleting middle class employment opportunities. Essentially, technology is replacing human labor as computers can complete tasks faster, cheaper, and with more accuracy than human employees. Starting in 2010, the number of people employed as telephone operators, word processors, and typists has declined 63 percent. The share of travel agents has decreased 46 percent, while the number of bookkeepers has plunged 26 percent. In addition, such jobs as check-out cashiers, bank tellers, ticket agents, and secretaries are on the decline, as many businesses use computers instead of employing workers.

One of the recent examples of job technology taking over is “bookBots,” an innovative project at North Carolina State University. Instead of human librarians who retrieve books as students request them, robots are programmed to find requested books, now located within 18,000 metal bins, instead of traditional library shelves. Thus, many middle class jobs are already unavailable to humans due to the reduced costs associated with computerized services and ease of use for consumers. Many professions could become completely extinct due to technological advances and innovative approaches in the workplace.

Decline of Labor Unions

Besides the fact that the American economy is shifting overseas and some professions are going extinct due to the increased use of technology, fewer workers inside the United States are earning union salaries. Historically, labor unions were the most influential advocates for workers’ rights, and unionized workers were the backbone of the American middle class. Now, fewer jobs are unionized, prompting a large-scale decline in the influence and power of American labor unions. In 1983, one in five workers was part of a union; today this is true of only one in ten workers. Unionized workers’ median monthly salary is $10,000 more than that of their non-unionized counterparts. With the decline in labor unions, fewer American workers are earning middle class salaries. Watch the video below to learn more about labor unions and their importance for the middle class.

Increases in ‘Out-of-Pocket’ Expenses and Rising Debt

Middle class households are those families that, besides living comfortably, are able to save money. Many middle class Americans have to pay their college tuition without financial assistance, which is available to lower-income families only. Health insurance is another “out-of-pocket” expense that can be rather costly, as only those who have very low or no income are eligible for government assistance. In 2001, two thirds of American middle class families were able to accumulate savings; in 2010, less than 55 percent were saving money for retirement or their kids’ education.

A large portion of middle class income is going toward paying off student loans and maintaining medical coverage rendering it difficult to save for retirement or to buy a house. Some middle class households are deep in debt. In 1992, the median level of debt for middle class families was $32,200; by 2010 it increased 161 percent, reaching $84,000. The economic pressures that middle class households face today result in downward mobility and accumulation of debt.

Restored Payroll Tax Rate

In 2009, President Obama introduced a temporary measure to stimulate the economy by cutting the payroll tax, which finances Social Security and Medicaid by taking a percentage of income from both employees and employers. Before 2009, the payroll tax constituted 6.2 percent of income; after the changes, middle class Americans received a two-percentage-point break, resulting in a payroll tax of 4.2 percent instead. In 2013, the payroll tax cut expired and middle class households began to receive $84 less in their monthly paychecks, which is around $1,000 in yearly tax withholdings. As lower- and middle class families were the ones who enjoyed the two-percentage-point break the most, they are now the ones who are suffering the most.

Higher Food Prices

Food prices have increased globally and in the United States. On average, there’s been a 6.4 percent hike on most food products, while the price of some essentials such as meat, milk, and eggs is 16-22 percent higher than in previous years. Nevertheless, the income of middle class families is staying the same, constraining food shopping for many middle class households. The median income is increasing only one percent a year, making it difficult to keep up with rising food prices without moving down the income ladder.

Conclusion

The dynamics of the middle class in the United States are changing. Some of the above reasons for the middle class downturn are more serious than others, but all are collectively responsible for the decline in its traditional form. At the same time, technological advances in the workplace are inevitable and most likely  will continue to erase traditional service jobs and create new occupations, shifting the middle class around.

 Resources

Primary

Pew Research Center: America’s ‘Middle’ Holds Its Ground After the Great Recession

Additional

Sen. Bernie Sanders: The Middle Class in America is Radically Shrinking. Here Are the Stats to Prove it

The New York Times: The Shrinking American Middle Class

CBS Evening News: Food Prices Soar as Income Stands Still

CNN Money: America’s Middle Class: Poorer Than You Think

CNN Money: America’s Disappearing Middle Class

DailyNews: Can Smart Machines Take Your Job?

Forbes: The U.S. Middle Class is Turning Proletarian

Huffington Post: Four Reasons It’s So Hard For the Middle Class to Buy a House

The New York Times: Middle Class Shrinks Further as More Fall Out Instead of Climbing Up

CNN Money: What Happens if the Payroll Tax Cut Expires

Pew Research Center: Are Americans Ready For Obama’s ‘Middle Class’ Populism?

PBS Frontline: The State of America’s Middle Class in Eight Charts

TIME: A Brief History of the Middle Class

USA Today: Middle Class a Matter of Income, Attitude

Valeriya Metla

Valeriya Metla is a young professional, passionate about international relations, immigration issues, and social and criminal justice. She holds two Bachelor Degrees in regional studies and international criminal justice. Contact Valeriya at staff@LawStreetMedia.com.

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As anyone who drives a lot–or has a TV, reads the paper, or just generally pays attention–knows, the price of gas has gone down recently. Way down! More specifically the price of Brent crude oil, a major global type, dipped below $60 a barrel Tuesday for the first time in more than five years. That means the price of crude oil has dropped by more than $50 a barrel since its peak, which was just in June. Additionally, nationwide the average price of a gallon of gas has dropped from a high of $3.70 in April 2014 to the current low of $2.53. There are several reasons for this drop; there are also numerous issues that have already begun to arise from the drop in price and many more potential problems if the price of oil remains low or falls even further.

Why is the Price of Oil Falling?

First, the obvious questions: why are oil prices suddenly dropping and why is it happening so rapidly? To answer these queries one must look into account, supply, and demand.

Too Much Supply

First is supply. Specifically, there is too much oil out there, or at least that’s the perception. This buildup is the result of several actors overproducing when the market is not ready to absorb their goods.

• OPEC: OPEC stands for the Organization of the Petroleum Exporting Countries. OPEC is an intergovernmental organization aimed at fixing oil prices of its member countries to ensure each has a fair and stable market for its product. The organization is made up of countries from South America, North Africa, and the Middle East. OPEC gained its greatest notoriety, and also put its fairness into question, with two embargoes in the 1970s that dramatically increased prices at the time. In a surprising about face however, in late November 2014, members elected to continue production at current levels. Why would OPEC elect to continue producing at high rates when basic economic wisdom called for a smaller supply? First, several members of OPEC have only just recently been able to ramp production back up to earlier levels. Libya, for example, was in a long struggle with rebels before it recently was able to reopen two key ports critical for oil exportation. Saudi Arabia was already burned before by trying to reduce supply to match demand back in the 1980s. Instead of keeping prices high it saw a significant loss in market share.
• U.S. Energy Boom: OPEC members increasingly have to tangle with the United States. While reports vary on which country is ranked where, the United States is unquestionably the world leader in energy production when natural gas and bio-fuels are included along with oil manufacturing. Biofuels and natural gas aside, the United States still ranks second in oil production behind Saudi Arabia, it being responsible for approximately 12 percent of the world’s output. The reason for the spike in American production is the now well documented shale boom that transformed places like North Dakota into energy and job hot spots. The video below details some of the pros and cons of the U.S. oil boom.

• Other Players: Along with OPEC and the United States there are several other major players in the Oil Industry. Chief among them is Russia, which sits closely behind at number three on the world’s production list. Russia is incredibly dependent on its energy sector, which generates up to 50 percent of the funds necessary to underwrite its budget. Along with Russia there are a few other non-OPEC countries, namely China, Canada, Brazil and Mexico.

Less Demand

Clearly then, higher supply is impacting world oil prices, but it is not alone. Equally as important is demand. After all, you can make as much of something as you like, but if no one wants it you are never going to make any money. So it is, in a sense, with oil.

A major decline in demand has occurred in two generally reliable regions–Asia and Europe–but specifically in Germany and China, due to economic slowdowns. In other key places such as the United States, similar sags in demand have been seen, but for different reasons. In the U.S., use of gasoline by companies plummeted following the financial crisis and has never returned to pre-crisis levels. Additionally, after numerous experiences being burned by unstable prices America has shifted away from high gas consumption toward more efficient technology like hybrids.

What It Means Now

Bad News

So what does this all mean then? For some countries this drop in oil prices is very bad. Russia in particular has a lot to lose with plunging oil prices. As alluded to earlier, up to 50 percent of its economy is dependent on oil prices and those prices have plummeted. As a result, Russia’s currency–the Ruble–has recently collapsed, losing a massive amount of value in just a couple of days. The collapse, coupled with western sanctions over Ukraine, is threatening to send Russia into a recession. The big question then is whether Russians are still willing to support Putin’s tactics when their standard of living starts to decline?

Other countries such as some of the members of OPEC also have a lot to lose as a result of the crisis. Like Russia, much of their budgets are predicated on their oil revenue. Thus countries like Iran and Nigeria that had relied on oil prices at much higher rates to maintain a sound budget now find themselves being forced to make cuts or face deficits–and even potentially defaults. It is even worse for another member: Venezuela.

Venezuela, despite having huge oil reserves, is facing an impending crisis that could be even worse than Russia’s. At least in Russia’s case it has reserve currency and little debt. Venezuela on the other hand has neither and was already dealing with shortages of other goods earlier this year. This situation has the makings of a powder keg. Some of these countries may also have to consider giving up stipends or canceling social programs funded by oil production. Some of these programs were instrumental in countries like Saudi Arabia potentially avoiding Arab Spring-style uprisings. The video below touches on the problems dropping oil prices imposes on Russia and Venezuela.

Mixed News

What about the United States? As mentioned earlier it has recently become either the biggest or second biggest producer of oil itself. What would a prolonged drop in the price of oil mean to the stars and stripes? Well, as is often the case, the United States may provide the most difficult answer. In certain ways this is a good thing. For example, Americans spending less on gas have more money to spend on other consumer goods, which could help spur faster economic growth.

Conversely, lowered prices could also mean some firms could no longer compete in the market. Many have speculated that lowered prices could dampen the U.S. oil boom currently taking place. In fact in has been widely circulated that OPEC’s decision to keep production high is basically a stare down between it and the United States where one side will eventually be forced to lower production to artificially inflate prices to stay in business. Additionally, employment is a major concern. Lost jobs here could be especially painful as they account for many of the jobs created since the recession.

 Conclusion

At the end of the day it is still unclear what will be the long term results of the drop in oil prices. In fact, as of right now it is still unclear how long these drops will be maintained at all; however, as the price continues to plunge and producers continue to forge ahead it seems fair to at least speculate. Really it’s just amazing that after all the war and talk of renewables globally that the world finds itself on such a precipice again concerning the familiar black gold. It seems then for now the impact of oil’s price drop will be left, much like its value is calculated, up to speculation.

Resources

Primary 

Organization of the Petroleum Exporting Countries: Brief History

Additional

Finances Online: Top 10 Oil Producing Countries in the World: Where’s the Greatest Petroleum Domination

USA Today: Eight Countries that Win and Lose Big from Oil Plunge

Vox: Why Oil Prices Keep Falling and Throwing the World Into Turmoil

USA Today: Russia’s Ruble in Free Fall Amid Panic

CNBC: Ticking Time Bombs: Where Oil’s Fall is Dangerous

Sovereign Investor The Hidden Cost of Oil

Foreign Policy: Can OPEC Kill the US Oil Boom?

Forbes: Oil & Gas Boom 2014: Jobs, Economic Growth and Security

CNN: Oil Plunge Takes Prices Below $55 A Barrel

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post The High Cost of Falling Oil Prices appeared first on Law Street.

Bitcoin first started making headlines in 2009 and has continued to grow into one of the world’s most well-recognized, thorough, and usable cryptocurrencies. But with multiple legal controversies and the general public’s skepticism when it comes to something as new as “cryptocurrency,” it’s difficult to tell whether Bitcoin has much of a future. Read on to learn more about the currency and its future.

What is Bitcoin?

Bitcoins are widely known as a digital or cryptocurrency. Unlike conventional currencies that are regulated by central authorities in their respective regions (such as the Federal Reserve Bank for the United States Dollar), Bitcoin is border-less and managed by a cryptographically-secured peer-to-peer network. The demand for Bitcoins determines their value in the market, and their supply is determined by complex mathematical algorithms developed by the founder–a person who goes by the pseudonym Satoshi Nakamoto. This supply generation process is called Bitcoin mining. So, Bitcoins are usually created by being “mined” by computers solving a complex string of processing problems, although one can now purchase existing Bitcoins.

Only fifty were created at the time of the cryptocurrency’s genesis and the maximum number of coins that can be issued is locked at 21 million. Just like the lowest value that the United States dollar can be divided into is one-cent pennies, a Bitcoin can at most be divided into eight decimal places. It gained prominence in April 2013 when its value spiked to $266 US Dollars compared to only $22 earlier that  same year. More than 10 million coins had been issued at that point at a total market value of $2 billion.

Courtesy of Idology.com.

Who likes Bitcoins?

Proponents of the cryptocurrency appreciate its purity in terms of supply and demand without any governmental interference. Bitcoins mitigate privacy concerns because they eliminate the need to enter information such as name and address for online transactions. For many tech aficionados, the cryptocurrency provides the thrill of following a new trend in the virtual world. Bitcoins are now being accepted by many platforms like WikiLeaks, restaurants, mobile payment applications, and retail apps that have partnered with major consumer brands like GAP and Sephora.

A federal district court recently ruled that Bitcoin is indeed a currency, given that it can be either used to purchase goods and services directly, or to purchase currency that can in turn be used to purchase goods and services. According to a study conducted by the European Central Bank, Bitcoins do not pose a risk to price instability given that their supply is capped at 21 million coins, and will not negatively affect  the economy as long as the government monitors it to ensure that its not being used for fraudulent purposes.

Who doesn’t like Bitcoins?

Opponents worry that the unregulated and anonymous nature of cryptocurrency lends itself to be used for illegal trade, tax evasion, money laundering, and investment frauds like Ponzi schemes. Dread Pirate Roberts, the owner of Silk Road, an online drug market in the deep web that is now shutdown, blatantly admitted that Bitcoin helped him win the war of drugs against the state.

Opponents also criticize Bitcoin’s algorithmic design for specifically inducing rise and fall in its value. But unlike traditional currencies, Bitcoin is not insured by the government in case it gets devalued enough to cause a major financial crisis in its market. Some claim that Bitcoin is being used more like a stock than a currency and that once the initial hype dies down its value will eventually decrease to nothing because it doesn’t have anything to offer except for its cool factor. Since Bitcoin is primarily digital (though coins are now available), it can be lost forever if a user loses his/her computer or account in which it’s stored.

What’s next for Bitcoin?

Bitcoin’s future is somewhat uncertain. While the cryptocurrency is still growing, there are many concerns that it’s not worth it. Detractors point out things like a possible Ponzi-style scheme involving Bitcoin in North Texas as indicative of the worthlessness of the currency. On the other hand, Bitcoin-based ventures have been growing, such as the development of startups like Coinffeine, which aims to create a new way to exchange Bitcoins. These are just a few examples of the ways in which Bitcoin is slowly breaking its way in into the mainstream, albeit with many setbacks.

Conclusion

Bitcoin. and other similar digital currencies, is just one of many interesting developments that has come about because of the internet. In essence, it’s a pretty revolutionary and fascinating idea, but whether or not it is actually good for the global economy remains to be seen. The potential for the use of Bitcoin as part of illegal activity though, should not stop people from using it for legitimate means. It’s only through incorporating online tools into the mainstream that it will become a genuinely useful and productive innovation.

Resources

Primary 

Bitcoin: Official Site

US District Court: Securities & Exchange Commission v. Trendon T. Shavers  and Bitcoin Savings & Trust

Additional

European Central Bank: Virtual Currency Schemes

Techland: Online Cash Bitcoin Could Challenge Government, Banks

Coindesk: Confirmed: Bloomberg Staff Are Testing a Bitcoin Price Ticker

CIO: In Kenya, Bitcoin :Linked to Popular Mobile Payment System

ParityNews: The Internet Archive Starts Accepting Bitcoin Donations

Webcite: In Bitcoin We Trust: The Berlin District Where Virtual Currency is as Easy as Cash

Readwrite: What’s Bitcoin Worth in the Real World?

Wire: Today’s Bitcoin Shows Why It’s Not Really a Currency

Fox Business: The Consumer Risks of Bitcoins

Slate: My Money is Cooler Than Yours

Washington Post: Imagining a World Without the Dollar

Social Science Research Network: Are Cryptocurrencies ‘Super’ Tax Havens?

The New York Times: Winklevoss Twins Plan First Funds for Bitcoins

Forbes: Goodbye Switzerland, Hello Bitcoins

Treasury Department: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies

GAO: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks

Forbes: IRS Takes a Bite Out of Bitcoin

The New York Times: New York and U.S. Open Investigations Into Bitcoins

TechCrunch: New York’s Financial Services Subpoenas Bitcoin Firms To “Root Out Illegal Activity”

Salome Vakharia

Salome Vakharia is a Mumbai native who now calls New York and New Jersey her home. She attended New York School of Law, and she is a founding member of Law Street Media. Contact Salome at staff@LawStreetMedia.com.

The post Bitcoin: What’s Next? appeared first on Law Street.

Chinese e-commerce giant Alibaba recently made major headlines when it decided to go public. The company’s initial public offering (IPO) went on to become the largest in history. IPOs can be complicated business, and most companies carefully deliberate before putting effort into an IPO. Read on to learn what exactly an IPO is, why companies want to go public, and what different ways there are to go about it.

What is an IPO?

An initial public offering allows a private company to become a public company. Essentially an IPO is a stock market launch where the company’s stock can be bought by the general public. Private shares of a company are sold to big investors who then sell to the general public.

A private company may have only a few shareholders. Since it is private, it is not subject to the regulations of the Securities and Exchange Commission (SEC). A public company is publicly traded and thus is subject to SEC regulation. An IPO is traditionally issued to smaller, younger companies hoping to gain capital to expand their business.

Why do companies decide to have an IPO?

IPOs are a great way for companies to quickly raise large amounts of capital to gain liquidity. This money can then be used to improve the company by reinvesting in its infrastructure or expanding the business. The major benefit to companies is that in selling shares they are never forced to repay investors the money they gain. Watch a video on some of the benefits of an IPO below:

Monetize the Investment

Many early investors or founders of a new company may be interested in cashing out their initial investment. An IPO easily allows them to do just that. The IPO provides an easy exit for angel investors or venture capitalists since they can cash out their investment by selling their shares of the company to the general public.

Increased Exposure

Going public means a company gains prestige and a better public image. Being listed in major stock exchanges such as NASDAQ or NYSE makes the public think more highly of the company and helps to garner media attention.

Benefit of Stock

Being able to offer stock gives the company options and flexibility. Employee stock ownership plans can help recruit top talent to the company. Further, the increased scrutiny that comes from SEC filings means the company can get better rates when it issues debt. Issuing debt allows the company to create other financing opportunities in the future.

What are the disadvantages of an IPO?

The immense legal, accounting, and marketing costs associated with the IPO process can be difficult for a smaller company to afford. The required time, attention, and effort of senior management take a significant toll and can hamper the company’s operations. The issuing of stock can also mean a loss of control for management, since shareholders may be given some say in the future direction of the company.

The requirement to disclose certain information in SEC filings is also a drawback for many companies. A publicly-traded company must have a board of directors and must report its financial information every quarter. This information could prove valuable to the company’s competitors.

IPOs can be risky for investors. It is tough to predict what the stock will do at the beginning of trading since there is no track record of the company to analyze. Since most IPOs are issued by companies going through rapid growth, there is a great deal of uncertainty in predicting how well the company will be doing in the future. Caution should be used when deciding whether to invest. Most experts say that small investors should wait a month or more to buy shares of an IPO so the price of the stock has time to settle down.

How does the IPO process work?

Given the concerns of going public, companies think long and hard before making the decision. The process is lengthy and very costly.

1. Once a company decides to go public, it will typically seek the assistance of an investment banking firm, such as Goldman Sachs or Morgan Stanley. The investment banking firm acts as the underwriter. Banks submit bids to companies going public with statements of how much money the company would make and what share the bank would make. This competition can be fierce, especially if banks think there is a lot of money to be made on the deal.
2. When an investment bank is hired, the company and the bank discuss how much money they will raise from the IPO, the type of securities to be issued, the price, when to bring the IPO  to market, and other details of the underwriting agreement. It is the underwriters’ job to make a large purchase of the firm and then facilitate the orderly sale of this initial stock. Underwriters make money through the fees charged to the company and by the stock they sell. The underwriter takes the risk that it will be able to sell the stock it bought from the firm for more than it initially paid.
3. The bank then puts together a registration statement called an S-1 to be filed with the SEC. This statement offers information about the company such as its past financial statements and any past legal issues. The SEC will investigate to ensure the information it receives is correct and to make sure all information has been disclosed. During this time the company will pick which stock exchange it wants its shares listed on.
4. The company will typically go on some sort of “roadshow.” It may travel to meetings across the country or online as a way to drum up investor interest in the IPO. Through attracting large investors in the roadshow, the company can then sell its stock in large blocks to institutional investors.
5. As the date of the IPO nears, the company and underwriter will agree on a price. They try to find a price low enough to generate interest yet high enough to raise money for the company. A certain percentage of shares, typically around 20 percent, are agreed to be sold. Institutional investors are often offered the first shares.
6. The underwriters sell their shares of stock to a large number of investors on the public market. The banks make their profit on the difference in price between what they paid before the IPO and what the shares sell for when officially offered to the public. Very rarely will small investors get some kind of IPO allocation. Typically they have to wait until the stock is listed on the exchange in a secondary offering. In a secondary offering, investors may sell a large block of their initial sales directly to the public.

Watch a basic overview of the IPO process below.

What are some alternative IPO methods?

There are numerous different ways of making a public offering. While most involve the basic process described above, the different methods alter specific elements of the IPO.

Venture Capital-Backed IPO

A venture capital-backed IPO is one in which management sells its shares to a group of private investors in exchange for funding and advice. This allows venture capitalists to effectively exit after creating a financially-stable company.

Reverse-Leverage Buyout

With a reverse-leverage buyout, the money made from an IPO is used to pay off debt accumulated while the company was private. By privatizing a publicly-traded firm that is undervalued on the market, the owners are able to make money once the public becomes aware of the high intrinsic value of the firm.

Dutch Auction

The idea of a Dutch auction was explored in the Google IPO. In a Dutch auction, the company reveals the amount of shares to be sold and a potential price. Investors state the number of shares they want and what price they want to pay. A minimum clearing price is determined, then investors who bid at or above that price are awarded shares. If there are more bids than available shares, the company awards a percent of shares based on the percent that was bid for. Investment banks do not typically like this arrangement since it offers equal access to shares to groups other than the underwriter. Further, if there is not strong initial demand for the shares, the auction could mean the company will not raise a lot of money through the IPO.

What are some recent examples of IPOs?

Prior to 2009, the United States was the leading issuer of IPOs in terms of total value. China has since taken the lead and become the new major IPO market. The number of IPOs is usually indicative of the health of the stock market and the economy. Most major IPOs in recent years were for technology companies.

On September 19, Chinese e-commerce giant Alibaba made its IPO debut. Trading went off without a hitch as Alibaba’s became the largest IPO ever at a whopping $25 billion. The IPO price was set at $68 a share, but shares opened more than 35 percent above the initial set price.

Facebook’s IPO in May 2012 made only $16 billion. Many cite Facebook’s mistake to be dramatically raising the price of shares and size of the IPO just before the date of the IPO. This led to rough trading and to the stock falling 50 percent in the first four months of public trading.

The recent success of Alibaba as well as other strong IPOs are seen as signals of stock market strength. Do not expect the increase in IPOs to slow down anytime soon.

Resources

Primary

CNBC: Initial Public Offering: CNBC Explains

Additional

Business Insider: The NYSE Explains How IPOs Work

The Share Centre: IPOs Explained: 10 Things You Need to Know

Business Insider: This Handy Infographic Explains How an IPO Actually Works

Wealth Lift: Initial Public Offerings Explained

Investopedia: IPO Basics: What is an IPO?

Seeking Alpha: Facebook IPO and Types of IPOs and After-Market Support

Investopedia: 5 Things to Know About the Alibaba IPO

CNBC: Alibaba IPO Biggest Ever; Shares Decline

Reference for Business: Initial Public Offerings

Mergers & Inquisitions: The Initial Public Offering Process: Got Facebook Shares?

USA Today: Why Alibaba IPO Fared Much Better than Facebook’s IPO

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

The post The Alibaba IPO: What Does Going Public Mean? appeared first on Law Street.

The minimum wage was first created to ensure that workers are protected from being underpaid for their work; however, given that national and local costs of living have varied over time, whether or not the minimum wage amounts are fair has been the main pillar of the  national debate for some time. Read on to learn about the minimum wage and all of the controversies and debates surrounding it.

Current Minimum Wage Laws

The Fair Minimum Wage Act of 2007 is a law passed by Congress that requires employees to be paid at least $7.25 per hour. The act took effect in 2009 as an amendment to the Fair Labor Standards Act. This law only applies to jobs that are under the purview of the Fair Labor Standards Act. Tipped workers may only be paid less than $7.25 an hour if their hourly wages plus tips match or exceed $7.25.

The Fair Labor Standards Act is a federal law that Congress passed pursuant to the Commerce Clause of the Constitution. Federal laws passed under that power are only effective if they pertain to an area that affects commerce between multiple states. Therefore, the Fair Labor Standards Act and the Fair Minimum Wage Act only regulate wages in businesses that are involved in interstate commerce. Businesses that are not sufficiently involved in interstate commerce are not regulated by the federal law but may still be regulated by state or local minimum wage laws. If there are state or local minimum wage laws in effect in the area a (non-interstate commercial) business operates then those laws determine the minimum wage employees of such a business can be paid.

State minimum wage laws are very variable.

The map below represents the minimum wage in a number of states. Green indicates a state minimum wage that is higher than federal minimum wage, yellow shows states with no minimum wage laws, blue states have the same minimum wage as the federal minimum wage, and red states have minimum wage laws lower than the federal minimum wage.

Map of minimum wage variations by state, courtesy of the U.S. Department of Labor via Wikipedia.

According to the Department of Labor, the laws are interpreted as follows:

Federal minimum wage law supersedes state minimum wage laws where the federal minimum wage is greater than the state minimum wage. In those states where the state minimum wage is greater than the federal minimum wage, the state minimum wage prevails.

So why do we still have separate federal and state minimum wage laws? One reason is, of course, politics. The states that have lower minimum wage laws keep them on the books in part to protest what they see as too high of a federal minimum wage. There’s also a more practical application: there are certain workers, such as seasonal workers or those on small farms, who are exempt from the federal laws. In some cases, the state laws may still offer some parameters for those workers.

What are arguments for keeping the federal minimum wage as is?

Supporters of the current federal minimum wage argue that raising the minimum wage will diminish the job market in an economy that is already suffering. They argue that raising the minimum wage to benefit the poor is a shortsighted strategy. Since a majority of the poor (60 percent) are unemployed, raising the minimum wage only makes it more difficult for them to find jobs because it raises the value that they have to demonstrate in order to justify being hired. Moreover, most of the people receiving minimum wage pay are above the nation’s median income so most of the funds workers receive from a higher minimum wage won’t go to the impoverished.

Supporters of keeping the minimum wage law where it is also worry that the costs of a higher minimum wage would be passed on to the consumers, who may be struggling themselves. They reason that the money has to come from somewhere, and in many cases it would come from an increase in the price of goods. In general, it would make it more expensive for employers to hire employees, and have negative ramifications throughout many parts of the economy.

Another argument against raising the minimum wage stems from an idea about the purpose of the minimum wage. Minimum wage jobs are often viewed as “stepping stones” for young people, or those looking to get back on their feet–not jobs for those who need to raise families or be permanently employed in that particular place of business. Those who subscribe to this argument tend to worry that with a higher minimum wage, these jobs become permanent paths rather than just stepping stones, and younger people will no longer be able to get their foot in the door.

What are arguments for increasing the minimum wage?

Those who argue in favor of increasing the current federal minimum wage argue that it does not even pay enough to keep a family of three above the poverty line. The average cost of living has increased by leaps and bounds, especially in larger cities. The minimum wage has not increased proportionately with inflation or the pay of the average worker. Today, the minimum wage is insufficient to keep a full-time working parent and one child out of poverty. At a bare minimum the federal minimum wage should be enough to keep a working parent and her child above the poverty line. Along the same lines, supporters of increasing the minimum wage point out that because those who work minimum wage jobs have such a difficult time making ends meet, many of them have to get some sort of government assistance, which is also a big problem for the economy.

That is why the Obama Administration is advocating for legislation to raise the federal minimum wage to $10.10 an hour. This change would raise America’s GDP, and reduce income disparities between several population demographics.

Conclusion

The minimum wage, and its many derivations across the states, will always be a contentious and politicized issue. The actual economic implications of raising or lowering the minimum wage are difficult to glean, and the arguments are sharp. That being said, the minimum wage debate is far from over.

Resources

Primary 

US Senate: Fair Minimum Wage Act of 2007

Department of Labor: Minimum Wage

Department of Labor: History of Changes to the Minimum Wage Law

Department of Labor: Minimum Wage Laws in the States

Additional

Forbes: Why Raising the Minimum Wage Kills Jobs

Washington Post: Economists Agree: Raising the Minimum Wage Reduces Poverty

The New York Times: Raise That Wage

The White House: Remarks by the President in the State of the Union Address

Atlantic: Minimum Wage Was Once Enough to Keep a Family of Three Out of Poverty

Economic Policy Institute: Raising the Federal Minimum Wage to $10.10 Would Give Working Families, and the Overall Economy, a Much-Needed Boost

CNN: Raising Minimum Wage Won’t Lower Poverty

America’s Best Companies: Five Important Exceptions to Know Regarding Minimum Wage

The New York Times: Raising Minimum Wage Would Ease Income Gap but Carries Political Risks

Entrepreneur: Listen to Small Business: Don’t Increase the Minimum Wage

Deseret News: In Our Opinion: Don’t Raise the Minimum Wage

John Gomis

John Gomis earned a Juris Doctor from Brooklyn Law School in June 2014 and lives in New York City. Contact John at staff@LawStreetMedia.com.

The post Debating Minimum Wage in America appeared first on Law Street.

TARP is the Troubled Asset Relief Program, created to help stabilize the financial system during the financial crisis of 2008. This program was the focus of significant debate when it was created. Read on to learn about the program, the different sides of the debate, and how it fares a few years after its inception.

What is TARP?

TARP was authorized by Congress through the Emergency Economic Stabilization Act of 2008 (EESA), and is overseen by the Office of Financial Stability at the U.S. Department of the Treasury. It was essentially a way for the government to address some of the problems of the 2008 subprime mortgage crisis. It allowed the government to buy some stocks from big banks and other financial institutions while those companies were struggling, with the understanding that in a few years they’d be sold back to the companies. The government would profit, and the companies would be able to get back on their feet. This is obviously a simplified explanation — there was much back and forth on what TARP should and could actually do.

Was TARP successful?

Yes and no — we don’t really know yet. The TARP program was instituted just a few years ago, and while the economy certainly appears to be be getting better, long-term effects are mostly unknown. If anything, programs like TARP are more frequently invoked as political talking points rather than economic topics of discussion. There is also some disagreement as to how much TARP actually cost taxpayers — with so many different moving parts, it’s difficult to calculate. What seems most striking however, is the ire that TARP and other “bailout” programs received.

What was the argument for TARP?

Proponents believe that TARP helped prevent a financial Armageddon by directly or indirectly injecting funds into banks that were on the brink of collapse. Even those who didn’t necessarily agree with the way that TARP was enacted agreed that it was essential to keep things afloat during such a turbulent period of American economic conditions. As former GOP Presidential nominee Mitt Romney put it:

The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system… The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.

This reduced the number of lost jobs by approximately 85 million, reduced or displaced the number of housing foreclosures by approximately three million, and increased consumer confidence. It cost taxpayers $50 billion, which is 85 percent less than the Congressional Budget Office’s original estimate. Additionally, banks have returned at least 78 percent of their borrowed TARP funds with interest. Those in favor of TARP also praise its ability to infuse liquidity and flexibility into a struggling economy.

What is the argument against TARP?

Opponents believe that TARP was a rushed, ad hoc policy. Even if it helped prevent a complete financial meltdown, it did not live up to one of its major original goals of supporting struggling homeowners. Its Home Affordable Modification Program (HAMP) prevented less than half of the foreclosures that original estimates projected it would. TARP only helped the big banks grow bigger and did little to help the common man on Main Street. Such programs set a bad precedent and implicitly encourage banks to continue making risky choices.

Opponents also argued that because the United States is a democracy the American people shouldn’t have to support a program, like TARP, that received such intense backlash from the public. The political toxicity made it more dangerous, to the point where some politicians didn’t even want to discuss it. That could have prevented much-needed discussions to help improve the program, and make it even more effective. Even if it did work in some ways, it’s difficult to bill such a despised program as successful. As Anil Kayshyap of the University of Chicago put it:

The TARP was presented by former Treasury Secretary Hank Paulson in a misleading way, because buying toxic assets never made sense. That confusion led to the populist rhetoric that TARP was just a bailout for the banks. “The public’s frustration has led to a general rise in populist political rhetoric and has polluted the policy discussion in many other areas.” Also, it did nothing to forestall foreclosures.

 

Courtesy of CBO.gov. Click here for a bigger version.

Conclusion

TARP was an attempt to fix a huge problem — the monumental financial crisis that the United States was facing. Six years we still see some after-effects of the crisis, and whether or not we’re out of the woods completely is a topic that is still up for debate, but the long-term effects of programs like TARP probably won’t be known for a few years. The arguments will continue, however — look for economic arguments that invoke memories of TARP to be present in both the 2014 and 2016 elections.

Resources

Primary

Federal Reserve: TARP Information

Additional

CBS: Auto and Bank Bailouts Prove Effective

Seeking Alpha: The Five Most Effective Bailouts

The New York Times: Audit Finds TARP Program Effective

Pro Publica: Bailout Tracker

Phys Org: Are Corporate Bailouts Effective?

Congressional Oversight Panel: TARP Provided Critical Support But Distorted Markets and Created Public Stigma

TIME: Bailout Report Card: How Successful Have the Financial-Relief Efforts Been?

The New York Times: Where the Bailout Went Wrong

Reuters: Are Americans Really Benefiting From TARP Repayments?

Politico: Criticism of TARP Persists

Salome Vakharia

Salome Vakharia is a Mumbai native who now calls New York and New Jersey her home. She attended New York School of Law, and she is a founding member of Law Street Media. Contact Salome at staff@LawStreetMedia.com.

The post The Troubled Asset Relief Program (TARP) Six Years Later appeared first on Law Street.

Millennials seem to be constantly in the news, and when it comes to money matters that trend holds true. With high unemployment and underemployment, unprecedented levels of student debt, and the burden of supporting an aging population, Millennials face a unique set of financial challenges. Recent studies indicate that Millennials think about money differently than older generations. Are Millennials actually less financially savvy, or are they just a product of the Great Recession? Here’s what you need to know about Millennials, their approach to personal finance, and what it means for their future.

Who are the Millennials?

There is no official start and end date to the Millennial generation, but the general definition includes anyone reaching young adulthood around the year 2000. Popular studies define a Millennial as anyone born between 1978 and 1994. There are more than 80 million Millennials, which makes them the largest generational cohort in history. They comprise nearly a third of the population, and their habits are simply too influential to ignore.

Various claims about Millennials only culminate in one agreeable truth: this generation is full of contradictions. Millennials are less politically engaged, but they are interested in helping their communities and making a difference. They are more diverse and tolerant of others, but aren’t naturally trusting. They love technology, multitasking, and personal branding. Critics describe Millennials as over-confident to the point of entitlement. Millennials and their financial situation are incredibly important since they are expected to make up roughly 75 percent of the workforce by 2025. As they search for jobs following the Great Recession, Millennials are best characterized as financially risk-averse.

What is the financial situation of Millennials like?

According to Pew Research Center, the median net worth of a household of a person younger than 35 in 1984 was $12,132 in today’s dollars. Today it’s only $6,815. With less money, Millennials need to be frugal. They are keeping more cash and investing less.

Cash

According to data from Bankrate.com’s latest Financial Security Index, 39 percent of 18 to 29 year-olds choose to hold money they will not touch for at least 10 years as cash in their accounts. This is not too surprising, given that young people are historically more prone to keep money rather than invest. Millennials without jobs or 401(k) plans need to keep more money on hand for short-term needs, like paying bills. This is not just a Millennial phenomenon either. The Great Recession led people of all ages to hold more money in cash rather than make risky investments. However, some scold Millennials for their lack of interest in investment, and even describe them as the most financially conservative generation since the Great Depression.

Banking

Millennials are less likely to rely on traditional banking for their money needs. Most Millennials instead turn to newer forms of payment, such as prepaid debit cards and mobile devices. Millennials shun checks and hate paying monthly fees for things like credit cards. After growing up with one-click companies like Amazon and Apple, Millennials believe in convenience. They look for free shipping, free services, and online accessibility. According to a 2014 TD Bank Financial Education Survey, ninety percent of Millennials use online or mobile devices for everyday banking.

Following the Great Recession, Millennials are hesitant to trust big banks. Many Millennials feel that those on Wall Street do not share their values. After seeing their parents’ accounts depleted in the recent recession, Millennials continue to distrust the stock market. Wells Fargo reported that 40 percent of Millennials disagree that financial advisors have their best interests in mind.

Saving

The good news is that Millennials, if they have the capability, do try to save. On average, Millennials begin saving at age 22, in comparison to age 35 for baby boomers. The issue is that Millennials save three times as much in cash or bonds as they do in equities. Because of this, they get little return on their money. While three in five Millennials describe themselves as savers, 45 percent have not started saving for retirement. Most Millennials are more concerned about saving to weather the next financial storm than saving for their far-off retirements. According to BankRate.com, Americans age 18 to 30 are the group most likely to set aside five months’ worth of expenses in a rainy day fund.

Homeownership

Millennials are more likely than other generations to wait to buy a home. They are also more likely to live with their parents while trying to gain stable financial footing. An October 2013 Pew Research Poll showed that for the second consecutive year a record number of Millennials lived in their parents’ houses. Over 30 percent of 18 to 31 year-olds lived with their parents in 2012 and 2013. Many recent graduates return home as a way to save money and pay off student loans.

However, this lack of homeownership is not necessarily due to shaky finances–there are a couple other explanations. First, Millennials live a more transient lifestyle and are more likely to rent in big cities before settling down. Secondly, Millennials are waiting until later in life to get married and have kids. This means they are also waiting longer to buy homes equipped for family life.

What has caused Millennials’ financial distress?

Student Loans

The increasing need to take student loans to get through college cripples young adults. The burden of paying off student loans leaves Millennials pushing other goals, including investing, to the future. According to the Federal Reserve Bank of New York, the average student loan debt in 2003 was $11,000. The average class of 2014 graduate with student loans owes $33,000. After paying off loan bills, Millennials have little extra money to invest.

The debt takes a toll on Millennials’ sense of financial security. Forty-two percent of Millennials say debt is their biggest financial concern. Forty percent say their debt is “overwhelming,” compared to only 23 percent of baby boomers. Fifty-six percent of Millennials say they are living “paycheck to paycheck.” Fifty-nine percent worry they will never pay off their college loans. Click here to read an in-depth analysis of the American student loan crisis, and watch this clip for more information on student loan debt below:

NerdWallet conducted a study of Millennials’ predicted ability to retire. They found the median debt for a student at graduation to be $23,300. The standard repayment plan of 10 years would cost that student $2,858 per year. This projected debt load would then end up costing that person $115,096 by retirement, since they would miss out on their most important decade of retirement savings with the highest compounded returns.

Unemployment

The difficulties of paying back student loans are exacerbated by the fact that many Millennials spend some period of time unemployed or underemployed in the slowly-recovering job market. Young adults face a rate of unemployment twice the national average. According to a Gallup poll in 2013, only 43 percent of Americans aged 18 to 29 had full-time employment. Some of these young adults could still be in school and therefore not looking for work. However, of those with a college degree, only 65 percent had a full-time job. While the country’s unemployment rate is falling, Millennials still make up 40 percent of those who are unemployed and searching for work. Bureau of Labor Statistics data from June 2014 show the unemployment rate for those ages 18 to 29 is over 15 percent.

So, why is the Millennial financial situation so concerning?

Those in the financial industry worry about Millennials’ lack of investments. Early investment is necessary to meet retirement goals. However, many Millennials are saving in cash to build a “rainy day fund” rather than to fund their retirement still decades away. Most Millennials are aware they cannot safely count on Social Security for their retirement. However, Millennials are not saving enough to get by in retirement without Social Security.

Holding cash in a savings account currently yields negative real interest. By holding cash rather than investing it, Millennials are essentially losing money. The burdens on Millennials in terms of debt and student loans may be preventing them from investing, but financial planners worry this generation is missing out on their prime years of investment. The issue is all the more troubling because Millennials have time to take on the risks of investment since they are still decades from retirement.

Consider the following investing example involving two twin sisters posed by USA Today: one twin sister starts investing $5,000 a year in a Roth IRA at age 22, then stops at age 30 and doesn’t save any more money. The other sister also starts investing $5,000 a year, but begins at age 31 and continues every year until she is 67. With a 10 percent annual return, they both will have just under $1 million. But the sister who started early and stopped at 30 will have slightly more. With consistent returns, the first nine years end up being worth more than the next 36. Getting an early start is more important now than ever, because set pensions are nearly non-existent. Most people have to make 401(k) contributions on their own, where an employer may match a certain amount. Watch for more about retirement savings below:

There are greater concerns than Millennials’ lack of investment and retirement savings. For example, the fact that Millennials are waiting until later in life to buy homes has drawn some ire. Critics contend that Millennials are holding back the recovery in real estate because they are content to live at home rather than become homeowners. Spending on homes and greater investment would have a positive ripple effect on the economy.

Are Millennials just being ignorant?

Maybe. According to Kiplinger, nearly half of Millennials have used costly forms of non-bank borrowing, such as payday loans and pawn shops. These young people may not be aware that less expensive options are available. This lack of knowledge permeates their attitudes toward personal finance. Less than a quarter of young adults in a Kiplinger survey could answer four or five questions correctly on a basic financial literacy quiz. Specifically, Millennials struggle with the concept of mortgages, likely because many have not bought a house. Millennials also struggle with the concept of inflation, probably because they have only lived in an era when inflation has been under control. In a financial literacy assessment created by the U.S Treasury Department and Department of Education, Millennials scored only 69 percent on average. In another quiz, created by the Jumpstart Coalition for Personal Finance Literacy, the average score was just 48 percent. Watch college students answer some financial questions below:

Through both schools and their employers, Millennials are offered more financial education than other generations ever received. However, their participation rate is among the lowest of all generations. Most Millennials are simply content being frugal and trying to save what they can.

Regardless, most Millennials know they need to save for the future. The problem is their current financial situation leaves them little money to invest. They may think holding cash is the safe bet now, but any hope for a safe retirement will require greater levels of investment. The Millennial financial situation isn’t great–but hopefully they will be willing to learn.

Resources

Primary

Financial Industry Regulatory Authority: The Financial Capability of Young Adults–A Generational View

Brookings: How Millennials Could Upend Wall Street and Corporate America

Additional

TIME: Millennials are Hoarding Cash

Fortune: The Collapse of Millennial Homeownership Could be a Mirage

Vox: Why is it so Difficult to Teach People to Manage Money?

Investopedia: Money Habits of the Millennials

U.S. News & World Report: Why Aren’t Millennials Investing? Fear Isn’t the Only Factor

Kiplinger: Millennials Face Financial Hurdles

USA Today: Slow Start, Shaky Future for Millennials

U.S. Chamber of Commerce Foundation: The Millennial Generation Research Review

Nerd Wallet: 73 Will be the Retirement Norm for Millennials

Philadelphia Business Journal: Millennials are Very Conservative Investors–and Why That’s a Problem

New York Post: Frugal Millennials Save for Rainy Days: Study

Federal Reserve Bank of New York: Are Recent College Graduates Finding Good Jobs?

Gallup: In U.S., Fewer Young Adults Holding Full-Time Jobs

Wall Street Journal: Congratulations to Class of 2014, Most Indebted Ever

Editor’s Note: This post has been updated to credit select information to USA Today. 

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

The post Millennials and Personal Finance: A Lost Generation? appeared first on Law Street.

The days of hailing down a cab may become a distant memory for those with a smart phone in their hand. Uber has reinvented the ridesharing industry with its user-friendly application. Created in San Francisco in 2009, Uber now connects customers with available drivers in cities all around the world.

Although generally loved by customers, Uber has faced many obstacles since its launch, including competition and government intervention. It has been criticized for disregarding regulations and carrying poor or no insurance on its drivers. Read on for an examination of the policy and incidents that have shaped Uber into the company it is today.

Click the image for more detailed information.

What is Uber?

Quick and inexpensive transportation can be challenging to find when you live in a city. That’s where Uber comes in. When a customer opens up the application, she is greeted with a map displaying the cars for hire in the vicinity and the estimated wait time for pick up. Uber is especially attractive because the same quality of service transitions from day to night. Business people can order a car on the way to a meeting just as easily as someone can use it as a designated driver after a night out.

The process of ordering a car is incredibly simple:

• Download the app and enter your payment information
• Set pickup location
• Choose the type of car you want to ride in
• Tap request and track the reserved car’s location

The services provided by Uber are vast. Originally the company offered black cars (UberBLACK), which are luxury vehicles including Escalade SUVs, Lincoln Town Cars, and Mercedes. Now with the implementation of the low-cost option, UberX, the company is able to attract a wider breadth of the market.

UberX drivers use their own cars, carry insurance and a valid driver’s license, and pass a background and DMV check. UberBlack drivers must also have the commercial licenses required by the city in which they operate.

Does Uber Have a Competitor? Possibly.

Uber shares many similarities with the ridesharing company Lyft. Founded in San Francisco, Lyft operates in 60 cities in 2014. While Uber and Lyft provide almost identical services, Lyft has been met with great opposition in New York City. Under the Taxi and Limousine Commission (TLC), Manhattan has stringent taxi regulations by which Uber abided. Lyft has not yielded to city and state regulations such as ensuring that all drivers are commercially licensed and that their vehicles are registered with the TLC. The attorney general’s office has filed suit and accused Lyft of eight violations, including using vehicles that are not registered with the TLC and hiring drivers who have not obtained the correct insurance and licensing.

In an interview with Buzzfeed, New York State Attorney General Eric Schneiderman declared in reference to Lyft evading the regulation:

“They’re allowed to try and we’re allowed to stop them.”

Lyft had planned on launching its peer-to-peer model, but because of the state’s officials and the TLC it postponed the launch. The company has agreed to work with the TLC to ensure that its cars and drivers are fully licensed.

Regulations

Are Drivers Insured?

The legality of Uber differs from city to city as each jurisdiction has different regulations pertaining to public transportation services. While taxi drivers have been subjected to these guidelines for years, Uber has been accused of bypassing many rules that govern taxi services.  Insurance of the Uber drivers has been a source of concern from legislators and the general public. To clear up any ambiguity, Uber announced that “all ridesharing transportation partners are covered by best-in-class commercial insurance coverage in the event of an accident.”

The insurance policies for UberX are:

• $1 million of liability coverage per incident
• $1 million of uninsured/underinsured motorist bodily injury coverage per incident
• $50,000 of contingent comprehensive and collision insurance
• No fault coverage in certain states
• $50,000/$100,000/$25,000 of contingent coverage between trips

The other Uber services (UberSUV, UberBLACK, and uberTAXI) are “provided by commercially licensed and insured partners and drivers.”

Price Caps

One of the best cases made by Uber opponents is the company’s history of hiking up prices during times of high demand — a practice that sets apart Uber from traditional taxis. While taxis have a fixed fare, the price of Uber depends on the demand. Schneiderman criticized Uber for “charging as much as eight times its base rate during storms.” To avoid this manipulation, Uber and the Attorney General reached an agreement that during emergencies there will be a limit to peak pricing in New York. This agreement was the beginning of Uber’s new policy of limiting surge pricing nationwide during emergencies. In addition to limiting price increases, when an emergency causes a fare to be elevated the company plans on donating 20 percent of profits to the American Red Cross.

Negative Responses

Death of a Child

Tragedy struck a San Francisco family when a six-year-old girl was killed after being hit by an Uber driver. At the time of the accident the driver did not have a passenger in his car nor was he on the way to pick someone up, which is why Uber claims it should not be held accountable. The parents of the deceased have brought wrongful death suits against both Uber and the driver.

Alleged Abduction

After becoming intoxicated while partying at nightclubs in Los Angeles, a woman was put into an Uber by a valet. Instead of driving the woman home, the Uber driver allegedly kidnapped her and brought her to a hotel with the intent to sexually assault her. When the woman awoke, she found the driver shirtless lying next to her in bed and immediately left to call the police. Uber spokesperson Lane Kasselman stated after learning of the event that “the facts are unknown at this stage and it’s certainly unclear that this is an Uber-related incident, as the driver in question was not logged in, connected to or operating on the platform at the time… Nothing is more important to Uber than the safety of our riders.”   Even if Uber is not accountable for this crime, the incident tarnishes the brand.

Protests in Europe

America is not the only place where Uber is meeting resistance. Protests against the ridesharing company have gone across the Atlantic to European nations. In London, more than 10,000 cabdrivers participated in an hour-long protest. London has especially stringent regulations on its cab drivers. The process to get a license is rigorous and quite demanding: cab drivers must have knowledge of the London streets and be able take alternative routes without consulting a map. Because they have this extensive knowledge, they have an intimate understanding of the city and are regarded as experts.

When Uber arrived in London with drivers who bypassed the intense training that London-based drivers are subjected to, it should almost be expected that cab drivers would halt their services in protest. Mario Dalmedo, a cab driver in London, said:

“There’s room for everyone, but you have to obey the law.”

In addition to losing their jobs, drivers are concerned about how Uber is not following the rules and fails to pay the same level of taxes.

Uber maintains that it is providing competition in a market that has not been introduced to new services in a long time.

Virginia: Cease and Desist

In early 2014 the state of Virginia levied more than $35,000 in fines against Uber and Lyft for not having the proper permits in Northern Virginia. Following those charges, Richard D. Holcomb, commissioner of the Virginia Department of Motor Vehicles, sent Uber and Lyft cease and desist letters. Uber and Lyft have applied for brokers’ licenses to operate in Virginia since receiving the letter. Also, both companies have applied for temporary authority that would allow them to continue operations until they receive licenses.

Kaitlin Durkosh, Uber spokeswoman, stated that the company has been working “in good faith with the DMV to create a regulatory framework for ridesharing.”

Conclusion

Since its inception, Uber has been faced with many regulatory challenges; however, its accessibility and innovation has transformed the startup into a legitimate threat to the taxicab industry. With strong customer loyalty and growing financial backing, Uber appears to be sticking around for the long haul.

Resources

Primary

Uber: Eliminating Ridesharing Insurance Ambiguity

Uber: Insurance For UberX With Ridesharing

Additional

Forbes: Lyft Pips Uber by Launching 24 Cities in One Day

Slate: Why Uber and Lyft Are Not Interchangeable Services in New York

BuzzFeed: New York Attorney General, Aide Slam Lyft Co-Founder

The New York Times: Uber Reaches Deal With New York on Surge Pricing in Emergencies

Bloomberg: Uber Faces Challenges in NY With Lyft Debut, Price Caps

Washington Post: Competition from UberX, Lyft has D.C. Taxis Crying Foul

Lyft: Lyft New York Update

Business Insider: Virginia Commonwealth DMV Orders Uber and Lyft to Cease and Desist

Washington Post: Uber and Lyft Working on Becoming Legal in Virginia

NBC: Uber Driver Arrested on Kidnap With Sexual Intent Charge

The New York Times: Traffic Snarls in Europe as Taxi Drivers Protest Against Uber

Alex Hill

Alex Hill studied at Virginia Tech majoring in English and Political Science. A native of the Washington, D.C. area, she blames her incessant need to debate and write about politics on her proximity to the nation’s capital.

The post Uber: Not Your Typical Taxi appeared first on Law Street.

Car companies rarely make headlines for things that they have done right, and General Motors is no exception. GM has recalled millions of vehicles since February 2014 and has been found responsible for multiple deaths. Read on to learn everything you need to know about why GM waited so long to fix a life-threatening problem, how much GM will pay to fix said problem, and why you might want to get rid of your keychain.

What is General Motors?

General Motors is one of the largest car companies in America. It manufactures and sells ten brands of cars including Chevrolet, Buick, and Cadillac. GM sold more than nine million cars globally last year.

Why did GM issue a massive recall?

A faulty switch on the ignition of some cars would, when pressed, jiggled, or bumped a certain way, turn the key to the “off” position while driving. This would turn off power steering, power brakes, the engine, and all airbags. Drivers would effectively lose control of their vehicles. Even just a heavy keychain could be enough to set off this chain of events.

How bad was this problem?

Really bad. So far, GM has attributed 13 deaths to the faulty switch problem. That’s the largest number of auto deaths related to a recall since 2000. Rep. Diana Degette (D-CO), a ranking member of the Subcommittee on Oversight and Investigation, believes that there may be as many as 100 deaths associated with the faulty switch.

Sadly, according to the report below from Bloomberg News, many of the victims were teenagers. This might be because the cars impacted were entry level vehicles that parents often buy for their kids.

GM has recalled 25.68 million vehicles this year. This is a massive number of impacted cars. To put that number in perspective, it’s equivalent to two years of the company’s output and it surpasses the average total recalls for all car companies per year.

How long has GM known?

This is the truly weird part of the story. General Motors has known that the problem existed in at least one of its cars since 2001. During pre-production of the Saturn Ion, engineers noticed the ignition problem and fixed it; however, the problem popped up again in 2004, this time in the Chevrolet Cobalt. This time GM did not fix the problem, saying the solution was too expensive. Instead, GM sent a memo to dealerships warning them of the problem and telling them to advise customers to remove heavy keychains. GM did not recall these vehicles or inform owners of the problem until 2014.

Watch Consumer Reports explain why this is such a big deal and why GM should have recalled the vehicles ten years ago.

An internal report shows that in 2006 a solution was proposed that cost nothing. The ignition switches would merely be replaced with a stronger spring that would be more difficult to accidentally turn. It’s unclear why GM did not make this change. Other reports state that the fix would have cost less than a dollar per car. Total retooling costs would have been $400,000. Apparently this was too much money for GM to spend.

GM not only knew that this problem existed, but the company also knew that people were dying as a result. The first death linked to the faulty switch took place in 2005. Sixteen year old Amber Rose died when the airbags did not deploy in her Chevy Cobalt.

The National Highway Traffic Safety Administration (NHTSA) is also reporting that GM withheld information that may have allowed the agency to investigate and discover the problem earlier.

How do I know if my car has been affected?

GM has been sending notifications in the mail to every GM owner, but you can also check this website.

Still, you should be wary even if the model you own has not yet been recalled. GM did not recall every broken car at once. Instead, the recalls have been coming out gradually since February as the company figures out which cars are impacted. You should remove anything heavy from your keychain if you own a GM car.

How much will this cost GM?

It has already been very costly. The huge number of recalls will absolutely result in a steep loss. GM has also announced that it will compensate victims and their families. Families will receive a minimum of $1 million, plus $300,000 for every surviving spouse and dependent.

Watch Kenneth Feinberg, Administrator of GM Compensation, explain how the company will distribute these funds:

In addition, GM has paid a $35 million civil penalty, the maximum for such a penalty, to the NHTSA for failing to quickly respond to the problem.

There are also bizarre stories developing about different incidents caused by these faulty ignition switches that GM will have to pay for. For example, a Texas woman who pleaded guilty to negligent homicide in 2004 after she crashed her Saturn Ion and killed her fiance, is now suing GM. NHTSA recently confirmed that the accident was caused by the faulty switch, and not by the driver’s negligence. GM could be in serious trouble if people who have been convicted of felonies can prove that the auto company was actually at fault. Expect similar lawsuits to pop up.

There is a loophole, however, that would allow GM to avoid liability for these accidents. You may remember that GM was bailed out by the federal government in 2009. What you may not know is that this bailout created two companies: old GM and new GM. New GM took the best assets from old GM and left the bad ones behind. This could mean that new GM would not be liable for any accident taking place before the new company was formed. U.S. Bankruptcy Judge Robert Gerber will decide whether or not new GM is responsible for the mistakes of old GM.

In addition to recalls, how else has GM responded?

Mary Barra, who became CEO a month before this scandal broke out, has fired 15 employees over the recall failure.

Barra also publicly apologized multiple times. She has apologized at Congressional hearings, in press releases, and in a video produced by GM.

Conclusion

GM was at best negligent and and worst greedy when the company waited more than a decade to address this fatal flaw in its cars. Congress will investigate to see how this situation could be prevented in the future. In the mean time, check the recall list to see if your vehicle is affected.

Resources

Primary

General Motors: Internal Investigation

Additional

General Motors: GM Delivered 9.7 Million Vehicles Globally in 2013

The New York Times: 13 Deaths, Untold Heartache, From G.M. Defect

Politico: GM Will Compensate for Ignition Switch Deaths Starting at $1 Million

CNN: GM CEO Barra: ‘I Am Deeply Sorry’

Wall Street Journal: GM Fires 15 Employees Over Recall Failures

General Motors: Ignition Recall Safety Information

NPR: Timeline: A History of GM’s Ignition Switch Defect

CBS: Why Didn’t GM Fix Faulty Switches? A Per-Car Cost of Less Than $1

Wall Street Journal: GM Says it Has a Shield From Some Liability

Motor Trend: The GM Recall Crisis–A Matter of Confidence

U.S. News & World Report: Where Were GM’s Ethics?

Fortune: GM’s Recall Scandal: A Scorecard on CEO Mary Barra

Eric Essagof

Eric Essagof attended The George Washington University majoring in Political Science. He writes about how decisions made in DC impact the rest of the country. He is a Twitter addict, hip-hop fan, and intramural sports referee in his spare time. Contact Eric at staff@LawStreetMedia.com.

The post What You Need to Know Now About the GM Recall appeared first on Law Street.

Since President Lyndon Johnson’s War on Poverty, there has been a debate on how to best give the poorest Americans a chance at a prosperous life. Federal assistance programs have come and gone with plenty of critics, but what if the solution was as simple as giving every American a check? Read on to learn about the plan that’s uniting liberals and conservatives.

What is a basic income?

A basic income is just what it sounds like: the government gives every citizen enough money to survive. This check would replace food stamps, unemployment insurance, and most of our welfare system. Most American proposals for a basic income provide for $1,000 a month, or roughly how much someone earning the federal minimum wage, $7.25 per hour, makes.

Why replace our current welfare system? If it ain’t broke…

It’s broken, very broken. This is partly because the term “welfare system” does not refer to one system. It is multiple social programs managed by different government bureaucracies. Food stamps, unemployment insurance, Temporary Assistance For Needy Families (TANF), and Child Nutrition programs (CHIP) are all examples of social programs that are broadly referred to as welfare. According to the Cato Institute, there are 126 different federal assistance programs. Anyone trying to receive government assistance has to apply to all of these separate programs which carry their own paperwork and contradictory requirements.

There is also the problem known as the “poverty trap.” This is when those receiving assistance risk losing money by taking a higher paying job. It sounds contradictory, but this anecdote from Harvard Professor Jeff Liebman explains the problem.

The woman in his story, let us call her Mary, moves from a job that pays $25,000 to a job that pays $35,000. This is great for her, except for the fact that she relies on government benefits. With this new job, she earns enough so that she no longer qualifies for many of the social programs she depends on. She no longer can get free health insurance, she has lost title eight housing benefits, she lost her child care voucher, she lost her EITC benefits, and she is now paying payroll tax. Added all up, Mary is actually making less money with a higher paying job. When welfare recipients are discouraged from taking higher jobs, they are discouraged from improving their lives to the point where they will no longer need welfare.

A basic income would get rid of the poverty trap. Mary could quit her lower salary job and even take her time to find a job that is right for her without having to worry about losing her support system.

For being such a failure, the current welfare system is also really expensive. America spends approximately $1 trillion on the welfare system. That’s $14,848 per person. This graph from The Heritage Foundation gives an idea of how that is split up between programs.

Basic income would also be expensive, but it would provide recipients the freedom they need to find good work.

Wouldn’t everyone just stop working?

It’s possible. While proponents of a basic income argue that removing the poverty gap is a huge incentive to work, critics argue that an unconditional check in the mail will disincentivize work. Belgian philosopher Philippe Van Parijs, describes the basic income as giving impoverished people “the real freedom to pursue the realization of one’s conception of the good life.” The good life in one person’s eyes could be having a lucrative job. In another’s eyes, it could be living off of the government dime and doing nothing. Proponents of the basic income, like US Basic Income Guarantee Network Board Member Alan Sheahen, believe that most people want to work:

This is a problem that nearly every welfare plan has to grapple with. Requiring work puts people in a poverty trap. Unconditional benefits allow them to coast without work.

Does any country do this?

There is no country that has replaced their welfare system with a guaranteed basic income. However, there are countries that give their citizens unconditional money and there are countries that have proposed this plan.

The best example would be in India, where a pilot program was implemented in 2011. This pilot program included an urban program, whose recipients were given 1000 rupees a month, a rural program, whose recipients were given 200 rupees a month, and a control group, whose participants received no basic income.

What happened next was amazing: Participants in the program spent more on healthy food than they did when they received subsidized food. These groups also spent more on medical services, and housing. The most impressive result was that these families spent significantly more on school supplies than the control group. As a result, school attendance in the participating villages increased to three times the level of the control villages.

Switzerland might become the first country to implement a basic income nationwide. They will soon vote on a referendum to their constitution guaranteeing the right of a basic income to all. However, it is unclear how a Swiss basic income would be implemented, if it were to even pass. There have been no studies in Switzerland, and only one advocacy group has been pushing the issue. Switzerland’s form of democracy requires only 100,000 signatures to get any issue on the ballot as a referendum, so the plan might not even have broad public support.

Has this ever been proposed in the United States?

The closest proposal to a guaranteed income in the United States was President Richard Nixon’s Family Assistance Plan (FAP). FAP was not a basic income for all, but it was similar. Any family with children where one of the parents worked or were registered with the United States Employment services was eligible for a minimum stipend. Once again, it was not a check in the mail for every American, but it was and still is the closest proposal to basic income this country has ever seen.

So, what happened? It passed the House of Representatives, but died in a Senate committee. Conservatives thought the idea of free money was too far to the left and Democrats thought the work requirement placed it too far to the right.

Here’s Nixon’s indictment of the welfare system and presentation of FAP, courtesy of the Richard Nixon Foundation:

In modern America, the closest example of a basic income is in Alaska, where the state unconditionally gives a portion of their oil revenues to their citizens. The payout varies depending on oil sales, so it is not a dependable source of income, but it is still significant.

Is this a liberal or conservative idea?

Actually, it is both. Liberals and conservatives have both embraced a guaranteed basic income.

Milton Friedman, one of the most influential conservative economists ever, proposed replacing the welfare system with a “negative income tax.” Every citizen would get a tax transfer, and would then be taxed on that transfer based on how much money they earned. Friedmann, like other prominent conservatives, supported the basic income because it took power away from the federal government and the many bureaucracies that managed the welfare state.

Liberals like the basic income because it works to reduce inequality. It also has the added benefit of giving workers the ability to demand better work conditions from employers without fearing a loss of financial security.

Since this is so bipartisan, is it going to happen?

Unlikely. Americans are not the biggest fans of redistribution, and a basic income is redistribution at its purest form. In a nation where 60 percent of the citizenry believe that the poor can become rich by trying harder, it is unlikely that a basic income will gain broad public support.

Watch this report from PBS to learn about the broad support basic income has amongst liberal and conservative thinkers, the movements in Europe to enact similar plans, and the opposition it faces at home.

Conclusion

While support for a basic income reaches across the aisle, it is too untested to be implemented in a country as large as the United States and it goes against the American ideal of earning every dollar made. Keep an eye on countries like Switzerland and India to see if this really is the solution to poverty that the world has been looking for.

Resources

Primary

Basic Income News: Indian: Basic Income Pilot Project Finds Results of India’s pilot program

Additional

PBS Newshour: Will a Guaranteed Income Ever Come to America?

City Journal: Why Not a Negative Income Tax?

Adam Smith Institute: The Ideal Welfare System is a Basic Income

Slate: EITC Isn’t the Alternative to a Minimum Wage, This is

Economist: The Cheque is in the Mail

Carnegie Mellon University: Truth in Giving: Experimental Evidence on the Welfare Effects of Informed Giving to the Poor

Harvard University: Fairness and Redistribution

Economist: Taxing Hard-Up Americans at 95 Percent

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Eric Essagof

Eric Essagof attended The George Washington University majoring in Political Science. He writes about how decisions made in DC impact the rest of the country. He is a Twitter addict, hip-hop fan, and intramural sports referee in his spare time. Contact Eric at staff@LawStreetMedia.com.

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The once-thriving Motor City now stands as a collection of vacant lots, unused industrial sites, and abandoned homes–the poster child for the decline of the Rust Belt. Detroit’s population peaked in 1950 at 1.8 million but has since dropped to a mere 700,000. Poverty, crime, and unemployment plague the city. 911 response times hover around 58 minutes. Detroit’s residents blame the woes on corrupt mayors and years of mismanagement. The question is now how to move forward. The city is undergoing the painful bankruptcy process, but what will this mean for the future of Detroit?

How can a city declare bankruptcy?

Declaring bankruptcy is a last resort for any indebted entity. The case of a city going bankrupt is no different from a person: expenditures exceed revenue to a point that is beyond repair. Chapter 9 bankruptcy allows municipalities to declare bankruptcy, and in many ways it is similar to bankruptcy by a person or company. Unlike a company, however,  a city cannot be broken up and sold for its parts. Municipal bankruptcies are rare because 23 states do not allow cities to file for Chapter 9. Further, it is difficult for a city to convince courts it cannot pay debts since cities have the power to tax. When a city cannot repay its debts, it has to find new ways to negotiate and restructure its debt. Watch this video for greater explanation of Chapter 9 bankruptcy:

In 2011, Jefferson County, Ala. became the largest municipality to declare bankruptcy until it was surpassed by the city of Detroit declaring bankruptcy on July 18, 2013. Detroit’s liabilities have been estimated at a whopping $18 billion. Problems with poverty, crime, and blight still plague the city. A recent report claimed there were 84,641 vacant structures and lots in the city, all of which require significant money for the city to fix. Despite increases in recent cases, municipal bankruptcies are nothing new. There have been fewer than 700 cases since the Chapter 9 provision was added in 1937. What is unprecedented is the size of the cities now declaring bankruptcy.

There are four main criteria for Chapter 9 bankruptcy that must be proven in court:

1. The state must approve the city’s motion to file for bankruptcy.
2. The city must be insolvent.
3. The city must desire a plan to adjust its debts.
4. The city must attain an agreement with the majority of creditors or at least attempt to negotiate with creditors.
   

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How does bankruptcy impact the city?

Declaring bankruptcy allows a city to find ways to cut costs and increase revenue that would otherwise be off limits. Before the filing, Detroit’s hands were tied. The city had almost completely lost the ability to borrow due to its bad credit rating and had difficulty increasing tax revenue as its population plummeted. Municipal bankruptcy brings all affected parties to the table to negotiate while allowing a judge to preside. Unlike a person or business declaring bankruptcy, a municipality declaring bankruptcy gives courts a less active role in determining the restructuring plan. A court can only approve a plan set before them. Detroit’s bankruptcy has allowed the city to reduce pensions that would otherwise be protected under the state constitution, which is significant since nearly half of the city’s debt comes from pensions and retiree healthcare costs. Watch for some of the implications of municipal bankruptcy:

Beyond the physical effects on a city, declaring bankruptcy can have a significant psychological effect. People come to see the city as dysfunctional and problem-ridden, even if bankruptcy may prove more beneficial in the long run. This impacts the city’s population, attractiveness, and future ability to borrow.

Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University, recognizes the necessity of bankruptcy. “Everyone thinks it’s so terrible, but if a violent storm or flood or tornado happens, we understand something outside the control of politicians happened to the city. If you have a financial storm that does the same to a city, you have to find a way to recover to ensure that essential services are provided.”

What is Detroit’s restructuring plan?

On March 14, 2013, Michigan Governor Rick Snyder appointed bankruptcy lawyer Kevyn Orr as emergency manager of Detroit. On December 3, 2013, Detroit was determined legally eligible for bankruptcy. Listen to Orr discuss the process below:

Orr, in conjunction with various other groups, has outlined a plan to slash Detroit’s liabilities and increase future revenue, mainly through deep pension cuts and cuts to bond insurers. Thirty-two thousand people are entitled to a pension from the city, 22,000 of whom are retired. Another major problem addressed includes what to do with massive swaths of uninhabited land. The plan includes:

• A 4.5 percent cut to pensions of general retirees if they accept the plan, and a 27 percent cut if they reject the plan.
• Elimination of cost-of-living adjustments for the pensions of general retirees and a lesser cost-of-living adjustment for police and fire department retirees.
• Up to 20 percent repayment from employees who received excess interest.
• Providing $1.25 billion over ten years to improve safety and remove blight.
• Paying 74 cents on a dollar for unlimited tax bonds.
• $25 million for a Department of Transportation security force.
• $90.6 million to improve outdated software and servers.
• New structure for the General Retirement System and Police and Fire System pension boards.

Until recently, plans involved deeper cuts that would force Detroit to auction works from the Detroit Institute of the Arts (DIA). The recently-appraised city-owned pieces of art were valued at $454-$867 million. Instead, a “grand bargain” was struck where foundations, the State of Michigan, and the DIA will collectively provide $816 million to reduce pension cuts and to allow the art to be transferred to an independent nonprofit. Auto companies General Motors, Ford, and Chrysler have already pledged $26 million for the deal. Michigan’s legislature passed a measure to provide $195 million to Detroit upfront.

A yes vote by July 11, 2014 is needed to secure the $816 million in state aid and private funding to prevent further cuts. Even If pensioners reject the deal, Bankruptcy Judge Steven Rhodes could still decide to force deeper benefit reductions. So far Orr has the bankruptcy process moving with unprecedented speed and bipartisanship in the hope of wrapping up the deal without further appeals before his term ends September 30, 2014.

 Why do people reject Detroit’s plan?

1. Severe cuts outlined in the bankruptcy plan have left many unhappy. Many reject the negotiations on principle, simply refusing to take any cut to pensions that were rightfully earned. Others across Michigan reject the state’s provision of almost $200 million in taxpayer money to provide a “bailout” to Detroit. They instead argue that Detroit should be forced to sell its assets.
2. What should be done with the water and sewage system? The city hopes to privatize the system, which serves more than four million people in Southeast Michigan. The plan has pitted the city of Detroit against its suburbs where residents fear their rates will increase. However, the plan could be a huge boost for the city since the new provider would pay for improvements to the system and provide additional cash flow to Detroit.
3. Other groups take issue with the cuts proposed for bondholders, claiming the plan improperly treats pension holders better than investors. Bond insurers are still searching for what options may be available to protect themselves. The insurers have forced the city to provide millions of pages of documents and in doing so managed to push back the trial to August 14, 2014.

How will this affect Detroit in the future?

With the approval and implementation of a plan, cuts to pensions and bonds can put Detroit on more stable footing in the future. This was the case with Orange County, Calif., which had a triple-A bond rating nine years after its 1994 bankruptcy. However, bankruptcy may lead public employees to rethink their approach to retirement benefits and their decision to work in the public sector. This results in highly educated workers no longer being attracted to public-sector jobs in the city, even in areas like teaching. The scale of the latest municipal bankruptcies has led to greater calls for disclosure and transparency in cities across the country, especially with regard to negotiated contracts.

The severe cuts to bondholders in Detroit will have strong effects on the future of the city and on other cities in the state with regard to the riskiness associated with municipal bonds. The cuts to bondholders makes these usually safe general obligation bonds less attractive to bondholders in the future. As a result, Detroit may have to offer higher interest rates to attract investors when their bonds have lower ratings. This could also negatively impact other cities and investors across Michigan who have seen the insecurity of municipal bonds firsthand.

Will more cities be forced to declare bankruptcy?

The case of Detroit has set legal precedent that through bankruptcy cities can renegotiate pension contracts and even cut bond liabilities. Most bonds had previously been protected in bankruptcy due to their legal classification. If the city does emerge stronger it may be used as a blueprint for other struggling cities. Even the threat of bankruptcies in other cities can be a catalyst for serious financial discussions. Cities have been reviewing their assets and moving to protect them, such as museum art, that they do not want to be forced to sell. If anything, the case of Detroit highlights issues with grossly underfunded pensions that exist across America. Money spent on pensions leaves little for spending on education or infrastructure. Listen to a discussion of bankruptcy and pension cuts in Central Falls, RI below:

Several California cities in the process of filing for bankruptcy haven’t been allowed to cut pensions since they are considered an arm of the state and exempt from the bankruptcy restrictions. The truth is that bankruptcy is not easy. Legal fees are expected to cost Detroit more than $100 million. The city of Vallejo, Calif. escaped $32 million of debt through bankruptcy; however, it cost the city more than $13 million in legal fees, and a potential second bankruptcy looms on the horizon.

Municipal bankruptcies will likely lead to more state involvement in local government. Despite the increasing size of cities now declaring bankruptcy, there is not an epidemic of cities failing to meet financial obligations. Frank Shafroth points out that bankruptcy does not have to be contagious, but cities have to be cautious. States have a proactive role to play in ensuring the success of their largest cities. Shafroth states, “What we are beginning to see in Michigan is an absolutely bipartisan effort of overcoming opposition from conservatives who said ‘Let Detroit burn in hell.’ The future of Michigan will very much depend on Detroit’s recovery.”

The case of Detroit has illustrated what options cities have in declaring bankruptcy, but cities will still use all measures available to avoid the unknown fate of Detroit.

Resources

Primary

U.S. Courts: Chapter 9 Municipal Bankruptcy

U.S. Bankruptcy Court: Detroit Bankruptcy Disclosure Statement

Additional

USA Today: Detroit Becomes Largest U.S. City to Enter Bankruptcy

Economist: Detroit’s Bankruptcy–Revenge of the 99 Percent

Huffington Post: Detroit Bankruptcy Could Set Legal Precedent for Bankrupt Cities With Pension Obligations

Fox News: Detroit Bankruptcy Case, the Largest at $18 Billion, is Moving Quickly Less Than a Year Later

Washington Post: Here’s How Detroit’s Bankruptcy Will Actually Work

Economist: Retirement Benefits–Who Pays the Bill?

Michigan Radio: Will Detroit’s Bankruptcy Affect Your Hometown?

The New York Times: Michigan Senate Passes Plan to Ease Detroit Pension Cuts

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

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