To raise or not to raise? That is the question when it comes to the minimum wage. The national minimum wage is $7.25, but many states have set their own minimum wages a few dollars higher (see how your state stacks up). A person working at the federal rate would earn about $15,000 a year. When the current rate was set in 2009, a single parent raising a child under the age of 18 would be above the poverty line…though not by much.

According to the Office of the Assistant Secretary for Planning and Evaluation (ASPE), the federal poverty line for a two-person household in 2009 was $14,570. In 2016, the ASPE put the poverty line for a two-person household at $16,240. And while the poverty line has increased, the minimum wage has not, prompting many people to push for a raise in the minimum wage.

But it’s not that simple. Many people fight back against the thought of raising the minimum wage. One argument against raising the minimum wage is that it would hurt low-skilled workers. Companies will not want to pay more to employees for the same work they were getting before the rise in the minimum wage. Thus, they will lay off employees to not lose profits. What’s more, they will not hire as many workers either, now that they “cost” more.

Tim Worstall, a Forbes contributor, raised this exact concern when talking about Seattle raising its minimum wage back in 2016. “A rise in the price of something will lead to people purchasing less of that thing,” he said in an article for Forbes. “So a rise in the price of low-skill labor will lead to employers purchasing less of low-skill labor.” A trend, Worstall said, that was confirmed when Seattle raised its minimum wage and saw a decrease in hiring low-wage workers.

History of the Minimum Wage

The first minimum wage was set in 1938. It was introduced under President Franklin Delano Roosevelt during the Great Depression. The idea of a minimum wage is to protect workers, and having a minimum wage helps the government, too. If people are working and staying above the poverty line, that is less money that the government has to spend on welfare or other government programs to help the poor. When it was first introduced, the minimum wage was $0.25 an hour. In today’s dollars that would be $4.19.

Since its introduction, Congress has raised the minimum wage 22 times. The most recent raise was in 2009 when it increased from $6.55 to $7.25. There are many reasons why the minimum wage gets raised, including inflation and the changing value of the dollar, as well as an increase in productivity.

The Case for Raising the Minimum Wage

One of the strongest cases for raising the minimum wage is the fact that a single parent, working for the minimum wage and raising a child under the age of 18, is living below the poverty line. If the minimum wage was invented to help and protect workers, this is a clear failure.

Another argument for raising the minimum wage would be the positive effect it might have on the economy. According to a report from the Federal Reserve Bank of Chicago, increasing the minimum wage by $1.75 an hour would result in an increase of $48 billion in household spending. When people have more money, they will spend more money. If a family is living at or below the poverty line, they are less inclined to spend what little money they have on anything but the essentials. Earning even a little more an hour, households would have more to spend on products that they normally would not have purchased.

In addition, raising the minimum wage could help augment the disparity in wages in the U.S. The disparity between the richest one percent and the rest of the country is staggering. Raising the minimum wage has the potential to move almost 900,000 people (out of 45 million) out of poverty, according to the Congressional Budget Office. While this is a small percentage, it is a step in the right direction. Bringing people out of poverty eases tension on the government, as a less impoverished populace means that the government will spend less on welfare and programs.

Peer pressure is another reason to raise the minimum wage. An article in The Economist explains that the U.S. is an outlier when it comes to other countries’s minimum wage rate. Considering the U.S.’ GDP per person ($53,000), the country’s minimum wage should be about $12 per hour. Converted to U.S. dollars, the minimum wages of many other western countries far surpass America’s. Australia, France, Germany, the U.K., and Canada all have higher minimum wages than we do. However, this is not a case of apples to oranges. Living conditions, local economies, taxes, health care, and a slew of other factors play into this as well. 

The Case Against Raising the Minimum Wage

Now let’s address some of the arguments against raising the minimum wage. While the current minimum wage would put a single parent below the poverty line, it would not put a dual-income household below the poverty line. Furthermore, not all living conditions are equal around the country. Many states have minimum wages that are higher than the federal one in order to compensate for higher living costs within those states.

Next, while decreasing the need for welfare paid by the government sounds positive, the money does have to come from somewhere. While the government is not paying as much for welfare, companies now take on that burden of paying people more. The effect of this is two-fold. Companies, in an effort to save money, may lay off workers, thus putting more people on welfare anyway. Companies may also raise the prices of their products, so the consumers will take a hit for the higher paid employees.

Also, companies may slow hiring employees because they now “cost” more. When it comes down to someone getting paid $7.25 an hour or $0.00 an hour, getting paid something is more beneficial than not earning anything at all. These threats are not just hypothetical. Rising minimum wage rates are happening in certain states and the effects are already starting to show.

In January 2017 some states raised their local minimum wages, causing national chains based in those restaurants to start paying their workers more for the same job they were doing before. Wendy’s CEO Bob Wright expects to spend four percent more on employees’ wages. To offset this, Wright had every store cut 31 hours of labor per week and replaced that lost labor with automated kiosks at some locations.

Some critics also argue that raising the minimum wage hurts lower-skilled workers and younger workers. The Pew Research Center published an article claiming that nearly half of all workers who are earning minimum wage are aged 16 to 24. Young members of the workforce who are trying to break their way in will have a harder time.

Companies might be less willing to hire someone with no experience and pay them a higher wage. They will be more willing to hire someone with more experience who they feel will be a better value for this higher price. Of course this then becomes a vicious cycle of young workers not getting hired because they do not have experience and having a harder time finding work because they continue to not get experience. A lower minimum wage might give young workers more opportunities.

What Should the Minimum Wage Be?

If the minimum wage is going to increase, how much should it increase by? There are a variety of numbers that get thrown around when talking about raising the minimum wage. Here is a breakdown of how people arrive at these figures.

Some people argue it should be raised to $21.67. The minimum wage had the highest purchasing power in 1968 when it was $1.60, or roughly $10.55 today when adjusting for inflation. Some studies show that personal income, excluding Social Security, has increased by 100 percent, and thus the minimum wage should be adjusted to fit that standard as well.

Others argue it should be raised to $15. In 2014 and 2015, many major cities put into place economic plans that would gradually increase the minimum wage to $15 by 2017 and 2018. Cities that enacted those plans include New York, Seattle, San Francisco, Los Angeles, and Washington D.C. 

In 2014, The Economic Policy Institute made the case that the minimum wage should be raised to $10.10, arguing that it should be raised over a three-year period. This amount was determined to ease pressure on Medicaid and other governmental assistance programs. The debate over the minimum wage rages on, and states may adjust their own minimum wages because the federal one is too hard to change right now.

What’s Happening Now?

There has not been much movement at the federal level. Individual states are combating the federal inertia. On January 1, 2017, 19 states raised their minimum wages. The majority of the changes were to adjust for inflation (Missouri, Ohio, and Florida raising their minimum wages by only $0.05 an hour), but some states saw significant increases, like Maine (from $7.50 to $9.00), Washington ($9.47 to $11.00), and Arizona ($8.05 to $10.00). Many states have plans to increase their minimum wages in the coming years as well.

As a candidate, President Donald Trump suggested the minimum wage might be too high. In a debate in November 2015, he said in his opening statement that he would not raise the minimum wage and that wages were “too high.” He had said previously that year in an interview with MSNBC that a higher minimum wage would hurt America. “We can’t have a situation where our labor is so much more expensive than other countries’ that we can no longer win,” Trump said. This may be bad news for Trump supporters, many of whom work at the minimum wage and struggle to get by.

Conclusion

The minimum wage debate is not a new one and it’s not one that will end any time soon. Inflation and the fluctuating value of the dollar will forever throw the minimum wage’s value into question. As it stands, the current minimum wage is too low for many people to live on, but too drastic of an increase could result in far more catastrophic job loss. A delicate hand and a knowledgable course of action will be the best hope going forward. It seems that this issue will not be raised in the current administration any time soon; individual states should (and are) trying to ameliorate the issue on a local scale. If you want to see change, go out and call, mail, email, tweet, or visit your local representatives. They’re the ones who will be able to help the most right now.

Anne Grae Martin

Anne Grae Martin is a member of the class of 2017 University of Delaware. She is majoring in English Professional Writing and minoring in French and Spanish. When she’s not writing for Law Street, Anne Grae loves doing yoga, cooking, and correcting her friends’ grammar mistakes. Contact Anne Grae at staff@LawStreetMedia.com.

The post The Minimum Wage: Where Are We Going and How Did We Get Here? appeared first on Law Street.

According to a calculation by the Associated Press, the disputed “bathroom bill”–HB2–would cost North Carolina about $3.76 billion in lost business over twelve years. Over the past year, several companies have left the state. For example PayPal, which pulled out of North Carolina last year, would have contributed an estimated $2.66 billion to the local economy.

Artists like Bruce Springsteen and Ringo Starr have cancelled concerts in North Carolina and the NCAA is also avoiding the state–it is about to announce the locations of various championships through 2022 and has said that North Carolina will not be included as long as the controversial law is in place. This could result in losses of hundreds of millions more.

‘Bathroom bill’ to cost North Carolina $3.76B, AP analysis finds https://t.co/3vyxKpSHJT #HB2 #LGBTQ pic.twitter.com/tIKfCz4DNm

— NBC Out (@NBCOUT) March 27, 2017

The bathroom bill prohibits transgender people from using the public bathroom that corresponds with the gender they identify with. It used the argument that allowing transgender women–who were born male–into the women’s bathroom, would result in an increase in sexual assaults. As there is absolutely no evidence for this, and male predators don’t typically identify as women or care whether they are allowed in the women’s bathroom or not before attacking, that argument understandably caused a lot of criticism and outrage.

Former Governor Pat McCrory, who was very supportive of the bill, failed to win re-election in November and revealed in a recent interview that he has had trouble finding a new job. “People are reluctant to hire me, because, ‘oh my gosh, he’s a bigot’–which is the last thing I am,” he said.

-Gov signs anti-trans bathroom bill
-State loses $600M, reputation hurt
-Gov voted out, can’t get job https://t.co/ByEk5EWbTs #ncpol #hb2 pic.twitter.com/yPpGVodCGq

— Alex Kotch (@alexkotch) March 13, 2017

The AP put together its analysis through interviews and public records, but also said that the numbers probably are an underestimation. The data only includes businesses that the AP could confirm were relocating or canceling their business in the state because of the bill. That means there could be more that the AP couldn’t confirm and therefore didn’t include. There were also likely cancelled endeavors from other companies that the AP had no way to measure.

“Companies are moving to other places because they don’t face an issue that they face here,” said Brian Moynihan, CEO of Bank of America, which is based in North Carolina. He said he has talked to many business leaders who had spoken out about their choice to relocate, but that others are probably moving quietly. McCrory’s statement after signing the bill into law that it wouldn’t affect the state’s position as “one of the top states to do business in the country” seems to have been proven wrong.

But supporters of the bill have not admitted to any defeat; rather they are saying that the costs are worth it, as long as it keeps sexual predators out of women’s bathrooms, which is the main argument in favor of the bill. Lt. Gov. Dan Forest accused the media of creating a false image of the economic impact of the bill. “The effect is minimal to the state. Our economy is doing well. Don’t be fooled by the media,” he said when addressing Texas legislators who are considering adopting a similar law.

Emma Von Zeipel

Emma Von Zeipel is a staff writer at Law Street Media. She is originally from one of the islands of Stockholm, Sweden. After working for Democratic Voice of Burma in Thailand, she ended up in New York City. She has a BA in journalism from Stockholm University and is passionate about human rights, good books, horses, and European chocolate. Contact Emma at EVonZeipel@LawStreetMedia.com.

The post Looks Like the Bathroom Bill Will Cost North Carolina Billions 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.

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.

The recent Ebola outbreak is plaguing thousands across West Africa with illness and even death. In the modern age of science, it seems incomprehensible that there is not yet a vaccine for Ebola. Though the virus is an urgent health concern, pharmaceutical companies have few incentives to develop drugs to combat the disease. Read on to learn what happens when economic incentives do not align with public health needs, and what better solutions may exist for drug development.

What is the status of the Ebola outbreak and vaccine?

Ebola virus disease is characterized by fever, intense weakness, and muscle pain, leading to more severe symptoms. Ebola was initially transmitted by animals and is now spreading between humans through contact with bodily fluids. The outbreak was first detected in Guinea, by which time it had already spread to Liberia, Sierra Leone, Senegal, and Nigeria. A separate outbreak occurred in the Democratic Republic of Congo, which is believed to be unrelated to the outbreak in West Africa. The virus has primarily infected villages where there is extreme poverty and insufficient medical care to combat the spread of the virus.

Statistics

Mortality rates for the Ebola virus are well over 50 percent. Since March, Ebola has killed more than 1,500 people, making it the deadliest outbreak of the virus in human history. The World Health Organization estimates that the Ebola outbreak could affect 20,000 within the next nine months, and that roughly half a billion dollars is needed to stop the spread. Watch the video below for more information on the outbreak:

Vaccines

Ebola first appeared in 1976, yet nearly 40 years later no approved vaccination exists. In part this is due to the nature of the virus. Since incidents of Ebola are rare and occur in remote villages, it is difficult for scientists to effectively obtain samples and study the disease. Scientists cannot predict when an Ebola outbreak will occur, and even during a typical outbreak there are rarely enough people for a vaccine trial.

Since the outbreak, scientists are furiously working on an Ebola vaccine, and requests for approval are being fast-tracked. In the United States, the National Institutes of Health partnered with GlaxoSmithKline to develop a vaccine. The potential vaccine tested very well on primates, but the trial on humans only began on September 1. Initial data from the trial will not be available until late 2014. A number of other prototype vaccines are being worked on across the world.

Other Treatments

ZMapp was the experimental drug given to two Americans who contracted Ebola this year. While vaccines are designed to prevent future infections, ZMapp was designed to treat an existing Ebola infection. Both Americans who took the drug recovered, but the company that manufactured ZMapp has exhausted its supply.

What is the drug development process like?

Developing a new drug or vaccine is an extremely long process due to stringent regulation. Candidates for a new drug to treat a disease range anywhere from 5,000 to 10,000 chemical compounds. Of these compounds, roughly 250 will show promise enough to warrant further tests on mice or other animals. On average, ten of these will then qualify for tests on humans. Since certain outbreaks, such as Ebola, do not lend themselves to have vaccines ethically tested on humans, the United States does provide a way for the drugs to be approved on animal tests alone.

Pre-clinical and clinical development for a new drug takes between 12 to 15 years, though the Ebola vaccine should come much sooner. Pre-clinical development includes testing the various chemical entities and meeting all regulations for use. Three sets of clinical trials are then conducted on humans. Clinical phases include trials on healthy humans to test for the safety of the drug. Testing then moves to those who are ill to see if the treatment is successful. If successful, the drug is submitted for further approval by the Food and Drug Administration. Other countries have similar regulatory bodies to the FDA. Internationally, the World Health Organization oversees which drugs can be used to combat a crisis like Ebola. Learn more details about the development process by watching the video below:

The problem is not that scientists lack the capability to create an Ebola vaccine, but rather that the economics of drug development do not entice companies to develop such a vaccine. Pharmaceutical companies estimate the cost of the entire process of developing a new drug to range from hundreds of millions to billions of dollars. Many times the drugs are not successful, in which case the companies have spent a huge amount of money and have no profit-making product. A Forbes analysis estimates that 95 percent of experimental drugs tested ultimately fail. Only one in five that reach the clinical trial phase are approved.

Given the low rate of success for potential drugs and the huge amounts of money that can be spent on research and development of drugs, cost plays a huge factor. In the United States, basic discovery research is funded primarily by government and philanthropic organizations. Development in later stages is funded mostly by pharmaceutical companies or venture capitalists.

Why do some see funding as a problem?

Funding for areas that support public health is a tricky issue. Since pharmaceutical companies are looking to make a profit, they have an incentive to make drugs that a large number of people will take and be on for a long time. Most research and development for these companies target diseases that affect wealthy people in primarily Western countries.

Targeting wealthier clients leads to a severe underinvestment in certain kinds of drugs. Diseases of poverty cannot compete for investment from financial companies looking for big return. Ebola infects relatively few and primarily affects the poor. Ebola is similar to diseases like malaria and tuberculosis, which kill two million people each year but still receive little attention from pharmaceutical companies. Watch the video below for more on the economics of drug development:

Neglected Tropical Diseases, a set of 17 diseases including Dengue Fever and Chagas Disease, affect more than one billion people each year and kill half a million. Most of these diseases could be completely eradicated, but the drugs are not widely available. One study found that of the more than 1,500 drugs that came to market between 1975 and 2004, only ten were aimed at these diseases.

Even though developing countries may experience an outbreak of a disease, the demand for new drugs is limited. In rural villages in Africa, many reject clinical drugs for diseases such as Malaria and Tuberculosis. Instead, they favor spiritual healers and herbal remedies.

What is being done to promote drug research of neglected diseases?

The Office of Orphan Products Development (OOPD) in the FDA was designed to advance development of products that could be used to diagnose or treat rare diseases affecting fewer than 200,000 people. Orphan diseases do not traditionally receive much attention from pharmaceutical companies. The program provides a tax credit of up to 50 percent for research and development of drugs for rare diseases. When these drugs do become available, however, there is still no guarantee that patients will be able to afford them.

Since 1983 the OOPD program successfully enabled the development and marketing of more than 400 drugs and products. In the ten years prior, only ten of these products came to the market. Learn more about the OOPD with the video below:

Additionally, in 2007 the FDA created a voucher program to encourage research for neglected diseases. If a company receives approval for a drug for neglected diseases, it will receive a priority review voucher to speed up the review time for another application. Only four of these vouchers have been awarded so far.

Are there better ways to fund drug research?

Some argue that researching very rare diseases is not worth the time, and that instead research should be focused on more prevalent diseases. Companies will naturally invest in research for the most pressing concerns that offer the greatest opportunity for profit. Drug development for rare diseases should not be encouraged since the diseases occur so infrequently. Others argue research for rare diseases is essential to public health. The case of Ebola shows that even rare diseases can have a disastrous world impact.

Bioterrorism

Beyond public health, knowledge about the workings of any serious virus or disease is important to combat threats of bioterrorism. Concerns of bioterrorism are what led to Ebola research in the past. Serious threats of bioterrorism force the government to partner with research institutions to learn more about rare diseases. In March, the University of Texas and three other organizations received $26 million from the National Institutes of Health to find a cure for Ebola and the Marburg virus in case they were ever used for a bioterrorist attack. Other groups partnered with the Department of Defense to find an injectable drug treatment for Ebola.

Prizes

Prizes and grants are seen as ways to incentivize companies to develop drugs for diseases they might otherwise ignore. Financial incentives would encourage speedy development for an Ebola vaccine. The World Health Organization has looked into building a prize fund, where a centralized fund would reward drug manufacturers for reaching certain research goals. These tactics are more cost effective for the government, since they only have to pay if the product actually works. By creating grants for specific drugs, the government can pull research into neglected areas. Most prizes and grants, however, are not offered until a severe outbreak occurs, by which time many people are already in need of drugs.

Partnerships

Others point to room for greater partnerships between various entities for drug development. The greatest area for partnerships is between development groups and pharmaceutical companies. For instance, if a company pays to research and develop a product, the government could pay the company for the right to the product and could then promote the product itself without worrying about profit. In another case, GlaxoSmithKline and Save the Children arranged for someone from the charity to be on GSK’s research and development board, so the groups can share expertise and resources.

The Ebola outbreak indicates areas in which our current drug development model is lacking. People are dying because no Ebola vaccine exists. When pharmaceutical companies search only for profits, drugs for rare diseases go neglected. By expanding partnerships and offering greater prizes and financial incentives, the government can encourage drug research for these otherwise neglected diseases.

Resources

Primary

WHO: Ebola Virus Disease

FDA: Developing Products for Rare Diseases

CDC: Experimental Treatments and Vaccines for Ebola

Additional 

CNN: Ebola Outbreak: Is it Time to Test Experimental Vaccines?

Vector: De-risking Drug Development

Guardian: Funding Drug Development for Diseases of Poverty

Reuters: Scant Funds, Rare Outbreaks Leave Ebola Drug Pipeline Slim

Explorable: Research Grant Funding

Vox: We Have the Science to Build an Ebola Vaccine

American Society for Microbiology: Ebola Virus Pathogenesis

NBC: No Market: Scientists Struggle to Make Ebola Vaccines

Wall Street Journal: Two Start-Ups Aim to Change Economics of Vaccine Production

NPR: Would a Prize Help Speed Up Development of Ebola Treatments?

Harvard Global Health Review: Funding Orphan Drugs

LA Times: U.S. Speeds Up Human Clinical Trials

Washington Post: Why the Drug Industry Hasn’t Come Up with an Ebola Cure

New Yorker: Ebolanomics

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 Incentives for Drug Development: The Case of Ebola 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.

Western countries agree that they do not condone the aggressive actions taken by Russia in Ukraine. Their response? Sanction Russia. Rather than resort to military action, countries now use sanctions as the foreign policy tool of choice. The United States and European Union are united in the belief that the best way to encourage Russia to behave in the international arena is to increase pressure on the country by way of this penalty. So what exactly are sanctions, how do they work, and will they be effective in the case of Russia?

What has been happening in Ukraine?

The conflict began at the end of 2013 when former Ukrainian president Viktor Yanukovych rejected an association agreement with the European Union (EU) and instead accepted a deal with Russia. Thousands of protesters took to the streets to voice their disapproval of the deal and perceived government corruption. In response to the protests, Ukrainian forces took aggressive action. Tensions escalated and eventually in February 2014, protesters overtook the capital and sent the president scrambling for Russian protection. Russia quickly moved to secure its interests by invading and annexing the Ukrainian province of Crimea. Russia still has troops stationed along the border in Eastern Ukraine and is accused of sending weapons to aid pro-Russian forces. The issue is complicated by the fact that many people in Ukraine, especially in Crimea, are ethnically Russian and would like to become a part of that country. Watch the video below for further explanation of the conflict:

Western countries declared Russia’s actions to be a clear violation of Ukrainian sovereignty and territorial integrity, which is a breach of international law. The White House called Russian intervention in Ukraine “illegal and illegitimate.” The United States sees the actions as a violation of the United Nations Charter regarding the prohibition of force and of Russia’s 1997 military basing agreement with Ukraine. Russian leader Vladimir Putin, however, continues to disregard the demands of the United States and European Union. With the collapse of a recent ceasefire, the future of the conflict remains unclear.

Western countries hope sanctions will deter Russia from future aggression in Eastern Ukraine and force the country to abide by its international obligations.

What are sanctions?

Sanctions are a foreign policy instrument applied to a country to pressure it into changing its actions. Sanctions institute deliberate government withdrawal or threat of withdrawal from trade or financial relations. Typically sanctions are used to force a country to cooperate with international law, or to contain a threat to the peace of other countries. Ideally sanctions send a strong message of condemnation and entice countries to comply with international rules in order to avoid further harm. Sanctions can be issued by individual countries or by an entire group, such as the European Union, United Nations, or the North Atlantic Treaty Organization. There are several different types of sanctions:

• Diplomatic sanctions sever diplomatic ties, such as by removing embassies from the offending country.
• Economic sanctions can include a number of trade and financial punishments, including a ban of trade, imposing tariffs or embargoes, freezing assets, banning cash transfers, and restricting travel.
• Military sanctions include military intervention, targeted strikes, or supplying arms and aid to military.

A long-term study by the Peterson Institute found that economic sanctions are partially successful only one-third of the time. The study showed sanctions are most successful when they are used to reach a limited, modest goal. Using sanctions to influence a more ambitious policy change drops the rate of success to just 30 percent. For example, the Cuban embargo, in place since the 1960s, is largely seen as a failure; however, the more recent blockades and financial sanctions in Iran were extremely successful in forcing the Iranians to negotiate with the United States. The success in Iran may have emboldened the United States to now apply economic sanctions to Russia for its role in the Ukraine conflict.

What kind of sanctions have been used?

So far, sanctions have been limited to specific targets to impose a cost aimed at those responsible for the situation in Ukraine and Crimea. The economic sanctions have been described by Forbes as a “new breed of financial warfare,” which the treasury has been honing as a way to lock terrorists out of the global financial system.

Specific Targets

On March 6, 2014, President Obama signed Executive Order 13660 to authorize sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine. More sanctions followed. Currently the list of those sanctioned by the U.S. government includes 23 government officials and 18 companies. The individuals are members of the Russian elite and have significant control over the Russian economy, including its banks, railroads, and media. The E.U. and other European countries also released lists of those sanctioned, which includes many of those targeted by the United States. Watch President Obama’s declaration of sanctions below:

Consequences

The sanctions of the United States and European Union currently only impose asset freezes and travel bans. Essentially those targeted are blacklisted. For those listed in the U.S. sanctions, all assets held in the United States are frozen. Furthermore, Americans are prevented from doing business with the listed individuals or entities and are prevented from making any funds available to them. The individuals listed will also be denied visas to enter the United States. The United States will cut off exports of American products to those companies and prevent exports of high-tech items that would contribute to Russia’s military capabilities.

Potential Problems

One of the problems with sanctions is that many feel they unfairly harm a country’s innocent civilians for a government’s actions. The idea is that sanctions may harm the people, but these people will then pressure their government to change its actions. In the meantime, the effects are felt most by ordinary citizens rather than the intended government officials. The current targeted sanctions , however, were enacted to apply pressure only on the elite rather than on the entire economy. Until more major banks are targeted, ordinary citizens may not feel the impact.

Have they had the intended effect in Russia?

It is difficult to judge the exact impact that the limited sanctions have had. Outwardly Putin still seems unfazed, yet in recent weeks he has tempered Russian aggression. The Russian economy was struggling before the sanctions, so these penalties have only furthered the decline. The Russian central bank predicts growth will slow to just 0.4 percent this year. A report by the International Monetary Fund (IMF) says that Western sanctions have had a “chilling effect” on investment. The IMF claims that the future strength of the Russian economy lies in greater global integration, which is currently hindered by the sanctions.

Effect on the Elite

Vladimir Yakunin, Putin’s close friend and head of Russian Railways who is on the saction list told the Financial Times, “I did not intend to travel to the U.S.  I have no assets.  So it does not bother me at all.”

These sanctions have much broader implications, however, even if they do not directly affect Yakunin. All financial institutions are discouraged from interacting with him in any way. The U.S. financial system is extremely pervasive, and the U.S. dollar is the world’s numéraire. Every financial institution needs a relationship with a U.S. bank to do business. Since Bank Rossiya appeared on the U.S. sanction list, it can no longer do business with any bank that deals in dollars either. Major credit card companies Visa and Mastercard even severed their business with the bank.

Effect on Public Confidence

Thus far the major impact of the sanctions has been psychological, impacting consumer and business confidence. No one knows who will show up on the sanction list next, so others are hesitant to do business. The entire Russian economy is effectively isolated. The sanctions lead to capital flight, inflation, and limit future investment in the country. Goldman Sachs reports that $45 to $50 billion was taken out of Russia in the first three months of 2014 as compared with only $63 billion in all of 2013.

Effect on the Future

Experts say the sanctions are likely to push Russia toward increased self-reliance. The economy ministry is already pushing to use state funds to aid lagging economic growth. Major effects of the sanctions have already been seen through cancelled IPOs and two cancelled government bond auctions. Standard & Poor’s recently downgraded Russia’s credit to one level above junk status.

Russia has responded by imposing like-for-like sanctions and threatens greater future sanctions. Russia banned nine prominent American politicians from the country, including Senate Majority Leader Harry Reid (D-NC), Senator John McCain (R-AZ), and Speaker John Boehner (R-OH). McCain responded in a March 20 tweet:

I guess this means my spring break in Siberia is off, Gazprom stock is lost & secret bank account in Moscow is frozen http://t.co/TgwZneD4HY

— John McCain (@SenJohnMcCain) March 20, 2014

Do sanctions hurt the U.S. economy?

The typical argument against economic sanctions is that they can harm the U.S. economy, especially for the companies that do business with the targeted country. The U.S. economy will not be significantly affected simply due to the fact that the United States and Russia do not do much business with one another. Trade between the United States and Russia amounted to $40 billion last year — only one percent of total U.S. trade. By comparison, EU trade with Russia is 11 times that of the United States. Even tougher sanctions, like those applied to Iran, would only have a limited effect on the American economy due to limited ties between the nations. Watch the video below for the debate over who will be harmed by the sanctions:

Concerns are growing, however, that Western jobs are at risk if sanctions increase. For example, Boeing uses Russian titanium, General Electric leases aircraft to Russian airlines, and Exxon, Coke, and Pepsi all do significant business in Russia. If Russia sanctions in return, these companies could see a loss in profits. The U.S. Chamber of Commerce and National Association of Manufacturers are preparing an ad regarding the harmful potential impacts of the sanctions. The groups are particularly concerned if the United States were to impose unilateral sanctions that would single-out American business and put them at a disadvantage. However, recent data shows that the United States exported more goods and services to Russia in May, after the sanctions, than for any other month in 2014 so far.

What’s next?

The idea is to gradually increase the pressure on Russia through sanctions. Many expect more sweeping measures to come in the near future, as both the United States and European Union indicated a stronger response will come soon. President Obama recently agreed on a phone call with British Prime Minister David Cameron that if Russia does not take steps to de-escalate the situation in Ukraine, the United States and European Union would roll out further sanctions. It is likely that targeted bans on key sectors of the Russian economy, such as gas and banking, are next. The options are nearly limitless. The United States could revoke Russia’s favorable tariff rates, which would increase taxes Russian firms have to pay to sell goods in the United States. Other alternatives include quotas, a trade embargo on certain goods, or further limiting Russian access to U.S. financial markets. Secretary of State John Kerry discusses what could be next below:

Unilateral sanctions are rarely effective, and the limited business ties between the United States and Russia means the European Union and United States must impose coordinated sanctions; however, Russia is the largest energy supplier in Europe and among the top three oil-producing countries in the world. Russia supplies roughly one third of the oil and gas in the European Union. This dependency complicates sanction efforts. Europe is hesitant to sanction because it could prohibit E.U countries from purchasing Russian oil, which would then lead to higher prices and potential shortages. Experts agree that ultimately any effective sanctions on Russia in the future must be coordinated and far-reaching.

Resources

Primary

Treasury Department: Treasury Sanctions Russian Officials

Treasury Department: Announcement of Additional Treasury Sanctions

Additional

Washington Post: The West Can’t Afford to Make Empty Threats on Russia Sanctions

Wall Street Journal: Western Sanctions Likely to Push Russia Toward Increased Self-Reliance

Guardian: Ukraine Crisis: Any EU Sanctions Are Unlikely to Make Impression

BBC: Ukraine Crisis Timeline

Politico: The New Russia Sanctions: Stalled Tax Talks

Forbes: Here’s How Obama’s Russia Sanctions Will Destroy Vladimir Putin

CNBC: Russia Sanctions: Who’s Losing Out So Far

BBC: The Impact of Economic Sanctions on Russia

Investopedia: Sanctions Between Countries Pack a Bigger Punch

USA Today: Business Groups Oppose Any New Sanctions on Russia

New Republic: These Sanctions Against Russia Will Hurt

Forbes: U.S. Exports to Russia Rise Despite Tensions

The New York Times: Western Businesses in Russia, Watchful and Wary

The New York Times: Obama Steps Up Russia Sanctions in Ukraine Crisis

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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