Two articles on how Barak Obama and John McCain understand Economics

Obama, the optimist on trade

By Susan Aaronson

The writer is research associate professor of international affairs and business, George Washington University

July 22 2008

Around the world, the press has portrayed the 2008 US presidential election as a choice between freer trader John McCain and “protectionist” Barack Obama. That traditional paradigm has helped the media simplify the differences between the two men. However, such these labels do not accurately describe either candidate. And it does not fully portray the candidate, Mr Obama, who has the more optimistic vision of trade.

The conventional wisdom labels Mr McCain as a freer trader because he supports three bilateral trade agreements negotiated by the Bush administration. Mr Obama, in contrast, has come out forcefully against these agreements. Moreover, because Mr Obama states that he wants to review the effects of existing trade agreements, the press has found him to be unenthusiastic about trade liberalisation. (It is important to note that the US is already conducting a similar review of the World Trade Organisation.) Finally, Mr Obama has support from many US unions, which traditionally have taken a protectionist stance.

In fact, both men are pro-trade; they each support using trade agreements to open markets and create economic efficiencies. But the two have different perspectives regarding what trade agreements should do, what rules these agreements should include, and whom these agreements should directly benefit.

Mr McCain sees trade as a means to the end of economic growth and trade agreements as simply economic instruments. He has said very little about how he would use trade agreements to address negative side effects of globalisation, such as pollution. Nor has he articulated how the US can ensure that the economic growth stimulated by trade is equitable. Beyond suggesting tax breaks for business, he has not explained how the US can ensure that companies remain in the US and continue to hire US workers, rather than rely on technologies to remain productive. To bolster his freer trade bona fides, he has stated: “Only risks to the security of our vital interests or egregious offences to our most cherished political values should disqualify a nation from entering into a free trade agreement with us.” But Mr McCain’s support for freer trade has limits – especially when important constituents are adamant about trade bans. As an example, he supports continued trade sanctions against Cuba and Iran and enhanced targeted sanctions against human rights abusing nations Zimbabwe and Burma.

Mr Obama, in contrast, is a trade enthusiast as well as a trade agreements reformer. He sees trade as a means to the end of enhancing human welfare. Thus, he has stated: “From financiers to factory workers, we all have a stake in each other’s success.” He recognises that Americans cannot succeed unless globalisation promotes greater access to resources and opportunities for more of the world’s people (our future growth markets). Mr Obama also believes that trade agreements are essential tools of global governance. He recognises that public concerns about trade are really concerns about inadequate governance – instances where our trade partners are unwilling or unable to adopt and enforce rules to protect workers, consumers and the environment. Demanding such standards in bilateral agreements will not alter global market conditions or empower all workers. Nonetheless, trade agreements can, if properly written, improve both the supply and demand for good governance at the national and international level.

Mr Obama also has put forth a consistently positive vision of the potential of trade to promote human rights. Many human rights activists think trade with human rights abusing regimes is a form of complicity that can indirectly perpetuate wrongdoing in countries such as Sudan. But Mr Obama has openly questioned this view, asking whether the US has more or less leverage with less commerce. He has argued that cutting off trade may not be the best (or only) strategy to bring democracy to Cuba or Iran.

Like Mr McCain, Mr Obama’s vision of trade has some inconsistencies. He has yet to reconcile his internationalist and co-operative worldview with his promises to Democratic special interests. In addition, he has relied on jargon such as fair trade, without defining such terms in a global context.

Press coverage and public rhetoric about trade lags reality. Clearly when we talk about trade agreements today we are talking about regulations that can affect productivity, investment levels, prices and other important economic factors. But trade agreements can also ensure that more people have access to more resources such as credit, education, safe food and healthcare as well as greater opportunities. While Mr McCain sees trade agreements as a means of increasing the nation’s riches, Mr Obama sees trade agreements as tools that can both empower individuals and help our trade partners improve governance.

Copyright The Financial Times Limited 2008

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Tuesday, July 22, 2008

A Short Primer on McCainomics Versus Obamanomics: Top-Down or Bottom-Up

Robert Reich
Robert Reich was the nation's 22nd Secretary of Labor and is a professor at the University of California at Berkeley.

McCain and Obama represent two fundamentally different economic philosophies. McCain's is top-down economics; Obama's is bottom-up.

Top-down economics holds that:

1. If you give generous tax breaks to the rich, they will have greater incentive to work hard and invest. Their harder work and added investments will generate more jobs and faster economic growth, to the benefit of average working people.

2. If you give generous tax breaks to corporations, reduce their payroll costs, and impose fewer regulations on them, they will compete more successfully in global commerce. This too will result in more jobs for Americans and faster growth in the United States.

3. The best way to reduce the energy costs of average Americans is to give oil companies access to more land on which to drill, lower taxes, and lower capital costs. If they get these, they'll supply more oil, which will reduce oil prices.

4. The best way to deal with the crisis in credit markets is to insure large Wall Street investment banks, as well as Fannie and Freddie, against losses. This will result in more loans at lower rates to average Americans. (Bailing them out may risk "moral hazard," in the sense that they will expect to be bailed out in the future, but that's a small price to pay for restoring liquidity.)

All of these propositions are highly questionable, especially in a global economy. The rich do not necessarily invest additional post-tax earnings in the United States; they invest wherever around the world they can get the highest returns. Meanwhile, large American-based corporations are doing business all over the world; their supply chains extend to wherever they can find low labor costs combined with high output, and their sales to wherever they can find willing buyers. Oil companies, too, are operating globally and set their prices largely at the point where global supply meets global demand. Additional drilling here creates environmental risks for us but generates the same marginal benefits for consumers in China, India, and Europe as we might enjoy (most likely not for a decade or more). Credit markets are global as well, so the beneficiaries of bailouts of large investment banks and lenders are also worldwide while the potential costs (including moral hazard) fall on American taxpayers.

This isn't to argue that top-down economics is completely nonsensical. America is, after all, the world's largest economy. So whatever helps the top of it will to some extent trickle down to everyone else here, and whatever hurts the top is likely to impose some burdens all the way down.

But in a global economy, bottom-up economics makes more sense. Bottom-up economics holds that:

1. The growth of the American economy depends largely on the productivity of its workers. They are rooted here, while global capital and large American-based global corporations are not.

2. The productivity of America workers depends mainly on their education, their health, and the infrastructure that connects them together. These public investments are therefore critical to our future prosperity.

3. Global capital will come to the United States to create good jobs not because our taxes or wages or regulatory costs are low (there will always be many places around the world where taxes, wages, and regulatory costs are lower) but because the productivity of our workers is high.

4. The answer to our energy costs is found in the creativity and inventiveness of Americans in generating non-oil and non-carbon fuels and new means of energy conservation, rather than in access by global oil companies to more oil. So subsidize basic research and development in these alternatives.

5. Finally, in order to avoid a recession or worse, it's necessary to improve the financial security of average Americans who are now sinking into a quagmire of debt and foreclosure. Otherwise, there won't be adequate purchasing power to absorb all the goods and services the economy produces. (As to "moral hazard," the financial institutions that did the lending had more reason to know of the risks involved than those who did the borrowing.)

Listen carefully to the economic debate in the months ahead in light of these two competing economic philosophies. And hope that the latter wins out in years to come.

Bordertown

There is a 2006 movie starring Jennifer Lopez and Martin Sheen that you should see. It’s called “Bordertown,” directed by Gregory Nava, and based on the book by the same name written by Diana Washington Valdez, an El Paso, Texas, journalist. It is a serious, political movie that takes a passionate social justice position on the immigration debate. It tells the powerful true story of life in the border town of Juarez, Mexico. Anyone wanting to see the effects of globalization, Free Trade, and NAFTA (all of which are discussed in the movie) should rent a copy and view it. (Note, I say, “rent” because most of us never knew it was in the theatres. It came and went so quickly and was never released to the multiplexes, so most people never had a chance to know whether they liked it or not. Reviews of the movie were very high, but most theatre chains did not want to risk running it.)

Ms. Valdez spent years investigating and documenting the deaths of thousands of women murdered in Juarez since 1993. These murders are called “femicides,” or gender murders. Hundreds of women working in American-owned factories (malquiladoras) were brutally raped and murdered in Juarez, a city gripped by fear. The attacks have been covered up by the local authorities, and still continue today.

Click in the space below for the theatrical "trailer" from the movie:

This movie details the inner work processes of the Maquiladores and their link to NAFTA. It looks at working conditions, low pay, and exploitation of workers, all so that large corporations in Mexico and the USA can make large profits. It also details the corruptness of both the Mexican and the American government, the greed of transnational corporations and the role/reason for the cover ups of these murders which are still going on today.

Click below for a particularly intense scene from the movie in which the two leads debate some of these issues:

And, for what it’s worth, it’s interesting to note that both Martin Sheen and Jennifer Lopez are people of faith. Both, are very active in their local Catholic parishes, and both on occasion have noted the connection between their political activism and their religious faith. Not to disparage the mega-church evangelicals with thirty-thousand member churches, who teach that Christianity applies only to issues of personal morality, the truth is that the spinal cord of Christian ethics is a commitment challenging and changing the political, economic, racial, and social impediments to fully human existence.

If You Think Education is Expensive, Try Ignorance: How Eliminating User Fees Helped 2 Million Kenyan Kids Go to School

An interview with Mary Njoroge

Multinational Monitor, NOV/DEC 2007 , VOL 29 No. 5

Mary Njoroge was Kenya's National Coordinator for Early Childhood Development and the Director of Basic Education until her retirement in 2006. She oversaw the Abolition of School Fees Initiative in 2003 and was awarded the Moran of the Burning Spear, one of Kenya's highest honors. Njoroge now works as an educational consultant. Multinational Monitor interviewed Njoroge in December 2007, before Kenya's national election.

Multinational Monitor: When were school fees first introduced in Kenya?

Mary Njoroge: They were introduced in the late 1980s and the 1990s through the structural adjustment programs promoted by the World Bank and the International Monetary Fund (IMF).

MM: So the idea for the fees came from the World Bank?

Njoroge: Yes, it did.

MM: And how did the Bank direct Kenya to impose school fees?

Njoroge: During that time, most low-income countries were working with the IMF and World Bank to set caps for the wage bills - the amount that could be spent on wages in different government departments - and the amount of money that the government could use for programs. One associated idea was to make sure that communities were contributing financially to the services that the government was providing. That was a problem, because even as the fees were introduced, poverty levels were rising in most of the country, and the parents were not able to pay the fees. That led to many, many children dropping out of school - just because of the inability of parents to pay the fee.

MM: In Kenya, when the decision was taken and there was no choice but to impose fees, how was that implemented? Did that become a national requirement or did it vary by different regions in the country?

Njoroge: No, it was national. Every parent was supposed to pay fees for tuition expenses and uniforms for the children. In Africa, uniforms are very, very important for making everybody from different socioeconomic backgrounds look the same. Fees also went to meet expenses for textbooks, even for expansion of infrastructure - classrooms, the school buildings themselves and sanitary facilities in the schools.

MM: How much was the fee?

Njoroge: There was no guidance on what level fee individual schools should charge, and that became a problem. The size of the fee was left to the discretion of the PTAs [parent-teacher associations] in schools. And unfortunately fees were imposed in quite a number of places for reasons you couldn't explain. And some of the money wasn't necessarily put to school use. A chunk of it was misused over time by the principal and the people overseeing the school. Many, many parents were discouraged and children fell out of the school system because there wasn't a guide for how school fees were going to work, or how much fees would be.

MM: Did the national government reduce the amount it was giving the schools on the theory they were raising money from the fees?

Njoroge: Yes, it did. Initially, the schools received federal grants. That would, for example, pay for some of the workers that were working there, for the teachers and for some of the programs of the school. Then, during this particular strategy, the government grants were removed and the parents were forced to accommodate the costs.

MM: And how much money did the schools raise from the fees? How important were they to their budgets?

Njoroge: The fees were important because it was from the fees that the schools could buy books, buy chalk, buy exercise books and any readers that they were going to use. Fees also paid for the running of the school, the overhead of the school. That money was very important. The schools were not going to be able to run without it.

MM: How did the fees affect the ability of families to send their children to school?

Njoroge: It affected the very poor children whose parents were not able to raise the fees that the schools were asking for. Initially, the choice was if children have to go to school, which children would go? And boys were the ones sent to school in the very poor communities and girls were left at home. Eventually, even that became difficult and for the very poor communities both boys and girls dropped out of the school system. Only those who were able to afford the school fees were left to continue.

MM: Was there supposed to be an exemption for poor families?

Njoroge: No, there wasn't. It was a blanket fee for everybody regardless of socioeconomic status.

MM: So the fees continued from the beginning of the 1990s, all through the decade?

Njoroge: Yes; up to about January 2003 when the current government took power and they abolished the fees. So all along education programs were being financed by fees from parents.

MM: How did the issue of fees rise to the level of political importance in Kenya?

Njoroge: The abolition of fees came as one of the strategies to reduce the level of poverty in the country. The level of poverty continued to rise to a level where more than 50 percent of Kenyans were living below a dollar a day. So asking them to pay around $8 or so for primary school was almost impossible. The current government regards education as one of the vehicles that can reduce poverty in the country. And when they came into power, they decided all the children of Kenya were going to have at least primary education free, with the hope that they would move on to high school and start participating in the economic status of the country and therefore lower the poverty level.

MM: The school fees became a significant issue in the 2002 presidential election.

Njoroge: Yes, it did. It was one of the election campaign issues.

MM: What was the response from the population to this promise to eliminate the school fees?

Njoroge: It was taken very positively because almost everybody in Kenya thinks education is very important for moving out of poverty and giving individual families hope. So there was a lot of appreciation for any proposal that was promising to put children back in school. Particularly because in the past, even the poorest of families struggled to find a way to pay the fees. They would pay more than one third of the family income to ensure that at least one child could attend school. So that is why everybody voted for this government. The education promise alone was enough, plus all the other positive things that they promised.

MM: Do you think this issue helped decide the election?

Njoroge: Yes, it did, and it still does. We are again approaching elections, scheduled for the end of December 2007. Everybody campaigning is highlighting education as a key issue and discussing how to continue improving what has been done. They are even discussing the issue of high school fees, since most of the children that entered school after fees were lifted have now completed primary school.

MM: And everyone agrees, no fees?

Njoroge: Yes, they do.

MM: This is a case where a candidate campaigned on the promise to eliminate school fees and then, with your help, delivered on the promise. How was it carried out?

Njoroge: The government improved the way it raises taxes from the people. In the past, the taxes were not being collected properly and therefore there was not enough revenue to fund various programs in the country. But this government has really collected a lot of taxes. They have also developed transparency and accountability strategies to ensure the money is actually going to the programs that people have prioritized, like education and health. And therefore the government has been able to raise national and internal resources to finance about 90 percent of the budget for this program. Only 10 percent of the funding is coming from outside donors.

MM: The fees were lifted in 2003?

Njoroge: Yes, in January 2003.

MM: That was immediately upon the new government taking office?

Njoroge: Yes.

MM: And what happened?

Njoroge: When the new government came in and announced that in the new year, children could attend school without paying fees, we witnessed an additional 1 million new children in our schools, over and above the 5.9 million who had already been in the school system. When all of those primary school-going children who had dropped out of the school system over the years came back to the classes they had left, that posed a lot of challenges to the teachers and to the system, which was not quite prepared. But over time I think we have addressed the issue and students have continued learning.

Now, not only did we receive 1 million children on that first day of the new academic year, we have over the years received an additional million more. We now have 2 million more children in school because of this initiative; we have almost 8 million children now in our primary schools.

MM: So a full quarter of the students were not going to school because of fees?

Njoroge: That's right.

MM: You had a sudden flood of students. How was the school system able to handle it?

Njoroge: Part of the training of the teachers was how to handle these extra learners. Some of the teachers are going through training even now on what we call "multi-grade." Multi-grade is a system where you teach learners of different age groups together in the same class by using different strategies. That was not necessary before, but now, because the learners are of different age groups, the teachers have had to go through that kind of training. We are still in the process of training all of the teachers.

The other training that has been found to be very, very important is how to handle children with special needs. When the government said education is free, children with special needs and various disabilities and who didn't have the opportunity to go to school before, also came to school. Unfortunately, teachers initially didn't have the skills to handle children with hearing or sight or mental disabilities. The Minister of Education is currently expanding the training of the teachers to handle the children with special needs.

The other thing that is required, but is still not there, is the expansion of facilities for children with special needs. For those that may be blind, we may convert the primary school curriculum into Braille, and we will probably even develop sign language for those that are deaf. So there are still challenges there.

The children with special needs still continue to attend school, but the integration is only working for those with mild disabilities. Those with severe disabilities require specialized education institutions and equipment, which the resources have not allowed to be put in place.

MM: What would you say to people who argue that it's a mistake to eliminate school fees because systems are not equipped to handle the surge of new children?

Njoroge: I would say they are wrong in the case of Kenya. It has worked because there was political will. There was very high professional commitment by the Minister of Education and the leadership, and there was strong desire by parents to ensure their children are lifted from the desperate situations in which they are living.

I would say anybody that is saying it is a mistake is wrong. In places like Kenya and many, many African countries, I think if we were asked to go through it again we would not change anything. Although it is true that the program had problems at the beginning, with determination it continued to be improved and children can now learn.

When the fees were lifted, we immediately saw the kids at school. It led to investment of resources by the government into the education system. It led to developing new strategies to finance the education program in a transparent and accountable manner, which also has attracted international donors. It is worth letting the children have the opportunity to go to school.

MM: Are there still uniform or textbook fees in Kenya?

Njoroge: No, there aren't. The monies that have been made available by the government and the international community have helped schools procure all the textbooks and the teaching materials that they require. To date, I think every primary school has all the textbooks they require in every class for every subject. What is missing is the expansion of the facilities and employment of additional teachers to make sure that that we don't have too many kids in a class.

MM: The ministry would like to hire more teachers?

Njoroge: Yes, it would.

MM: And you have more teachers already trained?

Njoroge: Yes, we do. We had a freezing of recruitment for additional public workers, particularly teachers, in 1997 when the IMF agreed with the government on a particular ceiling for primary school and high school teacher wage expenses. The IMF wanted the government to use funds to pay down its external debts. Although that was in place, we continued training teachers, and we have about 60,000 trained teachers who are unemployed and out there. Some of them are teaching as volunteer teachers. However, it is certain that the additional 2 million children requires at least an additional 40,000 teachers. Until we have sat down with the IMF to discuss it, we cannot absorb those teachers into the system because of those ceilings.

MM: The agreement from 1997 is still in place?

Njoroge: Yes, it is.

MM: So there's an agreement that is now 10 years old on how large the wage budget can be for education?

Njoroge: Yes. The ceilings and the agreements that the IMF normally has with individual countries do not necessarily take note of the Millennium Development Goals commitments. For example, almost all countries have agreed that they have to meet the Millennium Development Goal of universal primary education, ensuring that all children are going to school. That obviously requires additional teachers, and it requires additional resources in education. Discussions are needed so that additional teachers can be recruited into the system. And those discussions are not taking place in quite a number of countries in Africa.

MM: What has been the experience of other countries in Africa in lifting school fees?

Njoroge: I cannot necessarily give a blanket statement on each of the countries. But I think that it is not right for any country to be charging fees, because that country is forever going to remain in poverty unless it can educate its children. And it is only then that a country can start getting out of poverty and its population can start being able to participate in the economic activities of the country. So any country that is still charging fees ought to be assisted in terms of raising the monies internally as well as getting international support so that their children can actually go to school. I think it is wrong for any country to be charging fees.

MM: Many countries have followed Kenya's example.

Njoroge: Yes. After Kenya abolished its school fees, about 14 other African countries have followed, such as Uganda, Tanzania, Ghana, Malawi.

One of the things that they are following is our financing model, which we introduced for this particular program, where funds are sent directly to school accounts. In the past, funds went through the different levels of [the government] where a lot of resources were deducted for administrative fees. The current system now is sending money directly from the Minister of Finance, through the commercial banks and into bank accounts of individual primary schools. And therefore funds that are meant for the children and the activities of the school are not leaked in between. And, again, what we have done is to establish accountability and transparency standards at the school level, so the principal and the people who are handling the money can be held accountable by committees composed of both teachers and parents, and everybody can follow up on how much money is being spent and where the money at the school level is going. That model has worked both in Kenya and most of the other countries that have abolished fees.

Within Kenya, even the Ministry of Health is in the process of introducing that kind of financing, so they can send their funds directly to their health facilities in the country.

MM: Within Kenya, are fees still in place for secondary schools?

Njoroge: Fees are still in place in secondary schools. However, because of the many, many children who are now completing primary school, everybody - the government and civil society - is concerned and determined that the transition rate from primary to secondary should be raised. And because poverty is still substantial, the government has decided starting in January 2008 to meet the tuition costs in every public secondary school and leave the other fees, for example, for boarding expenses, to be met by the parents and guardians. We do have many boarding schools, particularly for girls. So if parents insist that they want their children to go to a boarding school, then they will meet that cost, but the government has covered the cost of the tuition.

MM: There are efforts to increase support from the rich countries for education. Can you give some sense of where that stands and the importance of foreign aid for supporting education?

Njoroge: In 2000, when the Millennium Development Goals were drafted and agreed on by a number of countries, donor countries agreed that they were going to support the development goals and strategies through what we called the Fast Track Initiative. They agreed to support countries that would take the step of abolishing school fees and allocating national resources for education.

Quite a number of those countries have been contributing. They are not giving all the money that they promised they would contribute, but at least they are providing some funds. Countries like the United Kingdom, Canada, Sweden, Japan and Germany have been contributing to the Fast Track Initiative and the monies have been going to help those countries that have abolished fees.