Targeting Federal Reserve’s independence is misguided, part 2

Published in Standard-Examiner, November 16, 2014, Ogden, Utah

VIJAY K. MATHUR

In part 1 of my column I discussed the Federal Reserve’s (Fed) structure, its responsibilities and implementation of monetary policy, independent of political interference. Here, I discuss different views (of Monetarist and Keynesian schools) on the conduct of monetary policy and the issue of the Fed’s independence from political pressures.

First some background. One of the conclusions arrived at by Professor Ben Bernanke, former Fed chairman, in his path-breaking book “The Great Depression,” is that in all countries monetary contraction was the major cause of the Great Depression of the 1930s. Even with widespread bank panics, sharp price decreases, and output and employment contraction, monetary policy was circumscribed by the prevailing gold standard. Countries that abandoned the gold standard had greater flexibility in initiating expansionary monetary policy (U.S. after 1933) to provide liquidity to banks and stabilize prices, hence output and employment. Bank panics significantly affected supply of output.

Congress created an independent Fed in 1913 to avoid financial panics before World War I. The Fed faced the most severe test in the Great Depression. Some conservative politicians and economists have questioned the Fed’s independence and its discretionary monetary policy.

Nobel Laureate conservative economist Milton Friedman (now deceased), leader of the Monetarist school, argued that discretionary monetary policy could be destabilizing to the economy in the short run. This could happen due to time lags in gathering information and uncertainty about the monetary policy’s effect on the economy. In the long run, monetary policy could be more effective in stabilizing prices. Friedman argued that a rule-based policy, such as a target rate of growth in money supply, is more credible and creates more certainty in markets, thus creating price stability in the long run and encouraging firms to increase output and employment. It is ironic that Friedman was fearful of political pressures on the Fed on its decisions.

Perhaps those politicians who wish to have more control over monetary policy do not like the discretionary nature of the Fed’s policies pursued in the Great Recession of 2007-2009 or their quest for control may be guided by Friedman’s views on monetary policy.

An activist monetary policy for the short run is the Taylor Rule, proposed by Stanford University Professor John Taylor. Andrew Abel, Ben Bernanke and Dean Croushore argue that the Taylor Rule establishes interest rate, rather than money supply, as an intermediate target of monetary policy to provide economic stimulus.

The rule states that the inflation-adjusted federal funds rate (real interest rate) responds to the difference between actual output and full-employment output and the difference between the actual inflation rate and the target inflation (considered to be 2 percent) rate. Therefore, if the economy is at full employment output and actual inflation rate is 2 percent the Fed should set the real interest rate at 2 percent. It should decrease the real interest rate below 2 percent if the economy is weak and increase it above 2 percent if the economy is overheating.

Keynesians recommend a flexible and activist monetary policy, depending upon the state of the economy. Monetary policy could be effectively used not only to stabilize prices but also to promote growth and employment. The Fed followed the Taylor Rule as a guide to achieve its goals in the short run. To make the economy grow in the long run it followed quantitative easing (QE). QE provides liquidity by buying assets such as government securities (Treasuries) and private sector securities. The Fed recently ended QE due to a pick up in economic growth; however, it would keep short-term interest rates very low for the near future.

Total attention of many conservatives to inflation rate is unwarranted. The Federal Reserve Bank Act of 1978 requires the goal of full employment. Despite the limited role played by tax and expenditure policies to combat the recent Great Recession, monetary policy had been very effective in boosting employment and growth, and in controlling the inflation rate.

The inflation rate now is hovering around the target of 2 percent. The current unemployment rate of 5.9 percent is close to full employment unemployment rate, and the U.S. is the only advanced country experiencing potential economic growth of 3.5 percent. Had Congress enacted robust tax and expenditure policies, the unemployment rate and growth would have been even better. Congress even ignored the advice of Professor Bernanke as Fed chair, on fiscal policy in his 2013 testimony in the Senate committee. Political debates and dysfunction in Congress undermined prospects for timely action on fiscal policy. Control of Fed’s monetary policy by politicians, feared by Professor Milton Friedman, will not establish the Fed’s credibility.

The study of 16 advanced countries by Professors Alberto Alesiena and Lawrence Summers found lower average inflation rates in countries with greater independence of central banks. Effectiveness of monetary policy would be compromised with more political intervention and supervision than what we have now.

Congress would be more productive if it settles on certain principles of its own to guide debt, tax and expenditure decisions in a timely manner to deal with recessions and inflation episodes, rather than being mired in endless political debates and indecisions.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes online for this paper. He lives in Ogden. Part one of this two-part series was in the Nov. 9 Standard-Examiner.

Targeting Federal Reserve’s independence is misguided, part 1

Published in Standard-Examiner, November 9, 2014, Ogden, Utah

VIJAY K. MATHUR

The Federal Reserve System (Fed) played a major role in averting depression in 2007-08. Historically, rigidity in monetary policy was one of the main causes of the Great Depression of the 1930s. However, it is alarming that many media pundits, politicians and Americans lack even rudimentary understanding of this institution and its role in stabilizing prices and the economy.

Many Republicans and some Democrats in Congress are calling for more transparency and congressional control over the Fed. Former Congressman Ron Paul even wants to eliminate it. Most are unaware of the fact that the Fed is already subject to congressional oversight. There are audits by the GAO, external audits and regular congressional hearings on Fed’s policies. It appears that politicians who disagree with the monetary policy want more control. This should concern all Americans.

It would be a travesty if monetary policy were conducted in the political theater. In this column I attempt to familiarize readers with the Fed and its role in the conduct of monetary policy, while in part 2 I will discuss different views on the conduct of monetary policy. Monetary policy requires deliberate flexible and timely strategies and actions to deal with recession and inflation episodes. Had monetary policy been subjected to political debates and media hysteria in 2007-08, we would have had a financial panic here and abroad and perhaps worldwide depression.

To avoid bank panics like those in the 19th century and early 20th century, Congress passed the Federal Reserve Act in 1913 to create the Fed. The Fed is the bank for banks and not the bank for individuals and businesses. A Board of Governors provides the leadership, and the president appoints its chairperson and six other members. Currently, economist Janet Yellen holds that position. There are 12 regional Federal Reserve Banks (Fed banks) with boards of directors, in 12 districts, to provide services to members of the Fed in their districts and carry out policies. Utah’s banks are in the 12th District, under the supervision of the Federal Reserve Bank in San Francisco. Member banks in the district are owners of the district Fed bank. The Federal open market committee (FOMC) is the main policy making body.

The Fed’s goals are price and financial stability, low unemployment rates and economic growth. Monetary policy deals with decisions on money supply (quantitative easing is an extension of this policy) and interest rates. Among many different measures, M1 is the simplest measure of money supply. M1 consists of currency in circulation held by non-bank public and deposits in checking accounts of banks (demand deposits). Fed does not print money to change the money supply, as some media pundits and politicians believe. As shown later, it can change M1 by affecting demand deposits of depository institutions.

The Fed supervises and regulates domestic and foreign banking institutions, and other large complex financial firms. Fed banks provide services such as check clearing, wire transfers and electronic payments to depository institutions. Fed banks also hold members’ reserve accounts, lend money to members and distribute currency to meet public demand.

Fed banks are not profit-making banks, as some believe. However, they do provide services to the U.S. Treasury, and other U.S. government and international agencies. They receive deposits of the U.S. Treasury for items like federal unemployment taxes, income taxes, corporate taxes, payroll taxes and certain excise taxes. They earn their income from interest on government securities, which they hold in the conduct of monetary policy, and fees for services to depository institutions. Excess of annual earnings over expenses of the Fed are returned to the Treasury.

Three main tools of the Fed to change money supply and interest rates are 1) required reserve to deposit ratio (RR), 2) discount rate (interest rate on loans to depository institutions) and 3) open market operations by FOMC (buying and selling of securities, such as Treasury securities, Government bonds and mortgage-backed securities). Increasing (decreasing) RR, increases (decreases) banks’ reserves with the Fed, leads to less (more) lending by banks, hence less (more) demand deposit creation, and therefore less (more) money supply. Increasing (decreasing) discounts rate incentivizes banks to borrow less (more) from the Fed and lend less (more), thereby contracting (expanding) money supply.

The open-market operation is the most effective tool of FOMC. Since most people and institutions, domestic and foreign, hold securities in their asset portfolios, selling (buying) securities at attractive prices decreases (increases) money supply in the economy. All the tools affect banks’ reserves at the Fed and hence money supply. Banks’ reserves also affect the federal funds rate (short-term interest rate) banks charge on mostly overnight loans to other banks that need funds, thus affecting other short-term interest rates in the market.

Economists Andrew Abel, Ben Bernanke and Dean Croushore state that money supply affects economy through changes in interest rates, foreign exchange rate and perhaps supply and demand of credit. The economic effectiveness of monetary policy through these channels requires an independent Fed, free of political pressures.

Mathur is former chair and professor of economics and now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio. He also writes online for this paper. He lives in Ogden.

Job market for college graduates not what it used to be

Published in Standard-Examiner, September 24, 2014, Ogden, Utah

By VIJAY K. MATHUR

There is a misunderstanding among many Americans that in today’s economy, those who wish to get a good high-paying job must get a bachelor’s degree. Colleges and universities further confirm this misunderstanding. They emphasize higher average salaries of bachelor’s and/or higher degree holders as compared to those with associate’s degrees and high school graduates, even though there are vast differences in salaries across disciplines for bachelor’s and/or higher degrees.

Data show that high school graduates with technical training and experience would earn more than some college graduates with four-year degrees in arts and humanities. I do not intend to discourage arts and humanities majors. However, many high school graduates would be well advised to pursue some technical training in marketable skills if their goal is to get well-paid jobs. Their net benefit from a bachelor’s degree after six years with overloaded debt, in a discipline with poor labor market demand, would be minimal.

The 2014 study at the Federal Reserve Bank of New York (NY Fed), by Jaison Abel, Richard Deitz and Yaquin Su (www.newfed.org) illustrates well the transformation in the labor market environment for college graduates. They find that even though college grads (with bachelor’s degree or higher) as a group have half the unemployment rate of all workers, the unemployment rate of recent college graduates is much higher than all college graduates from 1990-2013. A tough unemployment rate for college graduates tends to decline with age from late 20s to late 30s, but it significantly increased during 2009 -11 as compared to 1990-2000.

The NY Fed study also finds that the underemployment rate (percentage of college grads working in jobs that do not require a college degree) for all college graduates is around 33 percent and close to 44 percent for recent college graduates in 2012. A significant fraction of underemployed in both groups is earning higher salaries and/or wages in career-oriented skilled jobs such as electricians, dental hygienists, and mechanics, with average salary of $45,000 in 2012. They earn more than the salary of many (close to 15 to 30 percent premium in 2012) with bachelor’s degrees in low-wage jobs.

Abel and Deitz, in another study at NY Fed, Sept. 4, 2014, find that annual wage of bachelor’s degree holders at the bottom 25 percent of the wage distribution is the same as for high school graduates. But data on rate of return of college education based on averages could confuse many. For example, some rough estimates on the rate of return (net of cost of education) generated by Abel and Deitz show that on average a bachelor’s degree earns 15 cents and associate’s degree earns 12 cents on $1 of investment. However, as expected, majors in engineering, math and computers or health sciences earn much more than majors in social sciences or education.

For many high school graduates who are not fully prepared for college, a better option would be to attain an associate degree to acquire marketable skills. According to the Utah Education Task Force Report, May 22, 2013 (le.utah.gov) 18 percent of full-time and 17 percent of part-time students were in remedial courses in Utah’s four-year USHE Institutions in 2010-11. Total completion rate for first time students at a four-year public institution over six years is 32.21 percent, almost half the rate for the nation as a whole. This is not an efficient use of resources in higher education in Utah.

The Wall Street Journal reported, Sept. 12, 2014, that U.S. manufacturers are having a difficult time filling positions in skilled trades in 2014. To meet this skilled gap, President Barack Obama and some state governors want to implement German-style apprenticeship programs. Apprentices would work at jobs for pay and train for a broader range of skills, transferable to other jobs. For many high school graduates, a more rewarding and cost-effective strategy to earn a good wage would be to obtain an associate’s degree in marketable skills. This strategy will also lighten their debt burden and give them work experiences. They can always pursue higher education in the future if they so desire.

It is time to think of a different strategy for providing the workforce for the future. Simply said, all high school graduates going to four-year institutions to obtain bachelor’s degrees is not a cost-effective and welfare-maximizing strategy. Professors Frank Levy and Richard Murnane of Harvard University report in “Dancing with Robots” that since 1980, due to technological revolution, routine manual and other work tasks are declining. Work tasks that require non-routine manual skills, skills to work with new information, and abilities to solve unstructured problems are increasing.

Getting a four-year bachelor’s degree will not assure a promising work future for many. It is hoped that higher education institutions are ready for challenges in education and to prepare students to develop human capital to meet the demands of new technologies and information infrastructure.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes online for Standard-Examiner at http://www.standard.net/Guest-Cpmmentary. He lives in Ogden.

Compromise can be done on fiscal isues

Published in Standard-Examiner, March 21, 2014, Ogden, Utah

Vijay K. Mathur

Bloomberg, on March 5, reports online that President Barack Obama's budget of $3.9 trillion for fiscal year 2015 benefits low-income families, college students, researchers and infrastructure. It raises taxes on airline passengers, wealthy and multinationals. As a percentage of the Gross Domestic Product (GDP), the projected deficit will be 3.7 percent in 2014 and 3.1 percent in 2015, a decrease of more than 6 percent from 2009, when President Obama took office.

Congressional Republicans disapprove of the president's budget. For Republicans, major fiscal problems are deficits, debt, taxes, and entitlements. They claim that if we reduce income and corporate tax rates, entitlements, and regulations, growth rate and jobs will increase, budget deficits will decrease and debt rate will slow down. Rep. John Boehner, Speaker of the House, R-Ohio, criticized the president's budget and wants a balanced budget.

Rep. Paul Ryan, R-Wisc., has proposed reducing growth of entitlements and considered that overlapping poverty programs create disincentives for work. Rep. Dave Camp, R-Mich., has proposed a tax code overhaul. His proposal reduces the corporate tax rate from 35 percent to 25 percent and exempts from taxes 95 percent of repatriated foreign profits. It also reduces individual income tax rates and tax brackets from seven to three. Mr. Camp wants to replace the Earned Income Tax Credit (EITC) with payroll tax reduction. He claims, just like Rep. Ryan, that his tax reform will induce substantial economic growth.

It appears that a compromise could be negotiated on fiscal matters, while noting that Rep. Boehner's balanced budget idea is wishful thinking, given the economy's economic condition. However, the CBO reports, March 2013, (www.CBO.gov) that budget deficit in 2014 will be 4.4 percent of the GDP -- less than half of the deficit in 2009.  

The long-run goal should be to fix long-term fiscal problems in mandatory programs, claiming 71 percent of the revenues in 2013. Social Security, including disability payments, Medicare and Medicaid alone constitute 82 percent of mandatory outlays. Therefore, budget trimming over the long run should start with reforming these programs.

Here are some areas of probable compromises for the near term:

1. Expand the Earned Income Tax Credit (EITC) to individuals with no children, for job creation and reducing poverty.

2. Consolidate poverty programs with built-in work incentives. Even with thin empirical evidence on reduced work effort due to entitlements, it would be worth negotiating and implementing to improve efficiency.

3. Minimize use of "tax extenders" -- routinely extended tax subsidies, mostly to corporations. Tax Policy Center (www.epi.org) reports that tax extenders, expired on Jan. 1, if extended through 2024, it would cost $46.6 billion per year.

4. Reduce the corporate income tax rate. Reduction of tax on foreign profits should be temporarily granted on the portion of profits invested in non-financial investment activities in the US.

5. Treat "carried interest" of private equity firms' partners and capital gains as earned income for tax purposes. Many Republicans and Democrats in Congress are inclined to make these changes in the tax code.

6. Most agree that one of the effective ways to fight poverty is through education and training for high end and skilled jobs in the technology-driven economy. Expenditures on R&D are necessary to maintain competitive edge in global markets and foster growth. The president's budget boosts spending on these programs and on preschool education for all children. Most evidence shows that early childhood education pays a very significant economic dividend to children and the society at large. Data from the Office of Management and Budget (www.whitehouse.gov/omb) show that the estimated outlay on "Education, Training, Employment and Social Service" was 6 percent of the total outlay in 2013 and 2014 budgets. This meager sum should be increased.  Reducing tax extenders, tax revenue from treating "carried interest" and capital gains as regular earned income would be sufficient to pay for education, training and R&D.

7. Carbon tax and tax on Internet sales (with credits for local sales taxes), could be implemented in place for reductions in income tax rates and tax brackets.  Carbon tax is an efficient way to reduce pollution and dependency on fossil fuels, while offsetting any revenue loss from reductions in income tax rates and brackets. Internet sales tax on all suppliers, with the proposed credit, will enhance competition among all sales outlets.   Favorable tax treatment of out of state Internet sales, serving as substitutes to local outlets' sales, undermines competition. Internet sales already have price advantage due to lower display costs of products. 

Former Rep. Lee Hamilton of Indiana, Standard-Examiner, March 8, opines on the current dysfunctional Congress and Congressmen that, "Their aim seems to be partisan and ideological, rather than a constructive effort to solve nation's problems."  Hopefully all parties heed this criticism by an experienced and respected Congressman.  

Congress and the administration have a stake in working out the compromises in fiscal matters to make this democracy function and serve as a model to the rest of the world. For democracy and a democratic government to survive and sustain itself, it must work on consensus, not dissension, positivism not negativism, and welfare for haves and have-nots. 

Mathur is former chair and professor of economics, and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He also writes blogs at http://blogs.standard.net/economics,etc.

Moral hazard problem in media reporting massacres

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, December 19, 2013

Ari N. Schulman published an informative report last month in the Wall Street Journal on current research concerning mass killers. It cites many psychological studies on motives of mass killers. Recently, we all have witnessed a series of massacres that psychologists characterize "as a single, typically very public event." Various researchers are of the view that most massacres, for example, at Los Angeles Airport, Newtown, Virginia Tech, Aurora, and the shopping mall in New Jersey, are well thought out, planned, and occur in clusters.

Schulman reports that killers, according to the consensus, follow a "free floating template ... to resolve their rage and express their sense of personal grandiosity." There is also evidence of "suicide contagion effect" that gets attention in the media. In 1984 there were a series of suicides in the subway system in Vienna, Austria. Suicide researchers concluded that sensational reporting in the media and glorification of suicides might be the cause of the three-year epidemic. Researchers convinced media to change the coverage "by minimizing details and photos, avoiding language and simplistic explanations of motives, moving the stories from the front page and keeping the word 'suicide' out of the headlines." Subway suicides immediately dropped by 75 percent. 

These findings pose a conflict between freedom of press and media in the U.S. and elsewhere, and the public good. Psychologists' findings demonstrate that sensational coverage in media on mass killings, romanticizing killers, motives that sometimes evoke sympathy among the general public, may inadvertently bring about other potential killers who have gripes against the government, institutions, laws and regulations, and public in general. The media, motivated by aspirations to provide information to the public, can incite some potential mass killers to come out of the shadows. This effect of the media reporting on mass killers is similar to what psychologists call the "priming effect."
Nobel laureate, Daniel Kahneman, explains in his book, "Thinking Fast and Slow," that priming effect occurs when ideas influence actions. In the recent

report by state investigators on Newtown mass murders, killer Adam Lanza supposedly "became obsessed with the 1999 Columbine High bloodbath and other such mass killings ... " Thus, the extensive coverage of mass murders primed Lanza, already suffering from behavioral and mental problems, to commit murders of his mother and 26 school children and adults in Newtown, Conn. His mother, who purchased guns for him and took him for shooting practices, further facilitated his actions.

Entertainment media also contributes to the priming effect in the name of entertainment. For the society as a whole, sensational and graphic media reporting of mass killings and killers is akin to the moral hazard problem, which economists point out in markets and in many policy actions. Simply, moral hazard arises when a beneficial action by one party may incite the receiving party to engage in behaviors that tend to negate the benefits.
The problem of moral hazard or of "hidden action" was first studied in the insurance industry, where policyholders may engage in actions unobservable to insurance companies. For example, a homeowner who buys fire insurance, covering full replacement cost of home and its contents, lacks the incentive to take precautionary measures to reduce fire danger. Hence, lack of precautions increase fire likelihood, increasing cost of insurances.

Another example is the bail-out of banks and financial institutions during the recent severe recession. To critics, bail-out poses moral hazard problems because it incentivizes them to engage in hard-to-observe risky behavior, hence, posing threats to the financial system.

Similarly, media coverage of mass killers poses a moral hazard problem. Mass killers, primed by thrilling and vivid coverage in media, negate benefits of information to the public. What is the responsibility of free media to prevent such mass killings and promote the public good? I am sure responsible media is as concerned about killings as are others. However, in light of psychological evidence, media's right to exercise freedom of press in reporting massacres, could incite unobserved killers at the margin to commit mass killings to gain notoriety.

The priming effect of mentally unstable people becomes more acute with availability of high-powered weapons with high capacity magazines. Such weapon systems mutually support mass killing instincts of mentally unstable people who have gripes against society and institutions.

The value of the free press is unquestionable. However, given emerging psychological evidence, the exercise of freedom responsibly for the public good, is also precious.

Mathur is former chairmen and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. His articles also appear in blogonomics.blogs.com. He also writes blogs for Standard-Examiner at http://blog.standard.net/economics,etc.

The gender earnings gap and its economic consequences

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, September 10, 2013

The debate about the earnings gap between women and men in the workforce has long history and most of the debate in the media is full of misinformation. Even politicians lose sight of the real causes of earnings differentials which, to say the least, are complicated and are not amenable to quick solutions. In a market economy, one cannot legislate equality of earnings of men and women in the labor market.

The good news is that the earnings gap is narrowing over time between sexes. For full-time workers, median weekly earnings of females were 62.3 percent of males in 1970, increased to 82 percent in 2011 and to 85 percent in 2012. The gap is worst in Utah as compared to the national average. Many studies demonstrate that there are many other reasons the gender earnings gap persists aside from discrimination in workplaces.

Many believe that women earn less than men partly because they are concentrated in low-paid occupations. Not so, according to the Bureau of labor Statistics data (www.bls.gov) on occupational distribution and earnings differentials between men and women. The data is on median weekly earnings of full-time wage and salary workers across 22 major occupational groups in 2012. Following are some of the highlights: 1) The women’s share of total workers is more than 50 percent in nine out of 22 occupational groups and their share is more than 50 percent in six out of the top 10 highest paid occupations, 2) in 22 occupational groups weekly earnings of women, as a percent of men’s weekly earnings, range from 54 percent in legal occupations to 94 percent in community and social service Occupations, 3) in only the 12th lowest weekly earnings occupations, the women workers share of total workers is more than 50 percent. 

The above data show that even though more women than men work in the top 10 highest-paid occupations, women still earned less than men in those occupations in 2012. Hence, occupational distribution of women is not the main reason for the current earnings gap. The hopeful sign is that over a period of time earnings gap has narrowed substantially, partly because more women are now working in higher paid occupations and positions within. In addition, BLS data also show that women gained a greater percentage change in constant dollar earnings than men from 1979-2011 at all levels of educational attainment, from high school diploma to college degree. Given the occupational distribution and growth in earnings of women workers, the question is, why are there still differences in earnings across all occupations?

  

There are other factors in play aside from occupational distribution and outright sexual, racial and ethnic discrimination. For example, earnings differences in the same occupation could arise due to job location, job security, occupational positions, more freedom in the work place and/or pleasant surroundings, better fringe benefits, experience and seniority premiums and turnover rates that affect the cost of searching and hiring employees.

The problem arises when other factors are the same, but there are still differences in earnings. That must change because businesses are losing the full benefits of women’s productivity. Efficiency wage theory stipulates that when businesses offer higher wages it motivates workers to be more efficient and more productive. It would also reduce costly monitoring, because if women find differences in earnings at the workplace, they may shirk and hence underperform. They would also be constantly looking for jobs that pay them higher salaries, hence increasing the turnover rates and costs of employers.

Economists Daniel M.G. Raff and Lawrence Summers, in their research paper, Journal of Labor Economics, October 1987, argue that Henry Ford’s decision in 1914 to implement efficiency wage in his auto plants met with great success. When Henry Ford increased the wage rate to $5 a day, much above the going wage rate, productivity and profits increased. It reduced the turnover rate and assured an ample supply of qualified labor.

Businesses also have more to gain if they have a diversified sex mix to generate new ideas and innovations. Sameness in middle and senior management, dominated by white males, is bound to produce stale ideas, a recipe for failure in the global market place. Businesses are missing out on underutilization of human capital, since more and more women are graduating from colleges. In a special report, The Economist, Nov. 26, 2011, reports on a study by Catalyst, which finds that Fortune 500 companies with the most women in top management positions also had higher returns on equity than those with the lowest representation.

The earnings gap also contributes to wealth gap; see my upcoming blog on this issue on this paper’s website. Therefore it makes no economic sense for business to pay different wages to men and women at the same job with the same qualifications and work history. 

The economy would benefit a great deal if such discrimination in earnings between sexes were outlawed. It is time that businesses realize the productive potential of women in the labor force.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.   He also writes blogs for the Standard-Examiner at http://blogs.standard.net/economics,etc.

Contagion effect of corruption

Vijay K. Mathur

Published in Standard-Examiner, August 11, 2013, Ogden, Utah

The Corruption Perception Index (CPI) of Transparency International (TI) measures perceived level of public corruption in countries around the world from the perspective of businesses and country experts. The rankings are from least to most corrupt. In 2012, Denmark was the least corrupt while Somalia was the most corrupt among 174 countries. In 2012, the U.S. ranked 19 as compared to 22 in 2010, not a significant change. On the Bribery Payers Index of TI for 28 countries, Netherland ranked 1 with the least bribery, the U.S. ranked 10th, and the most bribery prone country is Russia. The Global Corruption Index of TI surveys 114,000 people around 107 countries. In 2013, 64 percent of the respondents thought that just a few big interests run the U.S. government.

Corruption implies dishonesty, bribery, fraud, cheating and perversion of integrity. On different indices, it seems that U.S. standing on corruption is very poor among the nations of the world. It has also infected the private sector as we witnessed fraudulent practices in the banking and financial investment industry, including hedge funds, derivatives and mortgage finance, in the recent Great Recession. These practices still continue. As recently as July 25, SAC Capital Advisors, a hedge fund, was indicted in New York for “rampant insider trading” and charged that the firm had a culture of pervasive cheating.

  

Utah is no exception, as evidenced by cases of affinity fraud in which investment fraud is committed by using church connections, securities fraud, as well as fraud cases in other sectors. Public officials are also not immune to fraudulent activity. Utah Attorney General John Swallow is facing scrutiny for accepting bribes from an imprisoned businessman. Creeping corruption corrodes moral and ethical standards, fair play in public policy and in the conduct of business. It also undermines trust in public officials and in the market place.

Corruption diverts resources from productive activities, discourages entrepreneurship and encourages rent seeking behavior, where rewards flow to those who have inside connections within business world and/or with public officials and politicians. Hence, it results in efficiency loss that is detrimental to growth and prosperity for all the people. The 1999 report by the European Bank for Reconstruction and Development provides evidence on deleterious effects of corruption on growth in many countries.

The worst part of corruption is its contagion effect, like a contagious disease. There is a cascading effect of corruption, when the corruption is top down at any level of government or in private sector. A contagious disease spreads from one person to another by mere exposure to the diseased person. The spread of the disease of corruption requires a certain minimum level of corruption before it spreads to others and becomes the social norm. However, it is hard to pinpoint the minimum threshold because it is influenced by cultural traditions, lack of monitoring and accountability, lack of transparency and an incentive system that includes rules, regulations and laws.

Economists C.J. Waller, T.Verdier and R.Gardner, Economic Inquiry, October 2002, theorize that centralized corruption (top down corruption) of public officials (as in Russia) results in less efficiency loss than bottom up corruption (as in India). The U.S. is closer to the centralized corruption regime.

The experimental work, reported by economists Robert Innes and Arnab Mitra (IM), Economic Inquiry, January 2013, at U.S. universities and at a university in India shows that dishonesty is contagious. An Indian experiment found that if a large proportion of the subjects were dishonest, other individuals were also dishonest with greater frequency. In the U.S.,  “... individual propensities for honesty evaporate when peers are thought to be dishonest.”

  

The above evidence is remarkable in the sense that it does not matter if the country is more corrupt, like India (ranking 94 on CPI in 2012) or China (ranking 80 on CPI in 2012), or less corrupt like the U.S. IM argue that their findings also provide some hope that corruption can be reduced, if there are significant number of honest peers to establish the social norm of honesty, integrity and truthfulness.

Chrystia Freeland, in her book “Plutocrats,” refers to a study in a book by Daron Acemoglu and James Robinson (AR) that analyses rise and downfall of nations. AR argue that the difference between failed states and successful states is “whether their governing institutions are inclusive or extractive.” In extractive states, ruling elites exercise control. 

The ruling elite’s aim is to acquire power and maximum amount of wealth from the rest of the society.

Concentration of power and wealth breeds corruption, and after a point it plagues the rest of the society. Inclusive states enable everyone to take part in the governance of institutions and society and provide access to economic opportunity for all. 

Leaders in the U.S. should be alarmed by the growing concentration of wealth, increasing corruption in business and among public officials, declining growth rate, high unemployment and under employment, declining wages and the gradual decline of the middle class.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.   He also writes blogs for the Standard-Examiner at http://blogs.standard.net/economics,etc.