The Federal Reserve decided to leave its target interest rate unchanged at a range of 0.25 percent to 0.5 percent while suggesting a hike later in the year was very likely.

The Federal Reserve decided to leave its target interest rate unchanged at a range of 0.25 percent to 0.5 percent while suggesting a hike later in the year was very likely.

The Federal Open Market Committee (FOMC), which just concluded a two-day meeting in Washington, said a string of recent economic data show growth is picking up but not enough to convince a majority of its members to raise interest rates for only the second time since the global financial crisis.

“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The FOMC’s so-called dot plot, which reflects its outlook for the path of monetary policy, shows that members still expect it to raise rates a quarter point in 2016. The committee meets next in November, but economists believe December is more likely for a rate hike.

We asked two scholars and former Fed officials – Mark Sniderman, an executive in residence at Case Western Reserve University who was chief policy officer at the Cleveland branch of the central bank, and Emory University’s Sheila Tschinkel, who was director of research in Atlanta – whether it was the right call.

The case for raising rates now

Mark Sniderman, Case Western Reserve University

Three Fed presidents dissented from the majority vote, an unusual event. These FOMC members clearly wanted to move the target rate up today, and, by dissenting, they are expressing the strength of their views.

I agree with the dissenters. However, before I get to that, two important points emerged from the FOMC’s statement. First, on a tactical level, the vote lays bare the strong differences within the committee regarding the timing of this rate hike. Second, and far more important, committee participants lowered their collective estimates of longer-term economic growth – from 2 percent per year to 1.8 percent – and, at the same time, revised down how much they expect interest rates to rise in the next few years.

My own preference, however, would have been for a rate hike now rather than later.

Viewed from a historical perspective, the case for a hike now is quite appropriate. The nation’s unemployment rate – at 4.9 percent – characterizes a labor market essentially at full employment. In addition, the core inflation rate – at 1.6 percent – is fairly close to the FOMC’s goal of 2 percent over the medium term.

In addition, most FOMC members expect the U.S. economy to continue expanding at a rate consistent with its potential growth rate. In other words, from a macroeconomic viewpoint, the economy is doing about as well as it can.

In situations like this, the FOMC should want to set its policy interest rate at neutral – the value it regards as neither encouraging expansion nor contraction. With the fed funds rate set at 0.25 percent to 0.5 percent before the meeting, the case for a rate hike was strong.

From a broader perspective, however, as long as the next rate hike occurs soon, the exact timing doesn’t matter very much. The dissenting votes indicate that there is internal pressure to move.

What should be most concerning to the public is the FOMC’s assessment that the economy is only capable of slow growth in the foreseeable future. If this view proves accurate, it is not the continuation of low interest rates we should be worried about but rather the slowing growth in our standard of living. That’s a problem monetary policy is not designed to solve.

Why the Fed’s right to wait

Sheila Tschinkel, Emory University

In its statement, the Fed acknowledged the case for raising interest rates has strengthened. This is good news because it means officials believe the economy is in good shape overall.

At the same time, real GDP growth so far this year has been steadily revised lower. In addition, estimates of future growth – along with the outlook for interest rates – have steadily tracked lower. In addition, there is no evidence that growth in consumer prices – inflation – is accelerating.

All of this means that the risks of waiting a little bit longer to raise interest rates are low. When the Fed does eventually act, if it turns out that the move is “late,” the central bank can always catch up by lifting rates by larger amounts or more frequently in the future.

The argument for increasing rates now so there is room to stimulate the economy if needed down the road (in case of recession) is a spurious one. Raising rates now would actually make such a downturn more likely, so creating the ability to respond to a self-induced recession is not a good scenario.

All the same, holding interest rates at such a low level for such a long time – it’s been almost eight years since the target rate was above 0.5 percent, which is unprecedented – no doubt creates risks. It pushes people into risky investments as they search for earnings, and it creates pressure on pension funds and the like.

There are negatives to standing pat, but raising rates right now and increasing the risk of slowing GDP growth is at least as negative, if not more so. There is a high risk that doing so would threaten job growth, just as people are finally returning to the labor force.

We need to remind ourselves that our expectations of what one macroeconomic policy tool – in this case monetary policy – can achieve are simply too high.

Was the Fed right to delay raising interest rates? Two scholars react is republished with permission from The Conversation

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The collapse of South Korean company Hanjin Shipping has left ships, cargo and crews stranded around the globe. It highlights the complex consequences of a shipping company going bankrupt, with Hanjin’s creditors and customers waiting to see whether the business can be saved.

The collapse of South Korean company Hanjin Shipping has left ships, cargo and crews stranded around the globe. It highlights the complex consequences of a shipping company going bankrupt, with Hanjin’s creditors and customers waiting to see whether the business can be saved.

Hanjin Shipping Co is one of the world’s top ten container carriers, operating some 70 liner and tramper services, transporting more than 100 million tons of cargo annually. Its fleet consists of some 150 container ships and bulk carriers.

Increased competition and Hanjin’s own high debt levels have led to its demise, as it struggled to adapt to changes in the market. Demand for shipping has fallen since the global financial crisis, at the same time as technology has started to produce larger mega-ships. Over capacity is one major problem.

Container operators are also increasingly constrained by competition laws in the US, the EU, Japan and more recently, China. It is a scenario playing out among other shipping companies in what appears to be a major readjustment of the size and operations of the world’s shipping fleet.

The company’s financial woes have caused it to seek protection from its creditors through Korea’s corporate “rehabilitation” laws. This is similar to Chapter 11 bankruptcy in the United States. This is where the insolvent debtor restructures the debts it owes to creditors, according to a rehabilitation plan, while the company continues its operations.

Under South Korean law, the plan must be approved by the creditors and the court and it is then implemented by a nominated receiver. The receiver is now in charge of Hanjin’s operations, and its ships, worldwide.

In the meantime the chairman of Hanjin Group has transferred 40 billion South Korean won to the company to help unload cargo stranded on the its vessels, but regulators have warned securing further funds could take “considerable time.”

Ideally, the plan will give Hanjin sufficient breathing space while the receiver restructures its business into perhaps a leaner operation, or one in which others, including creditors, may take a financial interest.

Ships are unusual assets for a receiver or liquidator to deal with. A shipping enterprise can be extensive geographically – with ships at all points of the world and difficult logistically – with those ships at various stages of cargo handling. A range of other players – the owners of vessels chartered to Hanjin, and bunker (fuel) suppliers and port agents in many different countries – all add to the complexity.

Typically, a liquidator takes possession of the fixed assets of a failed business – land, plant and machinery – assets that stay put and can be located and secured. While some of those assets may be overseas, shipping collapses invariably involve the application of cross-border insolvency laws.

Ships travel from place to place and can be hard to find and secure. Maritime law is unique for that reason; for example, the ship’s crew has a direct claim on the ship itself for their unpaid wages – a maritime “lien”. They can have a court martial board the ship, to arrest and secure it under a court order.

Arrest involves the marshal attaching an arrest warrant to the ship’s cabin or mast, and taking steps to prevent the ship leaving its mooring. This right of a crew dates back to the days when unwanted and unpaid sailors might find that while on shore leave at a distant port, their employer, the ship owner, sails off.

Others also have rights to arrest a ship at various ports around the world, this is happening right now with Hanjin. The South Korean receiver will be resisting these arrests of Hanjin’s ships.

However one of the fundamentals of bankruptcy is that ordinary unsecured creditors owed money have to wait in line for the receiver to decide how best to deal with the insolvent business. This includes realising assets to pay and what can be paid in way of dividends to those creditors – in many cases only 10 cents in the dollar, if they are lucky. Some maritime liens and other claims give the relevant creditor a “secured” claim, one that is paid out first before the ordinary creditors.

It appears that the South Korean receiver Mr. Tae-Su Seok is applying to various courts around the world for orders to challenge what may be secured claims. Well developed international cross-border insolvency laws will help him access to foreign courts to obtain orders protecting the ships in that jurisdiction. At the same time, he will be looking for funds to try to keep any profitable parts of the business going.

The shipping world is waiting to see how and whether the Hanjin rehabilitation succeeds. Other major collapses, for example in Korea with Pan Ocean and Korea Line Corporation, have resulted in creditors’ claims being considerably compromised. In these cases only a certain percentage of debts were repaid and over a period of time, or creditors took equity in the shipping company.

Given the state of world shipping, that outcome may occur here. The shipping industry suffers from an inherent inflexibility in responding to changing economic conditions. There may be a decline in demand for certain goods, leading to a drop in shipping rates.

A shipper taking delivery of a new vessel some long time after it was first commissioned may be left high and dry in finding that there is a much reduced demand for its services. On the other hand, a shipping company’s leaner world fleet may find that it does not have sufficient capacity when trade conditions quickly change.

While ships will always be needed, shipping is finding increased competition from air freight services, transporting many goods – food for one, and technology consumables – unsuitable for longer shipping delivery times. Demand for the latest iPhone 7s, or fresh fruit, would call for overnight air freight, rather than weeks. Pirate incursions are another current risk.

Still, the huge capacity of ships will never be offered by flight and this remains a major advantage. Ship design and technology is also improving – computer guided “crewless” ships are on the horizon. However, shipping remains a business subject to the vagaries of international trade and economic conditions.

Explainer: why Hanjin’s ships are stranded around the globe is republished with permission from The Conversation

The post Hanjin’s Ships are Stranded, but Why? appeared first on Economy Watch.

The G20 summit of world leaders just finished two days of meetings, during which they focused primarily on the many ongoing fires threatening the global economy. These include the alleged “dumping” of Chinese steel on other nations, worsening climate change, cybersecurity and the fear of competitive devaluations.

The G20 summit of world leaders just finished two days of meetings, during which they focused primarily on the many ongoing fires threatening the global economy. These include the alleged “dumping” of Chinese steel on other nations, worsening climate change, cybersecurity and the fear of competitive devaluations.

However, perhaps the biggest threat facing the current international economic order over the long term – as well as the enormous prosperity it has created, lifting billions out of poverty – is the backlash against globalization. As it stands, however, the G20 is focusing on the firefighting and less on the long term.

That’s a big mistake because the global economy is more fragile than many think, and there’s a real risk that protectionism and anti-trade sentiment could derail what has been built. Instead of remaining a fire brigade or an annual talking shop, the G20 should use its clout and resources to serve as counterweight to the backlash and articulate a global vision.

As a professor of international business over the past three decades, I have seen how the benefits of globalization have lifted billions out of poverty in emerging countries and conferred on American consumers over US$2 trillion in savings since 1980 in the form of lower prices. While these gains have been somewhat offset by the loss of low-end manufacturing jobs in the U.S., the net benefit has been enormous.

What is the G20?

The world is a very uneven and unequal place, made up of 193 nations, each with its own language, culture, laws, institutions and average income, ranging from a paltry $221 per person per year in South Sudan to $101,994 in Luxembourg.

While there are regional or global bodies like the United Nations and the European Union and trade agreements between countries, there is no world government or judiciary that can enforce its will on a sovereign nation. National sovereignty is still very much the norm.

That’s where the G20 comes in.

The G20 is a mixed bag of leaders representing 19 countries plus the EU, ranging from rich democracies like the U.S. and Germany to monarchies like Saudi Arabia and autocracies like Russia. Their economies cover 85 percent of the world’s economic output, almost two-thirds of its population and about three-quarters of its carbon footprint. However, it is a small enough group that these countries can have a real impact when they put their minds to something.

What can the G20 leaders accomplish when they get together, other than develop personal relationships? Actually, quite a lot, because the group not only represents over three-quarters of the world economy but, being small, can hope to reach consensus, compared with absurdly unwieldy bodies such as the United Nations with its 193 members. For the past century or longer, humankind has been building a global civilization and an interconnected economy. This cannot continue without closer coordination and cooperation among its leading nations, especially with emerging threats and concerns.

The G20 provides a forum to address them.

Presidents Obama and Xi could do more at the G20 than deal with short-term problems. Nicolas Asfonri/Reuters

Threats and concerns

President Xi Jinping summarized many of those threats in his 47-minute inaugural G20 speech.

Most are economic, such as sluggish global growth and falling trade. Protectionist sentiment and xenophobia are on the rise, as seen in the U.K.’s Brexit referendum and the candidacy of Donald Trump. This so-called globalization backlash threatens to take us backward to a more fragmented, “raise the drawbridge” world with a lower standard of living for all.

One of the biggest fears on this score is that countries will engage in competitive devaluations of their currencies to make their exports cheaper for other nations to buy and, consequently, reducing imports from its trading partners. As the world’s biggest exporter, China led the way at the summit in declaring that it would manage the value of the yuan responsibly, although it did not articulate any specific guidelines or parameters.

Other concerns included discrimination against foreign direct investors, the growing challenge of cybersecurity, the global oil glut and climate change. On this last problem, some progress was made as Presidents Obama and Xi reaffirmed their commitment to the Paris climate agreements.

Except for climate change, most of the other issues tackled by the G20 are short-term in nature. This is necessary, but misses a great opportunity to build an institution that addresses the long term collective destiny of humankind.

The G20 should build an institution devoted to long-term issues.

With so many pressing problems festering across the globe, it may be difficult to focus on the long term. That is exactly what the G20 needs to do, and is the only institution uniquely positioned to do so because of the relatively small size of member states.

We are, arguably, building and nurturing a global civilization, yet there is no efficient and ongoing organizational “architecture” for intergovernmental coordination and consensus. The United Nations, with 193 member states, is too large, too amorphous and too unstructured to do the job effectively. A smaller group of 20 nations – which as I noted represent about half the globe’s people and most of its output – can achieve better coordination and accomplish much more. An annual meeting is insufficient.

The G20 should take on this important role. It could become an articulator and formulator of strategy for long-term progress in the world economy and act as a counterweight to those who feel threatened by globalization and the rapid spread of ideas and values that are challenging traditional ones.

The global convergence of ideas and lifestyles distresses those whose traditional identities and self-image are threatened. Britain’s exit from the EU, Trump’s rise, the spread of extreme conservatism in Islam, ultraorthodoxy in Judaism and the unnecessarily defensive attitudes of the Hindu right in India are all manifestations of the reaction to globalization and the psychological and sometimes real threat it poses to traditionalists around the world.

Globalization is also seen as a threat by workers whose skills can be replicated by others in foreign countries, doing the same work for lower wages. This was one of the main concerns of Bernie Sanders supporters.

To an employee in Peoria, Illinois, or Canton, Ohio, laid off because his job was transferred to Vietnam, it is small comfort to be told that his pain is more than offset for the U.S. as a whole because America’s participation in trade treaties has created more export or international business jobs in California and Texas. Alternatively, that the typical American household benefits because it hypothetically saves at least $800 a year because of cheaper imports.

What the G20 could do is not only to articulate the overall benefits of globalization to their citizens but take practical steps such as creating a joint fund and colleges or vocational schools for retraining workers displaced by globalization – and encouraging its 20 member states to do the same in their own nations.

That’s why the G20 is the best bet to lead a coordinated defense of globalization and its benefits.

Over the last 15 years, globalization has lifted about 1.25 billion people out of extreme poverty and propelled another 1 to 2 billion into the middle class. Another telling stat: In 1981, when the world population was 4.5 billion, 1.98 billion lived in abject poverty. That’s 44 percent. In 2015, even though the world population reached 7.4 billion, the abject poverty rate had plunged to 9.6 percent. Only 710 million today live in extreme poverty.

This is primarily because of the spread of foreign direct investment, trade, domestic and international deregulation and the (tentative and shaky) emergence of a rules-based world economic order.

It is a stunning but fragile accomplishment, unprecedented in human history – which has been full of sudden blockages and U-turns.

The glories of Rome, Chang-An (capital of the Han dynasty, today’s Xian) and Pataliputra (capital of the Mauryan Empire in India) interconnected by the “Silk Road,” were followed by centuries of “dark ages” in Europe and fragmentation in China and India. The forces of protectionism, recidivism, excessive nationalism and tribalism lap at the shores of our fragile global economy. Who will defend it and help us build a global civilization while minimizing the pain of those hurt by globalization?

Even the largest countries, acting alone, are inadequate to play such a role. The G20 nations, while accounting for more four-fifths of the global economy, are nevertheless a small enough group to achieve consensus.

The coming decades of the 21st century call for an even greater degree of coordination, communication and joint action in pursuing fiscal policies and monetary systems, fostering innovation, balancing growth with ecological needs, tackling global warming and continuing poverty reduction. Although I’m not a big fan of big government, the G20 could be the leading espouser of global values, norms and rules and as a proponent of international business.

How the G20 can ensure the marvelous gains from globalization aren’t lost is republished with permission from The Conversation

The post Making vs. Keeping G20 Globalization Gains appeared first on Economy Watch.

When the European Union decided to fine Apple €13.5 billion for tax evasion in Ireland last week, it didn’t take long for the Irish government to join with Apple to announce it would appeal the ruling.

When the European Union decided to fine Apple €13.5 billion for tax evasion in Ireland last week, it didn’t take long for the Irish government to join with Apple to announce it would appeal the ruling.

The alignment between the tech giant and a nation state shows how governments can be held to ransom by corporations. In addition, more broadly, it demonstrates the full extent to which contemporary global capitalism is marked by a shift in power from governments to corporations.

Apple’s response to the EU ruling comes from a common corporate refrain, with CEO Tim Cook claiming it would have “a profound and harmful effect on investment and job creation in Europe”.

However, why would the Irish government say no to a potential economic windfall in an era of austerity? “It is important that we send a strong message that Ireland remains an attractive and stable location of choice for long term substantive investment,” Irish Finance Minister Michael Noonan explained. This is a frank admission that nation states are market actors as much as they are political ones. They compete in the market for corporate funds.

While corporations around the world are being vilified for tax evasion, the Irish finance minister is celebrating their actions as a way to keep Ireland “competitive” against its rivals in the dog-eat-dog world of the international free market.

Effectively what Noonan is admitting is that his government is at the mercy of large corporations because they operate in a market where tax minimisation is traded for investment and employment. In this market, corporations are in fact the rich and powerful customers, and states compete with each other using tax to attract corporate favour.

Danish EU Commissioner for Competition Margrethe Vestager explaining the results of European Commission investigations examining decisions by tax authorities in Ireland. Stephanie Lecocq/EPA/AAP

The EU ruling marks a decided attempt to confront and resist the already risen tide of corporate power. How this plays out is yet to be seen, but the result will speak volumes to the future not just of Ireland, but of state sovereignty more generally.

Nation states have evolved into “Nation Inc.”. They follow the same logic and seek the same ends as any corporation. Leaders are now CEO-like figures whose only concern is the bottom line. Citizens are shareholders – some of whom own more stock than others – that are forced to choose between these political executives.

Democracy is being hijacked by this marketisation of sovereignty. It marginalises any attempt to discuss alternative economic arrangements – especially those that would challenge the power of corporations and their political supporters. Instead, elections become technocratic struggles over which politician or political party can best maximise the country’s financial gains in a competitive global marketplace.

Not surprisingly, this has produced considerable popular backlash. The recent Brexit referendum was just the latest example of populist attempts by disaffected populations to “reclaim” their country – often in quite politically retrogressive and ethically disturbing ways. Too often in the absence of genuine democracy, individuals surrender to the worst types of scapegoating and desires for misguided vigilante justice.

The corporatisation of the state also exposes democracy to the worst features of corporate leadership. The image of the rational executive is undercut by a much more troubling reality. Boards of directors and shareholders are commonly duped by charismatic executives who promise the world while financially gutting the company. The “win at all costs” mentality has infected liberal democracies, as shown by the success of Donald Trump in the United States.

By contrast, the emerging popularity of progressive movements and leaders shows the potential for a different type of politics. One that is rooted in economic equality, social inclusion and democratic experimentation. This movement has its roots in a previous era of the 20th century where corporations were seen as entities that must be regulated for the public good. It shows we haven’t given up on the idea that democracy is more than shareholder citizens deciding who should run their corporate nation.

The EU ruled that Apple had cost Ireland billions of dollars. Yet the real cost is even steeper – it is the creeping global loss of our democracy.

Apple and Ireland are betting on ‘Nation Inc.’ and a world of shareholder citizens is republished with permission from The Conversation

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Small to medium enterprises (SME) are increasingly relying on commercial credit cards to finance their operations, because payment terms for the businesses they supply are stretching out. However, if the Reserve Bank of Australia (RBA) goes ahead with plans to include commercial cards in the new caps on interchange fees, SMEs will be even more hard pressed to make ends meet.

Small to medium enterprises (SME) are increasingly relying on commercial credit cards to finance their operations, because payment terms for the businesses they supply are stretching out. However, if the Reserve Bank of Australia (RBA) goes ahead with plans to include commercial cards in the new caps on interchange fees, SMEs will be even more hard pressed to make ends meet.

These interchange fees are a major component of the Merchant Service Fees that all Merchants pay on accepting payment cards. Commercial cards are however operated on a different business model to consumer credit cards. For example, commercial cards have much higher credit limits than consumer cards and the flow of interchange revenue from spending on these cards, to the card issuers (usually banks) enables them to take more credit risk and hence extend more credit to SME’s.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has said that, “the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients, a leading factor”. She claimed that “the big end of town are delaying payments to those that can least afford it; small-to-medium sized enterprises”.

One example of this is major food businesses Fonterra and Kellogg’s stretching payment terms for suppliers from 90 days to 120 days. The consequences of this are twofold; firstly the large corporations will hold onto money for longer and get positive returns on that, while the SME’s are forced to use expensive overdrafts at banks to fund their ongoing business.

A survey by a UK company MarketInvoice earlier this year, found Australia was the worst offender for late payments, ranking even below countries such as Mexico. Some jurisdictions have however been moving in the other direction, since March 2013 the maximum payment terms in the European Union have been 30 days, unless an agreement is made in writing by both parties, in which case the maximum is 60 days.

To overcome the cash flow challenges that go on along with longer payment terms, many SME’s use commercial credit cards to pay their suppliers and hence take advantage of the up to 55 interest free days (all the major Australian banks issue commercial cards and the interest free periods are up to 55 days) on these cards. SME’s are using commercial credit cards for more than just their cash flow.

These cards can be used to partly finance payments to suppliers, particularly where an SME has struggled to get finance from a bank. SME’s are hence more likely to rely on commercial cards as a source of finance than are larger businesses, which typically can raise capital through a variety of means like bank loans, share issues or corporate bonds.

The reduction in interchange which the RBA is imposing may cause issuers, including banks, to cut costs by reducing credit risk, which would mean less credit extended to SME’s, via commercial cards. Issuers could also find this segment of the credit card market less attractive and hence be less willing to offer this type of credit card to SME’s.

The RBA’s reasoning for including commercial cards in the proposed maximum 0.80% interchange cap is that there’s not enough evidence to suggest that issuers will stop providing these cards under the cap. The RBA however accepts that “this may involve the introduction of fees on these cards and/or the reduction of the interest free period”.

According to the Australian Bureau of Statistics, as of June 2015, the SME sector employed 68% of Australians and it generated 55% of total income from industry. As larger businesses look to increase the number of days before they settle their invoices from SME suppliers and these businesses face pressure to pay their employee’s wages and utility bills on time, the value of commercial payment cards is all the more obvious.

Less commercial payment cards with less credit offered on them, at higher interest rates, could well be another unintended consequence of the RBA’s intervention into the payments system.

Australian small businesses could be stretched by changes to commercial credit cards is republished with permission from The Conversation

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Mylan is the latest pharmaceutical company to face controversy over its drug pricing. It has come under scrutiny and strong criticism from the public and government officials for raising the price of its EpiPen allergy device from about US$100 in 2008 to about US$600 currently.

Mylan is the latest pharmaceutical company to face controversy over its drug pricing. It has come under scrutiny and strong criticism from the public and government officials for raising the price of its EpiPen allergy device from about US$100 in 2008 to about US$600 currently.

Fending off public outrage, Mylan has announced that it will introduce a cheaper generic version of the EpiPen and sell it at half the price of its branded version. Leaving aside the issue that the generic is still three times more expensive than the original 2008 price, this announcement has left some puzzled over why, or rather how, such a move makes any sense.

To paraphrase the incredulity expressed by CNN presenter Richard Quest: why would anyone pay US$600 for a drug when the exact same product by the same company is also available for US$300? How does Mylan stand to gain anything from this move?

This process of introducing a generic version of your own brand name drug is called launching an “authorised” or “pseudo” generic. Here, companies introduce generic versions of their branded drugs. The word “authorised” implies that there is still some patent preventing other companies producing generic copycats of the drug – but an authorised generic is where permission is granted from the patent holder to start producing a generic version under its licence.

Mylan has a near-monopoly of the EpiPen market. Greg Friese, CC BY

In this particular case, the timing of Mylan’s announcement may have something to do with the company managing its publicity – to deal with the public outcry over the EpiPen price hike. However, there are likely to be other factors at play – and the key question is to understand when branded firms offer these authorised generics.

First, some background. Mylan currently has a near-monopoly of the market for auto-injector devices, which jab a dose of the drug epinephrine to counter dangerous allergic reactions. However, this might not last long. Rival company, Teva Pharmaceuticals filed for independent generic entry to the same market with the Food and Drug Administration (FDA) in 2009. This resulted in litigation over the auto-injector patent, which was settled in 2012.

Under the terms of the deal, Teva could start producing a generic version of the drug injector by mid-2015. This has, however, run into problems. Teva’s generic version was recently rejected by the FDA. And, while Mylan would no doubt prefer to maintain its monopoly for as long as possible, it is probably preparing for Teva’s launch of an authorised generic once it gets approval from the FDA, as per the terms of their deal.

With this background in mind, we now consider why a branded firm would consider launching an authorised generic version of their drug at lower price. There are three interlinking reasons.

1. First-mover advantage

There may be a large first-mover advantage in being the first in the generic segment of the market. Patients (or insurers) may switch to this much cheaper version and, as the patient gets used to that specific generic, they may not want to switch again to another one, especially if the price difference between them is negligible.

Thus, if entry into the generic segment of the market is going to happen regardless, then it might as well be your own firm (or a subsidy or a partner firm) which enters first and captures a large part of the generic segment.

2. Pay-to-delay deals

Pay-to-delay deals are sometimes struck between the company with the brand-name patent and would-be generic entrants to the market. If a generic drug maker is threatening to challenge the validity of a patent and bring out its own version of a drug, the branded firm can offer the challenger money and a licensed entry at a later stage, in exchange for withdrawing the patent challenge. Branded firms will also often offer an exclusivity period to these challengers – for example, it would not offer such a licence to anyone else within six months of entry by the authorised generic firm.

This way both firms avoid the uncertainty and cost of a legal battle and the challenger can reap the benefits of the first-mover advantage. Further, the branded firm can profit by charging the challenger a licensing fee for producing the authorised generic.

3. Keeping other competition at bay

Reaching a pay-to-delay deal bundled with an authorised generic launch with the first challenger can also keep the other would-be challengers at bay. By announcing a legal settlement with one challenger, which is authorised to enter no later than an agreed upon date, the branded firm signals to all others that even if they win a patent litigation case, they would not necessarily capture any first mover advantage. This is because the authorised generic can be launched prior to the launch of any independent generic.

In short, while Mylan’s announcement to launch its own generic may seem bizarre, it is consistent with signalling to other potential competition that, even though Teva is having trouble entering the market, it can grab the first mover advantage for themselves. Therefore, the announcement to launch this generic might well be more than just a publicity stunt.

The logic of selling cheaper ‘generics’ for drug companies such as Mylan is republished with permission from The Conversation

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China is gearing up to hold the G20 summit in its eastern city of Hangzhou. It’s a fitting location for the leaders of the world’s 20 leading economies (19 countries and the EU) to meet. Famed for its beauty, Hangzhou is also a key part of one of China’s most entrepreneurial areas, Zhejiang province and a vital contributor to the country’s exports and GDP. Suffice to say, Hangzhou and Zhejiang count for a lot in China.

China is gearing up to hold the G20 summit in its eastern city of Hangzhou. It’s a fitting location for the leaders of the world’s 20 leading economies (19 countries and the EU) to meet. Famed for its beauty, Hangzhou is also a key part of one of China’s most entrepreneurial areas, Zhejiang province and a vital contributor to the country’s exports and GDP. Suffice to say, Hangzhou and Zhejiang count for a lot in China.

What’s more important to the Chinese government is that it shows itself in the best light at the upcoming summit. Hangzhou was an ancient capital of China and is now one of its most innovative cities, so it perfectly embodies China’s ideal combination of tradition and technology.

Intent on establishing further its emergence as a global power, China wants to showcase this to the world at the G20. In addition, as a Hangzhou resident, I’ve witnessed some interesting changes in the city over the last couple of months.

Security is at a maximum around the city – to a level never seen before. Since July, several weeks before the summit, access to the whole city has been only via a few checkpoints that have been set up at all entry points. Some Muslim minorities from China’s western province of Xinjiang have even been banned from their workplaces.

Many foreigners have been repeatedly questioned by the police, who have made frequent and unannounced visits to their homes to ensure they pose no risk to the success of the event. In China, there is often a bit of suspicion towards foreigners who, semi-jokingly, are sometimes thought of as spies of Western governments. More pragmatically, China wants to avoid the protests that often occur at big international summits, and which are often associated with Western students.

High security. EPA

City in shutdown

Businesses have been widely affected by the summit, too. A number of commercial outlets have been closed for a month; larger shop owners and shopping malls have received some compensation, but smaller independents were “invited” to close and were given, in some cases, nominal compensation (€100 at most) as a sign of gratitude. Large factories, a major cause of pollution in the city, have been shut down for two months.

Everyone in the city will have a week off and will likely stay at home or go away on a trip, as there is nowhere and no way to go anywhere within the city. I have some friends working for a state-owned company who have been practising singing for a planned performance in front of the G20 attendees.

In other words, the whole city – of 9m people – has been reorganised in the manner of the video game SimCity. The outcome: a blue-sky, accident- and protest-free weekend in Hangzhou for Obama & Co.

I have heard numerous complaints by ordinary people whose daily lives have been disrupted and many businesses have lost money. However, there is a positive side. The city has been entirely renovated, the construction of the city’s subway has been accelerated, motorways have been built, all the tourist areas – already very beautiful – have been given a makeover. Trees and flowers have been planted, old buildings have been restored, sewage and other hygiene systems improved.

Even though Hangzhou is one of the richest cities in China, there is still a large portion of the population, around 25%, that recently has arrived from rural areas and whose living conditions lag far behind the gentrified parts of the city. Yes, the focus of renovation has been in the areas where world leaders and the media are likely to go. However, positive spillover effects are all across the city and even in cities nearby.

Hangzhou’s scenic West Lake is a tourist hotspot. Damien Thorne, CC BY-NC-ND

An international showcase

On balance, Chinese citizens have accepted the restrictions. They will endure short-term difficulties in exchange for long-term gains. The narrative in the Chinese media is that the G20 is a major event for China, a showcase that will further portray a positive image of China to the world – along the same lines as the Beijing Olympics of 2008, Shanghai Expo of 2010 and the upcoming Beijing Winter Olympics of 2022.

For China, this is also another attempt to enhance its soft power, to be perceived as a responsible player in the international community and to take centre stage when it comes to the global economy. Indeed, China’s goals for the G20 are a greater international focus on sustainable and inclusive development for all sections of the world’s population. It has put Africa, often neglected by the West, at the top of the agenda.

For the first time, perhaps, China wants the world to remember where the G20 was held.

How China has re-engineered host city Hangzhou for the G20 summit is republished with permission from The Conversation

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On Labor Day, politicians have traditionally paid lip service to the plight of the worker, whom the national holiday is meant to honor. With working-class struggles taking center stage in this year’s election, we will likely hear from them more than usual talking about the steps they will take to reduce income inequality or end three decades of wage stagnation.

Some of them will go one step further and voice support for unions and collective bargaining, both of which have declined at the same time wages have stagnated.

On Labor Day, politicians have traditionally paid lip service to the plight of the worker, whom the national holiday is meant to honor. With working-class struggles taking center stage in this year’s election, we will likely hear from them more than usual talking about the steps they will take to reduce income inequality or end three decades of wage stagnation.

Some of them will go one step further and voice support for unions and collective bargaining, both of which have declined at the same time wages have stagnated.

They do so for good reason. Not only have American workers made it clear they are fed up with being left behind as the economy prospers, there is a growing body of evidence that union decline is one of the key causes of wage stagnation and income inequality.

The solution, however, isn’t to bring back the unions of yesterday. We need to create stronger business-labor partnerships for tomorrow.

Employers can get ahead by investing in their workers, with higher wages. Rebecca Cook/Reuters

Slide of union power

As far back at the mid-1980s, our research at MIT showed that collective bargaining was no longer capable of using the threat of strikes or other forms of pressure to get businesses to match negotiated wage increases.

Previously, strike threats and the fear of getting organized led companies to match wages negotiated in key bargains. For example, in the late 1940s, General Motors and the United Auto Workers negotiated a wage formula linking wage hikes to increases in productivity and the cost of living. Unionized businesses had to follow suit or risk a strike. Even companies without unions had to do the same if they wanted to avoid their workers getting organized.

Recent research shows that the decline in union bargaining power observed in the 1980s has persisted and has now taken a big toll on union and nonunion workers alike. A just-released report from liberal-leaning think tank the Economic Policy Institute, for example, estimates that the decline in unions – from 23 percent in 1979 to 11 percent in 2013 – and their collective bargaining power has caused men in the private sector to earn US$109 billion less every year and women to earn $24 billion less.

Other recent research shows that the decline in wages has now spread to the public sector. Teachers have been especially hard hit. In 1979, teachers earned just 2 percent less than comparable college graduates. In 2015, the earnings gap had widened to 17 percent.

Southwest Airlines follows a “high road” economic strategy by investing in its workers. Rick Wilking/Reuters

More than empty rhetoric?

Research like this has convinced more Democratic candidates to call for rebuilding labor unions.

However, is that possible or is it just empty rhetoric?

As I’ve argued before, I believe it is empty for two reasons. First, since 1978 three major efforts to pass labor law reform to make it easier to form a union have been blocked in Congress. In addition, there is no reason to believe this will change.

Second, even if unions started growing again, they would not be able to rely on their past sources of power to drive up wages. There is just too much domestic and international competition, and it is too easy to move capital and jobs to lower-wage countries. That makes it much harder to use strike or unionizing threats to get businesses to lift wages or match negotiated increases.

So what else can be done? In previous articles, I’ve made the case for a new labor policy that not only supports unions but also promotes labor management partnerships. I’ve also suggested extending protection against employer retaliation to more workers, such as fast-food employees fighting for a $15 minimum wage or independent contractors like Uber or Lyft drivers. These changes would help reframe labor policy to fit the modern economy.

However, labor policy can no longer stand alone. A more complete strategy is needed that integrates a revised labor policy with something known as a “high road” economic strategy.

At MIT, my colleagues and I teach this approach to our MBA students, in executive education classes and in our public online courses. We tell current and future business executives that they have a choice in how they compete in the marketplace: They can minimize labor costs and fight to keep unions out of their organizations or they can invest in their workers, drawing on their knowledge, skills and motivation to achieve high levels of productivity and customer service. Then reward those employees with their fair share of the profits they help produce.

Over the past two decades, researchers have discovered how companies employing this “high-road” approach – such as retailers like Costco or Market Basket, airlines like Southwest or health care providers like Kaiser Permanente – do just as well or even better on long-term financial returns, customer service and wages than “low-road” competitors, such as Walmart or Spirit Airlines.

The old manufacturing jobs won’t come back. Instead, the government could help support jobs making tomorrow’s technologies, like wearable tech. Elijah Nouvelage/Reuters

The task ahead

How can we encourage more companies to move in this direction?

As educators, we have an important role to play, but our efforts need to be matched by a well-coordinated effort that cuts across the federal government and business to realize the benefits of a high-road policy. One example is repairing America’s decaying infrastructure through public-private partnerships, to which some business and labor leaders have already committed.

The same deal needs to be struck in implementing a new manufacturing policy. We are not likely to bring back many of the jobs lost to China and other lower-wage countries. The best way for government to help rebuild our manufacturing base is to support investments in next generation technologies, such as light metals, photonics, robotics and wearable fibers that will generate energy and cool our bodies. However, it’s also important to insist the businesses getting federal funding commit to making their products here and investing in their workforces.

So this Labor Day, I believe candidates need to go beyond the empty rhetoric of the past and commit to doing the hard work of recasting labor policy in ways it might be possible to enact.

Then they should follow up with the comprehensive and disciplined administrative actions needed to realize a high-road strategy that puts the economy on a course that will truly work for all.

It’s time we reinvented labor for the 21st century is republished with permission from The Conversation

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It seems that the world has become unsafe for trade agreements. In particular, the Trans-Pacific Partnership (TPP), a major new trade deal among the United States and 11 other Pacific Rim nations, has become a political lightning rod for both the left and the right.

It seems that the world has become unsafe for trade agreements. In particular, the Trans-Pacific Partnership (TPP), a major new trade deal among the United States and 11 other Pacific Rim nations, has become a political lightning rod for both the left and the right.

As if to highlight that fact once again, Senate Majority Leader Mitch McConnell said recently that he would not bring the TPP to a vote until after the new president takes office in January.

That’s bad news for the trade agreement – and for President Barack Obama, who sees its passage as the final plank in his foreign policy legacy and who is pushing hard for a vote during Congress’ post-election lame duck session.

However, the controversial Asian pact is not the only trade agreement potentially on the chopping block. Last month, the European Union’s trade commissioner, Cecilia Malmström, decided not to fast track the EU-Canada Comprehensive Economic and Trade Agreement (CETA) due to the anti-trade climate prevailing on the continent.

In addition, France’s President François Hollande just declared that his country would not support moving forward with the gigantic Trans-Atlantic Trade and Investment Partnership (TTIP) being negotiated between the U.S. and the EU. His announcement came on the heels of a statement by Germany’s vice chancellor that TTIP “has failed.”

It seems that every time we get closer to the conclusion and ratification of a trade deal, a new barrier emerges to block any progress. What, then, are we to make of the tremendous obstacles confronting these three major agreements?

McConnell, second from right, has endorsed Trump, who has made anti-trade rhetoric a big part of his campaign. Jim Young/Reuters

The times they are a-changin’

First and foremost, opposition to trade is a sign of the times. The Great Recession, among other events, has generated strong pushback against globalization and liberal exchange, something that seems to have caught political elites around the world off guard.

The Doha Round of the World Trade Organization (WTO) had already come apart well before the recession. Its failure meant that a multilateral deal, one that would have committed nearly all of the world’s countries to the same trade agenda, was no longer possible.

At the heart of Doha’s collapse were the interests of the newly rising BRICS – Brazil, Russia, India, China and South Africa – which could not be reconciled with those of the U.S. and the EU. The failure of the WTO, in its turn, gave new impetus to regional agreements such as TTIP and TPP.

Initially, these regional agreements, along with their more modest bilateral cousins (deals between only two nations), were treated with suspicion by free traders, who feared that they would carve up the global trading system into inefficient blocs. However, in time, such agreements presented themselves as the best, and only, way forward in a more complex, multipolar economic environment.

Still, TTIP and TPP are more than just victims of the general skepticism for globalization that has arisen in the past few years. They are also the collateral damage from political events in the world’s major trading countries.

European Union Trade Commissioner Cecilia Malmström worries about the public opposition to CETA and TTIP. Jason Lee/Reuters

Illiberalism on the rise

First among these is the U.K.’s Brexit vote, which is likely to result in the country’s withdrawal from the EU. Brexit, which is itself the fruit of growing illiberalism in England and Wales, has distracted European leaders to such a degree that TTIP and CETA have moved onto the back burner.

Moreover, in the United States, the success of Donald Trump in mobilizing the anti-globalization working class has made Republicans in Congress, who typically support trade as good for business, wary of trade deals. It has also led Hillary Clinton to distance herself from previous statements supporting TPP made during her tenure at secretary of state.

Another problem facing TPP and TTIP is their unprecedented scope. Not only do these agreements create free trade blocs that encompass much of the world’s economic output, but they also touch on a variety of issues from internet freedom to generic drug prices to the right of private investors to sue states for compensation. Many of the most controversial elements of the agreements relate to these issues rather than to the traditional components of trade protection.

What happens next?

What would be the consequences if these agreements fail?

Economically, the U.S. is already tightly linked with both Asia and Europe. The TPP agreement would essentially expand the Pacific trade bloc beyond NAFTA to include nine additional countries, most significantly Japan. Similarly, TTIP would deepen the already significant economic interdependence that traverses the Atlantic.

The loss of these agreements would certainly have negative economic effects on all sides, as least in the aggregate (since some jobs would be saved by the reduced competition). Agreements this large cannot be jettisoned without consequences.

That said, given the deep connections that already exist among Asia, North America and Europe, the purely economic results of killing the agreements are likely to be important, but not enormous. More serious would be the geostrategic implications.

A rejection of TTIP by either side could signal a reduced U.S. presence in Europe, a particular concern in the face of increasing Russian assertiveness.

Meanwhile, an end to TPP could encourage a number of Asian countries, unsure of America’s future in the region, to move into China’s growing sphere of influence. It is no surprise that this last argument is the one being made most aggressively by the Obama administration.

Long live free trade?

If TTIP and TPP are not likely to be approved any time soon, does this mean that they are already dead?

A President Trump would certainly kill the agreements. If, however, Hillary Clinton becomes the next president, as the polls seem to indicate, their future is harder to predict. Clinton seems to be, at heart, a believer in open markets, but the current political situation makes it hard for her to say so directly.

If elected, Clinton’s statements during the campaign would make it difficult for her to support TPP out of the gate, especially with strong opposition from Bernie Sanders supporters. As envisioned by Cato trade analyst Simon Lester, she may well try to renegotiate a portion of the agreement as political cover and then resubmit it to Congress for approval.

By this point, if Trumpism has been defeated, Republicans may have a greater appetite for foreign trade. The question, of course, is whether the other TPP signatory countries will be willing to reopen portions of the agreement that have already been concluded.

Similarly, in Europe, it seems unlikely that much progress will be made until the Brexit issue is resolved and growth starts to pick up.

Despite all the obstacles, however, I believe that it is important to keep moving forward on free trade. The rejection of these important agreements could risk becoming merely the first step in a gradual erosion of support for the global economic architecture.

This architecture, so carefully created and maintained by the United States after 1945, has contributed mightily to international prosperity and peace. Maintaining it is of critical importance.

Does TPP’s slow death mean the world is now unsafe for trade deals? is republished with permission from The Conversation

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Australia should look at examples from the US in finding private funding for urban rail development because the present model depends on government providing the capital, which it mostly doesn’t have.

Australia should look at examples from the US in finding private funding for urban rail development because the present model depends on government providing the capital, which it mostly doesn’t have.

A new rail line in Florida called Brightline is the first American example to show this can be done. This rail project is entirely privately funded and is due for completion in June 2017. It will link the Atlantic coastal cities of Miami, Fort Lauderdale, West Palm Beach and Orlando, which can be seen as one long narrow city.

According to the company, the project is designed to take three million cars off the road. It is likely to succeed, bringing US$6.4 billion in economic impact to the Florida region.

The project uses a model where money is raised via land development through a consortia who can build, own and operate the rail line. The consortia creates funds through fares and the land opportunities unlocked by the rail line.

In Australia, all urban rail projects have been fully funded by government. Some American rail projects have used value capture, where governments set aside a stream of extra tax money generated by the new rail lines, due to the increase in land values around stations. Australia is yet to try this process.

The Brightline project is being financed by a New York hedge fund and the consortium will pay this back with money from land development around stations and train fares. The process for creating this project did not have to be set up by any government as the company proposed it as an unsolicited bid. The company actually owns the right of way, as it has operated a freight line for 120 years that runs along most of the proposed line as the new project.

The remarkable thing is that the company building this railway is the same group that 120 years ago, under the direction of Henry Flagler, was able to build these coastal cities entirely through the same mechanism: building a railway to make urban land development attractive enough to pay for the railway. The history of tram and train development in most cities is similar – they were all land development projects.

A depiction of what a station would look like in the Brightline project. Brightline, Author provided

The Brightline project did not need capital from the various levels of government, but it did need their support in the process of implementing the proposal. Significant land assembly and detailed urban design assistance was needed to enable the stations to be integrated into the cities and the land development around them needed to be suitably zoned and approved.

The consortium generated community support through not just ensuring that a good railway service could be provided, but that the urban development contained opportunities for living, working, shopping and provision of services. An innovative approach was adopted to ensure the trains (both passenger and freight) were silent when they went through residential areas and city centres. It did this using smart safety devices for drivers that eliminated the use of train horns.

Integrated design into all surrounding buildings was included in the build from the start. The model means there are returns generated from the buildings and the train fares as soon as the train line begins operating. Most new government funded rail lines do this after they are built, sometimes very poorly.

The company building Brightline has plans to expand their model into 100 other cities across the world. It’s also developing plans to build light rail east-west through the Brightline stations from Miami to Orlando. This would also be privately provided.

So now Australia has an American example to go by, in addition to the example set by the Japanese rail system, which is fully based on this private funding approach and two new light rail lines in Canada that are also privately funded.

The Brightline project is better at integrating land development into rail lines than top down government projects. In Australia, these often start out with a focus on land development, but end up being dominated by transport issues only, ensuring the fastest route of public transport and not focussing on the stops along the way. The US project is also fairer, as it eliminates the windfall profits made by those who just happen to own land near a new rail line built with government capital.

Who will be the first city in Australia to put this model into practice? There have been suggestions coming from those responsible in Brisbane for Cross City rail, in Sydney for the Metro, Parramatta Light Rail and West Sydney Rail (to Badgerys Creek), in Melbourne for their Metro, in Adelaide for their Light Rail extensions, in Hobart for a potential Light Rail along an old freight line similar to Brightline, in the Sunshine Coast for their proposed Heavy Rail and Light Rail projects and in Perth for their Heavy Rail extensions and proposed Light Rail.

Rather than just watch others doing this, we should take the opportunity provided by our lack of public capital to embrace alternatives.

Australia needs to follow the US in funding urban rail projects is republished with permission from The Conversation

The post Australian Rail…there’s a Model for that…in Florida appeared first on Economy Watch.