Category Archives: Economic Policy


Sanford Professors Talk Capital in the 21st Century

If you hCapital_in_the_Twenty-First_Century_(front_cover)aven’t heard anything about Thomas Picketty’s book “Capital in the 21st Century,” it may be time to look it up (go ahead, the Economist has a four-paragraph summary if you are short on time). “Capital” uses newly compiled data to track the evolution of wealth inequality since the industrial revolution. The analysis shows that wealth is increasingly concentrated among an elite few, and that Europe and the United States may be returning to a structure in which the economy is dominated by inherited wealth. Picketty’s conclusions have attracted an incredible amount of both positive and negative attention – as  Paul Krugman commented, “we’ll never talk about wealth and inequality in the same way.” Continue reading

How Norway Has us Beat on Women in Corporate Leadership

In the U.S., we’ve heard the dismal figures on women in business leadership time and again. Among Fortune 500 companies, women make up less than 5 percent of CEOs. Within boardrooms in these companies, women hold only 17 percent of seats.

And we’re not alone in this poor performance. As of 2010, women held a similar 15 percent of corporate board seats in France, 13 percent in Germany, and 12 percent in Britain.

But in Norway, the picture is very different.

Global Board Seats Held by Women, 2011 (Source: U.S. State Department)

Global Board Seats Held by Women, 2011 (Source: U.S. State Department)

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New Public-Private Partnership for the Research Triangle


President Obama addresses a crowd at North Carolina State University.  Photo © Ryan Gorczycki.

I got a call early this morning. A friend had an extra ticket for President Obama’s speech at North Carolina State University and was wondering if I wanted to go. It was an easy decision. How often do you get to see the President of the United State in person? It may be less than an once-in-a-lifetime opportunity.

On this day, the President was here to announce a new institute to be based at North Carolina State University titled the “Next Generation Power Electronics Institute”. According a White House press release, this is the first of a series of three new manufacturing institutes, which was proposed by President Obama during his 2013 State of the Union address. Each institute is designed to bring together companies, universities, and other academic and training institutions.

The initiative was launched as a competition, and the first was won by a group led by North Carolina State University. In the partnership, the Department of Energy will contribute $70 million over five years, which will be matched by another $70 million from the winning team of businesses and universities, along with the state of North Carolina.

In this new “Next Generation Power Electronics Institute”, the winning team will develop the next generation of ‘wide bandgap semiconductors’. Obama teased the crowd by asking if anyone knew what a ‘wide bandgap semiconductor’ was, and how he had just been learning about them himself earlier that day in his tour of the company Vacon. Obama said that the wide bandgap semiconductors are special, because they use up to 90 percent less power than normal semiconductors.

It was good to see this public-private initiative happen, because it seemed so non-partisan. While government money is being spent, it is not huge, and it helps to form a partnership between the product inventors and researchers, and its potential producers and users. Obama put the initiative within the context of globalization, stating that if the U.S. wants to have the good jobs of the future it has to compete with the other countries of the world and be the first to create and make the best of high tech products such as the wide bandgap semiconductor.

A Higher Minimum Wage: Not Actually a Bad Policy

Wage Pic

Raising the minimum wage will do more good than harm. Income inequality is at historic highs, and the minimum wage is worth less now than 40 years ago—a typical earner makes less than poverty level. Economists split hairs over particulars, but on the whole, an increase will boost low-wage workers’ fortunes, without large negative effects on employment. A higher wage floor will put many hard-working Americans on better footing.

I started thinking about this issue a few weeks ago, when I stumbled on a street demonstration in my home city of St. Paul, MN (see the picture). It was the day after Black Friday and protesters had just marched through the parking lots of Walmart and Target. I was waiting for a bus. They were calling for a higher minimum wage. I decided to look into it.

The federal minimum wage is $7.25 per hour. Many localities set wages above this rate. Washington D.C. just approved upping theirs to $11.50. Sea Tac, a suburb of Seattle, now has a $15 wage floor. New York State, California, and New Jersey recently upped their minimums. Congress has raised the federal minimum wage 29 times since its inception in 1938 (at 25 cents!), most recently in 2007.

Earlier this year two Democrats introduced the Fair Minimum Wage Act in Congress. It aims to raise the minimum wage to $10.10 by 2015. President Obama supports the measure, but Republicans in Congress do not. In general, a large majority of Americans favor raising the minimum wage; businesses are split.

Two-thirds of minimum wage earners are adults, and one in four is raising children. Even with full-time hours, a minimum wage salary pays only $15,080 per year, one-third less than the poverty level. The current minimum wage is worth less now than in the 1960’s.

If intuition tells you that amount is not enough to live on, you’re right. Taxpayers pick up the slack. For example, half of all fast food employees receive some kind of public assistance, $7 billion in total per year.

An increase to $10.10 would affect many who make above the current minimum. The Economic Policy Institute, a left-leaning think tank, estimates that 17 million workers—about one fifth the hourly workforce—would receive pay increases with the new law.

Really smart economists are divided over the effects of an increased minimum wage. A higher wage floor increases incomes, which stimulates spending, and may even drive employment. But it may also force companies to decrease personnel to account for higher labor costs.

Many business leaders feel strongly that a wage floor will hurt workers. “Arbitrarily raising the cost of labor would increase, not reduce, the unemployment rate among young, less-skilled workers,” Bruce Josten of the U.S. Chamber of Commerce said in a statement. James McNerney Jr., the CEO of Boeing, even hinted that higher labor costs could force companies to relocate, even though research suggests that most outsourced jobs are high-paying.

Microeconomics 101 teaches that as the price of labor rises, the demand for labor will decrease. No one really disagrees with this. However, studies have shown that in practice, an increase in the minimum wage improves the fortunes of low-wage workers without massive layoffs. Unlike other anti-poverty policies, this one adds nothing to the federal budget. It may even shift some of the burden back to private companies (remember that $7 billion for fast food workers?).

The United States is in a period of vast income inequality. Jared Bernstein of the non-partisan Center on Budget and Policy Priorities argues that the minimum wage “sets an important labor standard: the government will compensate for the sever lack of bargaining clout among our lowest-wage workers by setting a floor below which we won’t allow their wages to fall.”

Yes, we as a society need to have a broader conversation about our inequities, but as its name implies, a fair minimum wage should be the least we do for the most vulnerable in our society.


Financial Literacy Matters

By Aziz Gulhan

British Prime Minister William Gladstone articulated the importance of finance in his famous quotes in 1858: “Finance is, as it were, the stomach of the country, from which all the other organs take their tone.” A well-functioning financial system is considered a prerequisite of sustained economic development. It is clear that the recent financial crisis has changed the fundamental streamline of the world’s financial system. Financial architecture has been evolving since the Lehman Brothers, one of the world`s largest investment banks, went bankrupt in September 2008.

Some suggest that the lack of financial literacy of households is one of the key factors that led to the swelling of the mortgage crisis in the U.S. Since most people were not aware of the potential risk of what changes in interest rates would mean for credit, they did not hedge their financial position against the unexpected outcomes that could occur in financial markets.

United States Government Accountability Office (GAO) defines the financial literacy as an ability of making informed judgments and taking effective actions in regarding money. The Organization for Co-operation and Development published a detailed working paper in 2012 (OECD Working Papers on Finance, Insurance and Private Pensions, No. 15) regarding the current situation of financial literacy in selected countries. This working paper presents a pilot study undertaken in 14 countries (Armenia, Czech Republic, Estonia, Germany, Hungary, Ireland, Malaysia, Norway, Peru, Poland, South Africa, the UK, Albania and the British Virgin Islands).

According to the survey results, understanding daily financial terms such as compound interest and diversification of risk are lacking for significant shares of the population in all 14 countries. The study also points out that men have more financial knowledge than women in most countries, which is a noteworthy concern that countries should address. Another considerable result from the study is that knowledgeable people are more likely to show positive financial behavior. This study goes further to claim that low levels of schooling and income are also associated with lower levels of financial literacy.

The concept of financial literacy is becoming one of the core issues in finance, especially for middle-income households. Since financial instruments are getting more complicated and there are more opportunities to make investments, individuals should be well-equipped to analyze the risk of financial decisions.

According to Annamaria Lusardi, the Director of Global Financial Literacy Excellence Center at George Washington University, individuals have to make more decisions on their savings and investments than in the past. Therefore, specific needs and the economic capability of individuals should be recognized when making financial investments.

Governmental and non-governmental organizations have established some programs to improve the level of financial literacy. For instance, Securities and Exchange Commission (SEC) provides a website ( to promote investment and inform the individuals about their financial decision. National Association of Investors Corporation (NAIC), also known as BetterInvesting, is a Michigan-based non-profit organization which has 120,000 individual members, proposes to teach individuals to how to become successful decision-makers regarding financial instruments. Khan Academy ( also introduces free online courses for the fundamentals of capital markets and finance.

Policies towards improving financial literacy need more collaboration among regulatory institutions and non-profit organizations, as well as, international considerations. At this point, policy makers should design effective training programs focusing on individual needs of potential and current investors.

Global Financial Reform in the Wake of the Financial Crisis of 2008

by: Anthony Elson 

            In the five-year period since the outbreak of the global financial crisis, much attention has been given to the financial reforms that are needed at the national and global levels to minimize the risks of such crises in the future.  The discussions on global financial reform have been coordinated mainly by the G20 major advanced and emerging market economies, and have focused on improvements in what is known as the international financial architecture (IFA).  The IFA represents the institutional and cooperative arrangements that governments have put in place, such as the International Monetary Fund (IMF) and the Financial Stability Board (FSB), to monitor and regulate global financial flows and to provide emergency financing for countries in times of financial crises.  A key aspect of this reform effort has been focused on the governance arrangements for the IFA.  Notwithstanding the extensive discussions that have taken place, the pace of reform has been very slow and much remains to be accomplished.

At the institutional level, the shift of discussions on global financial reform from the G7 to the G20 has been an important improvement, along with the establishment of regular semi-annual meetings of the G20 at the level of both national leaders and finance ministers/central bank governors. This change, however, still leaves open the question of what criteria determine membership in the G20, as distinct from the International Monetary and Financial Committee and the Development Committee that oversee the operations of the IMF and World Bank, respectively, which are grounded in the clearly specified membership criteria of these institutions. There is also a large amount of redundancy among these three committees at the ministerial level, which has not been addressed, and should be simplified. In addition, with the passage of time, the agenda of the G20 has become extremely diffuse, embracing a wide range of topics beyond global financial reform. As a result, the initiative adopted by the G20 at the London Summit of 2009 to establish specific targets for coordinating and monitoring macroeconomic policy adjustments subject to a strict peer review process among its members has been abandoned.  This failure means that there is lacking within both the G20 process of deliberation and the IMF surveillance exercises an effective enforcement mechanism, which would help to avoid problems such as the build-up of global payments imbalances that were a major contributing factor in the global financial crisis.

Another important governance reform promoted by the G20 that is yet to be implemented relates to an increase in the financial resources of the IMF and the distribution of quota shares in the institution. A proposal to double the financial resources of the IMF along with a significant shift of quota shares in favor of the major emerging market economies was adopted by the Fund’s Executive Board, but these changes have yet to be approved at the national level. Significantly, legislative approval by the United States, whose vote is required for any major change in IMF operations, is highly uncertain in the present political climate. In addition, no discussions have taken place on the process of leadership selection of the Bretton Woods institutions, which by an informal agreement has always called for a European to take the top position in the IMF and an American to lead the World Bank.  Another reform that should be taken up within the IMF is the means by which its resources could be temporarily augmented during a major financial crisis, including through an issue of SDRs that were intended to be a major form of international reserve currency, and coordinated within a network of central bank swap arrangements.

The governance arrangements of the IFA also need to be improved in regard to its regulatory focus, which is coordinated through the FSB. The role of the FSB is to coordinate international discussions on the regulatory and other infrastructural aspects of the global financial system as a twin pillar within the IFA along side the IMF with its financial and policy surveillance responsibilities. However, even though the FSB has been formally established as an international institution unlike its predecessor body (the Financial Stability Forum), it still only has a very limited secretariat (of around 25 people, some of whom are seconded from member countries), and a part-time chairman. Clearly, to be effective, the resources of the FSB need to be significantly expanded.

The FSB has coordinated some reforms of the Basel capital accord, involving a limited increase in capital requirements for banks and the introduction of a new, maximum (leverage) ratio for total assets to capital and minimum liquidity requirements. However, in the opinion of most experts, the new capital and leverage requirements are very weak, in part because of intense lobbying pressure by banks on the national regulators that participate in FSB discussions, and need to be strengthened.

Anthony Elson is a Visiting Lecturer at the Sanford School, and will be teaching a mini-seminar in the Spring 2014 term on the Global Financial Crisis and Reform of the International Architecture.