Category Archives: CONGRESS WATCH

No more free-lunch bailouts

With governments spending on a massive scale to mitigate the economic fallout from Covid-19, they should be positioning their economies for a more sustainable future.
By Mariana Mazzucato and Andreo Andreoni – The Covid-19 crisis and recession provides a unique opportunity to rethink the role of the state, particularly its relationship with business. The long-held assumption that government is a burden on the market economy has been debunked. Rediscovering the state’s traditional role as an ‘investor of first resort’—rather than just as a lender of last resort—has become a precondition for effective policy-making in the post-Covid era.

Fortunately, public investment has picked up. While the United States has adopted a $3 trillion stimulus and rescue package, the European Union has introduced a €750 billion ($850 billion) recovery plan [albeit still under deliberation], and Japan has marshaled an additional $1 trillion in assistance for households and businesses.

However, in order for investment to lead to a healthier, more resilient and productive economy, money is not enough. Governments also must restore the capacity to design, implement and enforce conditionality on recipients, so that the private sector operates in a manner that is more conducive to inclusive, sustainable growth.

Government support for corporations takes many forms, including direct cash grants, tax breaks and loans issued on favorable terms or government guarantees—not to mention the expansive role played by central banks, which have purchased corporate bonds on a massive scale. This assistance should come with strings attached, such as requiring firms to adopt emissions-reduction targets and to treat their employees with dignity (in terms of both pay and workplace conditions). Thankfully, with even the business community rediscovering the merits of conditional assistance—through the pages of the Financial Times, for example —this form of state intervention is no longer taboo.

And there are some good examples. Both Denmark and France are denying state aid to any company domiciled in an EU-designated tax haven and barring large recipients from paying dividends or buying back their own shares until 2021. Similarly, in the US, the Massachusetts senator Elizabeth Warren has called for strict bailout conditions, including higher minimum wages, worker representation on corporate boards and enduring restrictions on dividends, stock buybacks and executive bonuses. And in the United Kingdom, the Bank of England has pressed for a temporary moratorium on dividends and buybacks. more>

New US Semi Fab: Reality or Illusion?

Official talks on construction and operation of a new TSMC semiconductor chip manufacturing fab the in U.S. is promising but riddled with political and technical intrigue.
By John Blyler – Will the news of a new semiconductor fab on U.S. soil be a boost to the economy and technological stability or is it merely a fanciful political scheme? To answer that question, let’s start with the news that has created so much discussion in the electronics space.

Recently, the Taiwan Semiconductor Manufacturing Company (TSMC) announced its intention to build and operate an advanced 5nm semiconductor fab in the U.S. state of Arizona. TSMC, headquartered in Taiwan, is the largest chip manufacturer in the world. The company currently operates a fab in Camas, Washington and design centers in both Austin, Texas and San Jose, California. The Arizona facility would be TSMC’s second manufacturing site in the United States.

The new manufacturing plant would be supported with funds from Arizona and the U.S. government. The fab will have a 20,000 wafer-per-month capacity, create over 1,600 jobs directly and thousands more indirectly, explained the company in a press statement.

This by TSMC is welcomed in the U.S. but not without controversy. Shortly after the announcement of the new fab, the U.S. Department of Commerce announced new restrictions on TSMC’s second-largest customer, HiSilicon of China – which is fully owned by Huawei. Some industry experts feel that the two events are related to the issue of U.S. export control.

Here’s where the political side of the TSMC fab announcement begins to emerge. Huawei, already part of the US trade war with China, was recently placed under new and more stringent export control. On May 19, the Commerce Department issued new rules to more fully close off Huawei’s access to the semiconductor chips it needs to build cellphones and 5G infrastructure. This could conceivably block China’s big telecommunications company from entering the much desired global 5G mobile network space. more>

‘Shareholder value’ versus the public good: the case of Germany

Support for companies amid the pandemic must come with social and ecological strings attached.
By Emre Gömec and Mustafa Erdem Sakinç – With uncertainty around the world about how and when the coronavirus outbreak will decelerate, whole business sectors have been affected by lockdowns and are facing ruin. In Germany, more than 750,000 companies have put over 12 million employees on reduced working hours (Kurzarbeit), dwarfing the 3 million hit by the 2008 crisis.

Society’s loss goes beyond the toll on employment. As the crisis lengthens, innovative capabilities accumulated over years and even decades may atrophy and disappear, making it far more difficult to emerge from the pandemic with a healthy economy.

This ‘innovation drain’ can be avoided if, and only if, corporations devote every available resource to retaining, and reinvesting, in productive capacity. Implementation of the rescue packages adopted in Germany in March and June must thus fundamentally address future practices of corporate resource allocation.

Making government support conditional on replacing value-extractive practices, such as excessive dividend payments and executive compensation, is the most effective way to block damaging business decisions which undermine investment in productive capabilities and secure employment.

Germany’s case was, it’s true, not as dramatic as that of the US, where S&P 500 companies, having fallen victim to the American disease of corporate financialization, distributed 92 per cent of their net income between 2009 and 2018 in stock buybacks and dividends. Still, in the decade from 2010 to 2019, 65 German companies in the DAX 30 and MDAX 60 indices paid out a total of €338.8 billion, or 46 per cent of their combined profits, in dividends, in addition to €35.3 billion, or 5 per cent of profits, in stock buybacks. more>

Social commons: the social protection we want

Universal basic income would offer a deadweight subsidy to low-paying employers. The route to security for all lies in the concept of ‘social commons’.
By Francine Mestrum – The coronavirus crisis has put ‘basic income’ once more on the agenda. It is understandable, since the crisis has hit all vulnerable people in our societies particularly hard. Many in precarious working conditions have lost their job and joined the ranks of the poor. These people deserve help. Ergo, give them some money, without conditions.

Sure, but let us be clear what we are talking about.

Once again—even more than in the recent past when the debate previously erupted—there is an enormous semantic confusion. Sometimes authors speak of the universal basic income as proposed by Phillippe Van Parijs or Guy Standing. But, in most cases, what is meant is some kind of minimum income, only paid to those who need it. This is the case, for instance, with the ‘basic income’ now introduced in Spain.

The first option, the ‘real UBI’, has to be rejected, as earlier explained. First, if one wants to solve poverty, there is no need to give money to the rich, who most often do not even pay taxes. Secondly, if one wants to improve mental wellbeing—as mentioned in the Finnish report on the brief experience with ‘basic income’ there—there are many ways to achieve this. Income security can indeed be a very important factor for wellbeing but the former is not synonymous with a universal basic income.

Thirdly, it seems rather contradictory to seek a fair tax system with contributions from big corporations, if at the same time the state allows companies to lower wages and offers to complement these wages with a basic-income subsidy—a kind of negative income tax. That would, at best, be a zero-sum game, for the state as well as for the corporations.

A UBI can only be acceptable if it can guarantee a decent standard of living, complementary to social protection. But then it becomes a very serious financial problem—far too expensive, as Van Parijs and Rutger Bregman admit. more>

America’s new civil war (II)

By Basil A. Coronakis – A chaos theory that claims a butterfly in Manhattan may generate a tornado in China.

That’s the theory, but in practice the tiny virus that was either purposely or accidentally dripped from China’s Wuhan Institute of Virology has created world-wide chaos, and we are just at the beginning. Our society has just entered into a large-scale evolution, seemingly far from a final settlement. How far that end is, nobody can seriously predict. Nor can they imagine exactly how it will end as the process is taking on the shape a major social confrontation. Everybody is taking positions against everybody else, and everyone will end to be on its own.

At present, very few people understand what kind of situation the world is getting to. The general panic caused by the virus was just the excuse to trigger a large-scale evolution, which for the time being remains under the radar, due to the fact that it is only the very beginning. The reasons can be summarized by the unbridgeable social gaps generated by periods of prolonged austerity, extended overregulation, the ever-increasing politically uncontrolled powers of administration and a scarcity of true political leaders.

When coupled with an unreasonable and prolonged lockdown, which added unemployment and misery to an already toxic mix, you have the perfect recipe for a social uprising.

Presently, three players affect the socio-political making of our times – the United States, China, and Russia. The European Union, although an integral part of the West, is leaderless and acts more like an unhappy player with no real role in a play where the first act is being staged across the Atlantic.

The United States is in civil war and one intelligent exercise would be to figure out what title future historians will give to this hopefully short, chapter in their history. more>

Updates from Ciena

How governments can solve layer 3 network complexity
What if government agencies could monitor and analyze their IP networks to ensure peak efficiency and service continuity—all while trying to modernize the network, balance cost, performance, and resiliency? Jim Westdorp, Ciena Government Solutions’ Chief Technologist, explains how this is possible.
By Jim Westdorp – Do you know what your layer 3 network is doing?

The dynamic nature of IP networking makes it virtually impossible to know at any point in time how traffic is traversing your networks. Troubleshooting problems by issuing pings and router CLI commands, scanning log files, and manually correlating the results is imprecise and inefficient. Many government networks disable services like Internet Control Message Protocol (ICMP), which makes these inefficient tasks impossible. The results can impact service delivery, the agility of the network, and mission.

Traditional management tools have several limitations. For example, they can’t:

  • Provide real-time visibility into routing paths across the network
  • Provide unique alerts for Layer 3 technologies related to: state changes, pathing, performance, and the availability of the network elements to route packets
  • Show and model how routing errors and changes impact service delivery
  • Understand the resiliency of the network
  • Correlate routing events with performance metrics of network services to assure service performance
  • Compute and provision transport paths to deploy new services
  • Provide unified visibility and analysis for multi-vendor, multi-layer networks

Think about all the things you’d like to be able to do with your network, and ask yourself a few questions:

  • What if you could get a graphical view of all the IP flows in your network and gain deeper insights into traffic patterns, flows, and congestion?
  • What if you could drill deep into specific flows to understand the detailed route and particular pieces of network equipment those flows traversed?
  • What if you could troubleshoot your network using DVR-like functionality to see the exact state of the network at the time of an event, even if it was days in the past?
  • What if you had automated analytics to help identify the best paths to route traffic through your network?
  • What if your cyber team could utilize the same platform to be alerted to conditions indicative of external interference with a government?

Often, “what-ifs” are hypotheticals. Not in this case, with Blue Planet’s Route Optimization and Analysis (ROA).  This technology has been field-proven for more than a decade with government entities that have strategic imperatives to monitor and analyze their IP Networks to ensure peak efficiency and service continuity—all while trying to modernize the network, balance cost, performance, and resiliency. more>

The Looming Bank Collapse

The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.
By Frank Partnoy – The reforms were well intentioned, but, as we’ll see, they haven’t kept the banks from falling back into old, bad habits. After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.

Despite their obvious resemblance to the villain of the last crash, CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system. Like former Fed Chair Alan Greenspan, who downplayed the risks posed by subprime mortgages, Powell and Mnuchin have downplayed any trouble CLOs could pose for banks, arguing that the risk is contained within the CLOs themselves.

Banks do not publicly report which CLOs they hold, so we can’t know precisely which leveraged loans a given institution might be exposed to. But all you have to do is look at a list of leveraged borrowers to see the potential for trouble. Among the dozens of companies Fitch added to its list of “loans of concern” in April were AMC Entertainment, Bob’s Discount Furniture, California Pizza Kitchen, the Container Store, Lands’ End, Men’s Wearhouse, and Party City. These are all companies hard hit by the sort of belt-tightening that accompanies a conventional downturn.

Under current conditions, the outlook for leveraged loans in a range of industries is truly grim. Companies such as AMC (nearly $2 billion of debt spread across 224 CLOs) and Party City ($719 million of debt in 183 CLOs) were in dire straits before social distancing. Now moviegoing and party-throwing are paused indefinitely—and may never come back to their pre-pandemic levels.

Meanwhile, loan defaults are already happening. There were more in April than ever before. Several experts told me they expect more record-breaking months this summer. It will only get worse from there. more>

Updates from McKinsey

The economic impact of closing the racial wealth gap
The persistent racial wealth gap in the United States is a burden on black Americans as well as the overall economy. New research quantifies the impact of closing the gap and identifies key sources of this socioeconomic inequity.
By Nick Noel, Duwain Pinder, Shelley Stewart, and Jason Wright – The United States has spent the past century expanding its economic power, and it shows in American families’ wealth. Despite income stagnation outside the circle of high earners, median family wealth grew from $83,000 in 1992 to $97,000 in 2016 (in 2016 dollars).

Beyond the overall growth in top-line numbers, however, the growth in household wealth (defined as net worth—the net value of each family’s liquid and illiquid assets and debts) has not been inclusive. In wealth, black individuals, families, and communities tend to lag behind their white counterparts. Indeed, the median white family had more than ten times the wealth of the median black family in 2016. In fact, the racial wealth gap between black and white families grew from about $100,000 in 1992 to $154,000 in 2016, in part because white families gained significantly more wealth (with the median increasing by $54,000), while median wealth for black families did not grow at all in real terms over that period.

The widening racial wealth gap disadvantages black families, individuals, and communities and limits black citizens’ economic power and prospects, and the effects are cyclical. Such a gap contributes to intergenerational economic precariousness: almost 70 percent of middle-class black children are likely to fall out of the middle class as adults. Other than its obvious negative impact on human development for black individuals and communities, the racial wealth gap also constrains the US economy as a whole. It is estimated that its dampening effect on consumption and investment will cost the US economy between $1 trillion and $1.5 trillion between 2019 and 2028—4 to 6 percent of the projected GDP in 2028. more>

What’s the Difference Between Today’s US Space Force and the Reagan Era Star Wars?

By John Blyler – The U.S. Space Force is being brought to life with federal funding and contractor rockets and electronics. This might be a good time to remember the lesson’s learned from the earlier Reagon era Strategic Defense Initiative (SDI) program.

First, let’s check out what’s behind the Space Force. A few years back, President Trump floated the idea of a space force as a new branch of the military. The Pentagon was quick to remind the president that a space force already existed in the armed services, mainly under the purview of the Air Force. No matter, the White House believed a new initiative was needed especially in light of the tensions and trade war with China. Dominance in space was the rallying call.

For those of us working in the defense industry in the 1980s and 90s, this all seemed eerily reminiscent of the famous “Star Wars” program initiated by former US President Ronald Reagan during the Cold War era. Officially known as the Strategic Defense Initiative (SDI), the program focused mainly around a space-based anti-missile system aimed at protecting US from potential preemptive military strikes from the former Soviet Union.

At the time, the main components of the SDI were considered technologically impossible – i.e., anti-ballistic missiles including lasers and electromagnetic weapons. While there were some successes, the program failed to meet its loftier technical goals.

Now let’s fast forward to today. While many dangers persist in the world, it’s not clear that the most imminent threat is from space. For example, it would be far easier and less costly to launch a cyberattack against an enemy’s infrastructures, steal technology IP, rig an election process or upset financial markets than to dominate in space. Regardless, the race to create a space force has been awakened and – more importantly – funded. more>

China in the Firing Line

By Clare Goldsberry – A two-hour webinar held by the Alliance of American Manufacturing last Thursday provided a forum for four members of Congress along with a business owner, a representative from the United Steelworkers, and the President and CEO of the National Council of Textile Organizations to talk about bringing manufacturing back to the United States.

“Crisis Brings Consensus: Prioritizing U.S. Industrial Policy in a COVID-19 World” began with a Q&A moderated by Josh Rogin featuring Marco Rubio (R-FL) and Josh Hawley (R-MO). Rubio noted that the increased push to bring back manufacturing and the need to change U.S. policies regarding trade with China is not “unique to a pandemic,” which has exposed vulnerabilities in the supply chain across several industries.

“This issue needs more than anger at China,” said Rubio. “While the Chinese Communist Party’s efforts to dominate the world in key sectors are evident, we’ve allowed them to do this. We need a strategy, then tactics to put in place the strategy to bring back U.S. manufacturing.” That would include developing incentives for companies to return their manufacturing to the United States.

Hawley began his remarks by noting that we live in a very different world today than we did after WWII. “The economic order is very different, and we need to address the rise of imperialist China,” he said. “We need very serious reform to address this different world and different [economic] system.” Hawley is not in favor of abolishing the WTO, while that issue has been raised by some. “I would rather ‘fix’ it than ‘nix’ it,” he added.

Hawley, who said he’s heard more about bringing U.S. manufacturing back home in the past four months than in the 14 months he’s been in Congress, does not approve of isolationism. “We are a trading nation and will continue to be, but we need reforms such as dispute resolution, which is a mess,” he stated. “We need an American economy that is strong and a strong American worker. Manufacturing is vitally important to the future of the United States. We need to bring back our supply chains.” more>