Capital for the people — an idea whose time has come

California’s experiments with ‘pre-distribution’ could be attempted at the federal level

Rana Foroohar 

            © Matt Kenyon

If American states are, as former US Supreme Court Justice Louis Brandeis once put it, the “laboratories of democracy,” then it’s worth watching closely what’s happening in California right now.

The threat of rising taxes and a “soak the rich” political atmosphere has led some wealthy Golden State residents, including a number of technology entrepreneurs, to leave for cheaper pastures such as Austin or Miami. 

This has, in turn, prompted worries of a larger migration that would have an impact not only on the state’s tax base, but on the growth and innovation that have made California the world’s fifth-largest economy.

It is an exceptionally fraught situation. 

While nobody these days has much sympathy for wealthy individuals or companies (witness the recent justified fury about the ProPublica leaks showing how little tax the wealthiest Americans pay), or really believes in trickle-down economics, the threat of tax and regulatory arbitrage by other states is real.

The good news is that California is applying some typically creative thinking to the problem. 

What if there was another way to harness company and citizen wealth for the benefit of all?

One such idea gaining popularity is what has been called “pre-distribution.” 

Unlike traditional methods of redistribution, in which the state taxes existing wealth and then uses it to bolster various projects and constituents, pre-distribution is all about harnessing capital the same way investors do, and then using the proceeds of the capital growth (which as we know far outpaces income growth) to fund the public sector.

The idea of allowing more people to become owners of capital has actually been in operation for some time. 

The CalSavers programme, created in 2016, allows for individuals such as gig workers or independent contractors who do not have access to private sector retirement accounts to contribute to professionally managed funds in a system run by the state.

Likewise, Proposition 24, the California Privacy Rights Act, was passed last year and will go into effect in 2023. 

This actually creates a kind of stealth sovereign wealth fund, in which 93 cents of every dollar garnered by the fees paid by companies for violations of privacy (which, given the nature of surveillance capitalism, are likely to be substantial) can be invested by the Treasury, and the proceeds of any gains used to pay for government operations. 

“It’s a way of helping us not have to raise taxes,” says California Senate majority leader Robert Hertzberg, a Democrat. 

He, along with some very rich Californians like former Google chief executive Eric Schmidt and Snap founder Evan Spiegel, have proposed that the concept be broadened into something called “universal basic capital”. 

The idea is that seed contributions of equity from companies or philanthropists could be invested into a fund that would then be used by individual Californians for things like retirement security, healthcare and so on.

Already, in the 2021-2022 budget, Gavin Newsom, the governor of California, has proposed using some of the state’s tax surplus this year — which along with federal Covid relief has put an extra $100m into public coffers — to start college accounts for every low-income first grader in the state.

One can imagine going further and having the state take a small equity position, perhaps 3-5 per cent, in start-ups, as countries like Israel or Finland already do. 

Given that the current value of publicly traded companies in California is roughly $13tn, that’s not chump change. 

If the state had been able to take even a small stake in top firms a few decades ago, there might be far less of the “Occupy” Silicon Valley vibe in California right now.

Pre-distribution should not, in my view, be a substitute for taxation. 

It couldn’t fill the gap, and taxes are in any case a way of bolstering a sense of civic duty and belonging. 

But it should be seen as a new revenue stream particularly well suited to an age in which network effects and intangible assets are concentrating wealth not only in fewer hands, but in fewer businesses that can generate outsize gains with far fewer employees.

It could also help better align public and private incentives and rewards. 

The massive wealth accrued by leading companies is in part down to the strength of the public commons — good schools, decent infrastructure, basic research, and so on. 

As economists like Mariana Mazzucato frequently note, why should taxpayers pick up the bill for, say, laying high speed fibre without getting any of the commercial upside?

Indeed, if pre-distribution works in the laboratory of California, I expect it will be adopted in some way at the federal level. 

The Obama administration actually tried to implement its own version of the CalSavers programme for the country as a whole, called myRA, but it failed in part because the funds were invested only in super safe low yielding Treasury bills at a time when the market as a whole was rising far faster.

Even at this politically polarised moment, it’s an idea whose time may have come. 

Pre-distribution is supported by such unlikely bedfellows as hedge funder Ray Dalio and leftwing economist Joseph Stiglitz. 

Perhaps that’s because while it doesn’t fundamentally alter the market system, it does broaden share ownership: a mix of capitalism and socialism that is right for our time. 

Emerging markets are right to worry about capital flows

Foreign exchange reserves offer only a partial defence against the effects of policy in the rich world

Duvvuri Subbarao

Shaktikanta Das, governor of the Reserve Bank of India. The country is a prime example of the vulnerability of emerging markets to volatile capital flows © Kanishka Sonthalia/Bloomberg

An inflation rate in the US of 5 per cent in the 12 months to May, well above the Federal Reserve’s target rate of 2 per cent, has fuelled speculation that the central bank might soon start scaling back its pandemic-driven monetary support.

Eight years ago, when then chair Ben Bernanke openly mused that the Fed might start “tapering” its quantitative easing programme, global markets went into a tailspin.

Yields spiked, risky assets tumbled and emerging economy currencies crashed. Are we now heading for “Taper tantrum 2.0”?

Bruised by past experience, the Fed has tried to assuage concerns about a surprise policy reversal. 

Chair Jay Powell has been at pains to emphasise that he will be patient and will not unwind the Fed’s balance sheet without seeing “substantial further progress” in the recovery. 

Several Fed officials have echoed those reassurances, saying that the Fed would not react hastily to a transient spike in inflation.

Even so, emerging markets are right to be apprehensive about possible market tantrums at home. 

After all, with extraordinarily loose money supply and low returns in the rich world, emerging markets inevitably become a destination of choice for investors looking for high yields. 

And when the cycle turns, capital flows revert abruptly, leaving emerging country asset and currency markets in turmoil.

India, one of the “fragile five” back in the summer of 2013, is a prime example of the vulnerability of emerging markets to volatile capital flows. 

The country was running large current account deficits year on year which were being funded by the easy money unleashed into the global system by QE carried out in rich countries.

We were lulled into complacency, pressure built up and, when the inevitable implosion occurred at the first signal of policy normalisation, it turned out to be hugely disruptive. 

The rupee fell by more than 15 per cent from peak to trough in the space of just three months, causing enormous loss to growth and welfare.

India has since built up a huge war chest of reserves, often considered the first line of defence against volatile capital flows. 

But it is learning to its dismay that this is no protection against capricious markets.

Consider the RBI’s policy dilemma during the current crisis. 

Despite the pandemic and associated lockdowns, India’s stock market is booming, fuelled by the extraordinary amount of liquidity that the RBI has injected into the system as part of its crisis management. 

As a consequence, foreign capital is gushing in.

The RBI has been in the market almost continuously, buying dollars to prevent an unwarranted appreciation of the rupee. 

But buying dollars results in extra rupee liquidity which could go beyond the central bank’s comfort level. 

The RBI could of course mop up the extra liquidity by selling bonds. 

But such a move would cause interest rates to spike, resulting in the economy being swamped with “carry trade” dollars looking to make money on the yield differentials.

The RBI faces a dilemma. Intervene in the foreign exchange market but leave the resultant liquidity unsterilised (by not selling bonds) and more foreign capital would come in, attracted by the returns in the stock market. 

Intervene but sterilise the flows and more capital would still come in, attracted by the potential yield differentials. 

In either case, the economy has to pay the price of adjustment when the easy money reverses tack.

This shows that foreign exchange reserves are at best a defensive weapon for managing the volatility arising from capital flow reversals. 

They do not help to prevent the build-up of pressure in the first place. 

If foreign exchange reserves are not an adequate defence, are capital controls the answer? 

We know that it is virtually impossible to design capital controls that allow the entry and exit of the right type of capital, in the right quantity at the right time.

To minimise the costs and maximise the benefits of financial globalisation, emerging markets have to maintain huge reserves and keep fiscal and current account balances sustainable. 

They must minimise short-term debt, especially sovereign debt, in foreign currency and deploy capital controls judiciously and credibly.

As India’s experience shows, even with all those measures in place, such countries still have to grapple with the so-called impossible trinity, according to which no economy can simultaneously have a fixed exchange rate, an open capital account and an independent monetary policy.

The writer is a former governor of the Reserve Bank of India

China’s Monetary Policy Slips a Gear Into Neutral

Unexpected shift in monetary policy is raising questions on strength of China’s rebound

By Nathaniel Taplin

The People’s Bank of China, the country’s central bank, in Beijing./ PHOTO: JASON LEE/REUTERS

China just trimmed the reserve requirement ratio for banks—one of its major monetary policy instruments—for the first time since the height of the pandemic. 

There is more: China’s monthly lending data released Friday also showed economywide growth in debt and equity finance outstanding stabilizing at 11% year over year after months of sharp slowdowns, and bank lending ticking up. 

China’s monetary policy has shifted from a tighter stance to neutral.

The question is why now, especially just a few months after regulators specifically told banks to curtail loan growth for the rest of the year, according to a Bloomberg report in April.

On the more benign side, this might be partly a response to higher seasonal liquidity needs as tax season approaches—as the People’s Bank of China has asserted. The reserve ratio cut will release around 1 trillion yuan ($154 billion) of liquidity, but part of this will also be used to repay maturing loans from the central bank.

Other explanations are less palatable. 

China’s quarterly gross-domestic-product figures are due Thursday, and this might be an attempt to inoculate markets against bad news.

Of particular concern are recent data points on consumption and services, which have remained stubbornly soft over the past year despite the rapid rebound in industry. 

The employment gauges of China’s official services and construction purchasing-managers indexes both ticked down significantly in June, and improvement in the 31-city-surveyed unemployment rate stalled out in May. 

New orders in the export sector, a major employer, have tapered off as well.

Part of the trouble is likely temporary: namely a new, short-lived coronavirus outbreak in Guangdong province that shut down one of China’s largest ports. 

Even so, the fact that sporadic Covid-19 flare-ups are still causing such problems gives pause—especially given China’s dependence on homegrown vaccines whose efficacies against new variants such as Delta remain highly uncertain.

Other more fundamental factors might be at play, too. 

Chinese households are heavily indebted, and even more so after the lost income from the dark, early days of the pandemic—which were followed immediately by another housing price boom. 

Many young Chinese workers are feeling the pinch. 

The rapidly unfolding regulatory assault on the country’s previously fast-growing internet sector—one of the best sources of decent-paying jobs—seems unlikely to help.

One thing to watch in China’s second-quarter data will be the household savings rate. 

It jumped in early 2020 as consumers retrenched, fell in late 2020, and then jumped again unexpectedly in early 2021, according to Oxford Economics. 

A temporary outbreak of caution and ennui among China’s consumers is one thing, and not necessarily unexpected given the events of the past year. 

But a more lasting malaise could do serious damage to the country’s prospects—and the nation’s consumer-facing companies.

A short-lived coronavirus outbreak in Guangdong province shut down Yantian port. / PHOTO: STR/AGENCE FRANCE-PRESSE/GETTY IMAGES

Latin America’s silent tragedy of empty classrooms

Prolonged school closures are inflicting lasting harm on a generation

For the first time in more than a year, this month small groups of children with their backpacks and chatter have trooped into some schools in Mexico City. 

It is a cautious re-opening. 

It is up to schools whether or not they open, and only a minority have chosen to do so. 

Only part of the class attends each day. 

The same goes for 18 of Mexico’s 31 other states; in the others all schools remain shut. 

With the pandemic far from over, caution may be understandable. 

But among the living, children continue to be among its principal victims, in Mexico and across Latin America.

The region has been hit especially hard by covid-19 in three ways. 

With 8% of the world’s population it has suffered around a third of officially recorded deaths from covid-19 (and many more unrecorded ones). 

Its economies contracted by an average of 7% last year, worse than the world as a whole. 

Much less discussed is that Latin America’s schools have stayed shut for longer than those in any other region. 

The effects will be felt long after the pandemic is over and economies have recovered.

Schools closed nearly everywhere in the region in March 2020 and many have remained shut ever since. 

They are fully open only in six smaller countries. 

Some countries, such as Argentina and Colombia, began opening their schools earlier this year only to close them again as they suffered a second wave of the pandemic.

The prolonged loss of learning will make dismal educational standards worse. 

The pisa international tests of 15-year-olds in 2018 found that in reading, maths and science, Latin American participants were on average three years behind their peers in the oecd group of mainly rich countries. 

With schools closed for 13 months, the World Bank reckons that some 77% of students would be below the minimum performance for their age, up from 55% in 2018. 

This has long-term effects. 

Even if only ten months of classes are missed, the bank reckons that the average student could lose the equivalent of $24,000 in earnings over his or her lifetime. 

The poorest, those in rural areas, and girls are most affected by the school shutdown, aggravating Latin America’s already wide inequalities.

Many Latin American countries have made big efforts to organise distance learning during the pandemic. 

But a sizeable minority of schools lack internet access for teaching purposes. 

Whereas 98% of the richest fifth of students in the region have internet at home, just 45% of the poorest do. 

In Brazil mobile phones offer the only internet access for over 60% of black and indigenous students. 

Many governments are using traditional channels, such as television, radio and printed materials. 

Mexico has offered distance learning by these means for 25m pupils.

This is no substitute for face-to-face teaching. 

“Not all students learn at the same pace,” says Marco Fernández, an educational specialist at Monterrey Tech, a university in Mexico. 

“They can’t ask questions or get feedback as they would in the classroom.” 

Beyond the loss of learning, school closures have brought emotional costs and a big increase in the number dropping out.

Schools in many countries in other regions re-opened months ago, with social distancing, testing and thorough cleaning. 

Apart from the severity of the pandemic, there are several reasons this hasn’t happened in Latin America. Parents have generally not been keen. 

In Mexico, until most people are vaccinated “we think that unfortunately the conditions don’t exist for a massive return to school,” argues Luis Solís of the National Union of Parents, a voluntary group. Teachers’ unions have been reluctant, too. 

In Argentina when the mayor of Buenos Aires tried to re-open schools in March he was opposed both by the union and the national government, its ally. 

“There’s no pressure” on governments to re-open, laments Mr Fernández.

Governments could do much more to promote safe re-opening, through information and consultation. 

“By now all countries should at least have made a substantial effort to open schools,” says Emanuela Di Gropello of the World Bank. 

“We are not where we should be.” Catching up will be a formidable challenge. 

Schools need quickly to assess each pupil’s level, organise remedial teaching, and make up lost time with Saturday classes and longer terms. 

This will take money as well as effort. 

Many governments have spent more on health care and emergency aid to families and firms during the pandemic. 

Education should be an equal priority if Latin America is not to fail a whole generation.