Should Americans Kick Shoe Tariffs?

nike-rereleases-forrest-gump-nike-cortez-colorway-2-202x300Last year, Nike brought back their Air Cortez sneaker in the White/Varsity Royal-Varsity Red color scheme– the very same style Tom Hanks was seen donning in the 1994 movie Forrest Gump. Producing this shoe is incredibly labor-intensive– its leather stitching, exposed padding on the nylon tongue, and crisp white laces have undoubtedly been produced in one of hundreds of Nike’s manufacturing plants outside of the United States. However, a significant portion of what consumers pay for when purchasing shoes like the “Forrest Gump sneaker” go not only towards manufacturing costs, wages, and shipping, but also tariffs and shoe taxes. Unbeknownst to many, outdated shoe tariffs have been contributing to the rising costs of shoes and have led to many Americans, like Forrest Gump, running their shoes into the ground.

With a globalized economy and companies increasingly outsourcing plants to take advantage of cheaper labor, brands produced in the United States have difficulty competing with low prices. In order to counter the low costs of the textiles and apparel imports, the United States government has imposed tariffs of up to 67.5 percent compared to an average 1.4 percent on most other goods to protect the United States’ dwindling domestic manufacturing supply chain (The Hill). However, with only one percent of shoes manufactured in the United States, American consumers could be the ones suffering the burden through unnecessarily high costs of shoes.

The shoe tariff was created in 1930, when the United States boasted a large domestic footwear manufacturing base (The Hill) that needed protection from foreign companies. Back then, footwear manufacturing was even more labor intensive than it is now, with each stitch handmade and leather meticulously done. Numerous European craftsmen brought with them knowledge and credibility in the art of shoemaking, which helped the United States manufacturing base flourish. Since the rapid globalization of the shoe industry, cheaper labor across seas made manufacturing in the United States less practical. Today, European shoemakers are not competing with the United States for shoe manufacturing, but counterfeits and cheaper goods from countries like Vietnam and China.

Generally, imposing high tariffs are meant as a supportive measure for the domestic manufacturing market. Raising prices of incoming goods keeps prices competitive for imports and domestic products, thereby encouraging United States consumers to continue supporting the United States economy on a local level. In the United States, over 99 percent of shoes are imported, mostly from Asia (Wall Street Journal). However, these tariffs still exist to protect the remaining one percent, whilst most Americans cannot name one American shoe companies manufactured in the United States.

An example of a company benefitting from the high tariffs is New Balance, an American sneaker company, and one of the last to continue manufacturing in the United States. Even New Balance, however, says that it is struggling to keep manufacturing in the United States. Though Robert DeMartini, CEO of New Balance, insists on keeping manufacturing in the United States, stating that New Balance’s U.S. plants are “twice as effective” as Asian plants, and that “we learned a lot because we had to in order to survive” (Wall Street Journal), the company is still facing difficulties to keep work at home. Manufacturing in the United States costs 25 to 35 percent more than to manufacture abroad in Asia (Daily News), and a majority of New Balance’s shoes have parts manufactured outside of the United States. In fact, the company manufactures two-thirds of its shoes across waters and relies heavily on machinery in order to keep costs low. Though the main argument for maintaining the high shoe tariffs is to keep manufacturing jobs at home, are they simply supporting jobs that we can no longer afford to keep in the United States?

Nike is one company protesting the high tariffs. Nike claims that current money going towards tariffs and taxes could go towards research and development advancing sustainability and innovation. The company argues that lowering tariffs can actually increase manufacturing jobs in the United States by allowing the company to develop advanced manufacturing methods that would make keeping jobs in the U.S. more practical. However, many Americans are skeptical of Nike’s promises to create jobs if tariffs are cut, especially as the company continues to move jobs overseas. Lori Wallach, the director of Public Citizen’s Global Trade Watch, is one skeptic. She says, “Nike’s job creation claim mimics the broken job creation promises that multinational corporations have used to push for past controversial trade pacts, only to turn around and offshore U.S. jobs after the pacts took effect” (NPR). Though Nike is viewed as having the financial and political backing to end shoe tariffs in the United States, the reality is that many Americans would rather trust a company like New Balance on an issue concerning American jobs due to its positive association of being made by Americans, for Americans.

footwear-tariff-pic-impacting-childrens-shoes-1024x829The 99 percent of shoes manufactured abroad pay a significant portion of their budget towards shoe taxes, which in turn ups the prices of shoes for unsuspecting Americans. Shoe tariffs are enforced based on shoe classification, which are assigned in a complicated process based on the shoe material, function, target gender, size, construction, and value. Generally, shoes that are more likely to have been produced through cheap, foreign labor have a higher tariff imposed. These shoe tariffs range from zero percent for men’s golf shoes, to 84 percent for cheap sandals and are implemented by volume, per shoe (Harmonized Tariff Schedule). Annually, these shoe tariffs provide an additional 2.7 billion dollars for Congress (NPR). Because most Americans purchase 7.3 pairs of shoes annually each regardless of age, the estimated 2.4 billion dollars that Americans could be saving according to industry analysis could be going towards other household expenses.

Due to the fact that shoe tariffs disproportionately affect prices on the cheapest shoes to manufacture — children’s shoes and low-cost-to-produce sneakers, the Americans hit hardest by shoe tariffs are often those who cannot afford to pay the extra costs. According to Economist Bryan Riley, shoe tariffs increase costs of the cheapest shoes by about one-third. For example, if shoe tariffs were removed on a $10 shoe, they would be reduced by $3. This in turn impacts how families living paycheck-to-paycheck end up spending money in other household necessities like groceries. Purchasing goods and services to support their children and their family’s health are affected unnecessarily.

Though the 1930s shoe tariffs were intended to protect the United States shoe manufacturing industry, the tariff is now outdated as American manufacturing work has since traveled overseas. Americans are left paying the costs of keeping a slim number of manufacturing jobs at home. Most Americans are unaware of the shoe tariffs, and with companies like Nike and New Balance arguing both sides of whether or not to keep them, Americans who are informed are decidedly split on the issue. As tariffs come to the forefront of politics, it will be interesting to see whether or not Americans decide to kick the tariffs costing them so much.

Sources:

New Balance Opposes Push to End U.S. Shoe Tariffs

https://hts.usitc.gov/?search_txt=shoes&query=shoes

Importing Shoes : HTS Shoe Import Duty and Shoe Tariffs

http://fdra.org/key-issues-and-advocacy/legislative-initiatives/

http://www.usalovelist.com/american-made-shoes-ultimate-source-list/http://www.aei.org/publication/the-us-has-imposed-protective-shoe-tariffs-on-americans-for-decades-even-with-no-domestic-shoe-industry-to-protect/

The Economy and a Pair of Shoes

http://www.npr.org/sections/itsallpolitics/2015/05/08/405196569/would-lower-shoe-tariffs-actually-encourage-american-jobs

http://thehill.com/blogs/congress-blog/economy-budget/264019-footwear-needs-tariff-relief

http://www.wsj.com/articles/SB10001424127887323764804578312461184782312

http://money.usnews.com/money/personal-finance/articles/2011/10/28/how-consumers-and-communities-can-benefit-from-buying-local

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/09/21/the-wasteful-culture-of-forever-21-hm-and-fast-fashion

http://www.forbes.com/sites/danikenson/2013/07/23/textile-protectionism-in-the-trans-pacific-partnership/#275d91d593a8

http://www.wsj.com/articles/SB10001424127887324735104578123523795505336

http://hypebeast.com/2016/7/nike-classic-cortez-og-forrest-gump

Brexit and Breadwinners: What leaving the EU means the future of the UK workforce

Behind the Vote

Brexit. A term that filled newsrooms, Facebook feeds, and local pubs all summer long.

It’s the word that became a reality on June 23rd, 2016, when the UK voted to revoke its membership from the European Union with a 52% majority vote. The decision sent shockwaves around the world, as countries questioned what the future of Europe would look like. With such a slim victory margin from the “Leave” campaign, the decision was highly controversial and has continued to cause political, social, and economic anxiety in the months since.

The official campaign for Britain was called Vote Leave, and was built on the notion that the UK had to leave the EU in order to protect its borders, strengthen its economy, and increase employment and wages for British nationals. Immigration was one of the most important components of the Vote Leave campaign, as proponents argued that until the UK had full control of its own immigration policy, it would not be able to handle the influx of European immigrants that arrive each year. However, according to the Office for National Statistics, of the 636,000 people who immigrated to the UK in 2015 only 270,000 were EU citizens. “Leave” voters also argued that immigrants were driving down wages in certain sectors and taking away many low-level jobs from British workers.

As for the economy, “Leave” voters claimed that Britain’s ties to the EU were preventing it from formulating trade relationships in emerging markets, such as China and India, where there is no major trade deal at present. Furthermore, these voters argued that leaving the EU would not affect London’s position as one of the world’s leading financial centers nor would banks relocate their headquarters. This is largely because Britain has very low corporate tax rates. Lastly, the Vote Leave campaign argued that an exit from the EU would mean that UK tax payers would no longer have to subsidize and bail out European countries that use the Euro and already have a majority in the Union. Instead, this money would be used to fund and support domestic issues such as the education system, NHS, and affordable subsidized housing.

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“Remain” voters, however, argued that Brexit would seriously hurt UK trade levels and foreign direct investment. These voters believed that a decision to leave could prove extremely challenging for the UK, as it would sever the existing economic, social, and political relationships that it had with many EU nations. As for the question of jobs, the “Remain” side claimed that around three million jobs were linked to the EU which, if taken away, would destabilize the economy. Additionally, “Remain” voters insisted that businesses would be less likely to invest in the UK if they were not in the EU. This would be extremely disruptive because, according to a report by the Bank of England, foreign direct investment accounted for 10% of UK’s assets and liabilities in 2015 equaling around £10.6 trillion ($13.1M). The feeling of uncertainty surrounding Brexit was clearly felt in the UK’s financial market in the months leading up to the vote, as the Financial Times reported that UK investment declined by 2.1% in the final three months of 2015, despite growing by an average of 1.4% in the previous quarter.

 

 UK Job Market on the Ballot

 The implications of Brexit on the workforce was a key issue heading into the vote. Many economists argued that a decision to leave would trigger an economic downturn in the UK which could significantly weaken the British pound and lower employment levels. The British Treasury released a report in May 2016, which claimed that if Brexit were to happen, unemployment would be 520,000 higher, wages 2.8% lower and house prices 10% down. These statistics demonstrate why there was a high anxiety throughout the UK, as economists and citizens alike were trying to predict what the future of the UK may or may not look like.

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However, because no other country had left the EU before there was no precedent for economists to compare the UK with. This meant that many of the arguments from both sides involved an element of speculation.

When the European Union was formed, it was created with the idea that there would be “free movement of labor” across all member nations. This meant that any citizen of the EU would be able to travel to Britain and seek employment without any formal job offer. Therefore, “Leave” voters viewed Brexit as an opportunity to gain back the jobs given to those immigrants and to increase national employment levels. According to research by Oxford University’s Migration Observatory, as of June 2016, there were 2.2 million EU workers in the UK composing for 6.6% of the total workforce.

The referendum drove voters to ask serious questions about long-term job security and availability. Would Brexit make it easier for young people to find jobs in the UK? Would wages increase as the result of a decreased supply of labor? What would happen to those jobs of migrants forced to leave? Where will the UK stand in terms of the international workplace?

Some economists predicted that in the short term, companies would choose to either transition their operations overseas or put a hold on hiring new employees until there was more economic certainty. The “Leave” campaigners argued that certain sector jobs, previously given to migrants, would now be available to British nationals.

However, there is very little evidence proving that immigration lowers wages or increases unemployment. According to Jonathan Wadsworth, an economist at the Center for Economic Performance at the London School of Economics, he says: “there is still no evidence of an overall negative impact of immigration on jobs or wages.” His claim was further supported research published by the UK Office for Budget Responsibility in 2015, which found that there was a small negative effect of migration on wages of workers in the semi-skilled and unskilled service sector such as shop assistants and restaurant and bar workers.

 

But do UK nationals really want those jobs?

While many argue that that Brexit will supply a large number of low-level jobs for UK nationals, the question must be asked of whether or not people are actually going to be willing to take them.

As seen below, EU workers are predominantly industry based with the manufacturing, retail, and health services accounting for the largest number of workers. Because the UK relies heavily on migrants to fill these low-skilled roles, the vote brought anxiety to employers in these industries, as they had to determine whether or not they will be able to fulfil their quotas if their workers were to be deported because of Brexit. While “Leave” campaigners argued that British nationals would seek these jobs if the referendum happened, “Remain” voters countered this by saying that British workers had not sought out these jobs before… so why would they now?

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Amy Smith, a student at the University of Sheffield, expressed her concern, saying:

“Having grown up in Germany, I witnessed the benefits of immigration first-hand. Immigrants are vital for filling the low level positions German natives are less willing to take. I think the UK needs to recognize that the same implications can and will happen here.”

This issue was further discussed by economist Jonathan Porte, who described the demand for immigrant jobs as not being just a zero-sum game. In an article published by the Guardian he explained, “it’s true that, if an immigrant takes a job, then a British worker can’t take that job – but it doesn’t mean he or she won’t find another one that may have been created, directly or indirectly, as a result of immigration.”

Porte’s argument stands exactly opposite to that of the Vote Leave campaign, as he argues that a rejuvenation in the UK workforce will not occur simply by deporting migrants. Rather, it will happen with innovation and the exchange of ideas – which are a direct result of migration.

 

 Current State of the Workforce

 It has been four months since the vote, and economic numbers are showing more promise than expected. Although there was fear from the ‘remain’ voters that a decision to leave the EU would cause widespread job losses, economic data following Brexit is saying the opposite.

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October figures from the Office for National Statistics (ONS) show that the UK unemployment rate remains steady at 4.9%, its lowest rate since 2005. According to the Guardian, this number remained unchanged since August, despite a 10,000 increase in unemployment.

Furthermore, the employment rate has remained at a record high of 74.5%. However, employment growth slowed from 173,000 in the three months leading up to July to 106,000 in August, with a large proportion of these being part-time workers.

So with these economic forces showing positive signs for the UK, does this mean that the workforce still has to worry?

Maybe not so fast.

While UK employment continues to rise, the country has seen a sharp rise in inflation which poses a major threat to job levels and wages. According to the ONS report, the UK’s inflation rate increased from 0.6% in August to 1% in September – the highest it has been since November 2014.

The issue of inflation is further exacerbated by the decreased value of the pound, which hit a new 31-year low against the dollar in October, and now exchanges at $1.22. This is largely driven by the uncertainty surrounding the terms of Britain’s exit from the EU, as financial markets lack confidence in the UK’s long term economic prospects.

An increase in inflation could potentially affect the UK’s unemployment rate going forward, as market anxiety can lead to decreased investment and lower economic growth in the workforce.

Furthermore, because the drop in the pound’s value has increased the cost of imports for British manufactures, certain sector jobs may be taken away as companies adjust to higher costs and decreased demand for goods.

But for now, until an official decision is made on Brexit’s terms, workers and immigrants across the UK must patiently wait… and hope that the decision to leave didn’t take their jobs with them.

 

 

 

SOURCES:  

https://www.ft.com/content/953671ba-b784-37f6-8f29-45402e846d50

https://www.theguardian.com/business/2016/aug/17/uk-unemployment-claimant-count-falls-after-brexit

http://www.telegraph.co.uk/business/2016/08/19/what-brexit-apocalypse-no-sign-of-economic-woe-after-the-referen/

http://www.independent.co.uk/news/business/news/brexit-uk-economy-eu-referendum-result-jobs-employers-hiring-a7191381.html

https://www.ft.com/content/3d0de756-1764-11e6-b197-a4af20d5575e

http://www.independent.co.uk/news/uk/politics/points-based-immigration-system-theresa-may-explained-brexit-referendum-australia-a7227001.html

http://www.voteleavetakecontrol.org/why_vote_leave.html

http://www.telegraph.co.uk/business/2016/06/28/brexit-will-foreign-investment-dry-up/

http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf

https://www.ft.com/content/cca62354-e052-11e5-9217-6ae3733a2cd1

http://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/migrationstatisticsquarterlyreport/may2016

https://www.ft.com/content/0deacb52-178b-11e6-9d98-00386a18e39d

http://ukandeu.ac.uk/fact-figures/where-do-eu-migrants-in-the-uk-work/

 

 

 

The Student Debt Crisis: How Your Degree is Causing Economic Unease

The Problem

Pursuing a degree in higher education is often romanticized. Education is revered as the investment of a lifetime, and a staple of the American dream. However, the price tag associated with this dream has either left millions in anxiety-inducing debt or deterred people from pursuing a degree at all.

In 2016, The White House released a study that evaluated the benefits and challenges of student debt. According to the study, “the average full-time worker over age 25 with a bachelor’s degree earns nearly $1 million more than those with a high school diploma.” Therefore, those with more debt due to pursuing a master’s degree, M.D., or J.D. will have greater ability to pay off their debt over time. This should make us feel better; it is statistically proven we will not be in debt forever. Despite this, it might as well be forever as paying off student loans can take decades. Additionally, the benefits of a degree still do not justify the rise in student debt, as there are many issues within the Federal system of student loans.

According to the “Student Loan Servicing” report by the Consumer Financial Protection Bureau (CFPB), student loan debt is up to $1.2 trillion (a decade ago it was $300 billion,) spread among 40 million borrowers, with an average debt of $30,000 per borrower. The annual report “Trends in Student Aid” by the College Board, revealed a 48% increase in loan borrowing from 2000-01 and 2005-06 (in inflation-adjusted dollars.) This increased to 65% by 2010-11. Although loan borrowing decreased by 23% from 2011-12 to 2015-16 student debt has only continued to increase.

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Looking at those who received their degree from a public four-year, the average debt level went from $11,300 in 1999-00 to $15,900 in 2014-15, a 40% increase overall. For a private four-year, the average debt went from 15,000 in 1999-00 to 19,900 in 2015-16, a 32% increase overall. Those who did not complete college had even higher debt averages.

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To some, it is too soon to call the student loan debt issue a crisis. The White House study acknowledges there are changes to be made, but public concern should be low. Additionally, economists such as Joel Elvery from the Federal Reserve Bank of Cleveland agree with this. According to the CFPB, the average monthly payment for those in the 20 to 30-year-old range is $351. Despite statistics like this, Elvery believes that post-grad earnings and repayment options offset these charges.

So how did we get here? Why has this happened? I will do my best to answer these pressing questions. However, the most important question is why should you care? If everyone eventually pays back his or her student loans, how does this affect the economy?

The Economy

If you take a step back and look at the big picture student loan debt affects everything in one way or another. Consumer spending and the housing market are the main concerns. Barbara O’Neill, a specialist in financial resource management for Rutgers University, believes student loan debt has slowed down the economy. As student loan payments become a priority, major life decisions (aka the ones that cost you the most) such as purchasing a car, and buying a home are put off for longer spans of time. Living to witness the entire U.S. financial system collapse does not help one’s views on financial well-being. If people doubt their financial ability, it is only logical that frugality will be the result.

The Census Bureau revealed that the housing market has dramatically shifted from owner-occupied to renter-occupied, which is mostly thanks to millennial’s (the most recent college graduates.)

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When looking at homeownership trends, the Federal Reserve found that fewer 30-year-olds have bought homes since the recession. Millennial’s join the work-force, wages rise, but purchases of single-family homes were down 6.0% in May according to the Commerce Department. Although this rose in September by 3.2%, the combination of high housing demand and low supply (you can only build so many homes) has increased housing prices.

One of the largest investments Americans will make in their lifetime is the mortgage. Mortgages are an important part of our GDP, and if purchasing of mortgages continues to decrease, there are consequences. For example, those who are currently trying to sell their homes are forced to sell below value, or worse off, not sell at all. We can’t blame millennial’s and their student debt entirely for issues in the housing market. Nonetheless, there is no denying that millennials are the future of our economy, and their halt in spending will have long-term negative effects.

Another concern is the fact that not everyone pays back student loans. In 2015, The Federal Reserve Bank of New York performed an analysis on repayment. They found that only 37% of borrowers were actively making payments, and 17% were delinquent. From the pool of borrowers that were struggling, 70% were from lower income zip codes. However, 35% of people from higher income zip codes also struggled with repayment. Higher delinquency rates are associated with not finishing school, but default rates still exist for those who did complete school. The highest percent of people who default (35%) have loans for $5,000 or less. This just goes to show that everyone is struggling with student loan debt in some shape, way, or form. It’s not fair to blame the borrowers entirely when all they wanted was the opportunity to get an education. Allowing more access to student loans was a good idea overall, but it is time we face the reality that the government may have been too generous.

The Screwed Up System

The main problem with student loan debt is that as tuition prices rise, a number of loans distributed must rise too. It is a continuous, vicious cycle. Private universities who have strong financial aid programs claim the right to have high tuition prices to make up for the deficit of those covered by aid. The problem is no better in public universities. Back in the 1970’s, public four-year institutions were the cheapest alternative. Although they are still cheaper than private universities, it is unknown how long it can stay this way. According to the College Board’s “Trends in College Pricing” from 1986-87 to 1996-97 there was a 3.9% average annual increase in tuition; from 1996-97 to 2006-07 there was a 4.2% increase, and by 2016-17 a 3.5% increase. As you can see, this is a pretty steady increase per year. Today, tuition plus room and board at a public four-year costs around $20,000, when it was closer to $10,000 in 1996.

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One of the reasons for this is the decrease in state funding. According to the Center on Budget and Policy Priorities, the average state is spending 18% less per student post-recession. The worst part is that these tuition spikes only make up for the deficit due to less state funding. The opportunities for students are not as plentiful as they could be when faculty must be fired to make a tight budget work.

A more obvious reason for tuition increase is economics 101: supply and demand. As more people enroll in college, the demand goes up. Despite there being plenty of colleges for every American, the supply or availability of spots at high ranking universities decreases. Colleges love to see how much they can charge before demand goes down. So far, we have all given into this experiment and paid the price. Additionally, the promise of a wonderful education from an affordable state school creates even more demand, but at some point, there must be cut-offs.

Finally, the main concern is the system itself. According to U.S. Department of Education, undergraduate students are allowed to defer loans if they have half-time enrollment in school, graduate school, face economic hardship, or a period of unemployment. Deferment is available for up to three years in most cases. Although this is a way to help students, some students use it as a way to put off loan payment for long periods of time. The current interest rate for direct loans is 3.76%. However, if the average borrower has $30,000 in undergraduate loans, $40,000+ in graduate loans, and interest, this can lead to repayment issues. Perhaps not default in every case, but it only takes a few late payments to hurt your credit score. If your credit score drops, eligibility for other loans such as for cars and mortgages are negatively affected.

Thankfully, there are precautionary measures that exist. The Obama Student Loan Forgiveness program provides many solutions for loan repayment. This includes income-based payments and interest rate reductions. Better yet, loans can be forgiven after 20 years if enrolled in the corresponding payment plan Pay As You Earn. Even with options of Pay As You Earn, the people in lower income regions are the ones who are still struggling with repayment. All these preventative measures will likely help, but it will take years to see the results. If tuition continues to rise at a steady rate, the need for student loans will increase ten-fold, and only so many steps can be taken to aid students in repayment.

There is no perfect solution, but ideally, putting tighter restrictions on loan availability and deferment could lower student loan debt. In addition, many borrowers are not fully aware of the binding loan contracts they are signing. If our high schools prioritized loan counseling as a part of college advisement, students may feel less inclined to borrow or make the effort to attend a more affordable university. Student loan debt is something that will most likely haunt us for decades to come, but hopefully, a decrease in student loan debt over time will jumpstart the economy. The economy may be doing well now, but the reality is the student loan debt crisis is a bubble waiting to burst. If we can decrease student loan debt, then the spending habits of young adults will also change and therefore increase long-term economic stability.

 

Is A Rising China More Appealing Than U.S.?

 

“I miss the price of my hair service in Beijing,” said Yuyuhou Li, a graduate student from the University of Southern California studying Strategic Public Relations, after her recent pricy experience in Korean Town. The total cost of having her hair dyed was “about $280, including tips.” In other words, having her hair dyed once in Los Angeles equals to three hair-dyeing appointments at a similar salon in Beijing.

No wonder it seems that living in America is quite expensive, at least in most Chinese people’s eyes. China’s economy is growing at an impressive pace. In the past decade and half, China has risen from ranking second in the world in nominal GDP, to pulling itself from poverty at least in its southern coast. “Made-in-China” label is being used worldwide and the grand hosting of the Beijing Olympic Games shows China’s economic power. Even the great Uncle Sam started to fear the rising eastern star.

Meanwhile, in the hopes of receiving a better education and a better life in the future, Chinese students are rushing to pursue academic degrees in the United States. The most recent figures, from the 2014-15 academic year, show that 304,040 international students in the US hailed from China – far more than from any other country, a 10.8% higher than previous 2013-14 academic year.

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Faced with the army of ambitious up-and-coming Chinese professionals, are Americans worried? Yes, they are. The loss of jobs is one of the top three problems that are rated as a very serious problem by approximately 60 percent of the American public, according to a survey in 2015.

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Undoubtedly, China is in need of fresh blood for a consistent and steady growth. On the one hand, China is experiencing its reorganization and optimization in industrial structure from labor-intensive industry to high-tech industry. Without those young talents, the process will be much slower. On the other hand, China’s rising wages calls for increasing productivity, which cannot be achieved without technological advancement. Therefore, enticing young talents to come back and contribute is significant.

However, a massive loss of talent for China is endangering the long-term development of the rising country. An estimated number of 2.64 million Chinese have moved overseas to study since 1978, but only 272,900 students returned to China over the forty years, according to the Ministry of Education. Moreover, a 2014 report by Oak Ridge Institute shows that 85 percent of the 4,121 Chinese students who received doctorates in science and engineering from American universities in 2006 were still in the U.S. five years later. The stay rate was 98 percent a decade earlier, which actually marks an improvement.

Such a brain drain seems to indicate that living in the States are more appealing than living in China, especially for a young and upcoming generation. How to make a decision when choosing a country to live and work? Living in an affordable place and working in a promising place are two important factors.

Living Cost & Purchasing Power Parity (PPP)

Pick up an apple from a Walmart in Shenzhen, one of the most developed coastal cities in China, and read the price tag carefully. Those lovely red apples are sold at ¥4.98 (=$0.75)per 500g. Now let’s move the scene to a Walmart in Los Angeles, where a large price tag reading $2.47/lb ($2.24 per 500g) sits on top of those made-in-America apples.

It is not uncommon to see an almost triple price difference between consumer products made in the most developed cities in China and those produced in America. A box of 12 cage-free eggs are sold at ¥12.9(=$1.93)in the Shenzhen Walmart, while eggs in the LA Walmart are more than double that price. Not only groceries, but also basic necessities such as toilet paper and laundry detergent suffer from the huge price gap. For example, Tide detergents of the same size in both China and the US do not break the spell of the three-times price difference.

Both Shenzhen and Los Angeles are coastal cities with a high volume of port trade and technology-intensive industries. However, as the chart below is shown, people would need around ¥35,143.95 ($5,266.80) in Los Angeles to maintain the same standard of life that they can have with ¥21,000.00 ($3123.60) in Shenzhen (assuming you rent in both cities). As the chart below shows, Shenzhen’s living cost is higher than Beijing’s, but still falls way behind Los Angeles’.

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(Source: Numbeo)

 

Purchasing Power Parity (PPP) plays a vital role in evaluating the living cost in the respective country. PPP is arguably more useful than nominal GDP when assessing a nation’s domestic market because PPP takes into account the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates, which may distort the real differences in per capita income.

According to the International Monetary Fund, China’s economy surpassed the U.S. in purchasing power for the first time in 2014 and continued to rank in first place in 2015.

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(Source:IMF)

With the same amount of money, you can enjoy more goods and services in China than in the United States. For example, Yuyuhou Li can buy the same detergent and enjoy similar hair dyeing services in both Shenzhen and Los Angeles; but in China, where labor and rent are lower, dyeing her hair and purchasing basic daily necessities cost much less than she pays in the U.S.

This round, China beats America by a huge margin.

Per Capita Personal Income

“If I am making money in dollars, living in the United States won’t be that expensive,” said Yutian, Li, a graduate student studying in USC with a major in computer science. There’s no doubt that computer science is one of the most well-paid jobs in the United States. But earning dollars and spending yuan is very tempting because the exchange rate between the yuan and dollar is more than 6:1.

“You earn a lot less money in China, but you can save more,” said Robert Little, who used to teach English at the University of International Business and Economics in Beijing. “America is much more expensive to live in because the cost of living is much higher,” he added.

The National Bureau of Statistics of China reveals that the average per capita personal income in Shenzhen was 73,492 yuan (=11,010.45USD) in 2014. The latest data shows that the average per capita income in Los Angeles County is 42,042 USD, almost 4 times higher than in Shenzhen.

If we divide the items sold at the Walmart in both cities by the average per capita personal income, interestingly, the percentages are so similar.

  Los Angeles Shenzhen
Apple 0.006% 0.007%
Egg 0.01% 0.018%
Toilet paper 0.03% 0.03%
Tide detergent 0.02% 0.03%
Hair dyeing 0.67% 0.82%

 

But what causes Los Angeles’ cost of living to run ahead of Shenzhen’s? Although the overheated property market in China has driven the prices up and up, rent prices in Shenzhen are 50.93% lower than in Los Angeles. “My living cost per month is about $3,000,” said Jake Davidson, a senior from Los Angeles studying accounting at USC.  According to Jake, he has to pay $1,600, almost half of his living cost, for his rent. In that case, people living in major cities in the United States such as Los Angeles and New York actually suffer more renting pressure.

However, Shenzhen’s hair dyeing services, when compared against average incomes, run higher than Los Angeles’. The comparatively high percentage meets a current trend of more expensive service industry in China’s big cities.

 

Opportunities Matter   

“I prefer to work in the United States,” said Caixin Yang, a sophomore who comes from Chongqing City and now studies economics in America. For her, the United States has more advanced and mature financial systems and markets. “China is under transformation and everything is in a mess,” she said.

The same answer goes with Yuyuhou Li, who thinks highly of a well-established public relations career path in America. “Although the living cost is really high here, especially in LA, working in the United States represents a more stable life,” she added.

In spite of skyrocketing living cost, especially the rent in the United States, Chinese students are eager to earn a degree in the United States. What entices Chinese students who receive education in the United States to choose to make a life in a foreign country even though China has become the second largest economy? Free work culture, decent income and better welfare treatment could be the answer.

“High living cost is not something I value if I choose to stay in the United States or in China,” said Yiling Jiang, 23, studying communication management at USC. He values personal development, opportunities, lifestyle, family, and friends when judging which country is more appealing. Not only Yiling, but all of the five interviewees studying in USC with footprints in both China and America agreed that the U.S. living cost is high but not a huge problem. In fact, the highly rigid bureaucratic working ethics, complicated relationship (guanxi) and unfair career treatment are three main factors that prevent young professionals coming back to China.

In addition, as living environment worsens, China’s most well-educated have begun fleeing the country. Caixin Yang also mentioned her concern in her interview about the long-lasting severe pollution in some Chinese metropolitan cities such as Beijing, the Capital of China.

At the same time, there is still a number of Chinese students who pursue degrees in America prefer to go back to China. Yutian admitted that current American life is more attractive in terms of advanced education and career training, but in the future, living in China will be more appealing to him, as the country’s pace of change is accelerating.

“China has a lot more potential in development and I am willing to be a contributor in this process,” said Yutian Li.

 

 

 

Mongolia to Minegolia: A nation’s struggle to develop amidst sudden economic expansion

A nomadic herder rides past a traditional ger in Northern Mongolia.

A nomadic herder rides past a traditional ger in Northern Mongolia.

Traveling outside of Mongolia’s only major city, Ulaanbaatar, can seem like traveling back in time 800 years. Among the hundreds of miles of rolling hills, I was hard-pressed to find any permanent, man-made structure. It was a natural landscape so untouched by modern man that I half expected to see Genghis Khan’s enormous army thunder down a hill aboard hardy little ponies.

Nomadic herding culture has been a part of Mongolia for thousands of years and it remains a major part of Mongolian life. However, Mongolia’s economy is undergoing massive transformation that could change both the cultural and natural landscape forever.

From 2009 to 2013, the Mongolian GDP nearly tripled in size from a scant $4.584 billion (US) to $12.582 billion, according to the World Bank.

mongolia-gdp-per-capita

Mongolia’s explosive rise in the Asian sphere began in the late 1990s when Mongolia found itself to be, quite literally, sitting on top of a gold mine. More important than the gold mine, however, was a copper mine, one of the largest in the world, that was buried underground, just north of the Gobi Desert.

Combining lush national resources and its location just north of resource-hungry China, Mongolia was set to launch itself from rural nomadic countryside to industrialized nation within a span of a few years.

Throughout its expedited transition from a largely agricultural economy to an economy in which one fifth of GDP relies on the mining sector, Mongolia has struggled to strike a balance between rapid growth and growth that is sustainable, fair, and environmentally responsible.

Today, the mining industry makes up 20 percent of Monglia’s GDP. This makes the Mongolian economy somewhat reliant on fluctuating commodity pricing as it sells its copper, gold, and other earth minerals to China. It is possible, however, that mining’s share of the GDP is much higher but the Mongolian government is presenting its nation as a well diversified and therefore more stable economy for investment.

Even at 20 percent of the economy, if metal and earth mineral prices plummet, as they did in the second quarter of 2012, GDP growth can halt or even contract without other industries to offset decreased revenue.

Since the beginning of development at the Oyu Tolgoi mine, a major contributor to GDP growth, GDP per capita has grown over 800 percent. However, the Gini Coefficient, a measure of income distributions in which a value of 0 represents perfect equality and 100 represents absolute inequality, Mongolia is rated a 36.5.

This rating ranks Mongolia 70th in terms of equality among nations worldwide. To put this in perspective, the most equal country is Ukraine with a score of 24.8 and the second most unequal country is South Africa, a nation that is still suffering great disparity along racial lines as an aftereffect of apartheid, with a score of 65.

While not nearly as bas as South Africa, nowhere is the disparity of development in Mongolia better illustrated than in Ulanbataar. In the center of downtown lies the massive Chinggis Square, named after the nation’s hero, Genghis Khan. On one end of the square sits the Blue Sky Building. This $200 million project is a glass and steel office building and hotel reaching 344 ft. high which would not look out of place in London, New York, or Shanghai. From this vantage point, the city skyline is dominated with towering cranes building offices, apartments, and shopping centers.

Construction on the Blue Sky Building in Ulaanbataar before the hotel and office building opened in 2009.

A mere 15-minute drive away from the downtown area is a very different sight. On the outskirts of the city an estimated 800,000 former nomads have settled in their gers, traditional felt tents that have been used by nomads for centuries. Here, there is no plumbing, running water, or civil services like trash collection. Some estimates place unemployment in these ger districts as high as 60% and without their herds to support them, many are likely living in poverty.

The story of Mongolia’s rise from uniform underdevelopment to the state of Ulanbataar today began in 1997, when the democratic government, established after the fall of the Soviet Union, which maintained Mongolia as a buffer against China, passed the Minerals Law of Mongolia. This law established the state’s ownership of all mineral resources within its borders and reserved the right to sell mining and exploration licenses.

The goal of this law was to grow Mongolia’s economy after a dip that left their GDP below the billion-dollar mark from 1993 to 1994. If the government could sell its mining and mineral exploration rights to international mining corporations, it could, in theory, increase levels of foreign direct investment, lower unemployment, and raise GDP.

Investors found abundant Mongolian reserves of copper, gold, fluorspar, and uranium highly attractive. In addition to owning natural resources, Mongolia shares a border with China, the world’s largest importer of raw materials. This presents a lucrative opportunity to sell materials to China at a lower price by minimizing transportation costs that make metals and minerals from South America more expensive.

Combining natural resources with its proximity to China, a country that imported $25.1 billion in refined copper and $63.9 billion in gold in 2014, Mongolia looked like the world’s premier destination for mining operations.

Turquoise Hill Resources Ltd., a subsidiary of the Canadian Ivanhoe Mines, found a massive copper reserve in southern Mongolia. It announced a $4.4 billion investment in underground development at its mining sight Oyu Tolgoi on December 14, 2015. Estimated to be the world’s third largest reserve of copper, Turquoise Hill originally invested $6.2 billion in 2013, after years of exploration and analysis, to begin production.

Turquoise Hill Resources has invested over $10 billion so far in the Oyu Tolgoi mine and surrounding infrastructure.

These investments were massive in communities where wealth was generally measured by herd population rather than hard currency. The influx of capital and demand for labor encouraged many nomads to abandon traditional herding practices in order to work for mining companies or construction companies which were needed to build infrastructure like roads and bridges virtually from the ground up.

In order to include Mongolian interests in mining decision-making, the Mongolian government and Turquoise Hill spent five years negotiating the Oyu Tolgoi Investment Agreement. The agreement states that the Mongolian nation has a 34 percent equity stake in the mine with the ability to renegotiate their ownership to 50 percent as soon as initial investments have been recuperated. This clause is very favorable for mining companies which are essentially guaranteed the recuperation of their investments.

Additionally, the agreement holds the investor accountable for regional economic development, adhering to national and international environmental standards, contributing to national infrastructure, maintaining a workforce that employs mostly Mongolians, and investment in the education of the Mongolian people.

While these terms are written into the official contracts, there is little evidence to support the clauses did anything more than pay lip service to ideas of sustainable development.

With the volatility of commodity pricing, those who have sold all of their herds and bet on Mongolia’s industrialized future by settling in cities are facing just as much if not more uncertainty than their countrymen and women who remain herders. Over the past five years, copper prices have fallen over 50 percent affecting both wages and unemployment.

After a severe dip in prices following the global economic crash in 2008,  copper prices rose. Since 2012, prices have been decreasing.

After a severe dip in prices following the global economic crash in 2008, copper prices rose. Since 2012, prices have been decreasing.

Dwindling copper prices have slowed economic growth to a crawl, the World Bank predicts 0.8 percent growth rate in 2016, and the Mongolian currency, the togrog, has plummeted in value.

Many economists blame Mongolia’s economic downturn on changes in the slowing Chinese economy. China, which is the destination of 80 percent of Mongolia’s exports, has decreased its demand for commodities like copper and coal, which has driven down international commodity prices significantly. This serves as a double blow to the Mongolian economy because China is not buying as much and prices are falling in the international marketplace.

Despite contractions in copper prices and resulting economic uncertainty, many nomads continue to settle in cities either to seek economic opportunity or escape the uncertainty of harsh winters that can wipe out an entire family’s herd, a Mongolian’s source of wealth and survival. The increasing frequency of these unusually cold winters are intensifying movement to urban areas, as herds die off on the ice covered steppes. These extreme weather conditions have been attributed to pollution and its affects on climate change.

Just like in Ulanbataar, families who renounce their nomadic lifestyles settle in gers on the outskirts of mining towns. During the winter months, when low temperatures average around -28 degrees Fahrenheit, former nomads burn massive amounts coal to keep warm and cook. Air pollution is so bad in the colder months that it exceeds the World Health Organization’s most lenient standards by 600 to 700 percent.

This creates a spiral of urbanization. As more nomadic families leave the countryside and gather in mining towns and cities, pollution increases thereby worsening and increasing the frequency of hard winters, forcing more families to trade their herds for mining or manufacturing jobs.

Former nomads settle in their gers near mines to find work.

What were once seen as beacons of opportunity are now more like poverty traps. Those who work in the mines are either susceptible to injury or the arduous labor prevents many miners from being hired past age 40. Even people who have moved to cities to support the growth of mining towns by opening shops and restaurants are feeling the strain of dwindling copper prices as miners become unemployed and have less to spend. And without the herds of sheep, goats, yaks, and horses that used to sustain Mongolians through the harsh winters, those who can no longer find work will find an economic landscape almost as barren as the Gobi Desert.

Barreled & Tapped: The History & Impact of San Diego’s Craft Beer Scene

San Diego is known for its robust craft beer scene, but it’s the history and economics behind this industry that makes this city shine in a nation filled with craft beer cities. According to the Brewer’s Association, in 2014, small and craft breweries contributed $55.7 billion to the U.S. economy and supported over 424,000 jobs with 115,000 directly at breweries or brewpubs. In San Diego, for every brewery job that is added within county, 5.7 jobs in supporting industries are created. The rich history, educational practices and connectivity between brewers and has allowed more breweries to open led to success of San Diego craft beer.

Craft beer may reign in San Diego, but it didn’t start there. The story of beer actually started in Mesopotamia in 5 BC with the Sumerians who participated in the brewing and drinking of beer that was passed down from generations through a poem. Oxford scholars found this poem from1800 BC that involves Ninkasi, the goddess of brewing, and the production of beer from barley. Thousands of years later in North America, Spanish missionaries came to spread Catholicism and brought fermentation practices that produced sacramental wine, which would eventually be used in the beer making process. When the Mexican government gained independence from Spain and in 1848, the United States took the region of San Diego from Mexico.

Beer making in San Diego can be traced back to 1868 when Conrad Doblier began brewing European-style beer as an emigrant from Austria as a brewer. In 1868, two breweries were created in San Diego named the San Diego Brewing Company and Mission Brewery. During Prohibition from 1920-1933, many San Diegans moved south to Tijuana, Mexico in order to produce and drink beer legally. While there, they opened Aztec Brewing Company and Mexicali Brewery, which soared in popularity due to the low supply and high demand of alcohol in the U.S. At the end of Prohibition in 1933, the San Diego Brewing Company and Aztec Brewery were responsible for 25 percent of California’s beer production. Once beer powerhouses like Anheuser-Busch, Coors Brewing and Miller Brewing started their production of beer in the 50s, they caused commercial beer production halt in San Diego breweries until 1987.

San Diego’s craft brewery scene started again in the 80s when California legislation was passed that legalized the brewpub throughout California. It also made commercial production ands sale of beer in restaurants and home brewing legal, giving beer enthusiasts the chance to capitalize on their hobby. Home brewers started swapping recipes, experimenting and eventually, built the connection between brewers in San Diego that exists today. However, during the 80s, one brewery stood out as the founder of this new era of beer. It is the story of two best friends who formed the Karl Strauss Brewing Company. Chris Cramer and Matt Rattner opened The Karl Strauss Brewing Company in Downtown San Diego and kick-started the craft brew revolution on February 2, 1989. It was the first brewery in operation since the 50s and the first-ever brewpub in San Diego. The 1980s marked a period of brewing pioneers innovators and craft brewers in the U.S. had gone from eight in 1980 to 537 by 1994, with Karl Strauss as one of them. Today, there are 518 craft breweries opened in California alone, the most out of any state, with over 120 located in San Diego.

coasters, pivni tacky, bierdeckel

www.beercoasters.eu

Karl Strauss started their business by only brewing a golden ale, an amber lager and a dark brown ale. Because of their innovative flavors that challenged the typical light beers that were on the market, there was a high demand for Karl Strauss beer and in 1991, Karl Strauss opened a distribution center in order to ramp up their production. Today, Karl Strauss has eight brew pub locations and has plans to open a second distribution center because of the demand for their beer. Even though they only distribute their beer in California, Karl Strauss is ranked the 45th– for the largest volume of craft beer distribution in America out of 3,000 breweries. According Karl Strauss, “craft beer is not just a job, it’s who [they] are.” This can be seen through their extensive network they created with employees that were mentored at their brewery and branched out on their own.

Karl Strauss started the careers on many brewers in San Diego who added the to culture of education and family. According to the founder of Karl Strauss, Chris Kramer, “One of the reasons why San Diego has become such a mecca for craft beer is we started off with a group of individuals who were friends and collaborative rivals.” This is still true today and is the reason why San Diego’s craft brewery scene is so interconnected. Many employees who had their start at Karl Strauss opened their own breweries, adding to the ever-growing family of craft brewers in San Diego. Karl Strauss’ original bartender, Scott Stamp, opened the San Diego Brewing Company and their first-ever waitress; Gina Marsaglia opened the ever-popular Pizza Port in 1992 with her brother Vince. In addition, Karl Strauss’ original tour guide, Jack White, opened the renowned brewery Ballast Point in San Diego in 1996, which is now the 11th brewery in America for its wide distribution, innovative flavors and unique offerings. The small craft brew circle that started at Karl Strauss has promoted the art of beer making is one of the reasons why San Diego craft brewing is successful today.

hc117_bk_timeline_r1

sandiegohistory.org

The interconnected nature of the San Diego craft industry started with Cramer and Rattner in 1989, but the San Diego Brewer’s Guild allowed the craft brew industry to continue to grow in San Diego. Founded in 1997, the guild was created with two goals: to promote San Diego’s brews and to create an open line of communication between brewers. This type of communication has allowed San Diego to continue to grow the industry while also keeping the competitive market friendly with the sole goal of promoting the craft as whole rather than individual businesses. The guild advances their mission to, “promote… locally brewed beer through education and participation in community events.” Craft powerhouses like AleSmith Pizza Port, Stone Brewery, Green Flash and Karl Strauss are all members of this coalition, making it easier for brewers to unite within San Diego. Although there are guilds throughout the U.S. that promotes craft beer, the SDBG is different because their breweries continue to innovate together within San Diego. As a team in 2014, San Diego breweries dominated the World Beer Cup where they won 11 of the 14 medals awarded. During the World Beer Cup in 2016, the SDBG won more medals than the entire United Kingdom and even beat-out Germany in the category for Kölsch, which is a German style beer. Just this October, the SDBG took home another 18 medals at the Great American Beer Festival in Denver, Colorado, cementing San Diego as a destination for craft beer innovation. Denver is often thought of as a craft-brewing center as the home of the Great American Beer Festival, but only won eight medals.

screen-shot-2016-10-25-at-2-21-18-pm

Great American Beer Festival

The strong dynamic to promote the craft within the industry and become a world competitor as a city has been promoted by the San Diego Brewer’s Guild but has remained a part of the craft culture with San Diego as well. . Because most brewers had their start at other breweries, they formed a sense of respect and trust for the craft culture in San Diego. When Vinnie Cilurzo created the Double India Pale Ale in 1994 in San Diego County, nearly every brewer has embraced this style of beer in San Diego. In fact, San Diego is now internationally known for their Double IPAs, which is often referred as the San Diego Pale Ale. Stone Brewery, Karl Strauss and AleSmith, all a part of the SDBG, are famous breweries that carry the torch of the Double IPA today. The creativity and education that solidified the bonds between brewers allowed many brewers to leave the breweries they worked at to form their own and create a craft beer boom in San Diego.

brew-licenses

voiceofsandiego.org

Between 2009 and 2011, nearly 40 breweries opened in San Diego causing a surge in the craft beer market. In 2011 alone, the county’s brew pubs generated $300 million to the county, generated over $600 million in sales and created more than 2,800 jobs in San Diego. The expansion of breweries in San Diego translates to a boom of jobs and contributions to the local economy through these jobs, revenue and taxes to the City of San Diego. During this time, more brewers came to San Diego than competing cities because of the respect the city has garnered for itself and wages provided. In 2012, San Diego had the highest average wage for brewery workers in the U.S. compared to Portland and Denver, which are often regarded in the same category. Today, the wage gap has closed where the average salary is around $36,000 a year. Although wages slowed in 2014, the craft brew sector grew overall and had a direct economic value of $600 million, which is twice the amount three years prior. This figure is generated based on San Diego’s 120 local breweries and their revenue, profits, wages and jobs the industry produces. Wages may have helped grow the craft industry, but it is education portion that diversifies San Diego from other brewing regions.

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NUSIN Institute

According to the NUSIN Institute, San Diego provides more education programs for industry professionals entering the craft beer market than their competitors. These types of programs further the industry and allow brew masters to pass on their knowledge within the industry. There are two major education programs in San Diego: the San Diego State University College of Extended Studies Business of Craft Beer Professional Certificate and the University of California– San Diego Extension Brewing Certificate. Both were founded in 2013 and follow the mission of the SDBG to promote local beer through education. In addition, many brewers encourage their employees to participate in the Cicerone Certificate Program, which was created in 2008 to educate people and create craft beer leaders. Similar to sommelier training in the wine industry, the Cicerone program trains professionals in the knowledge of beer in sales and services. In the NUSIN Institute study, 57 percent of craft breweries indicated that their employees participated in the Cicerone Certificate Program. Karl Strauss is one brew company that prides themselves on having multiple employees that are certified Cicerones and beer servers because, “everything from beer and food pairings to style education is part of the Karl Strauss experience that goes above and beyond what you’ll find anywhere else.” It is experiences like this that adds an extra layer of knowledge to employees and education to customers on their journey of beer in San Diego further expanding art of beer making into other industries in San Diego.

Jobs are being created within the craft brew industry and in supporting fields. Throughout the county, NUSIN has identified that one third of local industry jobs are directly relate to brewing while two thirds focus on brewpub operations. Brewpubs are dependent on food service and hospitality sectors that are composed or hosts, servers and cooks. Because of this specialized nature of brewing, supporting fields have popped up within San Diego such as: brewing equipment design and manufacturing, packaging, sales and marketing, brewing labs, home brewing supply stores and hops and farming. All of these industries that have an impact on the brewing process generates an average $56.6 million in sales annually.

untitled

NUSIN Institute

San Diego is a hub for the innovative beer market because of the rich history of beer making and the connections between brewers that has allowed the city to work together to educate people and produce beer as one unit. These factors are the reason that San Diego has its own IPA category of beer and produces more than 2,000 unique beers annually. If Karl Strauss had not started the craft sector in the 80s, the industry would not be the same. It is the need for creative flavors, friendly and collaborative rivals and the growth of an industry that Karl Strauss created that keeps the San Diego craft beer industry alive today. It is also the reason why they won mid-size brewing company and brewer of the year at the 2016 Great American Beer Festival. If the San Diego craft beer industry stays true to their message that craft beer is a family network that succeeds based on innovation, education and interconnectivity, there is a chance that the beer bubble won’t bust for a while longer and small batch brewers will continue to succeed.

Misused Policy: China’s Electric Vehicle Subsidy Fraud

The Chinese government has poured 33.4 billion yuan in subsidies since 2009. The government decided to establish a world-leading industry and increase jobs and exports, and to reduce oil dependence and the urban pollution. The incentive policy offers subsidies to encourage the companies that build electric cars, plug-in hybrids and fuel-cell vehicles to produce and sell electric vehicles (EVs). But a report from the Ministry of Finance of China exposed that at least five automakers defrauded the government for a total of 1 billion yuan ($150 million) in subsidies aimed at promoting EVs in September 2016.

Since some incentive regulations were vague and under weak supervision, speculators learned how to reap the benefit from a poorly crafted subsidy system the government had launched. For example, a big portion of the subsidies flowed into unqualified or non-existing cars made by dishonest companies. One of the bus manufacturers involved in the scandal was the Higer Bus in Suzhou, which received about a half billion yuan in subsidies through sales inflation. The five companies defrauded an average of 25,000 yuan per car, according to the government report.

In some cases, the manufacturers sold unqualified or faulty cars to related parties (for example, the companies’ own leasing subsidiaries). After the companies received the subsidies from the government, the buyers returned the cars. In other cases, the makers installed dysfunctional batteries or even one battery in different vehicles.

The high profit under the government support cultivated another deal model between the sellers and the buyers. An electric bus worth one million yuan would be priced at two million yuan. The buyers only needed to pay one million yuan, but the sellers forged a two million yuan receipt to apply for the government subsidy.

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China saw a big boom of EVs in 2015

The government planned to phase out the subsidies on the EV industry from 2016 to 2020. The manufacturers stepped up the production by adding incomplete or unlicensed vehicles, especially in the end of 2015. The total number of EVs sold in the fourth quarter increased by 92,000 dramatically. The monthly production in December 2015 quadrupled compared to the number in December 2014. Higer Bus sold 2,000 EVs with 83.9 percent incomplete in December 2015, which amounted to one-fifth of the company’s yearly sales.

subsidy-standards2
China’s EV Subsidy Criteria during 2013-2015

The policy designed to support the EV industry hurt the market instead. The vague criteria in the incentive policy lowered the threshold for receiving subsidies. Under the standard from 2013 to 2015, the amount of subsidies an EV could receive was mainly based on its range (mileage) or length. There were no rigorous standards for the vehicles’ technology and actual quality.

The subsidies have been blamed for attracting the ‘wrong crowd’ according to Zhang Zhiyong, a Chinese market commentator and auto-analyst based in Beijing. Many new players in the market decided to make EVs just to get the subsidies. They came not with previous manufacturing experience or R&D input, but with a gold-rush mentality.

China registered the largest amount of plug-in electric vehicles (PEVs) in the first quarter of 2016, yet ranks lowest on the Plug-In Electric Vehicle Index, which is a quarterly index tracking the production effectiveness and impact of the PEV market in different countries. “Despite having more than 200 manufacturers of new-energy passenger vehicles, buses and special-use vehicles, China still lags behind global leaders in terms of quality, reliability and key technology,” said Wang Cheng, an official at the China Automotive Technology and Research Center.

pev-index

According to the subsidy policy from 2013 to 2015, a qualified minibus with a length of three to four meters can help its maker receive subsidies ranging from 300,00 to 600,000 yuan. To get the subsidy, the company didn’t even need to know how to manufacture the electric bus; the company only needed to buy a 20,000-yuan diesel-engine bus and install an electric battery.

Though unqualified EV companies have cheated on the subsidy system, it does not mean the government support is unnecessary. Government incentives for EV industy are common practice in several national and local governments around the world, such as France, Germany, Japan and the United States. EV programs in these countries also encourage the residents and local bus transit agencies, which target more relevant parties than just the car makers. For example, California established the Clean Vehicle Rebate Project, which allows residents to get up to $7,000 for the purchase or lease of an EV. The transit agencies can benefit from the program of Electric Vehicle Supply Equipment Loan and Rebate. “They are set up to encourage local agencies to purchase electric vehicles like those from BYD, which help the environment while growing jobs here in California,” said the PR spokesman Joshua Goodman from BYD USA, an EV bus manufacturer with its headquarter in Los Angeles, “the California Air Resource Board also offers several different incentives to us (the EV manufacturers).”

Foreign countries’ practice offers good examples that China can learn from. The leading industry does not contradict the support from the governments. But a germane policy is in need. The Chinese government is trying to improve its policy now . The regulators plan to impose tougher policies on incentives, such as stricter technology standards on manufacturers. The government also considers limiting the number of startup EV makers to a maximum of ten.

Works Cited:

Bloomberg News. China Swats ‘A Few Flies’ to Temper Electric-Car Maker Excesses. Web. 11 September. 2016.

An Limin, Bao Zhiming and Han Wei. China Hammers out Tougher Subsidy Plan for Electric Vehicles. Caixin News Online. Web. 30 September. 2016.

Sustainable Transport In China. New Policy on Electric Buses Published in China. Web.

Bloomberg News. 95% of China’s Electric Vehicle Startups Face Wipeout. Web. 28 August. 2016.

 

Wanda’s Hollywood Ambition

Wang Jianlin, the richest man in Asia, is trying to change the balance of power in the global entertainment business. As the head and the founder of the largest Chinese commercial property company Dalian Wanda Group, Wang has made decisions to spend billions to buy his way in Hollywood. After the company became the world’s largest cinema chain operator in 2015, it announced several other acquisition and partnership with major Hollywood Studios. While facing critics and doubts, the company is not hiding its ambition to become a global entertainment colossus.

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Both Wanda and Hollywood are facing opportunities and concerns. To Wanda, it is shifting focus from property development to entertainment, hoping to start a new chapter of its business legend. Since 2012, Wanda has spent more than $10 billions to invest in everywhere from worldwide theater chains to Hollywood studios. But it takes time to define whether these are financially smart decisions. To Hollywood studios, having Wanda and other Chinese investments backing their projects means they have capitol to make the film they want to make; more importantly, they have access to the restricted Chinese film market. But at the same time, it raises concerns that Chinese might start to have too much influence over Hollywood.

According to Forbes, the 61-year-old Chinese businessman Wang Jianlin has a net worth of $32.8 billion as of November 2016, and his company’s assets amounted to over $90 billion. Before it made its moves on Hollywood, Wanda Group primarily focused on its commercial properties. Founded in Dalian, China in 1988, Wanda first started as a residential property company. To date, Wanda has established 160 commercial shopping malls throughout China.

Starting 2012, the company decided to shift gear to entertainment. Wanda Cultural Industry Group, founded in 2012 and became one of the company’s main focuses, has already become the largest entertainment company in China. Prior to the cultural group, Wanda established its film division, Wanda Media in 2010, which has already become the largest private Chinese film production company. It seems like the company has an obsession of becoming “the largest” or “the best,” and yes, the cultural group aims to become one of the top five entertainment companies in the world by 2020.

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This is an aggressive ambition. In hope to make it happen, Wanda followed up with a serious of direct investments, starting with its acquisition of AMC in 2012.

In September 2012, a byline started to appear underneath every AMC logo: A Wanda Group Company. Wanda spent $2.6 billion on this acquisition. AMC was the second largest movie theater chain in the United States at the time, and has over 5,000 thousand commercial movie screens in the U.S., out of a total of 40,759, and the acquisition has made Wanda the largest cinema operator in the world. However, prior to the purchase, theater operators in the U.S. were facing big challenge from low attendance rate. According to New York Times, attendance in North America 2011 fell to $1.28 billion, which is the lowest since 1995. At that time, it was unclear what caused the downfall, but theater certainly didn’t seem like the best investment that would earn Wanda much quick money.

Is it really a good deal for Wanda to buy AMC? At least Wang Jianlin thinks it is.

“It doesn’t matter how much money we make,” Wang was quoted in a Forbes interview. Perhaps rather than getting instant return, his vision is more towards making Wanda a globally known brand. In fact, the act of purchasing AMC had gotten Wanda and himself immediate public exposure. All of the sudden, Western media are writing about a Chinese entertainment company. From a public relation point of view, this is a long-term investment that comes with “free” advertisement.

(120905) -- LOS ANGELES, Sept. 5, 2012 (Xinhua) -- Chairman and President Wang Jianlin (R) of China's Dalian Wanda Group Co. and AMC chief executive officer and president Gerry Lopez attend a press conference at an AMC theater in west Los Angeles, the United States, on Sept. 4, 2012. China's leading private conglomerate Dalian Wanda Group Co. on Tuesday completed a high-profile acquisition of AMC Entertainment Holdings, Inc., valued at roughly 2.6 billion U.S. dollars, in Los Angeles. (Xinhua/Zhao Hanrong) (nxl)

Moving on to 2015, Wanda spent another $3.5 billion on Legendary Entertainment, one of the biggest filmmaking studios in Hollywood. In the past, Legendary had co-produced many well-known movies including “Jurassic World” and “Interstellar.” Some of its productions are more popular in China than in the U.S., such as “Godzilla” and “Warcraft.” The company’s future productions will likely include more Chinese elements and characters not only because it is now owned by a Chinese company, but also because of the access of the huge Chinese market. The number of movie screens in China has been increasing dramatically since 2009. As of 2015, China has 31,882 screens, which is more than triple to the number in 2011.

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Legendary’s upcoming production, “The Great Wall” will release in February 2017. Directed by Chinese director Yimou Zhang and starring Matt Damon, the movie will be distributed by Universal Pictures and two other Chinese distribution companies. This is a giant Hollywood production produced by a Chinese production company – although it wasn’t Chinese until last year.

Just two months after acquiring Legendary, Wanda paid $1.1 billion in cash to settle a deal with Carmike Cinemas, adding 2,954 screens to the AMC family, making it the largest theater chain in the world. The stock prices for both Carmike and AMC raised a little bit right after the purchase, signaling a good start for the merger.

Soon after the deal with Carmike, Wanda tried to make a deal for Paramount. Earlier this year, Paramount was looking for a party to buy 49 percent stake of the studio. Wanda was interested in making about $1 billion equity investment. However, after months of talking, Viacom abandoned the plan to sell in September. In response, Wanda almost immediately announced a partnership with Sony. The exact size of this negotiation was not released, but it is likely to be a smaller investment that won’t give Wanda a lot of initiatives on Sony’s strategic decisions. The company will now provide 10% to 15% in co-financing on some of Sony’s films, including the upcoming production “Passengers.” It will also be Sony’s strongest support on film distribution and marketing in China.

As of now, two months after partnering with Sony, Wanda announced another acquisition for Dick Clark Productions, offering about $1 billion. Dick Clark Productions had produced many television shows and awards, including the Golden Globes and “So You Think You Can Dance.” This acquisition marks Wanda entering the world of television production.

The series of intensive movement is causing lawmakers concern. They are worried that the company’s decisions might have been made in favor of the Chinese communist party, which may perform a “foreign propaganda influence over American media.” Traditionally, Chinese’s cultural presence has not been very strong. So the government has made “enhancing China’s soft power” as one of its priorities. The concerns seems logical especially when Wang Jian Lin is a businessman with a communist party background.

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Wang Jianlin explained his business motivation at Wanda’s L.A. Film Summit in October. “Chinese box office revenue has the potential to maintain an annual 15 percent growth for about a decade,” Wang said. By acquiring American companies, he is not only bringing technology and talent back to China, but also opening up the market for the American content. Wang believes his investments will thus be beneficial. And if Hollywood wants a share of this giant market, it needs cooperation with Chinese companies, and it needs to have better understanding in Chinese audience.

Hollywood isn’t the only place Wanda invests in. At the summit, Wang also encouraged Hollywood Filmmakers to come to Wanda’s new movie studio in Qingdao, China. Said to be the largest movie studio in the world, the Qingdao Oriental Movie Metropolis is aiming to rival Hollywood. Situated on a 494-acre site, the studio complex costs Wanda $8.2 billion to build and will open in 2018.

Wanda is not the only one to invest in Hollywood. Other Chinese conglomerates, such as Alibaba and Tencent, have also expressed interest. On Monday, Oct.10, Alibaba announced a partnership between its subsidiary Alibaba Pictures and Steven Spielberg’s Amblin. Earlier, Chinese internet giant Tencent and Hong Kong based information and communication technology company PCCW had also said they would invest $1.5 billion to STX Entertainment.

All those Chinese investments signal greater Chinese influence in Hollywood. However, by far Wanda seems to be the only one determined to enter the game as a main player. All together, Wanda has spent about $10 billion on investment in Hollywood, and certainly is willing to spend more to seal deals with Hollywood giants. Even for a man like Wang Jianlin, that’s still a lot of money. Only one thing can be certain, that the entertainment industry has become one of Wanda’s main strategic focuses. The company said it would become one of the five cultural enterprisers in the world by 2020, and it is keeping up with its ambitious vow.

 

 

Other Reference:

http://www.voachinese.com/a/wanda_purchasing_20120716/1405262.html

http://www.theepochtimes.com/n3/2089188-chinas-hollywood-takeover/?utm_expid=21082672-12.JPI1vw8-RKyYhrWpuuXhuA.0&utm_referrer=https%3A%2F%2Fwww.google.com%2F

Wanda’s Legendary Buy Is Just the Beginning of China’s Investment in Hollywood

http://yuleyingtang.baijia.baidu.com/article/649735

http://www.wsj.com/articles/chinas-dalian-wanda-buys-legendary-entertainment-for-3-5-billion-1452567251

 

Higher Minimum Wage? Expect Maximum Job Losses

In April 2015, over one thousand protestors flooded the University of Southern California campus sporting signs and mega phones. The contingent was primarily made up of fast food workers from the popular chains dotting Figueroa Street seeking a $15 per hour “living” wage. This over 100% increase from the federal minimum wage of $7.25 per hour would have once been unthinkable.

In July 2015, Los Angeles County did the unthinkable by instituting a plan to gradually raise the minimum wage from $9 to $15 per hour by 2022. New York City, Seattle, and Washington D.C. have similar plans (Journalist’s Resource). The minimum wage has long been a hot-button topic in American politics. Democrats tend to support a minimum wage increase, arguing that real-worker pay has unfairly stagnated. There is a long standing concern amongst Republicans that the economic effects of a high minimum wage would reduce profits for businesses and cause businesses to cut employment. Increasing the minimum wage to $15 per hour has potential to force fast food and retail businesses to raise prices and slash labor in order to cut costs.

The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act to keep money in struggling workers’ pockets (Journalist’s Resource). Since then, it has gradually risen from 25 cents to $7.25 per hour, but it has not been able to keep up with inflation and has actually decreased in real value (Journalist’s Resource). If the minimum wage were increased to $10 per hour, it would be equivalent to its adjusted 1968 value (Journalist’s Resource). Since the last federal increase in 2009, 23 states have taken matters into their own hands by increasing the state minimum wage over the federal (FRBSF). In these states, minimum wages in 2014 averaged 11.5% higher than the federal minimum (FRBSF). However, many of these states also have higher costs of living, providing some justification for the wage elevation.

Percent Difference between State and Federal Minimum Wages, June 2014 (FRBSF)

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There is historical precedent for elevating the minimum wage, but not to the standard of the proposed living wage. The MIT living wage calculator defines the living wage as the hourly rate that an individual must earn to support their family, if they are the sole provider and are working full-time (MIT). A living wage is dependent on location, cost of living and price indexes. For example, the living wage for one adult in Los Angeles County, CA is $12.56 (MIT). In Beaverhead County, Montana, it is $9.74 (MIT). This casts doubt over the effectiveness of a standardized federal living wage, meaning it is in individual states’ and cities’ best interests to set a minimum wage based on their economy.

Recent studies on minimum wage increases have yielded mixed results. A Purdue University study released in July 2015 suggests that paying fast food restaurant employees $15 per hour could result in price increases of about 4.3 percent (US News). Another study by Jeff Clemens from the National Bureau of Economic Research estimates that as many as one million jobs lost from 2006-2010 were a result of minimum wage increases, most of them belonging to lower-skilled workers (US News). Meanwhile, other studies point towards wage growth and spending increases from the lower-skilled worker bracket (US News). In Tacoma, restaurant jobs have actually increased since a bill to raise the minimum wage to $12 by 2018 passed (Grub Street).

The critiques against raising the minimum wage are hard to ignore when examined from a business owner’s perspective. According to a Pew Research Poll, 55% of minimum wage employees are employed in the leisure and hospitality industries, while another 14% are in retail (Pew). This means that minimum wage employees work for both large companies and small businesses, many of which are based in fast food and retail. The effects of a substantial increase would be handled differently from company to company, but the results would be similar.

Ultimately, a business’s job is to make a profit for the owners and investors, while the minimum wage is a form of government regulation intended to protect workers. This conflict between private and public interest was expressed in my interview with a former McDonald’s employee, Hamburger University graduate and small business owner, Patricia Podkowski, 56. When asked how businesses would respond to a $15 per hour minimum wage, she replied, “Business owners are there to put food in their families’ pockets. They will do what they need to do to cut costs.”

What business owners will do to cut costs depends on the size of the business. Many proponents of raising the minimum wage argue that the resulting price increases at businesses such as fast food restaurants are actually necessary. Because the minimum wage has stagnated, fast food prices have as well and can be moderately increased without impacting the profit line. On the surface, small increases makes sense, but the reality is fast food pricing does not follow the basic laws of economics. According to former McDonald’s CEO Ed Rensi,

“If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases.” (Forbes)

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The fast food and retail industries cannot drastically raise prices because their customers are looking for bargains. While an increase from $1 to $2 may not seem like much, a 100% increase may scare off a loyal fast food chain customer who is accustomed to their favorite item only costing $1. The effects of drastic price hikes to cover for labor raises would only result in additional losses for businesses, leading to unemployment.

Employers are not just paying more in salaries from a minimum wage increase, but would have to pay additional costs such as payroll taxes and insurance. This means owners and managers will resort to creative methods to cut labor costs while maximizing productivity. Patricia, a former shift manager at McDonald’s, believes that managers will spread out shifts and decrease the number of employees during slow hours. For example, a fast food chain employee who used to work the 12:00-5:00 lunch shift might find their hours reduced to 12:30-4:30 to account for the downtime between the lunch and dinner rushes. Even if their salary is increased, they will actually end up losing money in a given pay period because they are working significantly less hours. This could be further amplified at small businesses with lower profit margins, where an owner can pick up shifts themselves rather than paying an employee.

If price increases cannot offset increasing labor costs, decreasing labor is the only other option for business owners. A major point of emphasis for Patricia was that business boils down to controllable and uncontrollable costs. Utilities, taxes and production costs are uncontrollable, price is semi-controllable and labor hours are relatively controllable. However, there are still uncontrollable aspects of labor, which accounted for 15-35% of operating costs at different companies she worked for. Business owners cannot cut too much labor because they have to produce enough product for their customers. However, minimum wage workers may soon find their jobs replaced by a less expensive alternative: technology.

In 2011, McDonald’s ordered more than 7000 self-serve kiosks to replace entry-level cashiers (Forbes). The famous Chicago Rock and Roll McDonald’s is planning on thorough automation in an attempt to shake up their image in the eyes of younger customers (Chicago Eater). It is much cheaper for a business owner to invest in and maintain a $35,000 robotic arm to scoop french fries than it is to pay a human upwards of $31,000 a year to do the same task less efficiently. Former McDonald’s CEO Ed Rensi believes that raising minimum wage in the face of automation will only expedite the process of replacing employees with machines, saying, “It’s very destructive and it’s inflationary and it’s going to cause a job loss across this country like you’re not going to believe.” (Forbes)

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http://www.zerohedge.com/news/2016-04-06/mcdonalds-responds-minimum-wage-hikes-launches-mccafe-coffee-kiosk

The morality aspect of minimum wage may be the most compelling argument against substantial increases because the result might hurt the marginalized people the minimum wage is meant  to protect. In California, $3.7 billion goes to public assistance to working families (Washington Post). Even with a full-time job in one of the highest minimum wage states, minimum wage employees need welfare to survive. This means the government is essentially subsidizing fast food and retail companies with taxpayer money to keep their payroll low. Executives are not suffering from minimum wage increases, the workers are by becoming stuck in a vicious cycle of economic poverty with no wage mobility. An increased minimum wage is not the way to break this cycle, it will only trick young people into thinking minimum wage is a way to make a living when they should be pursuing an education.

Word Count: 1457

References

http://journalistsresource.org/studies/economics/inequality/the-effects-of-raising-the-minimum-wage

http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/

http://livingwage.mit.edu

http://www.latimes.com/business/la-fi-minimum-wage-impacts-20160421-snap-htmlstory.html

http://www.forbes.com/sites/timworstall/2016/05/26/mcdonalds-ex-ceo-says-15-minimum-wage-would-lead-to-robots-and-automation-hes-right/#4fb0dd847860

http://chicago.eater.com/2016/9/27/13078184/chicago-mcdonalds-of-the-future-photos-river-north-touch-screen

http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-minimum-wage/

http://www.usnews.com/news/the-report/articles/2016-03-28/ask-an-economist-will-a-minimum-wage-hike-help-or-hurt-workers

https://www.washingtonpost.com/posteverything/wp/2015/04/15/we-are-spending-153-billion-a-year-to-subsidize-mcdonalds-and-walmarts-low-wage-workers/

http://www.thenewstribune.com/news/politics-government/article109295012.html

http://www.grubstreet.com/2016/01/seattle-restaurant-jobs-increase.html

Interview with Patricia Podkowski, 10/5/2016

The Economic Realities of an Independent Catalonia

The debate surrounding Catalan independence has swirled with varying degrees of fervor for hundreds of years. Back in the 1600’s Catalans fought for freedom from the Spanish crown in the Reaper’s War which they ultimately lost. Since then the region has remained in a strained relationship with the Spanish Central government. Whether that government was a monarchy, democracy or fascist dictatorship the Catalans have always felt a distinctly separate cultural and ethnic identity from the rest of Spain. Similar sentiments exist in other Spanish regions such as the Basque Country and Navarre, as well as other European regions such as Scotland, in the UK, and the Umbria region of Northern Italy.

In more recent years, the arguments from separatist groups have taken a decidedly more economic bend. They have been fueled by the European debt crisis and other major economic issues facing Spain, and signal a bit of a change from the arguments from yesteryear. Even during the Spanish Civil War, which was largely fought between German and Italy-backed Nationalists and Soviet-backed Communists, the Catalans were largely in league with the anarchists whose economic policies you can probably guess weren’t too fully formed based on the fact that, you know, they were anarchists.

So this new approach is a stark change of tact for independistas, but don’t let the new paint job fool you. Despite the difference in content the underlying message is the same. They are still leveraging the historic trend of Catalan mistrust of the Madrista government and deeply felt regional pride to push for an independent Catalonia. Only now their arguments center on unfair taxation and mounting regional debt, instead of language and literature.

But does this rhetoric hold up to objective economic scrutiny?

If we look at raw numbers we can see that Catalonia comprises a significant portion of the overall Spanish GDP. In 2014, Spain’s total GDP was about $1.1 Trillion, according to World Bank, with Catalonia consistently accounting for around 20% of that figure, or just over 200 Billion euros, despite only comprising 16% of the nation’s population at 7.5 million people. Catalan GDP per capita was just over 28,000 euros in 2014, just behind the Euro-zone figure of just under 30,000 euros. But it was over 20% higher than the average Spaniard, thus making it one of the wealthiest regions in the country.

screen-shot-2016-10-08-at-12-03-23-amSource: Statista

Two major drivers of the region’s economy are both the export and transport of goods. Catalonia accounted for 25.5% of Spain’s total exports in 2015. Barcelona, the regional capital, is the third largest port in Spain, and Catalonia handles 70% of exports from the rest of Spain. Based on these strengths it would certainly hurt Spain to lose the one of its most economically powerful regions. It would hinder trade, and levy a sharp blow on the overall country’s overall economic output. Conversely, it could put Catalonia in danger of facing tariffs and boycotts on its goods which would harm its trade-dependent economy. Dangers loom for both sides in the event of a separation.

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Catalonia Region Economic Data (Source: World Bank)

So what’s driving the Catalan’s push for economic separation? Two things: a major debt crisis and the perception of unfair taxation. But what do we find when we look at these issues more closely? Let’s look at the debt issue first.

Despite the region’s economic strength it is still the holder of the largest regional debt in Spain. The meteoric rise of Spanish debt as a result of the European debt crisis was felt by the entire country, but it’s an issue that has become a particular flash point for Catalans.

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Catalonian GDP per capita compared to Spain and the Eurozone (Source: Statista)

After a brutal recession in 2008, and a second recession hit in 2012 and debt in greater Spain soared from 65.9% of GDP in 2011 to 85.4% in 2012. This reality led the Spanish central government to levy harsh austerity measures in an attempt to get the debt situation under control. They froze public sector wages and cut government spending by 12%. Combined with a regional unemployment rate of 22% in 2012, Catalans came face to face with a daunting combination of economic issues.

In attempting to service the debt the Spanish government made it more difficult for regions, like Catalonia, to jump start their economy through classic Keynesian stimulus plans. This is also a consequence of the Euro currency system which does not allow individual country to create their own monetary policy in order to ease the blow of recessions.  Perhaps that fact forces Madrid’s hand to austerity measures, but not many Catalans want to hear excuses for the Madridistas. The economic results, or lack thereof, of these actions certainly does not help matters. Despite severe austerity measures Spanish national debt debt rose to 99.3% of its total GDP in 2014, and then shrunk slightly to 1.1 trillion euros, in 2015.

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Source: Trading Economics

The question of how the two sides will allocate this debt is essential to understanding the possible economic consequences of Catalonian Secession. If the two nations agree that the Catalans should take 19% of the debt with them, or the same amount of money they contribute to Spanish GDP, then the effects on Spanish national debt after losing the region would be marginal, because they would lose the same share of debt, as they lose in total GDP.

However, if the central government allows the Catalans to leave with 16% of the debt, which matches their population size, or even 11% which would equate to government expenditures in the region then, according to economist Xavier Sala-i-Martin, Spain’s national debt could rapidly approach unsustainable levels. Even worse, If the Spanish central government comes to no debt transfer agreement with the Catalans it could mean that they leave without taking on their share of the Spanish national debt. This would be legally dubious, but possible,  and it would cause Spanish debt to explode. It’s estimated that debt levels would rise to nearly 125% of total Spanish GDP due the multiplying effect of losing the Catalan contribution to the national GDP while also taking on more debt. This eventuality could lead to a Spanish default. However, if the Catalans attempt to leave with no economic agreement they could surely expect to face harsh economic sanctions from Spain. Possibly even Spain blocking Catalonia’s entry into the EU because countries need unanimous approval for entry.

With both sides facing dangerous outcomes from secession, it can be difficult to understand why this independence movement has gained so much traction. But by investigating Spanish taxation practices we can see why so many Catalans, who are already predisposed to mistrust the central government, feel independence is their only option to receive fair treatment.

In response to central government austerity and rising debts, the Catalan regional government requested a payment of around 5.57 billion euros from Madrid, and not in the form of a loan. They wanted this as repayment for what they see as unfair taxation policies by the Central government.

According to a survey taken by the Catalan regional government in 2014, 80% of the Catalan population felt the central government taxed them at an unfairly high rate. In the populace’s view, too much money was taken without reinvesting enough of it back into Catalan infrastructure and social programs. These concerns led to the slogan, “España nos roba,” (Spain is robbing us), and fueled the pro-independence parties that were elected throughout the region in September 2015.

The question of whether Spain is truly “robbing” the Catalan people quickly becomes more complicated than it initially appears, and certainly more complex than the independentistas of Catalonia want their supporters to believe.

If we use the figures given by the Catalan government, they lose 8.5% of its GDP to the central government every year. Independentistas argue that if they left Spain then this money would simply stay in the region for the people to use at their own discretion and help curtail their rising debt. Those on the remain side respond that if you take into account the amount of public spending on services and infrastructure paid for by the national government then this number of “saved” GDP would shrink to around 4-5%.

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Source: Statista

Around the world, it is not uncommon for a wealthy region, such as Catalonia, to pay a higher share of taxes that are then redistributed to less wealthy regions. A 2014 study by Wallet Hub illustrates how this very principle exists here in the US. For example, a state like New Jersey received only $0.88 for every dollar they put into federal income tax. Meanwhile Mississippi, a relatively poor state, gets $3.07 back for every dollar they put into the system.

So if this happens regularly elsewhere are the Catalans just being unreasonably greedy? Maybe, but maybe not.

In a 2012 study published by Barcelona’s Pompeu Fabra University, researchers found that Catalonia accounted for 118.6%, of national taxes per capita which placed it third out of the 15 regions in Spain. After the redistribution of taxes its per capita distribution of tax money fell to 99.5% of the national average, placing it 11th. Conversely, Extremadura, a remote, mountainous region along the Spanish border with Portugal, which ranked 14th in national taxes per capita at 76.6%, rose to third place in per capita tax revenues after redistribution by receiving 111.8% of average government resources per capita.

Taking a step back, it’s clear that a combination of austerity tactics to cut down debt and improper tax redistribution created an environment ripe for separatism, though some analysts hold out hope that the situation can be rectified. “We continue to believe that the secessionist fervor is a response to fiscal austerity,” analysts at Credit Suisse say. “Much of it would calm down if the Madrid government re-negotiates intra-regional transfers with Catalonia and the region is allowed to have more tax autonomy.”

Catalans can point to the Basque Country and Navarre regions of Spain, as examples of fiscal policy that, if granted to Catalonia, may help settle talks of secession. Both of those regions have agreements with the central government allowing them to keep most of their tax revenues without sending them to the Spanish government. Perhaps if the central government institutes smart changes, or merely weathers the storm, then the winds of secession will die down.