MECKENHEIM, Germany (AP) — Martin Kopf needs natural gas to run his family’s company, Zinkpower GmbH, which rustproofs steel components in western Germany.
Zinkpower’s facility outside Bonn uses gas to keep 600 tons of zinc worth 2.5 million euros ($2.5 million) in a molten state every day. The metal will harden otherwise, wrecking the tank where steel parts are dipped before they end up in car suspensions, buildings, solar panels and wind turbines.
Six months after Russia invaded Ukraine, the consequences are posing a devastating threat to the global economy, including companies like Zinkpower, which employs 2,800 people. Gas is not only much more costly, it might not be available at all if Russia completely cuts off supplies to Europe to avenge Western sanctions, or if utilities can’t store enough for winter.
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Germany may have to impose gas rationing that could cripple industries from steelmaking to pharmaceuticals to commercial laundries. “If they say, we’re cutting you off, all my equipment will be destroyed,” said Kopf, who’ also chairs Germany’s association of zinc galvanizing firms.
Governments, businesses and families worldwide are feeling the war’s economic effects just two years after the coronavirus pandemic ravaged global trade. Inflation is soaring, and rocketing energy costs have raised the prospect of a cold, dark winter. Europe stands at the brink of recession.
High food prices and shortages, worsened by the cutoff of fertilizer and grain shipments from Ukraine and Russia that are slowly resuming, could produce widespread hunger and unrest in the developing world.
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Outside Uganda’s capital of Kampala, Rachel Gamisha said Russia’s war in faraway Ukraine has hurt her grocery business. She has felt it in surging prices for necessities like gasoline, selling for $6.90 a gallon. Something that’s 2,000 shillings (about $16.70) this week may cost 3,000 shillings ($25) next week.
“You have to limit yourself,” she said. “You have to buy a few things that move fast.”
Gamisha has noticed something else, too — a phenomenon called “shrinkflation”: A price may not change, but a doughnut that used to weigh 45 grams may now be only 35 grams. Bread that weighed 1 kilogram is now 850 grams.
Russia’s war led the International Monetary Fund last month to downgrade its outlook for the global economy for the fourth time in under a year. The lending agency expects 3.2% growth this year, down from the 4.9% it forecast in July 2021 and well below a vigorous 6.1% last year.
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“The world may soon be teetering on the edge of a global recession, only two years after the last one,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said.
The U.N. Development Program said rising food and energy prices threw 71 million people worldwide into poverty in the first three months of the war. Countries in the Balkans and sub-Saharan Africa were hit hardest. Up to 181 million people in 41 countries could suffer a hunger crisis this year, the U.N. Food and Agriculture Organization has projected.
In Bangkok, rising costs for pork, vegetables and oil have forced Warunee Deejai, a street-food vendor, to raise prices, cut staff and work longer hours.
“I don’t know how long I can keep my lunch price affordable,” she said. “Coming out from COVID lockdowns and having to face this is tough. Worse is, I don’t see the end of it.”
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Even before Russian President Vladimir Putin ordered the invasion of Ukraine, the global economy was under pressure. Inflation had skyrocketed as a stronger-than-expected recovery from the pandemic recession overwhelmed factories, ports and freight yards, causing delays, shortages and higher prices. In response, central banks began raising interest rates to try to cool economic growth and tame spiking prices.
“We’ve all got all these different things going on,” said Robin Brooks, chief economist at the International Institute of Finance. “The volatility of inflation went up. The volatility of growth went up. And therefore, it’s become infinitely harder for central banks to steer the ship.”
China, pursuing a zero-COVID policy, imposed lockdowns that have severely weakened the world’s second-biggest economy. At the time, many developing countries still grappled with the pandemic and the heavy debts they had taken on to protect their populations from economic disaster.
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All those challenges might have been manageable. But when Russia invaded Ukraine on Feb. 24, the West responded with heavy sanctions. Both actions disrupted trade in food and energy. Russia is the world’s third-biggest petroleum producer and a leading exporter of natural gas, fertilizer and wheat. Farms in Ukraine feed millions globally.
The resulting inflation has rippled out to the world.
Near Johannesburg, South Africa, Stephanie Muller has been comparing prices online and checking different grocery stores to find the best deals.
“I have three children who are all in school, so I have been feeling the difference,” she said.
Shopping at a market in Vietnam’s capital of Hanoi, Bui Thu Huong said she’s been limiting her spending and cutting back on weekend dinners out. At least there’s one advantage to cooking at home with her children: “We can bond with them more in the kitchen, while saving money at the same time.”
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Syahrul Yasin Limpo, Indonesia’s agriculture minister, warned this month that the price of instant noodles, a staple in the Southeast Asian nation, might triple because of inflated wheat prices. In neighboring Malaysia, vegetable farmer Jimmy Tan laments that fertilizer prices are up 50%. He’s also paying more for supplies like plastic sheets, bags and hoses.
In Karachi, Pakistan, far from the battlefields of Ukraine, Kamran Arif has taken a second, part-time job to supplement his wages.
“Because we have no control on prices, we can only try to increase our income,” he said.
A vast majority of people live in poverty in Pakistan, whose currency has lost up to 30% of its value against the dollar and the government has increased electricity prices 50%.
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Muhammad Shakil, an importer and exporter, says he can no longer get wheat, white chickpeas and yellow peas from Ukraine.
“Now that we have to import from other countries, we have to buy at higher prices” — sometimes 10%-15% more, Shakil said.
As the war fuels inflation, central banks are raising interest rates to try to slow price increases without derailing economic growth.
The resulting increase in loan rates is punishing FlooringStores, a New York company that helps customers find flooring material and contractors. Sales are down because fewer homeowners are borrowing to pay for home improvements.
“A huge percentage of our customers finance their projects with home-equity loans and similar products, meaning that the hike in interest rates really killed our business,” CEO Todd Saunders said. “Inflation wasn’t helping, but the interest rates had a bigger effect.”
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Europe, which for years depended on Russian oil and natural gas for its industrial economy, has absorbed a gut punch. It faces the growing threat of recession as the Kremlin throttles back flows of natural gas used to heat homes, generate electricity and fire up factories. Prices are 15 times what they were before Russia massed troops on the Ukrainian border in March 2021.
“There’s a lot more recessionary risk and pressure in Europe than in the rest of the high-income economies,” said Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England policymaker.
The damage has hardly spared Russia, whose economy the IMF expects to contract 6% this year. Sergey Aleksashenko, a Russian economist now living in the United States, noted that the country’s retail sales tumbled 10% in the second quarter compared with a year earlier as consumers cut back.
“They have no money to spend,” he said.
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Wiseman reported from Washington. AP reporters Rodney Muhumuza in Kampala, Uganda; Mogomotsi Magome in Johannesburg; Aya Batrawy in Dubai, United Arab Emirates; Hau Dinh in Hanoi, Vietnam; Eileen Ng in Kuala Lumpur, Malaysia; Edna Tarigan in Jakarta, Indonesia; Tassanee Vejpongsa in Bangkok; Muhammad Farooq in Karachi, Pakistan; and Munir Ahmed in Islamabad contributed.
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Follow AP’s coverage of the war in Ukraine at https://apnews.com/hub/russia-ukraine
In recent decades, populist presidential campaigns have arisen from the left (Bernie Sanders) and the right (Pat Buchanan). Both of these campaigns had limited appeal across the political spectrum or even attempted to engage Americans of diverse political views.
Over the past year in his independent presidential campaign, Bobby Kennedy Jr. has sought to bring together members of both major political parties, with a form of economic populism that expands ownership opportunities. In contrast to Sanders, Kennedy’s goal is not to grow the welfare state or state control over the economy. His economic populism is free-market oriented, aimed at building a broader property-owning middle class. It is aimed at widening the number of worker-owners with a stake in the market system, through their ownership of homes, businesses, employee stock and profit sharing, and other assets.
Whether Kennedy’s economic strategies can achieve the goals of ownership and the middle class he has set, remains to be determined. But his “ownership economy” is one that should be discussed and debated. Currently, it is largely ignored by the legacy media—or subsumed by the parade of articles speculating about of how many votes he will “take away” from President Biden or President Trump.
I wrote about Kennedy’s heterodox jobs program late last summer. In the eight months since, he has sharpened his jobs agenda, and connected it to a broader platform of worker ownership. It is time to revisit the campaign’s economic themes, briefly noting three of the subjects Kennedy often speaks about in 2024: the abandonment of vast sections of the blue collar economy, low wage workforces, and the marginalization of small businesses.
Abandonment Of Blue Collar Economy
“Compensate the losers” is the way that political scientist Ruy Teixeira characterizes the Democratic Party approach to the blue collar economy since the 1990s. According to this approach, workers whose jobs are impacted by environmental policies (oil and gas workers) or trade polices (heavy manufacturing workers) will be retrained for jobs in the green economy or in advanced manufacturing or even as white collar fields like information technology (the oil worker as coder). Since the 1990s a vast network of dislocated worker programs and rapid-response programs have arisen and are prominent under the Biden administration.
As might be expected, retraining hasn’t proved so easy in practice. One example: here in Northern California, the Marathon Oil MRO
refinery closed in October 2020, laying off 345 workers. The federal and state government immediately came in with the union offering a range of retraining and job placement services. A study by the UC Berkeley Labor Center found that even a year after closure, a quarter of the workers were still unemployed. Those that were employed earned a median of $12 less than their previous jobs. Other studies similarly have identified the gap between theories of skills transference and re-employment and the realities for most blue collar workers—including the realties of alternative energy jobs today that usually pay considerably less than oil and gas jobs.
Each refinery closure or plant closure has its own business dynamics, and in many cases, like the Marathon Oil refinery, the facility will not be able to avoid closing. Re-employment cannot be avoided. Kennedy has spoken of improving the re-training and re-employment process for laid off workers, implementing best practices in retraining with the participation of unions and worker organizations.
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Manufacturing jobs as a share of total jobs have been in decline for the past four decades, and even as he urges trade policies for reshoring jobs, Kennedy recognizes that manufacturing going forward will be a limited part of the blue collar economy. The blue collar jobs of the future will increasingly be in the trades and services. Kennedy has enlisted “Dirty Jobs” host Mike Rowe to highlight the importance of the trades, and identify policies that can improve conditions and wages for the trades. Among these policies: a greater share of the higher education federal budget redirected from colleges into training in the trades, and support for the workers who seek to enter and remain in the trades.
Improving the economic position of blue collar workers also means expanding employee stock ownership and profit sharing. While worker cooperatives have failed to gain traction in America, forms of employee stock ownership and profit sharing are being implemented in companies with significant blue collar workforces, such as Procter & Gamble PG
, Southwest Airlines LUV
and Chobani. Kennedy poses the challenge: Let’s have workers-as-owners more fully share in the economic success of their employers.
Inflation Impact On Low Wage Workers
In nearly all of his talks on the economy, Kennedy addresses the issue of affordability, and how inflation has undercut wages of America’s lower wage workforces. He posts regularly on the increased cost of food, transportation, and housing, the financial strains on working class and middle class families, the number of workers who live paycheck to paycheck. When the March national jobs report was issued earlier this month, he noted the slowdown in year-over wage growth (at 4.1% the lowest year-over increase since 2021) and the increase in part-time jobs.
Kennedy recognizes that many of the low wage workforces are in such sectors as long-term care, retail, and hospitality, in which profit margins for employers are tight, and employers have limited flexibility individually to raise wages. Kennedy continues his calls for a higher minimum wage, reducing health care costs, strengthening protections and benefits for workers in the gig economy. He urges a reconsideration of trade and tax policies and the need for immigration policies that secure the nation’s borders. Kennedy’s strict border policies reflect both the “humanitarian crisis” he sees with the drug cartels and migrants, as well as the impact of unchecked immigration on the wages of low wage service and production workers.
Home ownership has a special place in Kennedy’s ownership economy, as part of bringing more workers into the middle class, and he has stepped up his advocacy on home ownership. Across society, widespread home ownership stabilizes communities, promotes civic involvement, serves as a hedge against social disorders.
Small And Independent Businesses
During the pandemic, Kennedy warned that economic lockdowns were devastating the small business economy. Today, in a regular series of podcasts on small business, he highlights the ongoing small business struggles. Just this past week, the National Federation of Independent Business, the nation’s largest small business organization, released a survey showing small business optimism is at its lowest level since 2012.
As with home ownership, Kennedy characterizes widespread small business ownership in terms of the social values as well as the values to the individual owners. Small business drives enterprise and service to others, in providing goods and services that customers value and will pay for. It drives job creation, including for individuals who do not fit easily into larger employment venues. A Kennedy Administration will prioritize rebuilding the small business economy, particularly in rural and inner city communities.
Kennedy’s small business agenda goes beyond a laundry list of small business grant and loan programs. As with the wage question, Kennedy seeks to tie a vibrant small business economy to underlying trade and tax policies. He also seeks to tie this economy to reforms in federal government procurement policies, which he describes as ineffectual.
Economic Challenges And Alternatives
The middle class society and economy of the 1950s that Kennedy grew up in and is central to his worldview was the product of unique economic forces and America’s dominant position in the post-World War II period. There is no way to get back to it, and recreating it will be more difficult than in the past, in the now global economy, and with rapidly advancing technologies.
But a broad middle class of worker-owners, is the right goal, and private sector ownership the right approach. People may find Kennedy’s strategies insufficiently detailed or unrealistic or even counterproductive. But Kennedy raises thoughtful challenges and alternatives to the economic platforms of the two main parties—just as he is raising serious challenges on a range of other issues.
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gainsdo raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
