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My “5 Cents” on Growing Revenue Through a Smart, Targeted IT Overhaul

Not long ago in the European Business Review, Stephanie L. WoernerPeter Weill and Mark P. McDonald made a case for operational efficiency, arguing that companies can save a lot of money through something called “digital reuse,” that is, the ability to reap operational efficiency by using (and reusing) technological processes already in place and reducing the overall time-to-market.

This analysis is brilliant because it unveils salient ways you can curb costs by streamlining your IT processes as well as injecting consistency, efficiency and stability into your operations.

To get to that level of IT efficiency, you should pay attention to your IT risk management and governance framework along with your overall technology strategy. Here are my five tips on what I think you should specifically do as you embark on your IT streamlining bandwagon:

First, hire a skilled chief technology officer and task him or her with drawing up an IT strategic blueprint. Demand accountability and make sure the blueprint constantly is in sync with your overall operational model, including your company’s IT risk comfort.

Second, think short-term. Figure out how your existing IT processes can deliver value to your business. I always tell clients to focus on the operational part of IT and to attain the right mix of in-house delivery versus outsourcing. If too much value is delivered from outsourcing posts, there exists a medium- to long-term risk that your company will lose competitive prominence.

Third, think long-term. Implement an IT approach to improve your operational and strategic agility, making sure your operational plans mirror the full potential of technology to improve the company’s performance.

Fourth, make sure your existing IT infrastructure is integral to your business delivery processes, most notably your e-commerce approach. I suggest you overhaul your technology strategy and align it with your B2B and B2C tactics. The idea here is to integrate IT in client interactions, be they offline or online—via your company’s website, blog, e-commerce platforms and social-media profiles on outlets as varied as Facebook, Twitter, LinkedIn, Google+ and Pinterest.

Lastly, construct an IT investment portfolio in sync with opportunities and threats in your industry. In this day and age, trends in IT are quickly altering the basis of competition. As a corporate executive, your goal is to study those trends; zero in on key variables; disregard outlier variables; and come up with an IT roadmap that makes economic, strategic and operational sense.

To your success,

Marquis Codjia

Creating systemic consistency

Last week, a very talented executive at a midsize company sought my opinion on an important question: how to create strategic consistency in her business—amid the myriad challenges, and often competing goals, the organization is facing? My answer was simple: seek consistency in everything you do, from idea conception and analysis to implementation and post-execution review.

Sounds easy enough, right? But you’d be surprised how little attention this topic draws in corporate boards across the world. See, as a manager, your shareholders, bankers and other stakeholders demand consistency from you. And so do your personnel. They may not say it openly, but it certainly is a salient topic in their minds.

How do you achieve consistency?

Three things are important here: corporate culture, clear vision and managerial involvement.

Corporate culture means the “tone at the top.” In other words, how you convey your professionalism and ethical bent to your staff. Are you a “laissez-faire” executive or a hands-on manager? I’m not passing judgment on leadership fitness here, but you must determine your managerial style to ascertain the right steps to take. Time and again, clients are telling me the virtues of clear communication in promoting camaraderie among the top management team, an important mindset that trickles down positively to the rank and file. To create a productive corporate culture, work with your Corporate Communications, Human Resources and Corporate Social Responsibility departments—and craft consistent, clear and frequent content to keep your personnel interested and involved.

Clear vision means you define and stick to a strategic plan, regardless of the whims of financial markets. I know; this is a difficult one. But clients who have remained true to their operational ideals tell me they have been better off over time. Not in one quarter or two years, but over time—meaning a reasonable period to harvest the operational seeds you’ve planted. Timing is essential here, and depending on your company’s situation, you may not have time. But don’t underestimate the importance of vision clarity.

Management involvement doesn’t mean basking in adulation in front of midlevel personnel, hoping they’ll execute your plans right off the bat because you’ve showered them with a few thousand bonus dollars or praised some of them for their unique leadership style.

See, it doesn’t happen that easy, my friend. You should create effective communication channels through which you can get feedback, and act on it. Have periodic town halls and out-of-town excursions to gauge manager morale. Seek their involvement when mulling strategy. I’ve seen that even small involvement can make a manager feel appreciated, which, in turn, boosts his or her morale and overall productivity. Happiness at work augments productivity, you know that already. But what you may not suspect is the overall positive effect that clarity of mind and employee welfare typically have on your bottom line. Don’t take my word for it; just read the brilliant article penned by Elizabeth Dunn and Michael Norton in Harvard Business Review, to see how investing in your staff can create happiness—and a happy uptick in your overall return on investment in the long term.

To your success,

Marquis Codjia

5 Tips on Résumé Writing

By Marquis Codjia

For a job applicant, résumé writing can be a powerful tool to obtain the dream job. For active workers, it serves as a way to build and maintain their professional brand name – in other words, it epitomizes how they portray and where they position themselves in the job market.

Due to this significance, extensive care should be exercised in drafting a résumé. Job seekers who understand the importance of a well-written résumé – but are unable to pen one – usually resort to professional résumé writers or occupational coaches.  Although these specialists can provide invaluable advice in the job search process and produce a high-quality work, job applicants can also author excellent résumé if they strictly follow some simple rules.

Use proper grammar

A résumé provides an account of the relevant work experience and education.  It introduces the job seeker to a potential employer; it is thus critical that the first impression – the résumé – be a good one. Employers rarely offer interviews to applicants with error-filled résumés, unless the job is in a field where proper English and good spelling are priorities. (Those jobs are rare). Applicants should write, proofread and edit their résumés until they’re satisfied with the quality. It is advised to have a second person – and even a third – proofread the résumé before sending it out to potential employers. Avoid common mistakes (e.g.: it’s vs. its, you’re vs. your, two vs. too vs. to, they’re vs. their); they reflect poorly on your work and your personality.

Write in a concise, professional manner

The résumé is a professional document that describes work accomplishments, among many things. As such, it should be written in a professional manner. It should also be concise, dealing directly with the relevant aspects of one’s career or academic life. Aspects of one’s private life that do not relate directly to – or are not pertinent to – the job sought should be avoided.

Be truthful

Integrity is the cornerstone of everyday’s life, whether in politics, business, or society. Voters rarely elect individuals perceived as lacking honesty; companies seldom partner with unreliable institutions or individuals. Consequently, it is absolutely important that the résumé be truthful in all its aspects because this affects one’s reputation. Warren Buffet once said:  ‘It takes 20 years to build a reputation and five minutes to ruin it ‘.

Include only your major, relevant achievements

Sometimes it is tempting to include an exhaustive list of accomplishments on the résumé to impress a potential employer. However, this can be counter-productive because employers often have many résumés to sift through and won’t spend too much time on a lengthy, verbose résumé. It is more effective to include only the major achievements that relate to the position sought.

Use your résumé as a marketing tool

The résumé is your ultimate tool to manage your brand name, your professional positioning. At each stage in a career, the résumé can serve to differentiate top-caliber candidates from the rest of the pack. To stay in the top-caliber, it is critical to use all the tips already mentioned, but also maintain an extensive professional network where the résumé can be periodically exposed.

A part la Grèce, l’Europe a d’autres talons d’Achille

Par Marquis Codjia

Read in English

Le brouhaha actuel sur les pépins budgétaires de la Grèce et ses prétendus effets négatifs sur l’Europe constituent un moment capital de l’histoire de la jeune zone économique européenne, mais ce ne sont pas les points significatifs sur lesquels devraient s’attarder les  décideurs, y compris les dirigeants politiques et les acteurs financiers.

Le problème de la dette grecque sera résolu tôt ou tard, car l’Allemagne, géant de la zone euro, rejoindra  au moment opportun ses partenaires continentaux; aussi, les structures supranationales – telles que la Banque Centrale Européenne et le FMI – apporteront, de gré ou de force, une assistance conséquente à des Hellènes à cours de liquidités.

La crainte réelle est la contagion – éviter que le chaos financier ne se métastase à d’autres pays égrotants de l’union. Si un de ces pays, casés d’ordinaire sous l’acronyme anglais peu flatteur de P.I.G.S. (Portugal, Italie, Grèce, Espagne), voit sa note abaissée par les agences de notation, comme cela a été récemment le cas pour l’Espagne et le Portugal, les plans de sauvetage ultimes et les primes de risque augmenteront fortement.

Les leaders de la zone euro devraient régler rapidement le problème grec pour couper court au flou actuel. Le pays est, sans doute, un nain géostratégique et financier (2 % du PIB de la zone euro et n’abritant aucune institution communautaire majeure). Par ailleurs, les autres ventres mous tels que l’Espagne et l’Italie possèdent de fortes capacités d’autofinancement et une structure de dette différente (détenue en interne contre 95 % de la dette grecque détenue par des étrangers). Nonobstant, si l’impression transeuropéenne est que l’Europe ne sera pas solidaire géo-économiquement de ses membres dans les moments d’incertitude, alors le concept d’union politique perd de sa pertinence, et les acteurs économiques, y compris les marchés financiers, refléteront certainement leur mécontentement en faisant chuter la monnaie unique.

En général, des insuffisances systémiques continuent de ralentir la marche de la locomotive Euro.

Il y a, d’abord, l’absence d’une structure politique communautaire claire. Les dirigeants européens, en particulier ceux des grands pays (Allemagne, Royaume-Uni, France), semblent à ce stade satisfaits d’une hiérarchie fédérale regroupant des personnalités (de préférence des petits pays) qui ne représentent aucune menace à leur leadership, et une pléthore d’institutions employant des fonctionnaires recrutés au prorata des états membres. Cette stratégie d’union politique floue, fondée plus sur une zone économique, va à l’encontre de l’esprit de fédération qui sous-tendit le Traité de Rome.

Pour illustration, prenons un exemple simple : qui serait l’interlocuteur communautaire du président Barack Obama ou du premier ministre chinois Wen Jiabao si ceux-ci voudraient négocier un partenariat stratégique avec la zone Euro? Feraient-ils appel à l’actuel président de la Commission Européenne José Manuel Durão Barroso? Ou le président du Conseil Européen Herman Van Rompuy ? Ou le Président (tournant) du Conseil de l’Union Européenne José Luis Rodríguez Zapatero ? Ou les poids lourds de l’UE que sont le président français Nicolas Sarkozy ou la chancelière allemande Angela Merkel ? Ou, plutôt, tous ces leaders à la fois ?

Deuxièmement, l’absence de leadership politique engendre l’absence de programme socio-économique commun. Les leaders européens veulent les avantages de l’intégration économique mais semblent en haïr les inconvénients. Les citoyens de l’UE doivent clarifier ce que représente la zone euro : est-ce une zone de libre-échange, comme l’ALENA (Accord de libre-échange nord-américain) ou la CEDEAO (Communauté économique des états de l’Afrique de l’ouest), dans laquelle les pays partenaires conservent leur indépendance politique, économique et sociale, et peuvent rivaliser entre eux ? Ou est-ce une union politique et économique dirigée par des politiques sociales communes ? Ou est-ce, plutôt, un statut intermédiaire ?

Troisièmement, le rôle de la BCE devrait être élargi au-delà de la stabilisation des prix. Contrairement à la Fed américaine, le mandat principal de la banque pour le moment est de contrôler l’inflation. La BCE devrait intervenir davantage dans l’économie communautaire et éviter les déséquilibres systémiques. En somme, l’institution devrait faire usage de ses énormes réserves pour rasséréner les opérateurs économiques, entre autres rôles.

Quatrièmement, les critères d’appartenance à la zone euro devraient être réexaminés ; cela inclut aussi bien l’admission que l’exclusion. Naturellement, ce processus doit prendre un ton diplomatique pour ne pas frustrer des futurs partenaires, mais dans l’ensemble, les pays candidats à l’adhésion devraient passer des tests stricts. L’actuel Pacte de stabilité et de croissance, qui vise à limiter les déficits budgétaires, est un bon début mais sa gouvernance inefficace a permis les fraudes statistiques dont la Grèce a fait preuve lors de son entrée  dans la communauté. En somme, des solides fondamentaux économiques et une stricte gouvernance, en plus de la proximité géographique, devraient constituer les bases d’acceptation des nouveaux membres.

Enfin, l’élargissement de l’UE doit faire attention à deux dossiers-clés: le Royaume-Uni et la Turquie. Le propos ici n’est pas un souhait d’admission rapide, mais d’un processus  d’intégration clarifié et plus efficace que les 31 chapitres de l’actuel Acquis communautaire.

Ces dossiers sont complexes et politiques, mais leur résolution rapide apportera de l’eau au moulin de l’Europe. La Turquie a de nombreux « maux » (non-respect des droits de l’homme, conflit chypriote, impression d’islamisme malgré la laïcité du pays, droit des affaires opaque, etc.), mais aussi de nombreux atouts. Le FMI la classe 16ème PIB mondial dans son rapport 2009, dépassée dans l’UE seulement par l’Allemagne, le Royaume-Uni, la France, l’Italie et l’Espagne. Ce qui la place 6ème PIB dans une fédération de 27 membres. Le pays est géographiquement supérieur aux autres membres de l’UE et sa population de 73 millions vient en second après l’Allemagne (82 millions) ; il peut servir de débouché aux entreprises européennes en mal de croissance. Politiquement, Ankara est un allié géostratégique important de l’Ouest et un membre d’organisations-clés comme le G-20, l’OCDE et l’OTAN.

Quant au Royaume-Uni, membre de l’UE mais pas de la zone euro, son gouvernement travailliste a défini à la fin des années 1990 cinq tests économiques préalables à l’adoption de  l’euro comme monnaie nationale, soit par ratification parlementaire ou par référendum. L’adoption de l’euro reste un sujet sensible et risque de ne pas être abordé pendant longtemps. Mais, il serait intéressant de voir la réaction des politiciens et des dirigeants d’entreprise une fois que l’euro atteindra la parité avec la livre sterling ou la dépassera. Jusqu’ici, l’euro a augmenté de 65 % par rapport à la livre, de 57 cents en 2000 à 94 cents une décennie plus tard, atteignant brièvement la parité à la fin 2008 (0,98 en décembre 2008).

Chaos Social à Washington – Pourquoi La Sécu Pourrait Devenir L’Arme Financière de Destruction Massive en Amérique

Par Marquis Codjia

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Warren Buffett, l’investisseur milliardaire et gérant du conglomérat Berkshire Hathaway, affirma en 2002 que les produits dérivés étaient des «  bombes à retardement pour les contreparties aux transactions et le système économique ». Vu le rôle nocif que ces titres ont joué dans la récente crise, l’on peut dire que le « devin d’Omaha » possède également le don de prescience en plus de son légendaire sens des affaires.

Pourtant, ce qui risque d’estropier la croissance économique aux Etats-Unis, et par ricochet, les équilibres globaux, est la gestion des prestations sociales promises – ou plutôt dues – aux millions d’Américains sur non seulement un an ou deux, mais tout au long de leurs vies, une fois confrontés aux épineux épisodes existentiels que sont la maladie, la vieillesse, l’invalidité ou la perte d’emploi.

A ce jour, la Sécurité Sociale des Etats-Unis demeure le plus important programme d’entraide, revendiquant 20 % du budget national en 2009 ou 678 milliards de dollars EU, juste après la défense (23 %). D’autres programmes sociaux connus sont les allocations-chômage et les aides médicales aux séniors (Medicare) et aux pauvres (Medicaid).

Il est utile de comprendre le concept de sécurité sociale pour cerner ce débat. Pour être concis, la sécurité sociale permet aux retraités de toucher des revenus provenant de contributions apportées par la couche active de la population – par le biais de taxes salariales spécifiques. Naturellement, le système reste sain si les cotisations excèdent les sorties – comme c’est actuellement le cas.

Toutefois, les projections actuelles font état d’un déficit de financement commençant en 2016 – autrement dit, les paiements excéderont les rentrées, ce qui contraindra le pays à rechercher des fonds externes (nouveaux prêts ou coupes budgétaires). Pire, les gouvernements successifs ont emprunté et dépensé au fil des ans les excédents cumulés qui se trouvaient dans le Fonds de Sécurité Sociale.

Plusieurs facteurs sont à la base de ce déficit, les plus importants étant l’augmentation de l’espérance de vie, l’abaissement de la natalité et le vieillissement des baby-boomers (résultant en peu d’actifs cotisant pour plus de retraités).

Ce qui est déroutant, c’est le laxisme de l’élite politique actuelle – à l’instar des précédentes – dans le traitement d’une telle urgence budgétaire, préférant déplacer cette question sur des terrains partisans plus complexes qui rendent les populations obtuses. Résultat des courses : l’importance du débat sur la sécurité sociale se trouve amoindrie, et les couches citoyennes  les plus intellectuellement dynamiques n’accordent pas à cette rubrique la place socio-économique qui lui revient.

Ce statu quo transforme ainsi une question gérable en véritable crise – une “bombe à retardement” en une “arme financière de destruction massive” pour le tissu social de l’Amérique. Les deux derniers présidents de la Fed comprennent heureusement l’urgence de la question; Alan Greenspan préconise des mesures visant à maîtriser les programmes sociaux pour assurer la prospérité économique à long terme, tandis que Ben Bernanke avertit que “les Américains doivent s’attendre à des impôts plus élevés ou des coupures sociales … pour juguler les futurs déficits budgétaires.»

Plusieurs éléments justifient le penchant hyperbolique, ou apocalyptique, de cet article.

D’abord, l’absence d’un débat de fond sur la réforme de la sécurité sociale. Comme indiqué précédemment, cette situation est favorisée, au minimum, par les gouvernements successifs des trois dernières décennies, car cette réforme est, soit, un problème épineux et politiquement suicidaire aux yeux des politiciens, soit, ces derniers la jugent le cadet de leurs soucis. En somme, ils n’osent pas risquer des débats qui réduiront leurs chances de réélection.

Pour combler le vide rhétorique, l’on injecte, ici et là, des petites phrases assassines pour diviser l’électorat et éviter un débat de fond. Une illustration parfaite est l’idée que les actifs de la Sécurité Sociale devraient être confiés à des gestionnaires de patrimoine professionnels, car l’état devrait être en dehors des mécanismes du marché, et toute forme de gestion publique de ce patrimoine colossal est un type d’intervention « communiste » intolérable en Amérique capitaliste. Dans cet article, les avantages et inconvénients de cette thèse ne peuvent être évalués avec granularité mais les faits en révèlent les limites pratiques. Il est facile d’imaginer quel désastre financier le pays aurait subi si ce patrimoine fut investi en bourse avant le récent mini-krach. Il est également aisé de noter l’efficacité managériale de l’état en analysant les résultats opérationnels du Système Fédéral de Retraite (FERS), du Corps Médical de l’Armée, du Medicare et du Medicaid, lesquels demeurent des agences financièrement saines.

Deuxièmement, la nécessaire réforme fiscale tarde à arriver, et ce retard, couplé à la gestion opaque de deniers publics aux niveaux fédéral, local et législatif, anéantit tout effort de réduction de déficits budgétaires.

Ensuite, le spectre d’un cercle vicieux existe. Si le rapport retraités / actifs croît excessivement, il y aura moins de cotisations pour honorer les pensions, et une telle réduction du pouvoir d’achat des séniors affectera négativement la consommation des particuliers. Les entreprises seraient alors obligées de réduire leurs effectifs au vu des ventes anémiques, et la main-d’œuvre ainsi réduite contribuerait encore moins au Fonds de Sécurité Sociale, et ainsi de suite.

Quatrièmement, la Réserve Fédérale – en tant que créancier ultime – pourrait acheter les bons du Trésor si les finances publiques s’effondraient, mais elle ne peut continuer à imprimer des billets (via sa tactique de « quantitative easing ») de peur que le dollar ne dégringole sur les places boursières et n’accroît l’inflation.

Cinquièmement, l’incapacité du pays à réduire ses déficits ne sera probablement pas résolue à court terme car le tissu industriel américain est actuellement inapte ou démotivé à produire des biens bon marché, et l’ouverture du marché américain aux fournisseurs étrangers sert de levier géostratégique au plan international.

Au total, les spécialistes de la sécurité sociale posent la question suivante : pourquoi les autorités n’appliquent-elles pas les recommandations du Rapport 2009 du  Fonds de Sécurité Sociale qui préconisent  une légère hausse du taux  et des salaires d’imposition pour résorber le déficit? Par exemple, augmenter le taux d’imposition à 14,4 % en 2009 (de 12,4 % actuellement) ou réduire les primes de 13,3 % mettrait fin au déséquilibre, alors que ces montants augmentent à ca. 16% et 24 % si aucune modification n’est apportée jusqu’à 2037.

Beyond Greece, Eurozone Has Other Achilles’ Heels

April 29, 2010 14 comments

By Marquis Codjia

Lire en français

The current brouhaha over Greece’s budgetary mischance and its alleged adverse effects on Europe are an epochal episode in the history of the emergent European economic zone, but these are not the decisive areas where decision-makers, including political leaders and financial markets participants, should pay heed.

Greece’s debt pains would ultimately be resolved, because Eurozone behemoth Germany will strategically come in line with its continental peers; also, supranational channels – such as the European Central Bank and the IMF – will be coerced into using their balance sheets to provide liquidity to cash-strapped Hellenes.

The real fear presently is contagion – avoiding that the ambient financial pandemonium metastasizes into other economically comatose countries within the union. If any of these countries, clustered under the unflattering acronym of P.I.G.S. (Portugal, Italy, Greece, Spain), is downgraded by rating agencies – as was recently the case for Spain and Portugal who lost a few notches, the potential bailout costs and risk premia will rise stratospherically.

Eurozone leaders should swiftly settle Greece’s problems because of perception risks. No doubt the country is a financial and geostrategic dwarf (2% of Eurozone GDP and no major federal institution headquartered). Plus, other ‘weakest links’ such as Spain and Italy possess far greater self-financing capacities and have a different debt structure (domestically held vs. 95% of Greek debt held by foreigners). Notwithstanding, if trans-European perception is that Eurozone will not show geo-economic solidarity vis-à-vis its members in times of uncertainty, then the concept of political union loses its relevancy, and economic agents, including financial markets, will certainly reflect their despondency by driving the single currency lower.

Broadly, other systemic inefficiencies continue to thwart progress within the Eurozone.

First is the lack of a clear political structure in the federation. European leaders, particularly those from prominent countries (UK, Germany, France), seem at this point more content with a federal hierarchy replete with political figures (preferably from minor countries) who pose no leadership threat to them, and a plethora of bureaucratic institutions filled with functionaries picked on an unwritten pro-rata rule to satisfy member states. This strategic stance of an elusive political union grounded in an economic zone is antithetical to the very concept of federation that subtended the initial EU agreement.

To illustrate this, let’s consider a simple example: whom would current U.S. President Barack Obama or China Premier Wen Jiabao negotiate a strategic partnership with if either leader needs a European counterpart? Would they call upon the current President of the European Commission José Manuel Durão Barroso? Or the current President of the European Council Herman Van Rompuy? Or the current (6-month rotating) President of the Council of the European Union José Luis Rodríguez Zapatero? Or EU heavyweights French President Nicolas Sarkozy or German Chancellor Angela Merkel? Or a combination of all of these leaders?

Second, the lack of a clear, single political leadership begets an absence of a uniform socio-economic agenda in the union. It seems as though European leaders want the pros of economic integration, but abhor its cons altogether without attempting to minimize or obliterate them. EU citizens must define what the Eurozone stands for: is it a free-trade area, similar to NAFTA (North American Free Trade Agreement) or ECOWAS (Economic Community of West African States), where partner countries retain their political, economic and social independence, and can compete against each other? Or is it a political and economic union steered by broadly uniform national social policies, similarly to a single country? Or is it, rather, something in between, or neither?

Third, European Central Bank’s powers must be broadened beyond price stability. Unlike the U.S. Fed, the bank’s only primary mandate at the moment is to keep inflation low, with other objectives subordinate to it. The ECB should intervene further in the regional economy, and help avoid systemic disequilibria if need be. In sum, the institution should be allowed to use its gigantic reserves to calm jittery markets in times of uncertainty, among other roles.

Fourth, Eurozone membership should be reviewed; this includes not only the admission process, but also membership conditions and stipulations for exclusion. Understandably, the political undertones of this process call for some diplomatic verbiage, but overall, countries seeking membership in the privileged “Club Euro” must meet stringent criteria, and such criteria should be thoroughly enforced. The current Stability and Growth Pact, which aims to limit budget deficits and debts, is a good start but the ineffective control scheme around it permitted the kind of statistical fraud that Greece authored when seeking admission nearly a decade ago. In sum, sound economic fundamentals and strict governance rule, in addition to geography, should be the rationale for co-opting new members into the Eurozone.

Finally, the EU enlargement process should pay special attention to two key dossiers: U.K. and Turkey. The argument here is not in favor of a quick admission (in Turkey’s case), but for a clearer acceptance framework, more effective than the current 31-chapter “Acquis Process”.

Both dossiers are complex and politically charged, but their quick resolution will do more good than harm to the EU. Turkey has many woes (human rights concerns, Cyprus dispute, perception of Islamism despite the country’s secularism, business regulation, etc.), but its advantages are also interesting. It is 16th largest GDP in the world – per IMF’s 2009 ranking, outpaced in the Eurozone only by Germany, U.K., France, Italy and Spain. This means that, out of the current 27 EU members, it ranks 6th on GDP measurement. The country is geographically larger than any EU member and its ca. 73 million citizens are outnumbered only by Germany’s ca. 82 million; this may open up potential new markets for growth-seeking EU businesses. Politically, Ankara is an important geostrategic ally of the West and a member of such key organizations as G-20, OECD and NATO.

As for the U.K., a current EU member that opted out of the Eurozone, its Labor Party-led government defined in the late 1990s five economic tests that must be met prior to adopting the Euro as national currency, either via parliamentary ratification or referendum. Euro adoption remains a domestic hot button issue and thus may not be addressed for many years. But, it’d be interesting to see how politicians and business leaders will react once the euro reaches parity with, or gradually outpaces, the pound sterling. So far, the euro has risen 65% vs. the pound, from a low of 57 cents in 2000 to 94 cents a decade later, briefly nearing parity late in 2008 (.98 in December 2008).

Confronting The Entitlement Conundrum – Why Social Security May Be America’s Financial Weapon of Mass Destruction

April 18, 2010 67 comments

By Marquis Codjia

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Warren Buffett, the billionaire investor and long-time Chairman of conglomerate colossus Berkshire Hathaway, emphatically stated in 2002 that derivatives were “time bombs, both for the parties that deal in them and the economic system”. Given the deleterious role these securities had in the recent economic crisis, the “Oracle of Omaha” certainly evinces prescience in addition to his mythic business acumen.

Yet, what will likely choke off economic growth in the U.S., and by percolation, usher in global economic disequilibria, is managing mammoth entitlement benefits due to – or rather, promised to – millions of Americans over not only a year or two, but decades in their lifetimes, once they face thorny existential episodes such as illness, old age, disability, or loss of employment.

Of all government-steered social schemes, Social Security – the federal Old-Age, Survivors, and Disability Insurance (OASDI) program – is the largest, claiming 20% of the national budget in 2009 or $678 billion, right after defense (23%). Other known schemes are unemployment benefits, Medicare and Medicaid.

A conceptual understanding of Social Security is helpful to gauge the dynamics at work in the entitlement debate. Simply explained, Social Security allows retirees to earn pension income from contributions made by current workers – via specific payroll taxes. Understandably, the system remains balanced if contributions made exceed benefits paid – as is currently the case.

However, current projections posit a funding gap starting in 2016 – in other words, expenses will outrun revenues, thus coercing the country into seeking external funds (from new loans or cuts in other programs). Worse, successive governments have borrowed and used up over the years cumulative surpluses held in the Social Security Trust Fund.

The funding deficit is caused by a panoply of factors, the most important of which are the increase in life expectancy, the lowering birth rate, and aging baby-boomers (resulting in fewer workers paying for more retirees).

What’s flummoxing is that the current political elite – like their forerunners in both parties – seem to be voluntarily embroiled in partisan ramblings, and gladly enjoying esoteric rhetoric that renders the populace obtuse, and discredits the urgency and criticality of the social security debate. Consequently, our most intellectually dynamic citizens do not give this topic the socio-economic import it deserves.

The ensuing status quo threatens to turn a tractable conundrum into a veritable crisis – a “time bomb” into a “financial weapon of mass destruction” against America’s social fabric. Former and current Fed chairmen, fortunately, fathom the essence of the matter; thus, Alan Greenspan advocates a mix of measures to bring entitlement programs under control and ensure long-term economic prosperity, while Ben Bernanke warns that “Americans may have to accept higher taxes or changes in entitlements… to avoid staggering budget deficits.”

Several elements form the disquieting body of thoughts that justifies the hyperbolic, or apocalyptic, formulation used in this analysis.

First, the absence of a real, serious forum to gauge the merits of viewpoints engaged in the Social Security overhaul disputation. As noted earlier, this status quo seems to be furthered, at the very least, by consecutive administrations for the past three decades, because either the issue is thorny and politically unpalatable to constituents or elected officials deem it of lower priority. In sum, they dare not venture topics that may derail re-election prospects.

To fill the rhetorical void, snippets of partisan parlance are interjected here and there, mainly to polarize citizens and eschew a thorough debate. One such snippet is the notion that Social Security should be privatized and entrusted with professional portfolio managers because the government should let free-market decide and any form of public management of the behemoth fund is a type of communist intervention intolerable in capitalist America. In this article, the pros and cons of this argument cannot be evaluated with granularity but factual observations reveal the latter’s practical limits. It’s easy to wonder what financial devastation the country would have suffered had the Fund been invested in the stock market before the recent mini-crash. It’s also easy to observe how effective a manager the government can be by analyzing operational results at the Federal Employees Retirement System (FERS), the Army Medical Department, Medicare, and Medicaid, all of which remain sound programs.

Second, the much needed overhaul of the IRS and the country’s tax collection scheme is taking longer to occur, and this delay, coupled to the ongoing government waste at the federal, state, and legislative levels, annihilates any serious endeavour to cut budget deficits.

Next, the systemic spectre of a vicious cycle looms. If the ratio of retirees to active workers grows excessively, there will be fewer contributions to pay pension benefits, and such a reduced purchasing power will yield lower private consumption. Companies will then be forced to cut their workforce if sales are lethargic, and the smaller remaining workforce will contribute even less to the Social Security Fund, and so forth.

Fourth, the Fed – as the lender of last resort – can lend to the U.S. Treasury should public finances deteriorate but it can’t sustainably keep printing money via its quantitative easing tactic lest the dollar tumble on defiance from capital markets and heightened inflation.

Fifth, the country’s incapacity to lower its trade deficits will likely not be solved in the near future because the American industrial complex is currently unable or disinclined to produce superior goods affordably, and opening up U.S. markets to foreign suppliers serve as geostrategic levers in international discussions.

In the end, entitlement specialists and those well-versed in the Social Security issue ask the following: why aren’t authorities implementing the Social Security Trust Fund’s proposal (2009 Report) to marginally raise the tax rate or the salary cap on payroll tax in order to fix the funding gap? For example, raising the payroll tax rate to 14.4% in 2009 (from 12.4%) or cutting benefits by 13.3% would fix the program’s gap indefinitely, while these amounts increase to ca.16% and 24% if no changes are made until 2037.

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