Taxing Multinationals Across Borders?

On Nov. 8th, 2022 the European Court of Justice, EU’s highest court, overturned a tax ruling against Fiat Chrysler from 2015. The decision annuls the EU commission’s 2015 finding that Luxembourg granted selective tax advantages to Fiat through a transfer pricing ruling. The commission said the deal in 2015 amounted to a state subsidy and thus ordered the Luxembourg government to recover the equivalent of about $30 million from the company. This decision follows similar reversals in tax cases in the past few years, cases involving Starbucks Corp and Amazon.com Inc. In 2019, EU’s second-highest court ruled that Starbucks did not benefit from illegal state aid in the Netherlands. In 2021, the same court made a decision in favor of Amazon, stating that EU regulators failed to show that Amazon gained illegal advantages from tax dealings in Luxembourg. The European Commission has appealed the Amazon ruling to the European Court of Justice. 

As emphasized in the above-mentioned cases, the European Commission is committed to ensuring that fair competition is not distorted in the bloc through illegal tax breaks to multinational corporations. As the European Commission monitors and decides if state aid complies with EU rules, the above cases in particular concern Article 107 (1) of The Treaty on the Functioning of the European Union (TFEU), which prohibits companies from gaining unfair advantages over their competitors through government support. The Treaty generally prohibits state aid unless it is justified by reasons of overall economic development. 

In response to the Fiar Chrysler decision, the European Commission released a statement demonstrating its continued commitment to tax legislation amendments among member states. The Commission works with member states to address tax loopholes and ensure tax fairness and will continue to monitor the EU state aid rules. The Commission’s ongoing efforts to ensure that multinational corporations do not gain unfair tax advantages spurn the recent global concern of loose tax rules for international technology giants. Notably, last year in 2021, the G-7 — Canada, Germany, Italy, France, Japan, the U.K. and the U.S. — agreed that businesses should pay a minimum tax rate of at least 15% in each of the countries in which they operate. While almost 140 countries agreed to the 15% minimum tax rate, the implementation of this policy has faced several challenges.  

Many governments are waiting to see how G-7 nations would implement the policy, especially in the U.S. with a divided Congress. 2023 was set as a target for implementation, though many tax experts believe to be too ambitious. While the global minimum corporate tax may continue if smaller countries fail to pass new laws, the failure of larger economies, such as the U.S., to implement legislation would greatly debilitate the agreement. There has been substantial political pressure against a global minimum corporate tax as businesses, with Cisco Systems Inc., Bank of America Corp. and Texas Instruments lobbying against the tax. The EU has also struggled to move forward with implementation. Unanimous support is required among 27 bloc members for the EU-wide implementation; however Hungarian parliament continues to affirm its opposition to global minimum tax on corporations. 

The ongoing friction between European countries and U.S. over taxing U.S. tech giants has further thwarted implementation of the policy. During ongoing talks on international tax rules, some European officials argued that U.S. tech giants should pay more tax in Europe and reallocate taxing rights to where the product is consumed. Specifically, some European countries proposed their own taxes on U.S. digital services and products. In response, the U.S. rejected such proposal and threatened to respond with tariffs on imports from Europe. 

Nonetheless despite ongoing challenges, there has been some progresses. The Organization for Economic Cooperation and Development (OECD) released details on central components of the agreement, including the “undertaxed profits rule.” The rule allows participating countries without a minimum corporate tax rate to increase the company’s rate to 15%, creating financial incentives for non-participating countries to join the agreement. 

While the future of taxing multinationals across borders remains uncertain, the European Commission continues to monitor how member countries utilize state aids and OECD proceeds with detailed plans for global corporate tax.

The VC Slowdown Must Not Hit Climate Tech

Technology companies laid off over twenty-two thousand workers in the first ten days of November. The pandemic era of cheap money and long leashes for startups appears to have ended, and belts have begun to tighten. As the federal reserve continues to wrangle inflation through precedent-busting rates increases, venture capital firms and the startups they fund have had to re-evaluate their paths to success. Look no further than Party Round, a fundraising startup, which rebranded itself Capital after it became clear that its boisterous name no longer reflected the state of the economy. Notably, investment in green tech has yet to slow significantly, a trend that must continue if we wish to slow the planet’s warming. 

Vinod Khosla, a prominent venture capitalist, urgently reminds us that we do not have the necessary technology to decarbonize the economy, and developing that technology will require funding. Solar and wind remain necessary supplements to the power grid, but are insufficient unless paired with other sources of power that do not fluctuate as wildly. Startups focused on the holy grail of clean energy, nuclear fusion, have not moved beyond development stages. And top nuclear fusion startups do not anticipate delivering a viable product before the 2030’s. Even that deadline will require Venture capital firms to pour billions into these companies on top of the billions they have already contributed.

The sustained rates of investment in green tech, relative to other sectors, may be due in part to the Inflation Reduction Act (IRA) passed earlier this year, which devoted over $370 billion to fighting climate change. This included funding for various high-risk green tech solutions including carbon capture, superhot rock energy, and decarbonized concrete. While necessary, the provisions in this bill are all carrot and no stick. Activists hoped that the IRA would contain a market-based solution such as a carbon price. A market-based solution both rewards innovation and makes pollution more expensive by instituting a fixed price on every pound of carbon emitted, imposed through tax liability. Financial regulators have long advocated for this system because of the leveling effect it would have on the market. Not only would clean energy companies receive a subsidy, but high emitters would appear less attractive because their bottom lines would reflect their impact on warming. The IRA’s absence of such a system may prove fatal for green tech. 

Environmental ambitions have been put on the backseat in the face of harsh economic realities. For example, President Biden ran on the promise of phasing out new oil and gas drilling, but dramatically increased drilling on public lands when the war in Ukraine cratered supply. Moreover, the Federal Reserve does not appear to have any intention of slowing their rate hikes. This continued austerity may become severe enough to break through the IRA’s buffer. Unless investing in green tech continues to be attractive for VC firms, the outlook for our climate will become even bleaker.  

Musk Purchased Twitter, What Now?

Corporations acquire companies for a variety of motives which often affect the success of a merger. A merger can increase the value of a corporation by spreading the fixed cost of production over a larger output or by spreading the cost of expertise over a wider range of employees. Alternatively, successful mergers may align supply chains by integrating supply, manufacturing, and sales to lower costs of production. Mergers can even be effective disciplinary tools when they are used to replace bad managers.

Some acquisitions do not create value, but instead shift value from stakeholders to shareholders. When companies buy competing businesses and push out competitors, they can then institute monopolistic pricing. This shifts value from consumers to shareholders by raising costs for consumers and passing the profits on to company shareholders. Conversely, inefficient, unproductive mergers shrink company value when there are overconfident evaluations of corporate synergies or when companies seek to build name recognition and brand awareness but sacrifice value through careless empire building.

Elon Musk claims his recent acquisition of Twitter “help[s] humanity. While this is a noble goal, it is a very vague one. Musk argues the acquisition creates a forum for people to freely speak their minds. He clarified that Twitter would not become a free-for-all unfiltered environment, and that Twitter must “adhere to the laws of the land.” Despite these assurances, Twitter’s advertising clientele remains unconvinced. While social media sites like Facebook have rebounded from advertising boycotts, Twitter faces an uncertain future as companies may raise concerns that their ads would be shown alongside objectionable content.

Twitter’s advertising quagmire is not their only problem. Companies are questioning the validity of Twitter “verification,” which can now be purchased by any Twitter user willing to pay $7.99 a month. This defeats the purpose of Twitter verification: signaling the legitimacy of the account owner’s identity. Corporate spoof accounts cause confusion and chaos, demonstrated by one account impersonating the pharmaceutical firm Eli Lilly & Co. that announced that insulin would be free. In addition, fake politician accounts have flared prejudice and tension with inflammatory tweets, like a spoof account of George W. Bush tweeting an attack on Iraqis.

Despite Musk’s promise that acquiring Twitter was not about the money, he cannot ignore the reality of running a social media empire, which entails hefty monetary expenditures. Musk claims to be working tirelessly to balance the needs of his existing ventures, SpaceEx and Tesla, with his new venture in Twitter. This is critical because Musk intends to keep many of his employees as shareholders, giving him his own set of fiduciary duties. At this point, it is unclear what direction Musk plans to take the site, and such uncertainty could have been avoided with a clear cut strategy from the acquisition’s outset.

While the future of Twitter remains uncertain, Musk has indicated his plan to have someone else run the company. It is unlikely Twitter will be realized as the paradigmatic public forum Musk hoped it would be. The reality is that the company will need to have enough stability for advertisers to support its existence.

Big Tech Layoffs – A Coming Recession?

After years of unprecedented growth, the tech industry has recently come to a slowdown and some of the biggest tech companies have announced hiring freezes and job cuts. On November 2nd, 2022, Amazon decided to halt new incremental hires in their corporate workforce for the next few months in face of the “unusual macro-economic environment.” On November 7th, Lyft announced they planned to cut “13 percent of its employees” – nearly 700 of its 5,000 workers – as it anticipated a recession next year and rising “rideshare insurance costs.” Elon Musk, who recently acquired Twitter with a $44 billion deal on October 27, ordered job cuts across the company – from top executives, including the chief executive and chief financial officer, to divisions such as the engineering and machine learning units as well as the sales and advertising departments. No specific number was given, but the scale of layoffs was estimated to be roughly half of the social media platform’s workforce–approximately 3,700 employees. Meta also expects to begin large-scale layoffs as part of the company’s plan to cut expenses by at least 10% in the next few months.

The recent wave of tech sector layoffs has generated worry for the future of the world economy, which signal that a recession is looming. Many companies are seeing a decline in profits in recent quarters and expecting more downward trends, especially amid high inflation and rising interest rates. Notably, Meta’s profits in the most recent quarter were down more than 50% from last year, as the company struggles to restructure around its emerging immersive digital world of the “metaverse.” Google’s parent company, Alphabet Inc., also reported its fifth consecutive quarter of slowing sales growth, while it has also slowed hiring and required some employees to apply for new jobs. Snap, the maker of Snapchat, also suffered from slowed economic growth, and according to its third quarter report, the company experienced its slowest-ever rate of revenue growth. The slowdown is not limited to social media giants, and is being felt across the tech industry. For example, semiconductor companies are cutting manufacturing expenditures as sales of smartphones and appliances continue to decrease.

Amid the tech industry’s stagnation and persistently high inflation worldwide, economists and businesses have contradicting forecasts about the coming year. Many warn there is a high likelihood the U.S. economy is headed for a recession, but others have been more optimistic. Those who are more confident include JPMorgan’s Chief Financial Officer, who say they have not seen “a crack” in their financial health, and Delta Air Lines’ Chief Executive, who announced that the travel sector “is going to be very strong through the quarter and into the New Year.” Indeed, the October jobs report published by the U.S. Department of Labor seems to show that the labor market remains strong, despite unemployment rising to 3.7%.

While many other signals indicate a cooling economy and justify worries of a coming recession, the recent wave of layoffs from tech companies are not a major indicator of recession. The layoffs in the tech industry, though unprecedentedly large-scale and conspicuous, account for only a small part of the overall labor force. Employers across a variety of other industries, such as food services and entertainment, are actively hiring to restore their workforce from pandemic job cuts. Tech companies have seen huge growth in the past three years. Employees moved to remote work and students attended classes online, which drove up computer sales, cloud storage, and online shopping. But it is improbable they will maintain this growth as the Covid-19 pandemic begins to pose less of a public health crisis. Though tough days for the world economy are expected, the recent tech-layoffs could also be an unavoidable result of the tech industry cooling down from Covid-related expansion.

Why We Are Still Talking About #MeToo at Work

The #MeToo movement is often described as having sparked a “conversation.” Indeed, survivors have spoken, and collectively their voices have been heard. Although the response has certainly been substantial, the conversation is still in many ways one-sided. In a recent Bloomberg Law article, Proskauer Rose attorneys Sydney Cone, Kate Gold, Atoyia Harris, and Sehreen Ladak outline the #MeToo movement’s progress thus far—applauding its victories while highlighting the gaps that still pervade the conversation five years later. 

Since its viral outset in 2017, the #MeToo movement has set the foundation for several notable developments. In the corporate realm, for instance, an increasing number of employers have implemented mandatory sexual harassment prevention trainings and educational opportunities. These efforts focus on establishing stricter standards for conduct and compliance in the workplace. Moreover, the #MeToo response has resulted in new policy initiatives. President Biden’s Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 marked a pivotal point in this progression. The Act importantly defined sexual harassment claims as a category of law distinct from other workplace misconduct claims. Under the Act, sexual harassment claims would inherit a type of protective immunity because they would no longer be subject to arbitration and nondisclosure agreements. 

More recently, the Senate advanced another initiative, by passing the SPEAK Out Act in September. By making nondisclosure and non-disparagement clauses unenforceable in sexual harassment and sexual assault disputes nationwide, the Act was formed with the intention of empowering survivors and averting further harm in the workplace. 

While these emerging initiatives suggest a positive shift in the prevention of and protection against workplace sexual violence, the numbers say otherwise. Statistics collected by the Equal Employment Opportunity Commission (EEOC) demonstrate that instances of workplace sexual harassment have not followed this anticipated downward trend. In fact, the number of sexual harassment charges increased significantly in the years that immediately followed the viral expansion of the #MeToo movement in the Fall of 2017. Moreover, wide scale surveys indicate a growing disparity between the number of actual incidents and formally filed complaints. In a 2022 survey of women working in STEM, an alarming 62% of respondents noted incidents of sexual harassment at their places of employment. Only 29% of these individuals filed formal complaints. 

Pointing to these numbers is in no way an attempt to discredit the enormous gains that have stemmed from the #MeToo movement. Rather, they serve as a guide for ongoing conversations around the sexual harassment and assault in the workplace. In the majority of studies on workplace conduct, the prevalence of sexual harassment in professional spaces is attributed to power inequalities and the continuation of gender stereotypes. A 2020 Hollywood Commission survey on accountability found that only 35% of respondents felt that it was at least somewhat likely that an employee in a position of power or authority would be held accountable for sexually harassing an individual in a subordinate position. Interestingly, however, the frequency of harassment does not tend to decrease when the roles of power and gender are inverted. A 2020 study published by the American Academy of Arts & Sciences revealed that instances of sexual harassment actually multiply when women dominate spaces of authority and leadership. The authors of the study attributed this correlation to an evolving conscious or subconscious desire for “status equalization” as more women occupy positions of power. 

Without undermining the fact that women—and particularly women of color—are disproportionately impacted by sexual harassment and violence in the workplace, it is also important to note that people of all gender identities are affected. Across data samples, men constitute a much smaller percentage of overall reported cases of sexual harassment and violence. However, this is not an entirely accurate representation. According to a 2018 Marketplace-Edison Research Poll, nearly one in seven men have endured workplace sexual harassment, demonstrating that men are less likely than women to speak out. Again, the conversation turns to gender norms and stigmas, but the solution is not straightforward. 

The frequency of incidents of sexual harassment creates a common human experience of normalized violence. Goss Graves, the National Women’s Law Center director, explains that “our goal has to be ending sexual violence . . . The real goal feels giant, and not achievable overnight.” Legislative and corporate policy changes alone cannot achieve complete systemic reform. Recent policy initiatives are tremendous for survivors, but they are fragments of the wider conversation. The response survivors seek is expansive and multifarious, yet it shares a common root: education. Tarana Burke, founder of the #MeToo movement, explains that children must be taught “to reject rape culture and respect bodily autonomy.” Educating young people about consent and holding upcoming generations to a higher standard is integral to reshaping norms and expectations for conduct within academic, professional, and social settings. #MeToo amplified the conversation, and now we must continue to ignite the response.

US Recession: More Layoffs at Tech Giants are Approaching

As an impact of the pandemic and Russia’s invasion of Ukraine, the US economy is predicted to face a recession that may result in massive layoffs in 2023. In June, thousands of Tesla’s employees were laid off based on Tesla’s “super-bad feeling” about the economy. In August, Apple laid off roughly 100 contractors as part of a push to limit their spending. In September, Meta announced plans to freeze hiring and restructure current teams to cut down expenses and develop a streamlined internal workforce. Finally, HelloFresh laid off 600 employees, recorded as the biggest layoffs this year. 

The National Bureau of Economic Research (NBER) stated that the US is not yet officially in a recession. However, experts are concerned that recent layoffs among tech giants will impact the labor reports in the second half of 2022. According to the US Bureau of Labor Statistics, the unemployment rate rose 0.2% to 3.7% in August, and the number of unemployed people increased to six million. Labor reports are one of the most indicative factors in predicting US economic recessions. If people are not earning money, their purchasing power declines, and companies’ profits will decrease. Consequently, this dynamic also decreases investor confidence in companies. As a result companies layoff more employees to streamline business operations and adjust to lower consumer demand. 

As a result of employment trends, social media users are documenting their layoffs on TikTok, with the hashtag “layoffs,” garnering more than 30 million views. These users are encouraging young workers to distrust their future employers. Instead of viewing layoffs as a source of disgrace, the mindset of many laid off workers is that the company is responsible. Human resources departments are tasked with the legal and moral responsibilities of hiring, compensating, training, developing, monitoring, retiring, coaching or counseling, and selecting the right positions and/or laying off employees when the organization has to reduce its workforce. Therefore, it is important for the human resources department to apply a humanist approach when firing employees.

Because mass layoffs may continue into next year, companies must consider today’s employment law. Companies may face potential employment discrimination suits if termination is not supported by solid and transparent evidence demonstrating the financial reasoning behind layoffs. Lawsuit settlements or hiring legal counsel to develop defenses is extremely costly and time-consuming. When faced with a looming recession, employers should be aware of employment laws when conducting workforce reductions. They must consider notice of termination required by federal law and wage payment obligations under wage and hour laws. This will ensure employers are in compliance with applicable discrimination laws and that they can avoid incurring additional problems, beyond recession related profit losses.

Diversity, Equity & Inclusion: Enough with Bro Culture

Elon Musk’s all-male clique, the “Paypal Mafia,” epitomize the problem of Bro Culture in Tech. This close-knit circle of PayPal alumni founded or invested big in lucrative companies such as Tesla, Airbnb, Youtube, Uber, Pinterest, and LinkedIn. They invest in each other’s ventures and dictate which start-ups will receive their support and which will not. Basically, they gatekeep. But who do they close the gates to?

Mafia member Max Levchin answered this question in an interview with Fortune in which he attributed PayPal’s success to “self-selecting for people just like you.” In other words, they seek to exclusively hire those who fit into their “clique” – and by virtue of this their image of a ‘bro.’ This image skews straight, cisgender, and male.

Levchin elaborated on his dream employee: “He thinks like me, he’s just as geeky, and he doesn’t get laid very often. Great hire! We’ll get along perfectly.” Levchin admitted that the work culture he promulgates, in which disagreements sometimes lead to wrestling matches, excludes women and other minority groups. But he asserted that hiring employees of similar backgrounds and dispositions increases productivity, which is essential for startups’ success. Therein lies the problematic, bro-culture ethos that defines the PayPal Mafia: not only is diversity not worth pursuing; it is antithetical to success.

For a case in point, in the 646 companies PayPal mafia members invested in from 1995 to 2018, only eighty-nine (48%) had at least one female founder, and only one had a founder who identified as nonbinary. As the de facto golden boys of Silicon Valley, the PayPal Mafia inspires other power players to gatekeep in the same way, e.g., in the first quarter of 2022, women-founded teams received just 2 percent of venture capital funding. 

Because industry paragons like the PayPal Mafia primarily value bros’ perspectives, so do the directors, executives, and managers under them, who often ignore and denigrate employees who do not fit the ‘bro’-mold (“non-bros”). Junior male employees emulate this problematic behavior to advance, resulting in workplaces replete with harassment and discrimination. Riot Games, Activision Blizzard, Alphabet, Pinterest, Rivian, Uber, and SpaceX, among others, have all faced multiple gender discrimination suits alleging a toxic “Bro Culture.” Loretta Lee, who worked at Google from 2008 to 2016, alleged that she faced lewd comments, pranks, and even physical violence from her male colleagues daily. Employees who speak out against their companies’ Bro Culture often face retribution. After she complained, Lee’s male colleagues stopped approving her work, creating the illusion of false performance for which Google eventually terminated her. 

Bro Culture harms businesses by making them more difficult and less attractive places for non-bros to work at. This carries tangible financial consequences, e.g. Alphabet paid $310 million and Riot Games, $100 million, to settle sexual harassment and gender discrimination suits. Despite Max Levchin’s claims to the contrary, Bro Culture hinders productivity. Employees at Blue Origin attributed widespread project delays and budget overruns to a toxic work environment fueled by Bro Culture. Female employees struggled to be productive in the face of constant harassment and discrimination. In the highly collaborative schema of the tech world, hindering the work of some hinders the work of all. In the Google example, Lee’s male colleague’s retaliatory refusal to approve her work on a project delayed the entire project. As the highly skilled workforce that drives Tech grows increasingly diverse, employees will grow less tolerant of Bro Culture, and companies that only value bros will miss out on important pools of talent. 

For the sake of decency and financial sense, the technology industry must seek to eliminate Bro Culture from the top down. Industry leaders must fund more female- and minority-founded companies and support DEI initiatives in the businesses in which they invest, including a guarantee of equal pay regardless of gender. To eliminate harassment and discrimination, tech companies must empower Human Resources. HR should have regular check-ins with employees in which they can speak openly without fearing retaliation. Hiring committees must make a concerted effort to hire more minorities, women, and people who respect them. Onboarding committees must impress upon new hires the importance to the company culture of valuing everyone’s perspective. None of these steps will be easy, but if the technology industry truly strives to build a brighter future full of AI, self-driving cars, and commercial spaceflight, it must abandon the oppressive beliefs of the past. 

Anti-Woke Bank: Corporate Social Responsibility and GloriFi

Corporate social responsibility, or the idea that corporations should consider the needs of the community as much as the needs of their shareholders, is nothing new. In the famous case of Dodge v. Ford Motor Co., Henry Ford declared the purpose of Ford was to benefit others including his community, his customers, and his employees. Any benefit to his shareholders was meant to be incidental. Ford would go on to lose that case, setting the precedent for years to come that shareholders take precedence in the long list of corporate stakeholders.

Many corporations today advance far-reaching and progressive social causes. For instance, some financial firms such as JP Morgan and Bank of America have put their money behind clean, renewable resources in an effort to decrease our reliance on fossil fuels.

Some firms, including a startup known as GloriFi. have decided to take the opposite approach. GloriFi was founded by Toby Neugebauer and Nick Ayers, with funding from Ken Griffin and Peter Thiel. GloriFi is a mission-driven financial technology company which specializes in banking, credit cards, mortgages, and insurance. The founders had one objective in mind: to be a force for American conservatism on Wall Street. GloriFi has financially supported causes including bolstering police forces, capitalism, gun rights, and traditional family values. At the Summer Conservative Political Action Coalition event in 2022, Neugebauer furiously rallied at what he viewed to be Wall Street’s ubiquitous liberalism. Metaphorically shaking his fist, Neugebauer declared that it was time to “deliver better products than the people who hate us.”

Within months, GloriFi was on the verge of bankruptcy, and its investors had nearly lost all their investments. The firm had launched products that became commercial failures, including an inoperable credit card with material incompatible with payment terminals. The firm consistently missed deadlines, laid off several employees, and failed to deliver on its promise to provide quality service emphasizing traditional values.

Before long, Neugebauer was facing demands from investors to resign. Neugebauer responded by blaming vendors, surrounding himself with yes-men and sycophants, and growing increasingly paranoid and distrusting towards his business partners. GloriFi’s failure cannot be explained purely by the firm’s founders’ ideologies, which put them at a deficit in an increasingly progressive Wall Street. GloriFi refused to understand that company profits are more important to shareholders than ideological spending, corporate responsibility, and effective Environmental Social Governance (ESG).

While corporations continue to maintain their own corporate social responsibility goals, this is secondary to the aim of increasing company value. Demonstrated by A.P. Smith Manufacturing, a fire hydrant manufacturing company, who argued before the New Jersey Supreme Court that their company benefitted from investment into their community. By funding universities and higher education, the company ensured its community would continue to produce skilled consumers and workers for the future.

If GloriFi expects to succeed, its management should reevaluate how they plan to increase company value. Management should follow shareholder advice and focus less on paying homage to “conservative values.” Glorfi must consider how their community investments contribute to the value of their company. Social responsibility is more than just personal politics and private vendettas, it means a greater effort to ensure the survival of the company through social investment and understanding.

Fear of Recession at the Plain Sight after Fed Increases Benchmark Rates

Federal benchmark rates continued to rise after the Federal Reserve approved its third-consecutive increase this year by adding 75 basis points while projecting another increase. They expect the rate will increase until reaching 4 to 4.5 percent by the end of this year, a level we have not seen since 2008. This increase comes as expected in the battle against soaring inflation rates, which is at 8.2 percent annually, near its highest rate in 40 years. This increase was followed by negative responses on the stock market. The Dow Jones Industrial Average (DJIA) sunk 19.38 percent while the S&P 500 suffered a 23.64 percent decline on a year-to-date basis, falling to the level that people call a “bearish market.” The future economic forecast is even more gloomy. While the first two quarters of 2022 saw negative growth, experts claim that the third quarter’s Gross Domestic Product (GDP) is also close to zero. Consequently, the rise of interest rates will affect the economic recovery after it was hit by the last recession during the pandemic. Households, particularly low-income families and workers, will be the first to be affected as the hike in interest expenses will increase prices for products and services while they face the danger of unemployment. The United States will, once again, face the threat of recession.

While there is no standard for defining a recession, most experts refer to a recession as a significant decline in GDP for two consecutive quarters. The National Bureau of Economic Research (NBER) offers a broader definition of recession by taking into account several factors, such as the decline in GDP, the decline in real income, the rise of unemployment, the slowed production and sales of the industrial sector, and the lack of consumer spending. Many of these factors affect each other, meaning the decline in GDP will likely constrain consumer spending, which affects the production of products, and in turn, gives rise to the unemployment rate. According to NBER, a recession happens for months, while the average recession lasts for 21.6 months. The most recent recession in the United States is the Covid-19 recession, which lasted around two months.

Rising inflation rates is one of the common causes of a recession. When inflation is high, the price of goods and services increases and hampers people’s ability to purchase. Because the value of money is diminished, people tend to spend more of their money on everyday goods rather than save it. Consequently, people will ask for a wage increase, and in turn, the company will increase the product’s price again to make up for the labor cost. Then the cycle repeats itself. If this pattern continues for a more extended period, low-income families are the ones who suffer the most because they will not be able to afford the price increase, and their savings will not be enough to cover their expenses.

In order to control the inflation rate to a moderate level, the Federal Reserve resorts to its most helpful method: increasing the federal benchmark rates. Higher interest rates will slow down the inflation rate by tightening monetary policy. Simply put, the Federal Reserve increases the short-term interest rate, which makes money harder to borrow. Business owners will reduce the production of goods and services because of the rise of operational and interest expenses. On the other hand, consumers will be forced to tighten their belts and discourage consumption, driving down demand. Moreover, people will be eager to save money because the bank rate is higher. This pattern will continue until the supply and demand reach equilibrium and create price stability.

Increasing the federal benchmark rate is not risk-free, as it will bring other problems to the table. Jerome Powell, Chairman of the Federal Reserve, said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Low-income families are the ones who suffer the most as they will experience lower quality lives. First, as the interest rate rises, the companies will increase the price of goods and services to make up for their higher interest expenses. The Federal Reserve estimates that prices of goods and services will continue to grow at a level of more than three times the two percent target.. As a result, the low-income families probably will not be able to afford the usual standard of living because everything from gas, water & electricity bills, food, and groceries become more expensive. Moreover, while the increased interest rate encourages people to save money in the bank because of higher investment returns, low-income families might be unable to benefit from this as their savings barely cover their expenses.

Furthermore, the rise of interest rates also affects their repayment loans, such as mortgages and automobile leases. Their installments will increase as the interest rate increases, especially on a floating-rate lease. Accordingly, the rental lease will also become more expensive because landlords tend to pass the increased mortgage rent to their lessee. Finally, the increased rate also has a negative impact on the job market. In a worst-case scenario, the Federal Reserve projects an increase in the unemployment rate to 4.4 percent next year. That would mean the loss of 1.2 million jobs. The combination of increased interest rates and lower demand will diminish companies’ revenue and production, and in return, they will restrict their hiring rate. At some point, some companies might not be able to compensate their workers due to a lack of cash flow. Thus, mass layoffs will probably occur as companies attempt to cut labor costs. Consequently, many low-level employees will be on the verge of unemployment because their positions are the first on the list when companies plan to lower production and are easy to replace when the economic situation goes back to normal.

 

By Ristyo Pradana

 

 

Regulating Fast Fashion Industries as the New Norm?

Legislators all around the world are looking at fast fashion industries with greater scrutiny. In March 2022, the European Union published the Ecodesign for Sustainable Products Regulation (ESPR) to improve product circularity and identify substances that may prevent products from being recycled. 

ESPR specifically set single-fiber, or monofiber, clothes as the new standard, which makes clothes easier to recycle. Across the Atlantic in America,  the Fashioning Accountability and Building Real Institutional Change Act—known as the FABRIC Act—is the first federal fashion bill which aims to improve the labor rights of garment workers and encourage reshoring of the American garment manufacturing industry. More regulations on the fast fashion industry are also appearing at the state level. California recently passed a bill that requires hourly wages for garment workers. Under this new bill, workers would no longer be paid per garment, and manufacturers and brands would be penalized for illegal pay practices. 

Growing government regulations may be a response to the inability of fashion industries to self-regulate, despite their stated intentions. While in recent years, many fashion brands began sustainability marketing, much of the efforts remain acts of greenwashing that yield little concrete benefits to the environment or garment workers. The Netherlands’ Authority for Consumer Markets notably investigated H&M and Decathlon for greenwashing and misleading marketing claims. This is just one example, out of many, that led to the introduction of these new fast fashion regulations across America and the Western Europe which have begun to hold fashion brands legally accountable for their production and marketing not only domestically but also abroad in their offshoring factories. This series of new rules shifts the burden away from the so-called responsible and socially aware consumers and has begun to tackle fashion corporations.

In addition to its impact on fast fashion brands, new regulations will also affect the international supply chain of fast fashion. Specifically, as ESPR covers all clothes sold in the bloc which imports nearly three-quarters of its textiles, any fashion multinationals export to the EU would be impacted. We should expect the trickle-down effect of EU and American policies to hit fast fashion suppliers in developing nations. With the new regulations, one may envision a mutually beneficial scenario. Fast fashion brands may reshuffle their supply chains and possibly identify and transform local providers in Southeast Asia to comply with the EU standards. Economically resourceful fashion brands may in turn proactively provide infrastructure, training, and protection for offshore garment workers. 

Nonetheless, this possibly auspicious situation gives rise to many more concerns, among which who would bear the cost of more expensive products. It is predictable that sourcing sustainable and recyclable materials and ensuring workers’ rights would increase the cost of production. This rise in cost is at least a short-term problem before sufficient innovation can ensure cheaper and widely available recycling methods, thus creating a more efficient and closed ecosystem for clothing production. We are indeed hopeful that more and more startups have come up with solutions for effectively recycling clothes. France-based Carbios SA developed technology to recycle the polyester in clothes blended with synthetic and organic materials. It signed an agreement with sportswear brands earlier this year, including Puma SE and Patagonia. 

Holding fast fashion brands legally responsible for their impact on the environment and workers’ rights may also reshape the landscape of the fashion industry and induce interesting consumer behavior. The heightened labor and recycling standard in the new EU regulation would increase the retail prices of fast fashion items, at least in the short term. The single-fiber requirement would also pose challenges to many fast fashion designs, which rely heavily on mixed fiber fabrics. The major appeal of fast fashion—cheap pricing—would be mitigated. Consumers may gradually decide to purchase less or prioritize second-hand clothes shopping. It may also be likely that fast fashioning pricing would begin to approximate that of local and small business. As a result, consumers would place greater emphasis on the design, quality, or convenience of their purchases. Granted, fast fashion brands may have the upper hand in marketing and advertising. However, with lessened price competition, small and local businesses may finally have the ability to compete with fast fashion brands through the creation of a loyal consumer base.