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Sunday, 11 February 2018

Two researchers state: “Flex contracts are hampering consumption in The Netherlands”. Subdued development of collective wages might cause the lackluster domestic consumption


It is one of the recurring themes of this blog: the subdued wage development in The Netherlands and the effects that it has on domestic consumption.

It is no secret that the lower and middle classes hardly had any wage increases during the last ten year. It is also no secret that many of the store chains aimed at the middle classes in The Netherlands are going through a hard time and that the most successful store chains are either situated at the bottom or the top of the market. This is the effect of the lackluster consumption in The Netherlands.

What most people already suspect has now been proven by two investigators of the Dutch National Bank (DNB). In an article in Het Financieele Dagblad, Johan Verbruggen and Peter Keus stated that there is a strong correlation between the subdued wage development and the hampering Dutch consumption. 

More important, however, is that they also proved that the influence of flexible labour on this subdued wage development is considerable. The pressure of the flexible labour force and also the influx of foreign workers on the wages and rates of normal, contracted workers makes that their wages hardly rose during the last ten years. This is the reason that The Netherlands falls behind in economic development, in spite of impressive export figures.

Here are the pertinent snippets of this article:

The large number of flexible labour contracts in The Netherlands pushes the wages down and hampers the consumptive spendings and prosperity in The Netherlands. This conclusion can be drawn from a blog of two researchers of the Dutch National Bank on the website of economic magazine ESB.

Johan Verbruggen and Peter Keus investigated how the Dutch economy performed during the period of 2002 to 2017, in comparison with seven other Western economies: Germany, Denmark, the UK, the US, France, Canada and Finland. The Netherlands is a moderate performer, according to Verbruggen and Keus.

In order to explain the disappointing growth results, both researchers looked at the composition of the growth. There The Netherlands displays a blatantly different pattern than the other countries. In the period under research the Dutch entrepreneurs were successful in the export of goods and services to foreign markets. Only Germany did better and the US did about as good as The Netherlands.

That The Netherlands is nevertheless only moderate in growth and not belongs to the leading countries in this respect is caused by the strongly subdued private consumption. This consumption per capita in fact stagnated since 2002, while the other countries experienced a growth ranging from 10% to 25%.  

One of the explanations for this phenomenon lies in the share of the national income that flows to the wages. This so-called labour income quote (i.e. AIQ in Dutch) is under firm pressure in the whole industrialized world. 

Much of the growth is transfered to the suppliers of capital, in the form of interest and profit, and so only a lesser part is transfered to the workers as wages. This labour share within the Gross Domestic Product has stabilized at best in the countries under investigation. In especially the US and The Netherlands the share of labour in the GDP dropped considerably.

In The Netherlands, the emergence of flexible labour is one of the causes. Verbruggen en Keus write: “The excessive flexibilization of the labour market in The Netherlands puts downward pressure on the labour income quote”. More flex labour made it possible for employers to pay lower wages to their workforce. This came at the expense of consumption and hence of economic growth and prosperity in The Netherlands.

There you have it. Wage restraint, under pressure of a flexibilized labour force, as well as the influx of workers from the low wage countries (i.e. India and Eastern Europe), has had a direct influence on consumption and prosperity in The Netherlands. For the regular readers of this blog, this conclusion can hardly come as a surprise.

The problem of wage restraint is that it is a fyke, as a matter of fact: once companies start with it on a broad (i.e. national) scale, it will inevitably have a substantial influence on the wage development and consumption in a country. As a consequence of this, it is almost impossible to stop with wage restraint.

This is caused by the fact that:
  • wage restraints lead to lower income among lower and middle classes;
  • lower income leads to lower consumption;
  • lower consumption leads to lower earnings and profits among especially small and medium enterprises and store chains aimed at these middle classes;
  • and finally, lower profits and earnings among SME companies lead to the need to continue wage restraint in order to not land into the red figures.

It is the perfect fyke! In fact, the only ones who can change it are the large (multinational) companies, the government and the large capital suppliers, by simply raising the wages whenever they have the possibility to do so.

Unfortunately, in The Netherlands the government did in fact the contrary. They did so by hardly raising wages for their fixed workers, by making much more usage of flexible labour within their labour force and finally, by substantially raising all kinds of taxes and levies, thus making life more expensive for the Dutch lower and middle classes. 

One could therefore justifiably state that the government is directly responsible for the subdued consumption in The Netherlands.

I made a chart, based upon the correlation between the consumption in The Netherlands and the collective wage development among private companies, subsidized institutions and the government. This correlation is already stunning, even when the chart is also including consumption of food and necessary supplies, that are less prone to positive or negative change (i.e. people still have to eat and buy for instance toilet paper).

Household consumption and collective wage development
in The Netherlands
Chart by Ernst's Economy
Data courtesy of statline.cbs.nl
Click to enlarge
If these necessary articles would have been left out of the equasion, the image would be even more conspicuous when it comes to the stagnation of private consumption.

In the chart I “dramatized” the indexed changes by setting the Y-axis values between 94 and 120 (i.e. 2010: 100). However, the change of the income for all three groups (government, subsidized institutions and private companies) never exceeded 11% growth since 2010. And this wage increase is excluding inflation, which has eaten a considerable chunk from this 11% wage increase!

Looking at this particular image, t isn’t so strange that the development of private consumption in The Netherlands is so lackluster and that normal store chains for the lower middle classes are doing so poorly in general.

The big picture of all this is that especially capital investors and executive remuneration have profited excessively from the economic growth and the successful export of the last eight years, while the common workers footed the bill for it, by keeping the Dutch export prices lower than they should be in reality. 

This is wonderful for export, but killing for domestic consumption.

In spite of numerous statements by Dutch National Bank representatives (even chairman Klaas Knot made such a plea) and various professors in Economy to end this utterly damaging practice of wage restraint, the Dutch government and large employers have turned a blind eye towards the serious drawbacks of it.

The government and the large employers are not willing to raise the wage by 5% per year for the next few years, while the small and medium enterprises cannot raise the wages of their personnel, as their budget does not allow them. 

And so the lackluster domestic consumption will remain lackluster in the following years to come. And that’s a shame!

Saturday, 10 February 2018

Rabobank now understands once more that “playing international bank successfully” is not without risks. Pt II, the judge strikes back!


Almost one year ago, I wrote an article upon Rabobank RNA, the Californian branche of the Dutch cooperative bank Rabobank and the fact that it had been involved in a criminal investigation for acts perpetrated via its branches in Calexico and Tecate. Rabobank, a globally operating bank, is the second biggest bank in The Netherlands based upon the size of its balance sheet.

Rabobank RNA was investigated by the Californian OCC (i.e. Department of the Treasury’s Office of the Comptroller of the Currency) on the allegation of being heavily involved in money laundering via its branches in Calexico and Tecate. 

These branches – both very close to the Mexican border – were receiving so much cash money out of Mexico that they were forced to bring in several money trucks per week to ship this stockpile off. This money was probably coming from drugs trafficking and felonious money laundering, perpretrated by the drugs gangs over the Mexican border.

In that article I suspected that this Californian case would just be as harmful – or even more – as the earlier Libor fraud, for which Rabobank was found guilty earlier:

When these allegations are true, this is a serious situation for this Dutch bank that traditionally prides itself in doing business cleanly, transparently and responsibly. And it seems that the allegations came with a stockpile of circumstantial evidence, as it isn’t normal that a normal bank in the agricultural industry has to deal with (litterally) truckloads of cash money from suspicious sources coming in every week. On top of that the executives are seemingly hampering the investigation into the origin of this money.

As far as I know, the investigation did not lead to a court case yet. This makes sense, as such financial/administrative probes are always notoriously time consuming in the preparation phase, before they can even come to trial. And the more evidence is lying around to be collected and investigated, the more time it takes to inventorise it. This does not mean, however, that it will never come to a trial or a verdict in this case. Especially not as the American financial authorities are always extremely vigilant against foreign bank organizations.

I was right about this trial.

Last week the Dutch bank pleaded guilty to a felony conspiracy charge and was convicted to payment of a penalty to the tune of $368 million.

And even though the penalty itself for this Californian conspiracy was not as high as the huge €774 million penalty for “Liborgate”, it was especially the text of the Californian court’s press release that is so devastating for the cooperative bank for farmers and agricultural companies “that wants to grow a better world together”, according to its boasting adverts and commercials.

Here are the pertinent snippets of this press release:

Rabobank National Association (Rabobank), a Roseville, California subsidiary of the Netherlands-based Coöperatieve Rabobank U.A., appeared today before U.S. Magistrate Judge Jill L. Burkhardt and pleaded guilty to a felony conspiracy charge for impairing, impeding and obstructing its primary regulator, the Department of the Treasury’s Office of the Comptroller of the Currency (the OCC) by concealing deficiencies in its anti-money laundering (AML) program and for obstructing the OCC’s examination of Rabobank.  Rabobank will forfeit $368,701,259 as a result of allowing illicit funds to be processed through the bank without adequate Bank Secrecy Act (BSA) or AML review.

At today’s hearing, Rabobank pleaded guilty to conspiracy to defraud the United States and to corruptly obstruct an examination of a financial institution. In pleading guilty, Rabobank admitted to conspiring with several former executives to defraud the United States by unlawfully impeding the OCC’s ability to regulate the bank, and to obstruct an examination by the OCC of its operations throughout California, including its Calexico and Tecate bank branches.

“When Rabobank learned that substantial numbers of its customers’ transactions were indicative of international narcotics trafficking, organized crime, and money laundering activities, it chose to look the other way and to cover up deficiencies in its anti-money laundering program,” said Acting Assistant Attorney General Cronan. “Worse still, Rabobank took steps to obstruct an examination by its regulator into those same deficiencies.  

“Rabobank had an obligation to shine light on suspected drug traffickers, money launderers and organized crime,” said U.S. Attorney Braverman. “Instead, this bank deliberately allowed hundreds of millions of dollars of suspicious cash transactions and wire transfers to flow through its branches and took measures to hide this activity from regulators.

According to court documents, Rabobank also created and implemented policies and procedures to prevent adequate investigations into these suspicious transactions, customers, and accounts.  Among those policies and procedures was Rabobank’s “Verified List” – a policy that effectively resulted in Rabobank executing an end-run the BSA/AML and SAR requirements.  In particular, Rabobank instructed its employees that if a customer was on the “Verified List,” no further review of that customer’s transactions was necessary -- even if the transactions generated an internal alert, or the customer’s activity had changed dramatically from when it was “verified.”  

Rabobank knew that millions of dollars in cash deposits at these branches were likely tied to illicit conduct.  In particular, the Calexico branch, located about two blocks from the U.S.-Mexico border, was the “highest performing” branch in the Imperial Valley region due to the cash deposits from Mexico.  Throughout

When the OCC began conducting its periodic examination of Rabobank in 2012, Rabobank, acting through three of its executives, agreed to, among other things, knowingly obstruct the OCC’s examination.  Rabobank responded to the OCC’s February 2013 initial report of examination with false and misleading information about the state of Rabobank’s BSA/AML program.  Rabobank also made false and misleading statements to the OCC regarding the existence of reports developed by a third-party consultant, which detailed the deficiencies and resulting ineffectiveness of Rabobank’s BSA/AML program.

To further conceal the inadequate nature of its BSA/AML program and to avoid “others contradicting our findings” and statements to the OCC, Rabobank demoted or terminated two RNA employees who were raising questions about the adequacy of Rabobank’s BSA/AML program.

This Californian press release leaves little to be desired, when it comes to exposing the erratic and condemnable behaviour of the Rabobank in this matter. Especially when you let the red and bold texts sink in, you understand how outrageous the facts were that played in California and how conspicuously the Rabobank RNA acted to hide these facts from the American authorities. Especially the fact that Rabobank RNA fired two employees, who thought to do the right thing, sheds a very unfavourable light on the bank; not only on the Californian Rabobank RNA, but on the Rabobank Group as a whole.

Rabobank RNA, as a full subsidiary of Utrecht, The Netherlands-based Rabobank International (in those days), was not operating in a vacuum in California. Either it was or it should have been under close scrutiny of both Rabobank and Rabobank International, the two headoffices of the global Rabobank organization in Utrecht, The Netherlands.   

This means that both the head offices either have been or should have been aware that those branches in Calexico and Tecate created traffic jams of their own with money trucks, filled to the brim with Mexican drugs cash. 

Personally, I would be very surprised when the Dutch offices would NOT have been aware of these events. Even if the Dutch accountants and controllers just would “go through the motions” in their continuous assessments of the Californian bank data, some events must have been too conspicuous! And I am very sure that these accountants and controllers did not just go through the motions!

There would have been simply too many cash transactions around the thresholds for money-laundering reporting and too many truckloads of cash on behalf of those two Californian branches close to Mexico to NOT be conspicuous for those accountants.

This trial and especially the judge’s brutal verdict is something that Rabobank should take into consideration very much. Otherwise the bank could become an organization of ill-repute, with a sanctimonious charisma coming from their bragging commercials and their carefully preserved cooperative farming image, but with actual conduct that is well below par. 

Perhaps, Liborgate was just an unfortunate, albeit very expensive incident. And also Calexico might be nothing more than a local fraud and deception case of the Californian branch alone. But in this case it will definitely be “three strikes, your out”. One more incident and the reputation of the Rabobank is gone for a long, long time. Look for instance at Deutsche Bank and its enduring battle against its own ill reputation nowadays.    

And even though the American criminal case against Rabobank is now history with this verdict, the whole impact of these events is far from over yet. A Dutch sollicitor, Göran Sluiter, is planning to start a private court case against Rabobank in The Netherlands, on behalf of Mexican victims of the ruthless drugs mafia at the Mexican-American border.

On top of that, I have personal contact with an American customer of Rabobank, who wants to start a legal battle against the bank, based upon the fact that Rabobank hid their “criminal behaviour” from their American customers, thus making a better than deserved impression on their investors and private and corporate lenders. Probably this customer is not the only one, who wants to start a court case against the bank.

As far as I’m concerned, there is only one thing that the Rabobank could and should do. Not continuing with their boasting commercials and their ‘holier than thou’ charisma, without admitting to the general public how terribly wrong they have been a few years ago.

No, they have to sincerely apologize for these reprehensible events and prove that they are worthy of the confidence of their millions of customers in The Netherlands and far, far outside. This confidence won’t come for free and once lost, it will be gone for a long time.

Sunday, 4 February 2018

We must make an end to the pharmaceutical cash cows! When the prices of lifesaving drugs smell like extortion, the government and national health insurance system must say ‘No’ to compensation

It is perhaps the curse of the 21st Century: as a consequence of deeper insight in the human body, better therapeutical techniques and more advanced medicine, it is now possible to cure or slow down diseases that had been a death sentence for their victims until the recent past.

Many formerly deadly forms of cancer, auto-immune diseases (“aids”) or muscle degradation diseases can be cured or slowed down to chronical diseases today. Other diseases in these categories are still deadly eventually, but life can be prolonged with a number of years and/or the sickness runs with less debilitating effects on the patient.

The price to pay for such advanced medicine is often high, as developing these special drugs is mostly very expensive and the market for some of these drugs is small – even on a global scale. The compensation is therefore much higher than in case of more common, non-patented description drugs. This is not more than logic and should normally not be a reason to not compensate such drugs for chronical or deadly diseases; especially when the curative effects are irrefutable and have a lasting effect on the health and stability of the patient.

However, during the last decade the stories kept on emerging about excrescenses within the pharmaceutical industry: about pharmaceutical giants raising the sales price of certain drugs with dozens or hundreds of percents. 

For instance after a takeover of their initial manufacturer or just because they could do so, as their patients would need their drugs anyway.

Or about life-prolonging drugs that cost patients (or their health insurance companies) more than a quarter million dollars in annual compensations nowadays, but can be produced for a fraction of the price by proficient pharmacists and medical universities.

The same ol’, already worn-out story from the pharmaceutical companies is always that research costs millions of dollars. Such specialty drugs must therefore have these high prices in order to keep the pharma companies afloat and compensate for future research. And in some cases this story will definitely be true.

However, the pharma industry is also an industry that enjoys excess profits of sometimes more than 30 per cent per year; an industry in which the sky seems the limit in some cases. On top of that, ‘Big Pharma’ traditionally threw millions and millions of euros towards doctors and pharmacists, via sponsored courses and workshops in luxurious resorts at tropical destinations. By doing so, Big Pharma bought their eternal love and loyalty, leading to numerous descriptions of expensive patented drugs, where cheaper alternatives would also have sufficed.

Also the pharma industry still unleashes massive lobby power towards parliaments all over Europe, thus securing a willing ear among the national and European members of parliament. Such lobbies are invisible to the general public, but they are extremely successful in protecting the interests of Big Pharma.

And last, but not least: as the prices of such ‘Champions League’ drugs as the aforementioned ones differ between countries and price-setting is an extremely opaque process, the MP’s all over Europe are 5 – 0 behind against the ‘cunning’ pharmaceutical companies when it comes to information equality.

At the same time the world witnesses that strategically important drugs like new antibiotics – necessary to fight broad drug resistance among deadly bacteria – or drugs against for instance malaria  are developed at such a lackluster pace and by that little pharmaceutical companies, that it seems like an endless journey without any form of urgency.

This all paints an image of a pharmaceutical industry that merely exists for itself alone and not for the benefit of the world as a whole: only for the remuneration of their executive management and for the sheer profits of their shareholders. Not for the patients worldwide they are supposed to cure and that are dependent on them in order to survive.

The latest episode in this continuing story is the compensation for the drug Spinraza in the Netherlands. This drug against a debilitating and deadly muscle disease (spinal muscular atrophy) has the dubious honour of being the most expensive drug available in The Netherlands, with annual expenses of over half a million euro per patient. The Dutch Telegraaf wrote the following snippets about it:

That there will be green light for this drug [Spinraza – EL] is far from certain yet. From recent calculations of the Dutch Healthcare Institute (i.e. Zorginstituut Nederland) it becomes clear that the drug is unprecedently expensive: the drug costs more than half a million euros per year in the first year and over a quarter of a million in the years thereafter.

When the drug is allowed into the ‘basic compensation package’ of the Dutch national health insurance, Spinraza will eat away €30 million per year of the national health budget. This kind of drug is increasingly thrusting the healthcare premiums up in The Netherlands. In more and more [Dutch] households these premiums are pressing hard on the monthly budget.

This is almost an impossible choice for national politics:

Allowing this (and other) ‘Champions League’ drug(s) into the Dutch basic compensation package means that literally hundreds of millions of euros per annum in healthcare budget go up in thin air on behalf of a very limited, but nevertheless growing group of patients. And this development could continue until the point that the whole national healthcare system becomes unaffordable for the Dutch government and the “average Joe in the street”.

Not allowing this particular medicine or other Champions League drugs to the basic compensation package of Dutch healthcare, however, means in fact a death sentence for the patients suffering from such fatal diseases. They have nowhere to go anymore, as the road to such specialty drugs remains closed then. In other words: the Dutch government here is caught between a rock and a hard place and can never do it right.

Then the simple, one million dollar question remains: where ends a fair compensation for expensive, but lifesaving drugs being created for extremely small groups of patients and where starts (inter)national extortion of governments and insurance companies, using their terminally ill and desperate patients as leverage?!

This is really anybody’s call and it is a nearly impossible choice to make, but someone should do it!

With (of course) an ambiguous feeling about it, I therefore found it good news that the Dutch Healthcare Institute drew a provisional red line with respect to compensation of the aforementioned Spinraza. For the simple reason that the drug is currently too expensive for the Dutch healthcare system to bear.

The NRC wrote an article about this conundrum, of which I quote a few snippets:

For patients that suffer from muscle disease SMA the medicine Spinraza should be added to the basic compensation package for healthcare. Condition is, however, that the price is reduced considerably. In its judgement, the advisory committee for the Healthcare Institute weighs in appraisals by patients and attending physicians about the effectiveness of the drug.

The committee spoke with manufacturer Biogen and asked for an explanation with respect to the price. Spinraza costs roughly half a million euros per patient per year. The Healthcare Institute called this price outrageously high: ”The manufacturer could not explain sufficiently which expenses are made for the production of this drug”, according to a spokesperson of the Healthcare Institute in a notification upon the advice. The price reduction, that is conditional for addition of Spinraza to the basic compensation package,  must be drastical: 80 to 85%.

At this moment the patients of this terrible disease SMA do receive their Spinraza, based upon a temporary arrangement that lasts until May, 2018. And the advice of the Healthcare Institute is not yet definitive until February 5.

However, when the Healthcare Institute sticks with its provisional decision, the minister will have to renegotiate with Biogen for a fairer price. And when these negotiations fail, the drug will not be compensated anymore, as of May.

I truly hope that the Healthcare Institute and Minister Bruno Bruins of Healthcare and Sports mean business against Biogen. I consider that to be the only way to stop the outrageous development of prices for modern drugs, meant for a limited number of patients.

We all must make an end to the pharmaceutical cash cows, in order to stop the extortion of modern society! When the Dutch government gives in in this case, it will spur other pharmaceutical companies to also raise their prices for their Champions League drugs. And then the healthcare system everywhere could become unaffordable eventually.

The pharmaceutical companies should really ask themselves for which they are established: for giving their executives and shareholders the ‘financial ride of a lifetime’? Or for helping patients worldwide to cure from deadly or debilitating diseases against a fair compensation?

That is their billion dollar question. And it should be answered fast, before governments all over the world consider to step in and nationalize indispensable pharmaceutical companies!

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