economics

Sion Owen: Investors, Business Schools and Financial Crisis

by Sion Owen on January 18, 2012

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Investors, bankers, regulators: who is responsible for the financial crisis? The Financial Crisis Inquiry Commission (http://fcic.law.stanford.edu/report) underestimated the role of investors and focused too much on ‘financial institutions’ and ‘regulators.’ The commission’s minority, or ‘dissenting,’ report only partially resolved the imbalance as it blamed investors for creating a ‘credit bubble’ which made their role seem transient. In reality, the behavior of investors is the long-run driving force behind the financial crisis and financial markets. It is investors’ money that financial institutions manage, and it’s investors’ demand for a rate of return on capital that is the source of, now discredited, ‘financial innovation,’ including mortgage-backed securities. The mentality that characterizes investors is purely monetary, or ‘capitalist,’ and because the financial services industry acts as their agents, investors become detached from real business issues such as quality of product and service. This detached mentality is also connected with their inability to judge risk. Low wages across the globe have helped investors accumulate wealth, and if an investor has $100 billion, a $10 billion investment does not seem such a big risk. The FCIC blamed reckless risk taking on financial institutions, but the root of it is investors and their need for returns. Focusing too much on banking and financial institutions is not limited to FCIC. Charles Ferguson’s award winning documentary Inside Job (2010) blamed financial institutions for buying off business school economists. Ferguson is right to highlight business school failings, but wrong to blame financial institutions. The process of shaping economic ideas in ways that are congruent with the accumulation of capital has a long history. Professor Rob Bryer of The University of Warwick traces the process back to Irving Fisher who developed the concept behind modern financial theory, the ‘time value of money.’ The years between 1880 and 1930 were characterized by labor unrest in the U.S. William Jennings Bryan, a presidential candidate, declared: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.” Irving Fisher developed a theory of interest and profits calculated to calm the situation by presenting a picture of economic harmony. Recent efforts made by the banking sector to buy off economists look relatively minor when viewed historically. The independence of business schools is important, and they should strive for a high level of professional detachment, but the finance industry alone is not the cause of the problem. The root of the matter is the powerful economic interests of investors. Modern economics has become an ideological tool, seeming to promote the free market and economic opportunity, but doing so in ways that actually perpetuate wealth and privilege. Economists’ focus on ‘utility’ and ‘time value of money’ generates a partial and inadequate understanding of economic reality, clouding the balance between cooperation and conflict that exists in all societies. As Naomi Klein has shown ( The Shock Doctrine ), ideologues and zealots pursue extreme policies when the natural counterbalancing fabric of society is temporarily damaged. Appreciating the depth and the historical roots of the ideological tendency in economics and society makes it easier to comprehend how governments are brought within the sway of investors. Here again, Inside Job tends to overemphasize the role of financial institutions in corrupting politicians and regulators. Although economists’ ideologies divert attention from social processes, events such as the financial crisis reveal the true picture. Prosperity and inequality have increased the importance of investors and their ideologies have, to an extent, permeated society, but the tide is turning. Managers and knowledge workers realize that value creation is not purely monetary but depends on quality of product. Economists’ theories are retreating and new ideas like political economy interpret the ‘free market’ in its social context. Politicians can see the damage done to businesses and communities and they are looking for ways to rebuild. Consumers can see the limits of borrowing and are putting their personal finances back on a sustainable footing. Investors can see the danger that their elaborate veil of secrecy may be slipping. It is not just Wall Street that needs to be occupied and reformed, but Main Street, and the process is already underway in finance, retailing, manufacturing, education and politics. Perhaps this is the time for business schools to step forward and take a radical lead. Managers have the powerful combination of technical knowledge and commercial experience and business schools can help shape a new breed of manager that understands business in its social context and uses this perspective to shape sustainable, ethical and long term business growth.

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Sion Owen: Investors, Business Schools and Financial Crisis

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Lynn Parramore: Mr. Davidson’s Planet: NPR/NYT Guru Adam Davidson’s Discredited Economic Principles

by Lynn Parramore on January 13, 2012

Huffington Post…

You’d be hard-pressed to find a discipline that shapes our world more than economics, and yet none has weaker foundations or more misguided evangelists. The rise of economic guru du jour Adam Davidson, the co-founder of NPR’s “Planet Money” and columnist for the New York Times Magazine , is perhaps one of the most disturbing illustrations of this unfortunate fact. The Curious Field of Economics Not too long ago, I asked Nobel Prize laureate Joseph Stiglitz how many economists he’d met who still adhered to the Chicago School free market approach, otherwise known as Neoliberal economics, that was proven to be severely flawed by the recent economic crash. “About 60 percent,” said Stiglitz. “Why is that?” I asked. “For the most simple human reason of all,” Stiglitz told me. “People don’t like to admit that they’re wrong.” True, that. Economists don’t like to acknowledge that the models they built their careers upon, taught students to believe, wrote papers in support of, published books in homage to — in short, the models that have driven their careers — are poppycock. When new information and advances in fields like mathematics or physics have occurred, practitioners have had to do reassessments. Newtonian physics had to be updated, for example, because realities asserted by Albert Einstein led to a reexamination of the science that produced a better, stronger field with greater capacity to predict and describe reality. But economists are peculiarly slow to come to grips with reality. And what about economic journalists? There is Paul Krugman, the rare serious economist who writes for a broad audience, engaged in the Sisyphean task of pushing back on storm force economic nonsense day after day. Deserving of a Nobel Prize in patience to go along with the one he received in economics, Krugman argues, explains, provides facts, and demystifies mystifications. And then there are writers like Adam Davidson, who purports to “demystify complicated economic issues” for the public. Mr. Davidson has helpfully gone on record saying that journalists are too reluctant to acknowledge their own ignorance. He has warned of the danger of people believing dangerous and stupid things. Unfortunately, nothing is more conducive to this outcome than Mr. Davidson’s own commentary. Mr. Davidson possesses gifts as a storyteller — gifts that make him very dangerous. As an economic observer, he commands an extremely powerful platform. Mr. Davidson wants to make us think that he’s one of us. You know, just a curious guy without formal training in economics who wants to know how things work. But in reality he is what we might call a “One Percent Whisperer”—a salesman for conservative economic philosophy who regurgitates ruinous myths that have led to policies that depress prosperity and chuck justice out the window. Take a quick look at the most recent example of his one percent apologia, “ What Does Wall Street Really Do for You ?” and you’ll get an idea of where he’s really coming from. Financial blogger and author Yves Smith (whose Naked Capitalism website is a must-read for the financially-literate) noted that Mr. Davidson’s recent column, ” The Other Reason Europe is Going Broke ,” “manages the impressive feat of making you stupider than before you read it.” She catalogues the misrepresented facts and appeals to American prejudices that form the hallmark of Mr. Davidson’s work. Other experts have similarly sounded the alarm: Economist Dean Baker, co-founder of the Center for Economic and Policy Research, has repeatedly called out Mr. Davidson’s technical distortions and failure to comprehend basic macroeconomic principles on his blog. (See: “ Adam Davidson Gets Stimulus Wrong in the NYT ”; “ You Don’t Have to Save When Your House Does it For You ”, etc.) Back in the day when the boom was booming and business school students looked forward to making a mint on Wall Street or Silicon Valley and retiring by forty, economic journalists got in the habit of giving bogus economic theories the ring of truth by repeating them endlessly. Mr. Davidson got a BA at the University of Chicago, and started out writing about the Middle East for Marketplace before coming on as an economics correspondent for NPR in 2004, where he launched the career that has made him the darling of the mainstream press. As a journalist who cut his teeth in the pre-2008 bubble years, Davidson clings to a Neoliberal worldview without questioning its origin or legitimacy – just at a time when such a thing is precisely needed. His critical ideas and values are provided by the system that has dominated for three decades, and that system’s economic myths celebrate their happy resurrection in his writing. Workers v. Capitalists Take Mr. Davidson’s piece on Europe, which purports to demonstrate why certain European countries aren’t competitive because of worker coddling. He compares such countries (Ireland, Italy, Greece, etc) with other European countries (the Scandinavians, etc) and the US, which are presumably prosperous because workers rights have been trampled. One of the great tragedies of American economic policy has been the idea that it is necessary to constrain workers’ wages and benefits in order for an economy to be “competitive.” For the last thirty years, this philosophy has been pushed by influential bankers, Neoliberal economists, politicians, and economic journalists. Crushing workers is the price we must pay for prosperity, they declare. Sorry, but you’ll just have to suck it up! Tighten your belts! In their world, workers are greedy and lazy and they demand too much from capitalism. The most crass assertions of this philosophy are rampant on Fox News. But a more subtle variety – all the more pernicious for their guise of ‘reasonability’ — have taken over media that thinking people used to rely on for information, like National Public Radio and the New York Times Magazine. The flagging performance of productivity and employment in Europe since the 1970s had been a controversial topic in the economic field and has caused thorny difficulties for scholars trying to identify relevant variables and construct models that accurately reflect reality. Through the use of highly questionable methods, Neoliberal economists have presented a view, also known as the “Washington Consensus,” that blames European job loss to product and labor market rigidities, high tax rates on labor, over-generous unemployment compensation and early retirement subsidies. But researchers have made important advances in comparative economic history that clearly contradict the social-safety-net-hurts-economic-growth narrative and ought to give writers like Mr. Davidson pause. For example, economists Peter Lindert of the University of California, Davis, and Gayle Allard of the Instituto de Empresa of Madrid published a watershed paper, “ Euro-Productivity and Euro-Jobs Since the 1960s: Which Institutions Really Mattered? ”, in which they demonstrate that many institutions connected to the social safety net have not harmed European growth and jobs. “The welfare state’s tax-based social transfers have not harmed either employment or GDP,” they conclude. “Even unemployment benefits do not have robustly negative effects.” There are problems with the structure of benefits and wages, to be sure, and Lindert and Allard point to a pattern in which senior male workers in Europe have often been protected at the expense of women and youth. But this critique is far from the blanket assertion that high wages and benefits are always bad for economies – their research argues for a more just distribution of benefits, but certainly not a dismantling of the whole protection system. Lindert’s prize winning book, “Growing Public: Social Spending and Economic Growth since the Eighteenth Century” (Cambridge, 2004), shows, for example, how high tax systems are very often growth enhancing, because of the beneficial effects of high public investment. One paper he wrote for the National Bureau of Economic Research elegantly summarized his thesis: “Why the welfare state looks like a free lunch.” Davidson’s potted history of European economics gives us a tale in which the US helpfully tossed workers under the bus in the mid-1990s with, as he puts it, “Europe (somewhat nobly) trying to show that an economy can be humane and competitive.” That he deems such a premise worthy of mockery is demonstrated in a little quiz that asks readers to match certain social safety net policies with the countries in which they are practiced: Working students are still paid on exam days = Italy. ( The nerve! ) Workers, 41, and up, get a week of severance for every year worked = Ireland. ( Imagine! ) Notice period for layoffs: 0 days = Denmark. ( Now we’re talking! ) Despite Mr. Davidson’s contention that high worker wages and benefits lead to decreased growth and productivity, economists who have not been bound by free market fundamentalism have shown repeatedly that regulation, social protections, public investment, and, yes, often, wage increases frequently lead to increased productivity and economic booms. But Mr. Davidson can’t admit this, because to do so would repudiate the Neoliberal worldview he has hopelessly bought into. He would have to acknowledge that many countries have learned that if you invest in your workforce and social capital, you can do quite well. Take Japan, a country that arose from having nothing to attaining a high technology economy. Countries like Japan learned that by investing in education, for example, workers can become far more productive. To pay students taking exams, like Italy does, far from being a growth-depressing example of worker-coddling, is an investment that helps economies flourish. Mr. Davidson’s deployment of the jargon of “flexibility” and “competitiveness” is a strong signal that we are dealing with someone with a one percent agenda to “put workers in their place.” His narrative is a first cousin to the GOP line that progressives want to “Europeanize” America and make us less “competitive.” What you will not find in Mr. Davidson’s analysis is the fact that much of Europe’s economic history boils down to a capitalist v. workers story with the political victories too often coming out in favor of…guess who? From the late seventies to 2008, the main causes of European stagnation have not been wages, but high interest rates, maintained by central banks to force the depression of wages and benefits that Mr. Davidson wants in the guise of fighting a non-existent “inflation.” Unfortunately, this misguided and inhumane activity restricts demand for goods and services, so economies don’t grow. Over time, as economist Karl Aiginger has pointed out, such austerity policies also force cutbacks in social investments and scientific progress, making everything worse. Mr. Davidson can perform the cheap trick of cherry picking individual pieces of social protection policy and arguing against them in the abstract. But what he fails to admit is that the whole package increases productivity and economic prosperity, thereby creating a better human society. The slow economic growth Mr. Davidson deplores has all too often been the result of employers’ efforts to crush workers. In the 1970s, the US had the problem of stagnation, and companies decided that the best way to confront it was to throw workers overboard and invest abroad — and use the state’s investment to support businesses. Conservatives gained the upper-hand, and wages duly collapsed. The European capitalists wanted to follow their American counterparts, but their direct assault on the social safety net failed. Instead, the capitalists mounted an indirect assault on workers. (See: Joseph Halevi and Peter Kriesler, “ Stagnation and Economic Conflict ”). In Europe, the central bank held interest rates higher than they should have for long periods in order to increase unemployment, weaken trade unions, and force the rollback of the social safety network. But high interest rates lead to slow growth, which leads to lower tax revenues, more fiscal problems and more social conflicts. Meanwhile business invests outside the country, or doesn’t invest at all. You end up with macroeconomic austerity, big fights over taxes and lower rates of public investment, which gradually ruin economies. Mr. Davidson cites the Scandinavian countries as examples of how things ought to work. But he will not admit that the Social Democratic Scandinavian models are very old, dating back, in Sweden’s case, to the 1930s. Workers and unions have been much stronger in Scandinavia than in the rest of Europe or in the US, and because of their political history and climate, workers could trust the system not to screw them. Workers in the US and the rest of Europe, on the other hand, have often experienced horrible class warfare in which the balance of power tilted away from labor. The 99 percent grew to mistrust and outrageous behavior of one percent, for good reason. You Can’t Fool Most of the People All of the Time You could read through a number of academic papers and books to be able to see through Mr. Davidson’s distortions. But what if you don’t have the time or the technical expertise? How do you distinguish between good and bad economic thinking? True or false? Harmful or dangerous? Pundits and professionals want to make economics look hopelessly difficult. But the truth is that ordinary citizens are fully capable of making appropriate economic critiques. It doesn’t take any special training to intuit that pushing workers to the brink of despair can’t be good for a prosperous and harmonious society. And yet that is what Mr. Davidson cheerfully asks us to believe. Mr. Davidson betrays a consistent cultural and sociological orientation in which the 99 percent, for our own good, must be subjugated to the one percent. He is a symptom – the warning side that we are forgetting the value of our own culture and institutions. We are forgetting that any discussion of economics must serve our interest in creating a good society. And that is not a society by, for, and of the one percent. Mr. Davidson is on the wrong side of history, the wrong side of the economic debate, the wrong side of the 99/one percent divide, and, far too often, on the wrong side of the truth. But he may find that the rest of us just aren’t buying it anymore. We know both in our heads and in our hearts that his philosophy is truly alien to a just and prosperous society. Crossposted from AlterNet .

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Lynn Parramore: Mr. Davidson’s Planet: NPR/NYT Guru Adam Davidson’s Discredited Economic Principles

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The European Banking Authority (EBA) has warned lenders against being so risk-averse as to prompt a credit crunch.

December 11, 2011

FRANKFURT – The European Banking Authority (EBA) has warned lenders against being so risk-averse as to prompt a credit crunch. It also said regulators would not allow a cut in lending as a means to meeting regulatory capital targets. Banks have changed their behavior far more than the public has realized in the wake of the financial crisis, EBA head Andrea Enria told German magazine Der Spiegel in an interview. “At the moment, our concerns have gone to the other extreme: that we could now have the problem banks are too risk-averse, which could ultimately lead to a severe credit crunch,” Enria said in the interview in the magazine’s Monday edition. Lenders around Europe will need to drum up about 115 billion euros ($154 billion) in extra capital by June 30 to meet a regulatory capital target set by the watchdog. Banks can retain earnings, curb dividends and bonuses, sell off chunks of their businesses or reduce risky assets to meet the target, but Enria put them on guard if they were thinking of choking off loans. “If a bank reduces its lending to small and medium-sized enterprises, it won’t be counted (toward meeting the target),” he said. “We will not allow credit supply to be cut.” Banks have until January 20 to present their roadmaps for meeting the regulatory capital target to banking supervisors. Loan portfolios can be sold, even to hedge funds, to help bolster banks’ equity capital cushions, Enria said. The EBA wants banks to reach a core Tier 1 regulatory capital ratio of 9 percent by the mid-2012 deadline, which should help lenders withstand any market deterioration. The watchdog’s stress tests of banks, based on data from the third quarter, revealed six German lenders need 13.1 billion euros of extra capital to meet the deadline, nearly triple the amount estimated previously. Commerzbank (CBKG.DE) needs 5.3 billion euros and Deutsche Bank (DBKGn.DE) 3.2 billion, with four other public-sector or co-operative lenders — NordLB, Helaba, DZ Bank and WestLB — making up the remainder. “These sorts of high figures do not necessarily mean that banks are in bad shape,” Enria said. “The most urgent problem is funding, and in that regard the German banks are doing better than others. However, the storm is also affecting them, and they, too, have to strengthen their capital.” Only a few large banks have been able to fund their businesses since July, and have had to pay very high interest rates to do so, Enria said. “If banks cannot get funds, they stop lending and that damages the economy,” he said. “We are stuck in a vicious circle and we have to try to break out of it.” ($1 = 0.7482 euros) (Reporting by Jonathan Gould; Editing by David Hulmes) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Timothy Caulfield: Do Stem Cells Really Offer a Miracle Cure?

November 24, 2011

Quarterback Peyton Manning has used it. So has New York Yankee pitcher Bartolo Colon. Ditto Texas Governor and presidential hopeful Rick Perry. You can get it to combat wrinkles and reverse the aging process. You can even get it to improve your sex life. What is this miracle cure, this elixir of life? Stem cell therapy. But does it actually work? I think not — at least not yet. A recent event underscores the cavernous gap between the well-publicized (and completely legitimate) promise of stem cell research and actual, efficacious, therapies. Last week, a California biotech company, Geron, decided to terminate a much-scrutinized and highly-anticipated stem cell clinical trial. This was a one-of-a-kind, first-in-the-world initiative that involved the injection of stem cells into the backs of patients with recent spinal cord injuries. It is no surprise, then, that last week’s decision generated both shock and anger. And for the patients hoping for a near-future cure, it was nothing less than heartbreaking. Not only did the company decide to stop this particular trial, it decided to get out of the field of stem cell therapies altogether. So definitive was the decision that Geron gave back millions of public research dollars. We need to be careful not to over-interpret the Geron pull out. This is one company and one trial. There are now a few other clinical experiments in the pipeline (emphasis on a few), such as one to treat a form of blindness . And we must remember that not all things that are called “stem cell therapies” are the same. Manning, for instance, reportedly received a type of adult stem cells , though there are few details on the exact nature of his treatment. Still, the move by Geron provides an opportunity to reflect on the state of stem cell research today. A reality check. First, ignore the hype. I believe there is little evidence that any of the often advertised stem cell therapies, embryonic or otherwise, work. Yes, there are a handful of decades-old treatments, such as the use of cord blood stem cells for some forms of cancer, which are clinically beneficial. But the list of proven treatments is short and does not include any for common diseases or injuries. (The International Society of Stem Cell Research has a terrific website that outlines what is available.) Manning, Colon and Perry may have had a positive experience (the placebo effect is a powerful thing, after all), but, to date, I believe good clinical evidence simply does not exist. Second, despite the hope of many, it isn’t going to be easy to make money off stem cell research — at least with a treatment that is scientifically legitimate, appropriately tested and approved by the relevant regulatory agencies (three characteristics missing from most of the stem cell therapies currently offered in clinics around the world). Economic growth has often been one of the ways that the huge public investment in stem cell research has been justified. Just a few weeks ago, for example, the UK government announced that it was committing millions in a stem cell research centre with the hope that it will help drive the UK economic recovery. But the ability of emerging stem cell technologies to stimulate the economy and create jobs is far from certain. Indeed, economics is the explicit reason for the Geron pull out. The company press release stated that the decision was made after a strategic review of the costs, timelines and “clinical, manufacturing and regulatory complexities associated” with this kind of research. In other words, stem cell research is not, from the perspective of this company, worth it. I don’t mean to be a downer. In fact, I believe that stem cell research holds tremendous potential. I remain fully confident that, one day, therapies will emerge. But the inappropriate hype associated with this area hurts policy debates, leads to unmet expectations, and has the potential to mislead the public about the actual state of the science. The Geron story is a sober reminder that promise is not reality, even in a field as exciting as stem cell research.

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Robert Teitelman: On the Zeitgeist Patrol with OWS

November 18, 2011

The pundits have been out in force of late, making grandiose declarations. The world is changing! The world is changing! Much of this, not surprisingly, involves Occupy Wall Street. Over the weekend in the New York Times , Columbia University’s uber-professor (actually he’s director of the Earth Institute, and nothing gets much more uber than that) Jeffrey Sachs declared , “Occupy Wall Street and its allied movements around the country are more than a walk in the park. They are more likely the start of a new era in America.” Sachs insists OWS represents the beginning of a third Progressive Movement in American history, though he offers very little real evidence for this beyond political gridlock, lousy macroeconomic performance and the fact that “Historians have noted that American politics moves in long swings.” Why does one suspect Sachs told the Russians the same thing when he introduced them to the market in 1991? The Times ‘ public editor, Arthur Brisbane, in the same Sunday paper, describes OWS as if it had tumbled from an alien spacecraft and essentially admits that the Times had no idea what it’s been reporting on for the past two months. This must have been popular in the newsroom. The Times , he writes, is used to dealing with leaders and OWS seemed to have no leaders, leaving the paper confused and befuddled. (I’m just interpreting Brisbane here.) His suggestion — culled from a survey of “journalism educators” — is to examine the origins of the movement, identify the leaders and go from there. That might work (others managed to pull that off: see Bloomberg Businessweek on anthropologist and anarchist David Graeber ) but then, once again, you’re fixating on leadership, which was the problem in the first place. Then, hard on the heels of the police cleanup of Zuccotti Park, which would have been described as a counterrevolution if we’d actually had a revolution, comes former FT editor Richard Lambert who offers hope to the 99% : “The Occupy Wall Street movement is a symptom of a growing public disquiet about the workings of market capitalism. As such, Monday night’s decision to close down the camp in New York City is unlikely to check the protests: if anything, the reverse may be true.” Events have proved, he adds, that the efficient market “is for the birds” and inequality is rampaging. (He says nothing about Europe — and he’s probably right about that: OWS, like the Tea Party and GOP candidates for president, seems not to know or care that it’s coming apart.) And then his big conclusion: “So it may be that capitalism is approaching some kind of tipping point, away from the winner takes all culture of the past three decades. If left unchecked, public disquiet will sooner or later bring a political response, maybe in the form of much more aggressive regulations and progressive tax systems. These could be at least as damaging as the free market fundamentalism that they would seek to replace.” Let’s deal mostly with Lambert, who at least makes an argument, albeit, like Sachs, a classic journalistic resort to the Zeitgeist. Something’s happening out there and he doesn’t know what it is, so he resorts to rudimentary cause and effect: It must be a reaction to that which came before — a variation of course on Sachs’ profound belief that politics moves in long swings. Lambert is right about inequality and the blows taken by rational expectations and efficient-market economic theories. That said, there’s no evidence that OWS has the ability to move the political meter a jolt. In fact, today, there are major questions where the movement goes at all. It’s very true, as some of the spokespersons (don’t call them leaders) declare, the movement doesn’t need a small park in lower Manhattan to define itself; its sentiments, beliefs (particularly in terms of direct democracy) can be recreated anywhere at any time, virtually or tangibly. But while some issues like inequality have been aired, usually by mainstream pundits and journalists desperate to make the movement make sense in terms of conventional politics — It’s the progressive Tea Party! It’s the reincarnation of SDS! — its core philosophy has gotten little traction. The goals of OWS were always immense: to transform, at least around the edges, American political culture. They were never primarily about economics at all. It’s easy to exaggerate the long-term effects of sudden political tempests by outsiders, particularly when they’re predominately young. Wasn’t it just yesterday that the Tea Party was creating a destroy-the-government revolution in America? And they weren’t necessarily young. Wasn’t it the day before yesterday that the young came out for Obama in droves? Now the Tea Party has taken over the GOP. And the great mass of students not only do not appear to be politically active for Obama this time around (it could change), they appear to be unmoved by OWS, which still remains a fringe movement, no matter what the polls say. For God’s sakes, an entire campus of students mourned the firing of a football coach last week, and raised a little hell as well. One of the big lessons of the ’60s is not just that students helped end Jim Crow and Vietnam, but that the country lurched to the right in reaction to them — a rightward swing we’re still living with. The ’60s students had a major effect on the political Zeitgeist, but voters — including young people — went overwhelmingly for Richard Nixon and Ronald Reagan. Lambert insists on emphasizing the economics: that OWS symbolizes a deeper economic dissatisfaction. That may well be true — though he raises an old Marxist “superstructure” debate: Which drives change, politics (OWS) or economics (the media and commentariat)? When he declares that “capitalism may be reaching a tipping point,” what does he mean? A revolution? A series of reforms like belt-tightening and re-regulation, which has already begun and elicited charges of socialism from the right? With communism seemingly gone, what is the alternative to capitalism? Efficient markets may be a crock, but in a world run by economists and their technocratic fellow travelers — what do we have to replace it with except tighter regs and safer banks? Lambert doesn’t offer an answer. The demos does not care about efficient markets or direct democracy; it cares about growth, jobs, after-tax incomes. Let’s face it, the mass of Americans care about buying stuff, educating their kids, getting healthcare and retirement, and still feeling like No. 1. Despite their travails, they do not seem prepared to launch great experiments — in large measure because those experiments would be shaped and executed by the folks who brought them 2008. (OWS shares that sentiment with the Tea Party.) In America, at least, with its increasingly surreal and polarized politics, there is no indication that the country is about to tackle the problems of a winner-take-all society; it’s not even clear who will be in the White House next time. If there were a true perturbation of the Zeitgeist, there would be a larger reaction to OWS’s temporary eviction. Lambert fears an abrupt reaction; he’s caught between a nasty past and an uncomfortable future. But right now, there is no alternative to capitalism, despite the efforts of the anarchist intellectuals behind OWS and affiliated protests. They, of course, seem prepared to play a long game. And perhaps that’s the point. Whether it’s 1848 or 1968 or 2011, the game is long and the unfolding consequences complex, varied and either ironic or contradictory. Students grow up, new generations crowd the stage, old folks with their memories die, and history wanders across the plain. It does no good to treat the Zeitgeist like a punching bag. It’s a living thing, and the punch that matters often comes from nowhere. Robert Teitelman is editor in chief of The Deal magazine.

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Richard Kirsch: We are the 99 Percent: A Progressive Narrative in One Powerful Phrase

October 14, 2011

Cross-posted from New Deal 2.0 . One of the most common criticisms of progressives is that, unlike the right, we don’t have simple messages that tell our story. Our young leaders at Occupy Wall Street have come up with a powerful answer: We are the 99 percent . For the past several months, I’ve been working with a group of progressive leaders and communicators on the development of a ” progressive economic narrative” — a way of telling our story about the roles of the individual, business, and government in creating shared prosperity. The right has a well-developed view, to the point where after several decades it can now be summarized in three brief phrases: free markets, limited government and individual liberty. If we as progressives do our job well, we will also get to the point where we have three such phrases that are widely recognized. But that actually takes a long time. (Here are three candidates, but the fact that you may not nod your head readily when you read them is because you can’t shorten the process: shared prosperity, government that works for all of us, and liberty and justice for all.) For now, I’m celebrating the fact that we now have one phrase that tells much of our story: “We are the 99 percent.” This phrase’s power is in the emotions it elicits. It is triumphant, not defeatist. It says, “We have the power and the moral authority, not you!” It conveys action — we’re standing up for ourselves and occupying your turf. It declares our common humanity. It is hopeful. The progressive economic narrative I’ve been helping to draft has five conceptual pillars, and understanding them helps illustrate why “we are the 99 percent” also works intellectually. The first pillar of the narrative defines the progressive view of our economic problem: the crushing of the middle class by the rich and by corporate America. “The 99 percent” is a great unifying expression of inequality, as it avoids the separations that come from labels like “the middle class,” “working class” and “poor.” It says we’re all screwed together by rising inequality and highlights those who are responsible: the super-rich and big corporations. The second pillar defines what makes a successful economy: the well-being of our families in a big middle class and the productivity of our nation, not the stock market and corporate profits. “The 99 percent” is a simple declaration that our economy is driven by the vast majority of people, not a few super-rich. The fourth pillar (I’ll come back to the third) defines the political problem: our government has been captured by the super-rich and corporate America, corrupted by big money and politics. “We are the 99 percent” affirms that we have to take our democracy back to ensure that our economy works for all of us, not just the richest few. This has been a consistent message from the Occupy Wall Streeters, who seamlessly link inequality, corporate power and corruption. The fifth pillar is a call to action. And here’s where the triumphant power of “We are the 99 percent” works so well. It’s no accident that the phrase took root in an action that people could easily do –  posting a picture of themselves with their story — and was adopted instantly by a movement. The third pillar explains the role of government in building a successful economy and the relationship of public action to individuals and business. It can be summarized thus: We build a large and prosperous middle class through the decisions we make together, investing in our people, expanding opportunity and security, paving the way for business to innovate, and doing business in ways that create prosperity and economic security for Americans. This third pillar is essential to explaining how we should solve our problems and refuting the conservative view that the economy is driven by natural forces, best left on its own without government interference. “We are the 99 percent” opens the door for us to tell that story, but we need to fill in the blanks. When people say that Occupy Wall Street doesn’t have demands, we should look at that not as a criticism, but as an invitation to complete the story. Everything about the phrase establishes the point that we build an economy that works for all of us when we make decisions that benefit the 99 percent. Helping the American public understand a progressive worldview about the economy starts with our being clear on what we believe and telling that story consistently and widely. The best evidence that we’re on the right track is when a simple message captures the hearts and minds of us — the 99 percent.

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Georgia Kelly: Return to Mondragón

October 10, 2011

Imagine living in a place where, even in this economic downturn, there is zero percent unemployment. Where there are no homeless people or soup kitchens because poverty is unknown. Where students get a quality education at a private university for about $5,000 a year, and healthcare and pensions are not threatened because of political posturing or Wall Street manipulations. In September 2011, Praxis Peace Institute brought a group of 25 people to study at the Mondragón Cooperatives (MCC) in Spain, the largest consortium of worker-owned businsses in the world. Founded by a Basque Catholic priest about 57 years ago with one small worker-owned business, today the Mondragón Cooperatives comprise 120 businesses and about 90,000 worker-owners. While the unemployment rate in Spain is currently around 20 percent, it is zero percent in the Mondragón Cooperatives. How do they do it? If one company in the cooperative network needs to downsize, they are able to place workers in another one of the Mondragón businesses. Sometimes the worker-owners vote to lower their salaries for a given period of time, but their healthcare and pensions remain solidly in place. The Mondragón Cooperatives incorporate a holistic approach to economic relationships and they teach ten core principles: Education, Sovereignty of Labor, Instrumental and Subordinated Nature of Capital, Democratic Organization, Open Admission, Participation in Management, Wage Solidarity, Inter-Cooperation, Social Transformation, and the Universal Nature of Economic Democracy. It seems that Mondragón has taken the very best ideas in both capitalism and socialism and created a hybrid that supports people, their ideas, their health, their education, their personal development, and their society. Whatever one calls it, it works. And, it works better for more people than any other system today. Though the Director of the Mondragón Education Center told us at the beginning of the seminar, “We are not angels and this is not paradise,” they had not convinced us by the end of the week’s seminar. This was our third seminar in Mondragón and we returned ever more inspired and hopeful for what humanity is capable of achieving in a supportive and enlightened environment.

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Seriously Delinquent Mortgages Again On The Rise

September 29, 2011

WASHINGTON – Borrowers are making their mortgage payments on time more frequently compared to a year ago, but delinquency rates remain elevated as government efforts to help homeowners fail to keep pace with job losses that push more homeowners toward foreclosure. At the end of the second quarter of this year, 88.0 percent of U.S. mortgages were current, a slight deterioration from 88.6 percent in the previous quarter but an improvement from 87.3 percent a year ago, according to a report from the Office of the Comptroller of the Currency. The second quarter reading marks an improvement from the percentage of loans that were current and performing by the end the 2007-09 financial crisis, according to the OCC. The percentage of current loans fell for seven consecutive quarters leading up to the end of 2009, when 86.4 percent were current at that time. Seriously delinquent mortgages that are 60 days or more past due rose to 4.9 percent in the quarter through June 30 from 4.8 percent the previous period, following five quarters of improvement. Seriously delinquent loans were down from 6.1 percent a year earlier. Bruce Krueger, a mortgage official at the OCC, said seasonal factors may have been the reason for the mortgage delinquencies picking up from the first quarter and might not be directly related to weakness in the economy. He said delinquencies are often low in the first three months of the year and show a pattern of inching up by about 0.2 percent to 0.5 percent by the end of the second quarter. “We’re right in line with what we normally see as the increases in the first and second quarters,” Krueger said. He cautioned that the OCC is paying close attention to the pick-up as the year proceeds to gauge if there are economic factors impacting delinquencies, such as high unemployment. The number of borrowers involved in foreclosure proceedings increased by 0.9 percent during the quarter. However, first-time foreclosure filings on the loans decreased 8.0 percent from the first quarter to 287,145, the report said. Regulators caution foreclosures remain high by historical standards. Loans are being modified by servicers to make them more affordable through government programs and industry initiatives. Servicers modified 2.08 million loans from the beginning of 2008 when the housing bubble burst through the end of the first quarter of 2011, the report noted. The modifications were not all successful, with 9.2 percent 30 to 59 days delinquent, and 18.2 percent “seriously delinquent” by the end of the second quarter. The OCC survey covers 32.7 million loans, which have $5.7 trillion in principal balances. These figures represent 63 percent of outstanding U.S. mortgages. (Reporting by Margaret Chadbourn, Editing by Andrea Ricci) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Businesses Increasingly Pessimistic About Future Economic Conditions

September 1, 2011

Optimism for the American economy continues to evaporate, even as President Obama readies a supposedly major jobs plan to be unveiled in a speech before a joint session of Congress next Thursday . Months of sluggish growth, high unemployment, political infighting and market fragility continue to take their toll on American confidence, as polls show that many consumers and business owners agree with a broad consensus among economists that the U.S. is in for several more months of frustratingly slow expansion. A recent survey of franchise executives , conducted by the International Franchise Association, found that pessimistic expectations for the state of the economy have nearly tripled since March, while optimistic expectations are down by nearly half. The number of executives who anticipate easy access to credit — which allows small businesses to expand and create jobs– also fell to nearly half what it was in March. Access to credit. The plunge in credit-access expectations is especially noteworthy as the Federal Reserve recently announced its plans to maintain interest rates near zero through the middle of 2013 , thus keeping credit cheap. That the franchise owners expect credit to be hard to come by anyway suggests their pessimism runs too deep to be alleviated by the Fed’s gesture. The IFA’s findings reflect a wider sense of gloom. Americans’ confidence in the economy has been crumbling all summer, according to Gallup, with levels recently reaching their lowest point since early 2009 . A separate confidence-tracking study from the Conference Board recently reached a similar conclusion , and a closely watched consumer-sentiment index compiled by Thompson Reuters and the University of Michigan found in August that sentiment had fallen to a 30-year low . Growth this year has slowed almost to a standstill , and while large corporations have continued to enjoy strong profits , small businesses have been particularly affected by the stall-out . Multiple surveys indicate that small business owners anticipate pain throughout the rest of 2011 , with dwindling numbers saying they expect hiring to pick up or economic conditions to get more favorable. Small-business borrowing was relatively strong in June and July , but tumbled in August, possibly as a result of violent stock market fluctuations and uncertainty over Washington’s plan to expand the economy while also reining in the federal deficit. Obama, who recently met with a number of small business owners during a bus tour through the Midwest, has indicated that his jobs plan will include measures to stimulate small-business growth , as well as creating new infrastructure jobs. The president’s recent nomination of labor economist Alan Krueger to head the White House Council of Economic Advisers suggests the administration is making job growth a top priority. Obama’s chances of re-election in 2012 are widely seen as hinging on whether the economy experiences a robust turnaround by then.

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Walsh Slams Buffet’s Tax Hikes, Appears On Chicago Tonight Wednesday

August 31, 2011

U.S. Rep. Joe Walsh’s (R-Ill.) scheduled appearance on WTTW’s “Chicago Tonight” Wednesday will cover the economy, debt and revelations about his personal finances–and will no doubt mention his inflammatory appearance on the Bloomberg news show “Inside Track” Tuesday where he attacked billionaire businessman Warren Buffet for his recent op-ed calling for a tax hike on the super-rich Buffet’s August 14 article in the New York Times highlighted proportional tax discrepancies that give breaks to America’s millionaires and billionaires and volunteered himself, and other “coddled” wealthy businessmen, for higher taxes. “I think Mr. Buffet needs a day job. He’s got too much time on his hands,” Walsh said on “Inside Track” Tuesday. (Scroll down for video) “This is ridiculous. He’s so disingenuous. He’s heating up his rhetoric because his support for the President is so desperate.” The Tea Party politician slammed Buffet’s claims that lower- and middle-class Americans pay a larger percentage of their income in taxes than the wealthy, especially in the case of capital gains and dividend “loopholes,” arguing that there are too few millionaires and billionaires for a tax increase of that group to make a difference. When asked if the Tea Party’s inexperienced politicians could have impacted the nation’s credit downgrade, he insisted that Tea Partiers weren’t the problem. “We lost our credit rating because this country is in debt,” Walsh said. “We lost our credit rating because this President has increased the debt $4 trillion in two and a half years. He knows that. Warren Buffett knows that. And that’s what the credit agencies told us. Look, the American people understand that if these troublesome Tea Party Republicans hadn’t gotten here, we’d erase the debt ceiling without even thinking about it. And we’d be spending away our kids’ future every single day.” Walsh will be on “Chicago Tonight” on WTTW Wednesday at 7:00 p.m. CT. Watch Walsh’s rant against Warren Buffet’s tax proposal:

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Federal Judge Throws Out Obama Drilling Rules

August 13, 2011

CHEYENNE, Wyo. — A judge on Friday threw out Obama administration rules that sought to slow down expedited environmental review of oil and gas drilling on federal land. U.S. District Judge Nancy Freudenthal ruled in favor of a petroleum industry group, the Western Energy Alliance, in its lawsuit against the federal government, including Interior Secretary Ken Salazar. The ruling reinstates Bush-era expedited oil and gas drilling under provisions called categorical exclusions on federal lands nationwide, Freudenthal said. The government argued that oil and gas companies had no case because they didn’t show how the new rules, implemented by the U.S. Bureau of Land Management and U.S. Forest Service last year, had created delays and added to the cost of drilling. Freudenthal rejected that argument. “Western Energy has demonstrated through its members recognizable injury,” she said. “Those injuries are supported by the administrative record.” An attorney for the government declined to comment but Kathleen Sgamma, director of government and public affairs for the Denver-based Western Energy Alliance, praised the ruling. “She completely discounted the government’s argument that the harm was speculative,” Sgamma said of the judge. The Energy Policy Act of 2005 allows the BLM and Forest Service to invoke categorical exclusions and skip new environmental review for drilling permits under certain circumstances. The circumstances include instances where companies plan to disturb relatively little ground and environmental review already has been done for that area. A categorical exclusion also can be invoked when additional drilling is planned at a well pad where drilling has occurred within the previous five years. Categorical exclusions were widely used throughout the West – especially in the gas boom states of Wyoming, Utah and New Mexico – until last year. In Wyoming, the BLM invoked categorical exclusions for 87 percent of the new gas wells drilled in the Upper Green River Basin between 2007 and 2010. Those drilling permits added up: Close to 3,000 over those three years in the basin’s Jonah Field and Pinedale Anticline gas fields. The Jonah Field and Pinedale Anticline ranked fifth and sixth for gas production in the U.S. in 2009. Federal land agencies adopted new rules for interpreting the Energy Policy Act last year in response to an environmentalist lawsuit over the use of categorical exclusions. The Western Energy Alliance sued over the new rules last fall.

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Small Business Optimism Continues To Decline Amidst Uncertainty

August 9, 2011

Amidst anemic consumer spending and national uncertainty over the fate of the debt ceiling, small-business optimism declined for the fifth straight month in July , as independent business owners acknowledged that they don’t expect the economy to improve any time soon. Small-business owners cited “economic conditions” and “political climate” as reasons for their relative pessimism, likely a reference to the gridlock over the federal deficit that consumed Washington in July. The drop in the Small Business Optimism Index , a monthly report published by the National Federation of Independent Business, mirrors a nationwide atmosphere of trepidation that has also resulted in shrinking consumer confidence and massive sell-offs on Wall Street. The Index fell 0.9 points in July, dropping to a level of 89.9, according to a release Tuesday from the NFIB. Pessimists outnumbered optimists on a number of scores. There were more small-business owners predicting the economy would be worse six months from now, for example, than those saying it would be better. Bill Dunkelberg, chief economist at the NFIB, said in a statement that it might be time to “begin referring to the ‘Small-Business Pessimism Index’ from now on.” On the whole, small-business owners were also more likely to predict their sales would be lower over the next three months, and that it would become harder to get credit. While 10 percent of respondents said they planned to increase their workforce in the next three months, another 11 percent said they planned to eliminate jobs. The survey results suggested that Main Street feels constrained by its relationship with the government. While “poor sales” were the single most-cited problem in the survey, “taxes” and “government regulations and red tape” came in second and third, respectively. In addition, when asked about the single most important problem they faced, respondents were twice as likely to name regulation as inflation, insurance, or competition from big business. Last week, the NFIB launched Small Businesses for Sensible Regulations , an initiative aimed at taking regulatory pressure off independent businesses. The campaign has attracted representatives of businesses in six states. Other economic factors are contributing to the difficult climate for independent business owners. Weak GDP , sluggish housing and stubbornly high unemployment , as well as market panic following a downgrade of the U.S. credit rating by Standard & Poor’s, have Americans worried that the country could be pointed toward a double-dip recession. The debt-ceiling negotiations in Washington, which stretched throughout the month of July before resolving with an August 2 deal, had an especially detrimental impact on small-business sentiment. Caught between a government unable to agree on the best way to expand the economy, and nervous consumers reluctant to make discretionary purchases, small business owners are feeling the squeeze as much as anyone.

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Robert S. McElvaine: Investors Prefer Fact-Based to Faith-Based Economics

August 4, 2011

So, President Obama signs the terms of surrender — his, progressivism’s, the Democratic party’s and that of common sense — capitulating to the extremists of the Tea Party who held the economy and the nation’s full faith and credit hostage. And what happens? The stock market takes a nose dive . It appears that investors know that the endlessly repeated catechism of the faith-based Marketists , “When the American people have to tighten their belts, the government should do the same” is the opposite of the truth. The fact is that when potential consumers tighten their belts under recessionary conditions, the government must do the opposite to make up for the decline in demand. The “compromise” to which the President and many Democrats caved under the irresponsible threats of the extreme right is exactly the wrong policy in a major recession, and investors appear to realize this fact, even if the regressive (not at all “conservative” ) ideologues don’t. Robert S. McElvaine is Elizabeth Chisholm professor of arts & letters and Professor of History at Millsaps College, in Jackson, Miss. His books include The Great Depression: America, 1929-1941 . He is now writing “OH, Freedom! — The Young ‘ 60s.”

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Robert Reich: Random Paid

August 1, 2011

Anyone who characterizes the deal between the president, Democratic, and Republican leaders as a victory for the American people over partisanship understands neither economics nor politics. The deal does not raise taxes on America’s wealthy and most fortunate — who are now taking home a larger share of total income and wealth, and whose tax rates are already lower than they have been in eighty years. Yet it puts the nation’s most important safety nets and public investments on the chopping block. It also hobbles the capacity of the government to respond to the jobs and growth crisis. Added to the cuts already underway by state and local governments, the deal’s spending cuts increase the odds of a double-dip recession. And the deal strengthens the political hand of the radical right. Yes, the deal is preferable to the unfolding economic catastrophe of a default on the debt of the U.S. government. The outrage and the shame is it has come to this choice. More than a year ago, the president could have conditioned his agreement to extend the Bush tax cuts beyond 2010 on Republicans’ agreement not to link a vote on the debt ceiling to the budget deficit. But he did not. Many months ago, when Republicans first demanded spending cuts and no tax increases as a condition for raising the debt ceiling, the president could have blown their cover. He could have shown the American people why this demand had nothing to do with deficit reduction but everything to do with the GOP’s ideological fixation on shrinking the size of the government — thereby imperiling Medicare, Social Security, education, infrastructure, and everything else Americans depend on. But he did not. And through it all the president could have explained to Americans that the biggest economic challenge we face is restoring jobs and wages and economic growth, that spending cuts in the next few years will slow the economy even further, and therefore that the Republicans’ demands threaten us all. Again, he did not. The radical right has now won a huge tactical and strategic victory. Democrats and the White House have proven they have little by way of tactics or strategy. By putting Medicare and Social Security on the block, they have made it more difficult for Democrats in the upcoming 2012 election cycle to blame Republicans for doing so. By embracing deficit reduction as their apparent goal — claiming only that they’d seek to do it differently than the GOP — Democrats and the White House now seemingly agree with the GOP that the budget deficit is the biggest obstacle to the nation’s future prosperity. The budget deficit is not the biggest obstacle to our prosperity. Lack of jobs and growth is. And the largest threat to our democracy is the emergence of a radical right capable of getting most of the ransom it demands. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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LIVE UPDATES: Debt Ceiling Deadline Looms, Default At Stake

July 30, 2011

The Senate has killed an effort by the House to raise the government’s borrowing cap. Democrats and several Republicans killed the measure put forth by House Speaker John Boehner by a 59-41 vote Friday night, just minutes after it arrived from the House. Democrats opposed the measure because it would require another painful debt-limit debate early next year. The move continues a standoff over the debt limit but could set the table for negotiations this weekend on compromise legislation that could pass the Democratic Senate and the GOP-controlled House before an Aug. 2 deadline to prevent a potentially disastrous default on U.S. obligations like interest payments and Social Security checks. Check back here for the latest developments. What happens if the U.S. defaults? See the slideshow below.

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Strategic Defaulter Walks Back To His Mortgage

July 15, 2011

Ernie Soto and his wife are moving back into their house in Alamogordo, N.M., the same house they abandoned at the beginning of 2010 after Soto lost financing for his fledgling mechanic business. Soto, 47, said that when they moved into a nearby trailer that January, they didn’t expect their house would just sit there, vacant, for a year and a half. They didn’t know that at that time that it was taking banks 410 days on average to actually seize a home after its owner quit making payments, according to data from Lender Processing Services . (It now takes 580 days.) So when Soto heard of a new program that helps struggling borrowers — but only ones who are still in their homes — he decided he should move back into the still vacant home and give it a shot. Soto said he told himself, “Okay, I’ll move my ass back in there.” He and his wife brought most of their belongings back to the house this week. He told the company that services the mortgage, Ocwen, that he wanted to work something out. He said Ocwen turned him down for a mortgage modification on Thursday. Now he’s going to try to get into the federal Emergency Homeowners’ Loan Program , which would pay his arrears — the money that should have already been paid — with a forgivable loan that would also subsidize mortgage payments for two years. The $1 billion temporary program is part of the 2010 Wall Street reform bill. Earlier this year Soto landed a job at a furniture rental store, to which he said he commutes more than 200 miles a day. He’d been totally unemployed since April 2010, when he lost his job as a manager at a car dealership. He said he’s going to have to fork over $1,100 to get the electricity and gas reconnected. “We’re hoping we can get it all fixed,” Soto said. “I didn’t expect this kind of expense. A few years back I could have told you it was nothing, I had it in my front pocket.” HuffPost reported Soto’s decision to ditch his mortgage in a February story that probed the financial and psychological consequences of strategic default. Borrowers who owe more than their homes are worth are more likely to stop making payments even if they can afford to, but most borrowers in this situation, known as being “underwater,” keep paying even though it may not be in their financial best interest. (That’s why it’s called “strategic default” and not “stupid default.”) Soto gave up on his mortgage after draining his savings to stay current, going through both a bankruptcy and a thoroughly frustrating time trying to get a modification. The indignity of it really got to him. The low point came when he had to put down his sick dog, which he said he remembers vividly. He’d arrived at the Ark Animal Hospital, a one-story building off a four-lane road in Alamagordo in August 2009. “I pulled up in the truck. He knew, the dog knew, ‘I don’t recognize this place. Something’s gonna happen and I don’t wanna go in.’ I had him outside, he wouldn’t go in with me.” As Soto tried to coax nine-year-old Petey, named for the Little Rascals’ Pete the Pup pit bull, a tow truck pulled into the lot. Its driver recognized Soto and his 2000 Ford Ranger. “He’s like, ‘Are you Ernie?’ He’s like, ‘I’m here to pick up the truck.’ I says, ‘Can this wait?’ He’s like, ‘It really can’t.’ He gets on the phone. He sees what’s happening.” Soto said the repo guy got on the phone with his superior and tried to explain what was going on to see if he could get out of the assignment, but the superior had no sympathy for Soto. ‘He told me, ‘Man, I gotta stay. I got to take the truck. I’ll let you gather your things.’ ” Soto said. “I got the dog on one side, I got people going in and out. So I called my wife and said, ‘You know, I’m sorry, you’re going to have to come and get me.’ ” “My wife finally shows up, we both walked in with the dog and they put him down. Of course they did what they did and the guy hauled the truck off. I went back to work.” Soto said he wouldn’t have left his house when he stopped making payments if it hadn’t been for that experience. “I was in unfamiliar territory. I don’t lose houses every so often,” he said. “I was thinking it’d be like the car, they’d come throw me out in three months.” Now that he’s back in his house, Soto sounds much more hopeful. “I’m still upset but I’ve learned to deal with it a little differently,” he said. He wants to tell his story so other people know they’re not alone. “They just need to keep trying,” he said.

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Payday Lenders, Pawn Shops Benefit As America’s Economy Sputters

July 10, 2011

NEW YORK (AP) — As the jobless rate inches up and the economic recovery sputters, investors looking for a few good stocks may want to follow the money — or rather the TV, the beloved Fender guitar, the baubles from grandma, the wedding ring. Profits at pawn shop operator Ezcorp Inc. have jumped by an average 46 percent annually for five years. The stock has doubled from a year ago, to about $38. And the Wall Street pros who analyze the company think it will go higher yet. All seven of them are telling investors to buy the Austin, Texas, company. Is the economy still just in a soft patch? A hard patch? Will the market rise or drop? Even experts are just guessing. In investing, it’s often better to focus on what you can safely predict, even if that safety is found in companies that thrive on hard times. One good bet: The jobless aren’t likely to find work anytime soon. And companies profiting from their bad fortune will continue to do so. Among them: — Stock in payday lender Advance America Cash Advance Centers (AEA) has doubled from a year ago, to just under $8. Rival Cash America International Inc. (CSH) is up 64 percent, to $58. Such firms typically provide high interest loans — due on payday — to people who can’t borrow from traditional lenders. — Profits at Encore Capital Group, a debt collector that targets people with unpaid credit cards bills and other debts, rose nearly 50 percent last year. Encore has faced class action suits in several states, including California, over its collection practices. The Minnesota attorney general filed a suit in March. No matter. The stock (ECPG) is up 59 percent from a year ago, to more than $30. — Stock in Rent-A-Center (RCII), which leases televisions, couches, computers and more, is up 57 percent from a year ago to nearly $32. Nine of the 11 analysts covering the company say it will rise further and that investors should buy it. The idea of investing in companies catering to the hard-up might not be palatable to some people. But it is profitable. Mark Montagna, an analyst at Avondale Partners in Nashville, has developed what he calls “value retail” index of 11 companies — dollar stores, off-price shops and clothing and footwear chains favored by shoppers looking for deals. The index is up 149 percent since February 2009, which marked the lowest month-end closing value for the S&P 500 during the recession. Desperation stocks continue to be lifted by a drumbeat of bad news. Consumer spending, adjusted for inflation, has fallen for two months in a row — the first back-to-back fall since November 2009. On Friday, the government reported the unemployment rate rose to 9.2 percent in June, sending stocks in tailspin. On top of that, one in seven Americans now live below the poverty line, a 17-year high. “It’s been a good year,” says John Coffey Jr., a Sterne Agee analyst, referring to the companies he follows, not the economy. Coffey created a stir late last month when he issued a report arguing shares of Ezcorp (EZPW), which also makes payday loans, were worth a third more than their price and urged investors to buy. The stock rose 7 percent in just a few hours. The next day a widely followed survey showed consumer confidence at a seven month low. “Here we are celebrating the second year of recovery and confidence is at levels consistent with a recession,” says David Rosenberg, an economist at money manager Gluskin Sheff. “The folks in the survey are probably not the same folks shopping at Tiffany’s.” (That company’s stock is also up nearly 50 percent since March, to about $82.) But they probably are shopping at Dollar General Corp. Stock in the discount retailer recently hit $34.13, up 50 percent from its IPO in late 2009. And it may be worth about a third more, at least according Avondale’s Montagna. “People are broke. They’re all chasing value. It’s a seismic shift in mindset,” he says. Some experts think these down-and-out stocks are just as likely to fall now instead of rise. It’s not that they think the recovery will turn brisk and people will get jobs and shop elsewhere. It’s that things could get worse — making customers too poor to borrow or buy even from these outfits. Rent-A-Center, the furniture store, is already suffering. Some of its core low-income shoppers have seen money they would have spent leasing a couch or cocktail table eaten up by rising food and fuel bills. But not to despair. According to Nick Mitchell, an analyst at Northcoast Research, wealthier customers, say those making $45,000, are feeling so strapped lately that they’re starting to rent furniture, too. Montagna, the Dollar General bull, says he’s seeing people earning $70,000 or more at that chain, too. Even he shops there now. “If I’m driving past one, I stop in,” he says, adding triumphantly, “I just bought toothpaste — Crest — two tubes for $4.”

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Paper Says China Has Legal, Moral Right To Curb ‘Rare Earth’

July 7, 2011

BEIJING (Reuters) – China is well within its rights, legally and morally, to limit rare earth exports, argued an article in Chinese state media on Thursday, days after the World Trade Organization ruled against China on its curbs of raw materials exports. The People’s Daily, the mouthpiece of China’s ruling Communist Party, said claims by countries that China’s export curbs on the minerals threatened their economic and national security were “groundless.” “It’s not that other countries don’t have their own supplies, it is just that they have hidden them away,” it said. “China’s handling does not violate international rules and is not contrary to its WTO accession promises,” the paper said. The WTO ruled on Tuesday that China had violated its rules when it curbed exports of coveted raw materials such as bauxite, coke and magnesium used in the production of steel, electronics and medicines. That ruling, initiated by complaints filed by the United States, the European Union and Mexico in 2009, was seen as a possible precedent for a future case on China’s rare earth export quotas. In its ruling, the WTO panel said China’s domestic policies fell short of demonstrating that its export duties on raw materials were to curtail pollution or conserve exhaustible natural resources — reasons also offered for its rare earth quotas. China is widely expected to appeal the ruling. It has taken steps to consolidate and rein in its polluting rare earths industry, which may bolster its case should rare earth quotas be the target of a similar WTO challenge. The central government slashed rare earth export quotas by 35 percent for the first half of 2011, building on previous quota cuts. That move choked off global supplies, boosted prices and angered China’s trading partners. China produces 97 percent of the world’s supplies of rare earths, a group of 17 minerals used in electronics and defense and renewable energy industries. Aside from reiterating China’s stance, the report cited experts who highlighted United Nations declarations on sovereignty over resources and WTO rules that would allow China to make exceptions with its rare earth quotas under trade law. “Western countries cite WTO clauses to criticize China … but there are always exceptions to the WTO legal provisions,” the paper quoted prominent Tsinghua University scholar Zhou Shijian as saying. “For example, article 20 of the General Agreement on Tariffs and Trade expressly stipulates that contracted parties may, for certain special purposes, limit imports and exports,” the paper said. The WTO did not permit those general exceptions on the raw materials decision. (Reporting by Michael Martina; Editing by Sugita Katyal) Copyright 2011 Thomson Reuters. Click for Restrictions

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U.S. Recovery’s 2-Year Anniversary Arrives With Little To Celebrate

July 1, 2011

WASHINGTON (AP) — This is one anniversary few feel like celebrating. Two years after economists say the Great Recession ended, the recovery has been the weakest and most lopsided of any since the 1930s. After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven’t kept up with prices at the grocery store and gas station. The economy’s meager gains are going mostly to the wealthiest. Workers’ wages and benefits make up 57.5 percent of the economy, an all-time low. Until the mid-2000s, that figure had been remarkably stable — about 64 percent through boom and bust alike. Executive pay is included in this figure, but rank-and-file workers are far more dependent on regular wages and benefits. A big chunk of the economy’s gains has gone to investors in the form of higher corporate profits. “The spoils have really gone to capital, to the shareholders,” says David Rosenberg, chief economist at Gluskin Sheff + Associates in Toronto. Corporate profits are up by almost half since the recession ended in June 2009. In the first two years after the recessions of 1991 and 2001, profits rose 11 percent and 28 percent, respectively. And an Associated Press analysis found that the typical CEO of a major company earned $9 million last year, up a fourth from 2009. Driven by higher profits, the Dow Jones industrial average has staged a breathtaking 90 percent rally since bottoming at 6,547 on March 9, 2009. Those stock market gains go disproportionately to the wealthiest 10 percent of Americans, who own more than 80 percent of outstanding stock, according to an analysis by Edward Wolff, an economist at Bard College. But if the Great Recession is long gone from Wall Street and corporate boardrooms, it lingers on Main Street: — Unemployment has never been so high — 9.1 percent — this long after any recession since World War II. At the same point after the previous three recessions, unemployment averaged just 6.8 percent. — The average worker’s hourly wages, after accounting for inflation, were 1.6 percent lower in May than a year earlier. Rising gasoline and food prices have devoured any pay raises for most Americans. — The jobs that are being created pay less than the ones that vanished in the recession. Higher-paying jobs in the private sector, the ones that pay roughly $19 to $31 an hour, made up 40 percent of the jobs lost from January 2008 to February 2010 but only 27 percent of the jobs created since then. Kathleen Terry is one of those who had to settle for less. Before the recession, she spent 16 years working as a mortgage processor in Southern California, earning as much as $6,500 in a good month, a pace of about $78,000 a year. But her employer was buried in the housing crash. She found herself out of work for two and a half years. As her savings dwindled, the single mother had to move into a motel with her three daughters. They got by on welfare and help from their church and friends. Terry started taking a 90-minute bus ride to job training courses. Eventually, she found work as a secretary in the Riverside County, Calif., employment office. She likes the job, but earns just $27,000 a year. “It’s a humbling experience,” she says. Hard times have made Americans more dependent than ever on social programs, which accounted for a record 18 percent of personal income in the last three months of 2010 before coming down a bit this year. Almost 45 million Americans are on food stamps, another record. Ordinary Americans are suffering because of the way the economy ran into trouble and how companies responded when the Great Recession hit. Soaring housing prices in the mid-2000s made millions of Americans feel wealthier than they were. They borrowed against the inflated equity in their homes or traded up to bigger, more expensive houses. Their debts as a percentage of their annual after-tax income rose to a record 135 percent in 2007. Then housing prices started tumbling, helping cause a financial crisis in the fall of 2008. A recession that had begun in December 2007 turned into the deepest downturn since the Great Depression. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics analyzed eight centuries of financial disasters around the world for their 2009 book “This Time Is Different.” They found that severe financial crises create deep recessions and stunt the recoveries that follow. This recovery “is absolutely following the script,” Rogoff says. Federal Reserve numbers crunched by Haver Analytics suggest that Americans have a long way to go before their finances will be strong enough to support robust spending: Despite cutting what they owe the past three years, the average household’s debts equal 119 percent of annual after-tax income. At the same point after the 1981-82 recession, debts were at 66 percent; after the 1990-91 recession, 85 percent; and after the 2001 recession, 114 percent. Because the labor market remains so weak, most workers can’t demand bigger raises or look for better jobs. “In an economic cycle that is turning up, a labor market that is healthy and vibrant, you’d see a large number of people quitting their jobs,” says Gluskin Sheff economist Rosenberg. “They quit because the grass is greener somewhere else.” Instead, workers are toughing it out, thankful they have jobs at all. Just 1.7 million workers have quit their job each month this year, down from 2.8 million a month in 2007. The toll of all this shows in consumer confidence, a measure of how good people feel about the economy. According to the Conference Board’s index, it’s at 58.5. Healthy is more like 90. By this point after the past three recessions, it was an average of 87. How gloomy are Americans? A USA Today/Gallup poll eight weeks ago found that 55 percent think the recession continues, even if the experts say it’s been over for two years. That includes the 29 percent who go even further — they say it feels more like a depression.

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TEPCO’s Credit Rating Reduced To Junk By Moody’s

June 20, 2011

TOKYO – Moody’s Investors Service cut its credit rating on Tokyo Electric Power Co to junk status on Monday and kept the operator of Japan’s crippled nuclear power plant on review for possible further downgrade, citing uncertainty over the fate of its bailout plan. Moody’s said it had lowered Tokyo Electric Power’s (Tepco) senior secured rating to Ba2 from Baa2 and long-term rating to B1 from Baa3, citing rising costs and compensation fees related to the disaster at Tepco’s Fukushima Daiichi nuclear plant after the March 11 earthquake and tsunami, the world’s worst nuclear disaster in 25 years. “The latest downgrade reflects further escalation of costs and damages from the continuing Fukushima nuclear plant disaster and increased concern that government support measures may not completely protect creditors from losses,” Moody’s said. “The continued review for possible further downgrade is due to the uncertainty surrounding the passage of the support plan through the Diet, and the difficulty in estimating the ultimate total for Tepco’s total compensation liability,” it said. The move follows a similar downgrade to junk status by ratings agency Standard and Poor’s, which late last month cut its long-term credit rating on Tepco to B+ from BBB, and the utility’s secured bonds rating to BB+ from BBB. Moody’s said likely damages were now beyond Tepco’s ability to finance without government support, and the ratings agency said it is “very likely that a support program in some form will be legislated eventually due to TEPCO’s role as Japan’s largest provider of electricity.” Tepco is Japan’s largest corporate bond issuer, and its shares are widely held by financial institutions. “A failure to approve the support program would result in a multi-notch downgrade to reflect likely default through some form of debt restructuring, or court-supervised bankruptcy proceeding,” Moody’s said. Even if a support program is enacted on a timely basis, Moody’s said it expected Tepco to remain financially weak for several years. Tepco will likely face rising costs for replacement power, bear higher costs for stabilizing the Fukushima plant, as well as its decommissioning, Moody’s said. “Prospects for passing higher costs onto its customers in timely manner that meets the company’s financial needs are in doubt under the current regulatory regime and in view of the unfavorable economic environment,” Moody’s said. “These factors would together put its equity base under significant pressure. In addition, no losses have yet been booked for compensation claims which size is still uncertain,” Moody’s said. Reactor cooling systems were knocked out by the earthquake and tsunami, causing a meltdown at three of the reactors and forcing the evacuation of about 80,000 residents near the plant. Efforts to restore control over the plant have faced repeated setbacks, with the latest on Saturday, when a rise in radiation halted the clean-up of radioactive water at the Fukushima plant hours after it got under way. Japan’s government last month agreed to set up a fund with taxpayer money to help Tepco avoid insolvency and compensate victims of the radiation crisis at the plant. Japan’s ruling party will extend a session of parliament to approve extra spending needed to rebuild areas ravaged by the earthquake, although it is unclear if the bills will win support from a combative opposition. Besides the extra budget, lawmakers have yet to approve a draft law on compensation to Tepco victims, among others. There is much criticism about the scheme. Japan’s main opposition Liberal Democratic Party (LDP) is not prepared to accept the government’s scheme to help Tepco pay billions of dollars in compensation to victims of its nuclear plant disaster, a LDP lawmaker said on Monday. But the LDP is not united on its own counterproposal to a government bill that would allow the establishment of a fund to help Tepco compensate those affected by radiation leaks, Taro Kono told the Reuters Rebuilding Japan Summit in Tokyo. Tepco’s next shareholder meeting will be held on June 28. (Reporting by Chikako Mogi; Editing by Chris Gallagher) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Robert Teitelman: Politics and the Economist as Hero

June 13, 2011

Felix Salmon offers up two posts that further point out the absurdities in some of the regulatory backbiting that has now erupted. On Friday, Salmon pointed out the similarities between statements in Timothy Geithner’s speech last week about big regulation and that of Jamie Dimon, in the J.P. Morgan Chase & Co. chairman’s little to-and-fro with Ben Bernanke. Salmon goes on to argue that Geithner is a big-bank guy because of the time he spent at the New York Fed, which is owned by the big banks. Perhaps — although the New York Fed is also part of the Federal Reserve System, headed by Bernanke, Dimon’s current target. So how does that work? Salmon also comments today on Bank of Israel Gov. Stanley Fischer, a World Bank veteran and No. 2 at the IMF during the Asia Crisis, who threw his hat in the ring for the top job, vacated by the housebound Dominique Strauss-Kahn. Fischer is an extreme long shot for a variety of reasons. Salmon points out that while Fischer’s technical expertise is world class (he was Bernanke and Greg Mankiw’s thesis adviser at Harvard), and France’s Christine Lagarde’s is not, much of what the IMF faces is profoundly political in nature, a strength of Lagarde’s and not particularly an asset Fischer brings to the table. Obviously, the optimal solution here is to have someone with both strengths. But the deeper question is whether most of the challenges facing the fund — notably, but not exclusively, what to do about the euro zone — are fundamentally political or economic issues. Can they be resolved by sheer knowledge of economics, or will they require some serious political horse-trading? This question has long dogged both the World Bank and the IMF. Two op-ed columns in the Financial Times illuminate this dichotomy. The first brings former Clinton Treasury chief and Obama uber-briefer Larry Summers back to the FT , where his columns during the financial crisis were must-reads and helped renovate a reputation sullied by his messy tenure running Harvard and retroactively battered by his service in the Clinton years. Summers tackles the subject of how the U.S. can extricate itself from its Japanese-like, post-crisis malaise. He rattles off the economics of the situation with alacrity, focusing on the lack of demand in the equation. “After bubbles burst,” he writes, “there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence — vacant houses, malls without tenants and factories without customers.” Given that situation, he notes in his very Leninesque way: “What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.” Summers goes on to argue for continued stimulus in a play for “near-term growth.” All very sensible — and all offered up with Summers’ usual brisk confidence. But what’s noteworthy here is his passing dismissal of “traditional political agendas” in the face of obvious economic imperatives. Contrast that with Clive Crook’s column on the same FT page with the eye-catching headline: “America prefers fiscal idiocy to framing intelligent choices.” It has been a common theme of Crook that both parties in the U.S. seem to be careening toward fiscal disaster with a kind of blithe ignorance of what the long-term consequences could be, particularly if something isn’t done with the debt ceiling. Crook’s argument may be overstated — or it may not. We shall, unfortunately, see over the next few weeks. But Crook has a clear-eyed view of politics that Summers would like to sweep away with a brush of rational argumentation. He understands that on both the debt ceiling and on long-term fiscal health issues the imperatives of economic “truth,” as articulated by Summers, Fischer, Geithner, Bernanke or Paul Krugman, take a back seat to the fumes and vapors of politics. Only when a crisis comes crashing down will politicians check their instincts for self-interest, demagoguery and short-term maneuvering, mostly because they know they will lose if they get blamed for shoving the nation off the cliff. That’s really not a comfortable place to perch, but it is what it is. That’s not to say we don’t need technical economists — despite their spotty record in the past. At the very least, they provide some check on the more extreme fantasies and inanities concocted by retail politicians. But for all their credentials, for all their skills, and for all their considerable egos and self-belief (any number of big-name — what the FT calls A-List — economists display the outsized grandiosity of famous modernist architects, like Frank Lloyd Wright, a theme Ayn Rand tapped into years ago), they tend to be viewed by the political classes as annoying carpers, overeducated intellectuals without a clue of the real world or comprehensible only as the instrument of some large special interest, the banks, say, the corporations, the unions or (not many here) the poor. This is a poisonous relationship just at a time when, as at the IMF, we really need all the help we can get. – Robert Teitelman

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Dana P. Goldman: Congress and Medicare

May 31, 2011

Both Republicans and Democrats agree that rising Medicare costs are the principal long-term driver of the federal deficit. They just don’t agree on how to rein in the spending. The lesson from New York’s special House election is that the Republicans’ plan — vouchers to purchase a private insurance plan — may be political kryptonite, and some are starting to back away. So what will the Democrats do to curb costs? The new health-care law gives an independent board the power to make sweeping cuts in Medicare spending. President Obama’s new deficit reduction plan proposes to beef up that power. Republicans and some Democrats want none of it. They claim the Independent Payment Advisory Board usurps Congress’ spending power over a huge and important social program. “It’s our constitutional duty, as members of Congress, to take responsibility for Medicare and not turn decisions over to a board,” said Rep. Allyson Schwartz (D-Pa.), a co-sponsor of a bill to repeal the board. True, Congress is responsible for establishing policies affecting all aspects of Medicare, including payments to health-care providers, hospitals and insurance plans. The problem is that Congress also has a long record of walking away from the most promising attempts to save money in the Medicare program. Congress should not be allowed another opportunity to repeat history. Take bundled payments. In this cost-saving approach, health- care providers receive a fixed sum of money for a package of services, which reduces incentives to overuse services. Many health economists – and even Congress’ own Medicare Payment Advisory Commission – agree that bundled payments show the greatest promise to reduce Medicare spending. In 1991, Congress seemed to agree. It authorized a demonstration project to test the effectiveness of bundled payments for cardiac- bypass surgeries, one of the most common and costly services in Medicare. Four hospitals were chosen for the demonstration, and each was paid a single fee for all inpatient and physician services for heart-bypass patients. The result? Medicare saved more than $50 million over five years — and quality of care improved. Yet the American Hospital Association and organizations like the Mayo Clinic didn’t like the idea. Congress caved in to the pressure, killing any chance of broader implementation. Another promising solution to Medicare’s cost problems involves competitive bidding. Because certain health-care services can be considered as commodities, Medicare could save money by buying them from the lowest-cost supplier. In 2002, Medicare began a demonstration project using competitive bidding when buying such medical equipment as oxygen tanks, diabetes supplies and wheelchairs. The approach produced a 20% savings over a six-year period, according to Medicare. Initially a strong supporter of competitive bidding, Congress again wilted in the face of vigorous opposition from large medical supply companies. The effort remains on hold. There are other areas where money can be saved if Congress would join the cause. The use of diagnostic and imaging services has exploded in recent years. In 1980, 3 million CT scans were done in this country. By 2008, the figure had climbed to 68 million . The rise came despite evidence that CT imaging could be responsible for 1 in 50 future cases of cancer, according to an article in the New England Journal of Medicine. In 2007, Medicare moved to disallow CT imaging for cardiovascular disease in cases where the scan was not clinically warranted. With the backing of Congress, Medicare officials took the risky step of demanding evidence of a scan’s benefit before paying for it. Lobbyists for cardiologists soon arrived on Capitol Hill, and Congress again lost its nerve. The result is that Medicare is helping to subsidize a technology that may be doing extensive harm. Congress can’t even agree to pay more money for better performance. In yet another demonstration project started in 2005, Medicare created a pay-for-performance reimbursement system that rewarded health-care providers who were better at managing their patients. In three years, physician groups and hospitals showed better outcomes on 28 of 32 clinical measures — such as blood pressure, weight and LDL cholesterol levels — for patients with diabetes, congestive heart failure and coronary artery disease. Participating hospitals saw their Medicare quality scores – such as readmission rates — increase by 17% in four years. But not a peep from Congress. The beauty of the Independent Payment Advisory Board is that it keeps Congress on the sidelines. If Medicare spending growth exceeds a set target, the board is required to recommend cuts to reduce spending by specified amounts, starting in 2015. The reductions automatically go into effect unless Congress comes up with alternative cuts that result in equivalent savings. Congress, of course, flinched when it could have enhanced the board’s powers when drawing up the Affordable Care Act. By not giving the board the authority to recommend changes in Medicare benefits, impose cost-sharing on patients or reduce payments to providers and suppliers already scheduled for cutbacks, Congress bypassed yet another opportunity to save money. Medicare is one of the few areas in government where we know what to do to start saving money. Congress’ long history of support for wasteful Medicare spending shows that we can’t trust it to help. Dana P. Goldman is director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California. Veeral Shah is a graduate student in the school of public policy.

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China Hikes Power Prices In Attempt To Counter Threatening Shortage

May 30, 2011

BEIJING (Jim Bai and Tom Miles) – China has raised power prices for industrial, commercial and agricultural users in some regions by about 3 percent in an attempt to ease what threatens to be the worse power shortage in seven years in the world’s second-largest economy. The power price rise, which excludes residential users, will add to inflationary pressures but revive profit margins at power producers. That should prompt an increase in electricity supplies from loss-making power plants that had failed to keep up with rising demand. Higher prices should also discourage excess power consumption. “This is obviously good for the power shortages and it was very much expected – the only way the problems can be solved is by adjusting prices,” said Lin Boqiang, director of the Center for Chinese Energy Economics Research. “The other problems – like the power grid or the transportation of coal – are long-term and can only be solved after several years. There was just no other way. This is clearly going to have some sort of impact on industry but the impact of actually having no power is much bigger. Most businesses will be more willing to accept higher prices than power cuts.” China looks set for the worst summer power shortages since at least 2004 as demand growth remains strong while coal-fired power plants, which generate 80 percent of national electricity output, have restricted production due to operating losses resulting from high coal costs. At the same time, hydropower has been hit by a drought in central China, including Hubei province, home of the Three Gorges Dam, the world’s biggest hydropower project. The government raised the prices that grid firms charge industrial consumers by 0.0167 yuan per kilowatt hour , Chinese state media said after a briefing by the National Development and Reform Commission, the country’s top economic planning body. Lin said the price rises would add about 0.5 percentage points to inflation, but the impact would be much more if the shortages were allowed to continue unchecked. The increase, ranging from 0.004 yuan/kWh to 0.024 yuan/kwh in 15 Chinese provinces including Shanxi, Qinghai, Gansu, Jiangxi, Hainan, Shaanxi, Shandong, Hunan, Chongqing, Anhui, Hubei, Sichuan, Hebei and Guizhou. The price rise came earlier than some analysts had expected. Several had said China would first raise on-grid power tariffs, the prices at which power generating firms sell to grid operators, and then hike prices for end-users once inflationary pressure had subsided. “The move aims to ease power shortages, this will add to inflationary pressures but the impact will be limited and it will take some time for upstream price rises to trickle down to downstream,” said Wang Jun, an economist at CCIEE, a government think-tank. The increase was the first since November 2009 and follows on-grid tariff hikes in 12 provinces on April 10, with three more provinces following suit on June 1, the NDRC was quoted as saying. The average price rise offered to power producers was 0.02 yuan per kWh, slightly more than the hike for end-users. Jianguang Shen, chief economist at Mizuho in Hong Kong, said he expected the price of coal would jump in response to the price hike, wiping out the margin gain for power producers and adding to Chinese coal imports. To prevent that, the government would order state-owned coal producers to hold down their own prices, he said. The previous on-grid price hike had no significant impact on the power shortages because of a concomitant coal prices rise, said Want Wei, a senior analyst Guotai Junan Securities. “Coal imports could rise after the power rise hike as coal producers and trading companies are likely to raise coal prices, triggering more coal imports,” he said. “Every 0.01 yuan rise in power price could offset an increase of 50 yuan in coal prices.” China has already cut power supplies to some industrial users in eastern, southern and central regions as pent-up demand rebounded after local governments ordered power cuts in late 2010 for the purpose of achieving energy saving goals. In addition, power generating firms curbed their output levels because rising coal prices undermined their operating margin. The National Development and Reform Commission, China Electricity Council and some industry analysts have all warned of the possibility of worse shortfalls in summer when demand peaks. The State Grid of China, the country’s dominant power distributor, said it would cut supplies to more industrial users in summer to shortfalls expand. China’s five state-owned power generating groups lost more than 10 billion yuan ($1.5 billion) on their thermal power operations in the first four months of the year, an official with the council said on Tuesday. The five groups, parents of China Power International Development Ltd (2380.HK), Datang International Power Generation Co Ltd (0991.HK) (601991.SS), Huadian Power International Corp Ltd (1071.HK) (600027.SS) and Huaneng Power International Inc (0902.HK) (600011.SS), had racked up more than 60 billion yuan in losses in past three years, according to the State Electricity Regulatory Commission. (Additional reporting by Judy Hua, Kevin Yao and David Stanway; Editing by Ken Wills and Simon Webb) Copyright 2011 Thomson Reuters. Click for Restrictions .

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U.S. Should Raise Interest Rates, OECD Says

May 25, 2011

WASHINGTON (By Pedro Nicolaci da Costa) – The Federal Reserve should begin to hike interest rates in coming months, the Organization for Economic Cooperation and Development said on Wednesday, as it raised its outlook for U.S. economic growth. In its semi-annual forecast, the OECD said it sees U.S. economic growth of 2.6 percent in 2011, up from its forecast last November for growth of just 2.2 percent. The outlook, however, is much lower than the Fed’s own “central tendency” estimates, which as of April 27 pegged growth for this year in the 3.1 percent to 3.3 percent range. Despite what it sees as significant potential downside risks to expansion from higher energy and commodity prices, the OECD recommends the Fed begin slowly withdrawing some of its extraordinary aid to the economy as 2011 progresses. “A modest reduction in monetary stimulus should get under way in the second half of this year,” the OECD said in its report. Alan Detmeister, the OECD Economics Department’s U.S. desk officer, said in a press briefing the Fed should raise its benchmark federal funds rate to 1 percent from the current zero to 0.25 percent range before the end of the year. Continued high levels of unemployment are not enough of a reason to keep rates at rock-bottom lows, the OECD said, since low rates raise the risk of future bubbles or inflationary shocks. The group predicts the U.S. jobless rate, currently at 9 percent, will remain close to 8 percent for much of 2012. “At present there is little sign that continued extraordinarily loose monetary policy settings have increased inflation expectations more than a small amount or are resulting in another asset price bubble,” the OECD added, citing oil and other commodities as a “possible exception.” The OECD expects the trend of subdued inflation to continue for the foreseeable future, predicting U.S. consumer price inflation of 1.9 percent for this year and just 1.3 percent next year — well beneath the Fed’s implicit target of 2 percent or a bit below. The Fed looks set to complete its $600 billion bond-buying program aimed at keeping long-term rates down in June, as scheduled. Its balance sheet now stands at a record $2.74 trillion, but a large amount of bank reserves remain parked at the Fed rather than being lent out to businesses. A LITTLE TOO LOOSE? Still, the OECD’s call for rate hikes, potentially controversial given a still-fragile U.S. recovery, appears to be based on the presumption that rates are so far below their normal levels that the tightening process must begin soon. Detmeister believes a “neutral” U.S. benchmark rate that neither retards or stimulates growth should be around 4.5 percent. “Tightening somewhat now would reduce the need for steeper, and potentially disruptive, increases in interest rates later,” the OECD said. At the same time, the group said long-term unemployment presents a dangerous challenge for the United States, since it risks becoming self-reinforcing and reducing the productivity of the labor force over time. Just under half of the 13.7 million jobless Americans have been out of work for six months or longer, the highest ever. The OECD noted that countries such as Germany and Japan, where firms were either reluctant to lay off workers or were able to reduce their hours through workshare arrangements, fared better than countries without such programs in place. “The ability of these countries to cushion the employment impact of the crisis may offer lessons that could help improve labor market resilience to future shocks,” the report said. (Reporting by Pedro Nicolaci da Costa; Editing by Leslie Adler) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Japan Could Need Additional Stimulus, Moody’s Says

May 23, 2011

TOKYO (Leika Kihara) – Japan’s return to recession and a bigger-than-expected slump in first-quarter economic growth are negative for its credit rating, Moody’s Investors Service said, warning that a delay in recovery could warrant additional fiscal and monetary stimulus. The triple blow of the March earthquake, tsunami and nuclear crisis has nudged Japan into recession and led to a surprisingly deep 0.9 percent contraction in January-March, which Moody’s said was negative for Japan’s rating and made it increasingly urgent for Prime Minister Naoto Kan to compile a second extra budget. “Reconstruction and relief expenditures will eventually lead to a rebound in economic growth later this year and in 2012,” Moody’s said in a statement on Monday. “But the scale of the loss in output and income caused by the earthquake may already have lowered the future growth trajectory of the Japanese economy, thwarting Japan’s long-term growth rate, which is currently around 1 percent,” it said. While the shock from power shortages will be temporary, the risk of Japanese companies permanently losing global market share due to current supply chain disruptions is more damaging, Moody’s said. “Should the rebound in Japan’s economy be weaker than forecast or delayed entirely, additional actions by both the Ministry of Finance and Bank of Japan may be needed,” the ratings agency said in a statement. Japan is facing its worst crisis since World War Two after the magnitude 9.0 earthquake and a deadly tsunami battered its northeast coast on March 11, leaving about 25,000 dead or missing and crippling a nuclear power plant. The economy shrank in January-March at nearly double the pace forecast by markets and is expected to contract again in the second quarter as supply chain disruptions and power shortages hit factory output. ADDITIONAL ACTION The Bank of Japan eased monetary policy days after the quake but has stood pat since then on the view — shared by many economists — that growth will pick up from around autumn when supply constraints ease. But the central bank has expressed its readiness to ease policy further if the damage from the quake is bigger than expected and threatens Japan’s return to a moderate recovery. The government, for its part, passed through parliament a 4 trillion yen ($48 billion) first emergency budget for immediate disaster relief and is now eyeing a second extra budget for reconstruction, which Moody’s said will “likely need to be much larger than the first one.” Kan has signaled that the second extra budget would be quite big, while Economics Minister Kaoru Yosano said reconstruction may cost up to 15 trillion yen. But any progress in compiling the second extra budget would be slow as Kan needs cooperation from opposition parties, which control the upper house, to pass necessary legislation through parliament. Another uncertainty overshadowing Japan’s fiscal outlook is the extent to which the government will share the burden of Tokyo Electric Power’s (9501.T) rising quake-related liabilities, Moody’s said. Japan’s public debt, at double the size of its $5 trillion economy, is the biggest among major industrialized economies, limiting room for additional fiscal stimulus and triggering warnings from ratings agencies. But lawmakers are hesitant about raising taxes, particularly the politically sensitive sales tax, for fear of scaring voters away, even as the cost of quake reconstruction adds to the heavy burden of spending for social welfare in a rapidly aging society. Moody’s warned in February that it might cut Japan’s Aa2 rating — its third highest rating — if the government fell short of crafting comprehensive tax reform to fix the country’s tattered finances. ($1 = 81.710 Japanese Yen) (Editing by Michael Watson and Edmund Klamann) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Nell Merlino: Expanding Into Foreign Markets: Advice, Caution and Building a Strategy

May 19, 2011

Did you know that the word “millionaire” in Hindi is masculine? What does that mean for women in India who wants to grow a multi-million dollar business? I learned about this conundrum from a colleague Nalini Mehta who attended our Make Mine a Million $ Business event in San Francisco last Fall. I often hear from small business owners who are looking for advice on how to break into and navigate international markets like China, India or even Vietnam. It’s a hot economic trend and with good reason. A report released this week by TD Economics revealed that from 2004-2009, exports by small U.S. firms to all countries grew 30%, while exports to China and India doubled. In addition, according to the U.S.-China Business Council, a private, nonpartisan, nonprofit organization of roughly 220 American companies, China has been our fastest growing export market since it joined the World Trade Organization. What’s more, it’s the only major market since 2000 to have averaged the 15 percent growth per year needed to meet President Barack Obama’s goal of doubling US exports by 2014. The Council also reports that America’s small- and medium-sized companies are succeeding in China, but those companies still need more help accessing China’s markets. So I asked my good friend Ned Cloonan, a former vice president at AIG and the current president of Ned Cloonan Associates, an advisory firm focused on international market access, strategic philanthropy and business intelligence, for some of his thoughts. Ned was one of the first in corporate America to seriously invest in gender equity issues around the world (including Count Me In). He’s also been at the forefront of just about every major market opening in the world over the last 15 to 20 years and he has great advice for women wanting to do business abroad. For example: 1. UNDERSTAND THAT THIS IS A LONG-TERM COMMITMENT. It’s going to take time and capital for you to get access and be able to establish a business in countries like China, India or Vietnam. It’ll be longer and cost you more than probably anything you’ve done to date. To be on the safe side, you might want to build the new markets into a long-term business and financing strategy. 2. YOUR BUSINESS, PRODUCT OR SERVICE STANDS THE BEST CHANCE OF BEING SUCCESSFUL IF IT IS RELEVANT TO THE CURRENT ECONOMIC PLANNING AND PRIORITIES OF THOSE COUNTRIES. For example, in China, they have great interest in product or service that can help in energy efficiency or alternative energy. They are also facing an aging population because of the country’s longstanding one child policy, so if you have a product or service that is related to healthcare or healthcare related services that could be of interest to them. You need to offer something that these countries need and want at that time. 3. SPEND TIME AND EFFORT TO UNDERSTAND SOME OF THE DIFFERENCES IN THE WAYS DECISIONS AND POLITICS ARE MANAGED. It’s important to know the difference between local, regional and federal or central government interests. It’s critical for you to know the decision makers in the process in the regional and local governments. To that end, see if you can participate in a trade mission with the governor’s office, state department of commerce, the Asia Society, or U.S./India business council. There’s a wealth of information and knowledge that may help you understand more fully not just the challenges but also the opportunities and maybe some potential partners. Participating in trade missions and reaching out to chambers — both here and abroad — can be a cost effective way for a small business owner to meet more senior decision makers and get better advice and information in these countries. You stand a better chance to “punch above your weight.” 4. POLITICS MATTERS. Your business can easily be affected by the ebbs and flows of the political relationships between the US and those countries. Even if you’re small or medium sized, you can feel the pressure if the relationship is strained or if there’s a desire for the relationship to expand or grow and prosper. M3 awardees receive a one-year legislative membership with Women Impacting Public Policy (WIPP), a non-profit, nonpartisan public policy advocacy organization with over half a million members (including 54 business organizations) educating and advocating on economic issues for women in business. It’s been a valuable resource to those interested in breaking into foreign markets. 5. FIND A PARTNER IN THAT COUNTRY. If you’re small or medium-sized, you’re going to have to find a compatible partner to assist you in navigating through all of the challenges each one of these countries presents to any business that wants to be successful there — particularly a foreign investor. Choosing a partner could include a reference to a model that has worked in the past is finding someone educated here but from there. 6. CONSIDER A “SECONDARY CITY” STRATEGY. In China, for example, the government is encouraging investment in smaller, interior cities, and not just Shanghai or Beijing. So, it’s important to be flexible.

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AlaskaDispatch.com: Alaska Gasline Failure Disappointing, but No Surprise

May 18, 2011

ANCHORAGE, Alaska — Backers of Alaska’s Denali natural gas pipeline project had barely thrown in the economic towel, when some state lawmakers began calling for TransCanada and the administration of Gov. Sean Parnell to prove the controversial state-sanctioned gas line project is economically viable. At stake with the Alaska Gasline Inducement Act is several hundred million dollars in public money the Legislature agreed to give the project as well as the state’s ability to move forward with a larger-sized, in-state gas pipeline. And the announcement Tuesday morning by the Denali project’s backers that they were giving up on building a $35 billion, 1,700-mile pipeline from the North Slope to Alberta, Canada, was also immediately viewed as yet another sign that a decades-long major economic dream for Alaska is once again slipping away. Disappointment, but not surprise was the phrase most used by people who have been following the gas line debate on all sides. It’s not unexpected news,” said Larry Persily, the federal coordinator for Alaska gas line projects. “Clearly given today’s market it’s going to be hard. If you were Denali how many more millions are you going to spend when you’re not seeing success close at hand. It’s all their money. Maybe when you’re spending someone else’s money you can keep going a little longer.” TIMELINE: Alaska’s gas line pipe dreams In an indictment on the economics of the natural gas business in Alaska, Denali President Bud Fackrell said in a press release that the company was unable to secure customers and wasn’t going to spend billions more dollars on a futile effort. This after BP and ConocoPhilips, the companies behind Denali, had spent about $165 million on the project. Natural gas prices have fallen considerably since 2007 when the Legislature led by former Gov. Sarah Palin passed AGIA and agreed to support it with as much as $500 million of state money. The state signed an exclusive license agreement with TransCanada which then brought Exxon Mobil on as a partner. The Denali project was started as a parallel effort and has not had the benefit of state subsidies, a fact some AGIA supporters point to as one big difference between the two proposals and perhaps the reason TransCanada can succeed where Denali failed. But House GOP leaders who have long been critical of AGIA are seizing the demise of Denali as an I-told-you-so moment. In the just-ended legislative session, they pushed for — but then dropped — an effort to force TransCanada and Gov. Sean Parnell to prove whether the project is economically viable before giving it even more state cash. “Why is TransCanada afraid to answer the same question that Denali just answered openly and honestly and in the public eye?” Rep. Mike Hawker, an Anchorage Republican and one of AGIA’s biggest critics, said Tuesday. “What do they have that makes theirs different? They’re looking at exactly the same marketplace and the same customer base.” Alaska Speaker of the House Mike Chenault, another Republican opponent of Palin’s AGIA law, has begun moving toward an in-state gas line that would run from the North Slope through Fairbanks and down to Anchorage. The House, over the Senate’s objections, included $200 million in the capital budget in a dedicated fund that would kickstart an in-state gas line if approved. The budget also reduced by $100 million the amount of money Parnell had requested for AGIA. But the bullet line has come under fire, too, for its huge cost — as much as $12 billion — and high tariffs that would mean a dramatic rise in the cost of gas to Southcentral consumers. The only way around that would be if the state subsidized the project with billions of dollars. Read the complete story only at Alaska Dispatch http://www.alaskadispatch.com

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Howard Steven Friedman: Grumps, Dreamers, Bean Counters, Cool Cats and Shills: The Taxonomy of High Profile Economists

May 13, 2011

The dismal science has bred a fascinating collection of prominent species. While many economists toil away in obscurity, a small set of economists rise to fame, fortune or even both. Those leading lights of economics tend to fall in a few easily recognizable groups. The Grumps: Ahh, the Grumps. We all know them. They sound like Mr. Wilson, Dennis The Menace’s cranky next-door neighbor. Grumps are terrific at criticizing other people’s work. They poke holes through theories and applications, concepts and methods like a machine gun through toilet paper. Grumps are great backseat drivers, Monday morning quarterbacks and every other cliché you can think of for someone who destructs to perfection but never actually constructs anything themselves. Grumps don’t offer new ideas, because they know that their ideas would be criticized… they know it’s much safer to just attack. Grumps are the archenemies of the Dreamers and cause Bean Counters to cower in pockets of small ideas. The Dreamers: Dreamers believe that they can change the world with grandiose ideas and a few calculations. They occupy that rarefied air that is reserved for strategists who can never implement and visionaries who can’t tie their shoelaces. Dreamers can’t be troubled with error checking, detailed research, analysis of the real world or any of the mundane things that make economic output have any chance of validity. Dreamers are charismatic salesman, able to capture large crowds of non-experts with their glorious ideas then quickly hop away in their donor-subsidized Lear jet once they see a Grump approaching. The Bean Counters: These perfectionists only look into research questions if the conditions are as 100% ideal as they were taught in their freshmen year Introduction to Experimental Design class. Their topics are meaningful and their research papers are textbook examples of how to do science that is both internally valid (the conclusions are true for the population studied) but have absolutely no generalizability (you can’t transfer the conclusions to other populations). Bean Counters aspire to do something meaningful but are so deathly afraid of taking on any large scale or strategic project since the analysis methods might not get them a solid A+. The Cool Cats: The hipsters of the economics world. They wear fashion shades, write best-selling books and are guests on the Colbert Report , NPR and the Daily Show . Cool Cats jump from hot topic to hot topic, each one a fun idea for the public but with no potential for meaning or impact. They can tell you about the revolution in tooth paste dispenser design, how having friends who are plastic surgeons correlates with pre-mature wrinkling and the relationship between the length of your middle name and your life expectancy. The Cool Cats are jealous of the Dreamers’ big ideas but are not taken seriously enough by the Grumps to even warrant criticism except to be asked, “Why don’t you try doing economics for a change?” Lastly, the Shills: Shills are bought and sold by their industry. They’re the economists who lean forward after being quizzed, “What is 2 plus 2?” and ask, “How much would you like it to be?” Shills are found in most major industries but cluster in finance where they can sing the loudest and be paid the most for their lovely voices. Shills either graduated from top schools or proudly proclaim that they are ABD’s (see the special note below). Other economists treat Shills with a healthy mix of contempt and wallet envy. Next time you come across a prominent economist, see how long it takes before you can spot their species. Special note about ABD’s: A good friend of mine (Ph.D. in Math) pointed out that the only people who introduce themselves as having an ABD (All But Dissertation) are Shills who were once enrolled in Economics/Econometrics/Finance Ph.D. programs and dropped out to take lucrative jobs. He noted that they proudly offer themselves as being “equivalent to a Ph.D., but so valuable that the industry just couldn’t wait for them to graduate” while people who dropped out of other Ph.D. programs are often ashamed. Those who try to convince you that an ABD is similar to a Ph.D. are blissfully ignoring the fact that researching, writing and defending the Ph.D. thesis is what takes the vast majority of time, effort and skill in a Ph.D. program. When he hears someone refer to themselves as an ADB, he replies, “where I’m from, those are called Masters degrees or Ph.D. dropouts. That is, unless your university printed a degree that says ABD with your name on it.” Please join Howard’s Facebook Fan page

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Robert Teitelman: Krugman on the Policy Elites

May 9, 2011

Paul Krugman launches an attack Monday in the New York Times on what the headline of his column calls “The Unwisdom of Elites.” Well, I can agree with that. This is a Krugman column, however, that has almost very little to do with economics, technical or otherwise, and everything to do with political polemics. It involves the classic straw man lead, followed by a series of simplistic statements and a quivering finger pointed at the bad guys. We could be on cable television. First the straw man. Krugman tackles the big question: “How did it all go wrong” in both the U.S. and Europe? He, of course, answers himself. “Well, what I’ve been hearing with growing frequency from members of the policy elite — self appointed wise men, officials and pundits in good standing — is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing and weak-minded politicians catered to the electorate’s foolishness.” But au contraire, he goes on to argue, “The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with a few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious.” Who has Krugman been listening to? Well, undoubtedly Republicans of the Paul Ryan deficit-reduction rump, which means he’s been watching far too much Fox. (Krugman makes a parallel argument about Europe, which I’ll set aside because it’s a) confusing and b) involves matters I don’t know as intimately.) After all, he’s pretending that that argument, which is hardly as monolithic and noisy as he would suggest but does exist, stems from some “policy elite,” to which he, of course, with his Nobel, his teaching job at Princeton and his New York Times column, does not belong. This notion of public blame is also not a new argument, but rather a continuation of one that suggested that consumers contributed to the mortgage meltdown by overleveraging and speculating on real estate. But Krugman takes a fairly nuanced position that posits a number of different causes of the crisis (and of today’s deficit problems) — regulators, policymakers, politicians, globalization, innovation, trade imbalances, and, yes, overleveraging and speculation on Wall Street and Main Street — and radically simplifies it down to “you’re blaming blameless victims so just shut up.” Krugman reasonably locates three policies at the heart of the current mess: the Bush tax cuts, the Iraq War and fallout from the financial crisis. All three, he argues, were foisted secretly upon America by elites — or through “a highly deceptive sales campaign.” You can believe, as I do (and did), that all three were problematic policies and still not accept his Manichean view of all this, which depends on making the great mass of ordinary Americans chumps prone to endless manipulation. It’s not that Republican or Democratic pols are sainted. It’s just that there are no saints here at all anywhere. After all, Americans voted for Bush, which would presumably mean his tax cuts and his war, in 2004. True, large parts of the country opposed these policies; but even larger parts embraced them. Krugman may default to the “deceptive sales process” for any policy he dislikes that gains support, but to do so suggests that this democracy is broken beyond repair. Indeed, it’s to see the great mass of voters out there not just as irrational, but as pawns. Why, if that’s what he really believes, does he even bother to write his anti-elite, elite jeremiad? More disturbingly, it also takes him to a place he shares with large parts of the right: into the mental landscape of conspiracies and plots, of small groups of influential men, where you can only retain your fondest hopes of a just and rational nation by imagining that the great gentle herds of Americans have been (and have to be in the future) manipulated. I would argue differently. Americans that I know seemed to understand what the Bush tax cuts meant and the post-Sept. 11 context of the Iraq War. Many of them opposed both; some favored one or the other or both. That latter group was not blind. They may have been wrong, or they may have been consumed by their perceived self-interest, and indeed they may have believed the White House on supply-side wonders and Saddam Hussein’s threat to humanity, but they were no more manipulated than other folks who accepted Barack Obama as the Second Coming. They all made judgments, drew conclusions and, for better or worse, acted in their own rational self-interest — just like the folks I know who used their homes as piggy banks or engaged in flipping. None of them — not Krugman, not Bush, not Carleton Sheets — could predict the future, could see how tax cuts would hollow out the revenue-generation capacity of the state, could foresee how Iraq would go so wrong or, indeed, how deregulation and a dozen other factors produced the Great Recession. They took their chances; they imagined different outcomes. American history is one long cleanup, like a parade that just keeps circling the block. Krugman shares something else with some of his ideological foes, this time on the economics side. He is defining the public in strict utility-maximizing, rational terms, just like the disciples of the school of rational expectations. Politics is not game theory. Because he cannot accept a public with a variety of contrary ideas, dreams and preoccupations — some rational, some irrational, some, like a Shakespearean play, millennial, prosaic, greedy, fantastic, stupid, tragic, comic — he has to posit “deceptive sales practices” as the explanation for not only the wayward course of American politics and history, but for the public’s failure to listen to, well, the likes of him. This democracy thing is a very messy process, far more than whatever goes on in a lecture hall at Princeton. Originally posted at The Deal .

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What Really Caused Oil’s Record Drop?

May 9, 2011

NEW YORK (Reuters) – When oil prices fell below $120 a barrel in early New York trade last Thursday, a few big companies that are major oil consumers started buying around $117. It looked like a bargain. Brent crude had been trading above $120 for a month. But the buying proved ill-timed. Crude kept on falling. “They were down millions by the end of the day, trying to catch a falling piano,” an executive at a major New York investment bank said. Never before had crude oil plummeted so deeply during the course of a day. At one point, prices were off by nearly $13 a barrel, dipping below $110 a barrel for the first time since March. Oil’s descent followed the biggest one-day price drop in silver since 1980 on Wednesday, after hedge fund titan George Soros was reported to be selling. Exchange operators raised silver’s margin requirements, making it more costly to trade the metal and sending investors out of the market. Silver plunged by 20 percent, more by week’s end. The rout unnerved some commodity investors. Oil just doesn’t fall by 10 percent in the course of a normal day, though. In commodities markets, oil is king, and its daily contract turnover, typically around $200 billion, is usually able to absorb even large inflows or outflows of investment. The rare moves of $10 a barrel usually are set off by dramatic events — the outbreak of the first Gulf War in 1991, or the collapse in 2008 of Lehman Bros bank, which both led to recessions. Of course, there was major news last week. But the daring Pakistan raid that killed Osama Bin Laden had done little to shift the balance of oil markets on Monday. In interviews with more than two dozen fund managers, bankers and traders, no clear cause emerged for the plunge in price. Market players were unable to identify any single bank or fund orchestrating a massive sale to liquidate positions, not even an errant trade that triggered panic selling, as seen in the equities flash crash last May. Rather, the picture pieced together from interviews on Thursday and Friday is one of a richly priced commodities market — raw goods have been on a five-month winning tear over all other major investment classes — hit by a flurry of negative factors that individually could be absorbed but cumulatively triggered a maelstrom. Computerized trading kicked in when key price levels were reached, accelerating the fall. “It was a domino effect,” said Dominic Cagliotti, a New York-based oil options broker. The negative factors — prominent cheerleaders turning bearish, some weak economic data, cheap money from the U.S. Federal Reserve ending by July, a lessening of political risk — merely provide a backdrop for the waves of selling. What stands out is the way computers turned readjustment of positions in a huge and deep market into a rout. THE COMPUTERS Stunningly large jolts from so-called stop-loss trading amazed market traders. The automated sell orders were generated as oil crashed through price points that traders had programed in advance into their supercomputers. In many cases, computer algorithms sold for technical reasons, as oil dropped through levels that, once breached, could trigger ever larger waves of selling yet to come. The machine trading, based on subtly different but fundamentally similar, algorithmic models, eliminates the white-knuckles and potential human error involved in actively trading a volatile market, and increases anonymity. Instead of breeding hesitation, abrupt price drops can quickly prompt these machines to unload a bullish long position in oil, and build up a bearish short one instead. Machine-led trading is one plausible thesis for another apparent market anomaly that occurred on Thursday. Exchange data shows that the total number of open positions in the oil market — a number that would typically fall in a selloff — instead rose. Normally, panicky funds selling oil en masse would cause total “open interest” numbers to shrink, as exiting investors closed out contracts. But some machines, following the market trend, may have gone further, by dumping long positions and quickly amassing sizable short positions instead. “Computers don’t care. Momentum just increases until nobody wants to stand in front of it,” said Peter Donovan, a floor trader for Vantage on the New York Mercantile Exchange. Some big Wall Street traders watched their own systems sell into the down trend but couldn’t know for sure who had initiated the selling spree. They only knew that similar machines at other firms, from New York, to London, Geneva and Sao Paulo, would be automatically selling in much the same manner. During Thursday’s crash, such selling locked in profits that high-flying commodities traders have been accumulating for months. Some of Thursday’s rout appears to have been more a product of the wisdom of crowd computing than of widespread human panic. “We believe the magnitude of the correction appears in large part to have been exacerbated by algorithmic traders unwinding positions,” Credit Suisse analysts wrote in a report. High frequency trading and algorithmic trading accounts for about half of all the volume in oil markets. BIG NAMES TURNED BEARISH Some of the seeds for the rout were sown earlier. In April. Goldman Sachs’ bullish team of commodities analysts, led by Jeff Currie in London, issued two notes to clients in rapid succession recommending they pare back positions. In one, the bank called for a nearly $20 dollar near-term correction in Brent oil, while maintaining a bullish longer-term outlook. The closely watched money king, George Soros, who runs a macroeconomic hedge fund, had said for months that gold was pricey. Even online advisors to mom-and-pop investors such as The ETF Strategist had warned of a bubble in precious metals that could be ready to pop. On Wednesday, the Wall Street Journal had reported the Soros Fund was selling commodities including silver, and four sources from other hedge funds told Reuters they believed Soros was busy selling commodities positions again on Thursday. Silver markets already had suffered four days of carnage and ended the week down nearly 30 percent. But silver is a tiny market, much more susceptible to sharp price moves. Some traders suspect that big holders were cashing out of the least liquid commodity market first, before moving onto the big one – oil. As crude crashed on Thursday, it dragged down every other major commodity. The Reuters Jefferies CRB index, which follows 19 major commodities, was on its way to a 9 percent weekly drop, the biggest since 2008. Oil’s selloff began in London, and accelerated as New York traders piled in. A routine report on U.S. weekly claims for unemployment benefits spooked investors, showing the labor market in worse shape than expected. That fed a growing pessimism about the resilience of the global economy after industrial orders slumped in Germany and the massive U.S. and European service sectors slowed. Then the European Central Bank surprised with a more dovish statement on interest rates than expected, signaling its wariness about the euro zone outlook. The dollar rose sharply. Before noon New York time, Brent crude oil prices were already trading down a jaw-dropping $8 a barrel. Fourteen hundred miles southwest of New York’s trading floors, on Texas refinery row, oil men were stunned by the drop, which played havoc with their pricing models. “It was nuts. Our risk management guys were tearing up their spreadsheets,” said a major U.S. independent refiner, who asked not to be identified. A range of factors, both economic and political, were also at play. The recent rise in raw goods has been fueled in part by the U.S. Fed pumping cash into the markets by purchasing $600 billion in bonds. This program has pushed interest rates extraordinarily low, making borrowing essentially free once adjusted for inflation. Investors have been using the super-cheap money to buy into commodity markets. But the Fed’s program is slated to end on June 30. “Funds were likely to take profits before June when the direct (Fed) bond purchases stop. All were eyeballing each other to see who would take profits first,” said a London-based oil trader. China, the world’s fastest-growing consumer of commodities, also is tightening monetary policy to tamp growth rates and control inflation, raising the prospect of a slowdown in demand for oil. The political risk premium built into oil prices also came under scrutiny last week. The unrest sweeping through the Arab world – home to over half of world oil reserves – has boosted oil this year. The only major supply disruption so far is from Libya, where war has cut off at least 1 million barrels a day. “We’ve been in a world thinking there’s more risk, more risk, more risk,” said Sarah Emerson of Energy Security Analysis Inc. “People took this week, and the news of bin Laden’s death, to simply reflect. They stopped and said, maybe there’s less risk.” GAME OVER Put all these factors together, and they amounted to a reason to sell. Traders and brokers who spoke with Reuters speculated that macro funds like Soros and others, which had been aggressively overweight commodities, were cutting the portion of their portfolio allocated to commodities. Because those positions had grown so large, even a small rebalancing would amount to billions and billions of dollars in contracts sold. After weeks of thin trading in Brent oil futures, Thursday’s trade volume hit a record. Early Thursday, investment advisory firm Roubini Global Economics had also joined the fray, telling clients for the first time in years to cut commodities in their macro portfolios. Many funds were merely taking months of handsome profits off the table. Yet Thursday’s rout certainly produced casualties. By the afternoon New York time, some of the world’s biggest money managers thought they smelled blood. Several banks and funds seemed to be selling oil in an orderly fashion, even if the price drop was extraordinary. But could a hedge fund be struggling for survival? They wondered whether any major commodities funds were on the losing end of bullish oil bets, and were getting forced by margin calls from brokers into dumping massive positions. One trader at a major bank in New York called a colleague at one of the world’s largest hedge funds. During the conversation, they exchanged notes, suspicious that one or more commodities-focused hedge funds might be facing a moment of reckoning, one of the participants said. No fund could be pinpointed. By the end of the day, the person said, they were less suspicious — a view shared by week’s end by many market participants who spoke to Reuters. No one was naming a major hedge fund in dire trouble, or a computer trading algorithm that went haywire. And unlike last May’s flash crash in equities markets — when stocks fell by a similar 9 percent margin in just minutes — Thursday’s decline came in rolling cascades, playing out over at least 12 hours. Even after Brent fell to settle around $110 by the end of the day, crude prices were still up 38 percent from a year ago. “Since prices have been advancing well beyond any reasonable measure of value, Thursday’s declines felt more like orderly corrections than chaotic panics. There was no sense that anyone was ready to jump from the window,” said oil analyst Peter Beutel of Cameron Hanover in Connecticut. CASUALTIES The day left some commodities-heavy funds nursing wounds – weekly losses of 10 to 20 percent, according to several fund managers who invest in other hedge funds. Two of the sources said that London-based BlueGold, a fund known for taking aggressively bullish directional bets on oil in the past, had sizable losses. It was not immediately clear how much the fund dropped, and BlueGold declined comment. One money manager said of BlueGold’s head trader Pierre Andurand: “He’s had tougher weeks so I don’t think it’s game over.” Fund sources also cited losses at $20 billion Winton Capital, of around 2.2 percent, on Thursday. FTC Capital, a $300 million European commodities fund, lost 4 percent in one of its larger funds, the sources said. Neither fund was available for comment. In the space of just hours, the drop in the price of crude oil had shaved nearly $1 billion off the cost of supplying the world’s daily oil needs. That could be good news for gasoline consumers. But Eric Holder, the U.S. Attorney General who has recently formed a government working group to investigate manipulation in oil markets, had a blunt warning for oil traders. He wants proof the savings are being passed on to end users. “This working group was created to identify whether fraud or manipulation played any role in the wholesale and retail markets as prices increased. If wholesale prices continue to decrease, fraud or manipulation must not be allowed to prevent price decreases from being passed on to consumers at the pump,” Holder said on Friday. (Reporting by Matthew Goldstein, Svea Herbst, Jennifer Ablan, Emma Farge, David Sheppard, Claire Milhench, Zaida Espana, Robert Campbell and Josh Schneyer. Writing by Josh Schneyer. Editing by Stella Dawson)

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Japan Cabinet Ministers Express Confidence In U.S. Debt After S&P Lowers Outlook

April 19, 2011

April 19, 2011 1:27:39 AM By Kaori Kaneko and Tetsushi Kajimoto TOKYO (Reuters) – Japanese cabinet ministers on Tuesday moved to shore up confidence in U.S. debt after Standard & Poor’s threatened to lower its credit rating on the world’s largest economy due to a bulging budget deficit, touching a nerve with one of the largest holders of Treasuries. S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, slapped a negative outlook on the United States’ top-notch AAA credit rating on Monday and said there was at least a one-in-three chance that it could eventually cut it. Japan is the second-largest holder of Treasuries after China and its confidence in dollar-denominated assets has been steadfast until now, but the prospect of a ratings downgrade could test Japan’s faith in Treasuries. The increasing chance of a downgrade for the United States could also draw unwanted attention to Japan’s large debt burden, which is likely to grow larger as the government secures funding to rebuild after last month’s devastating earthquake and tsunami. “The United States is tackling fiscal issues in various ways, so I still think U.S. Treasuries are basically an attractive product for us,” Finance Minister Yoshihiko Noda told reporters after a cabinet meeting. If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields could erode the value of Treasuries held in currency reserves and push borrowing costs up in other countries. Japan’s reserves rose to $1.12 trillion at the end of March from $1.09 trillion at the end of February after Japan and other Group of Seven countries intervened to stem a rise in the yen. The bulk of Japan’s reserves are believed to be held in Treasuries. “Even if a private company downgraded, U.S. treasury bills are in demand from the world,” Economics Minister Kaoru Yosano said. Japan’s public finances are also in a dangerous state, and the timing of S&P’s warning could be a source of discomfort. Japan is set to compile an extra budget worth about 4 trillion yen ($48.4 billion) to start reconstruction after the March 11 earthquake and tsunami, which also triggered the world’s worst nuclear crisis in a quarter century. This is likely to be the first of several spending packages. Japan’s public debt is already twice the size of its $5 trillion economy, and policymakers have said new bond issuance would be needed after the first extra budget to pay for reconstruction costs. S&P cut Japan’s sovereign rating to AA-minus in January, although it said shortly after the March disaster that it did not expect to change its ratings stance on Japan. ($1 = 82.675 Japanese Yen) (Editing by Edmund Klamann) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Steve Blank: Lessons in Learning Faster for Stanford’s Hottest Startups

April 15, 2011

The Stanford Lean LaunchPad class was an experiment in a new model of teaching startup entrepreneurship. This post is part five. Parts one through four are here , Syllabus is here . Week 5 of the class Last week the teams were testing their hypotheses about their customers (who are the users, payers, buyers, etc.) This week they were testing one of the most confusing sections of a company’s business model — customer relationships — the activities used to “Get, Keep and Grow” customers in a physical or virtual (web or mobile) channel. (Internet investor Dave McClure coined the acronym ” AARRR ,” to remember the parts of customer relationships on the web.) Many of the students had heard phrases that fall under customer relationships before; “customer acquisition, SEO/SEM, public relations, Social Network, Advertising, Loyalty programs, cross-sell and up-sell” etc., but now they were actually trying to implement it. (If their team was a web or mobile app they actually had to buy Google or Facebook ads and create demand.) For some of the teams their expectation was if they built the product customers will come. Filing into the classroom I could tell that for some reality had just come crashing down on them. Seeing the lack of customer interest for the first time is always depressing. (The goal of the class was to get them to understand that in a startup, that was the norm not the exception. And to teach them a methodology of what to do about it.) It was making some of the teams question other parts of their business model (did they have the right customer, did they have the right product features to meet customer needs, etc.) The Nine Teams Present The first team to present was D.C. Veritas, the team building a low cost, residential wind turbine. During the week they interviewed 7 more companies and consultants, developed case studies for 20 different cities in 5 states, and finalized the bill of materials for the wind turbine. But the big project for the week was testing and analyzing Customer Acquisition Costs. The team put together their sales funnel and started testing demand. The results were disappointing. The most optimistic estimates showed that the residential wind turbine market was less than $20 million in year 5 and the costs to acquire the customers made this a money-losing business. After regrouping the team decided that a major pivot was in order. Perhaps residential customers were the wrong target? Maybe the wind turbine they were building was better suited to a different customer segment? They had gotten feedback from consultants and industry experts that cities and utilities might be a more receptive audience. What if they redesigned the wind turbine to be embedded into street and highway light poles? Then they could serve cities, lighting companies and utilities. Using the business model canvas, the changes to their business were obvious. (BTW, our definition of a pivot: it’s when you significantly modify one or more of the business model building blocks.) Three more weeks to go. Can the D.C. Veritas team discover whether there’s a real opportunity for their wind turbine in cities? The teaching team observed that the next few weeks are going to be interesting. Time to dig in and find out. Our next team up was Autonomow , the robot lawn mower farm weeder. Last week they had pivoted from customers who needed large areas mowed, to organic farmers who needed lower costs for weeding. In this week’s foray into farm country they spoke to five farm implement dealers and interviewed yet another farmer. However, their primary focus was thinking through how they would “get” their initial customers. In talking to farmers and farm equipment dealers they learned the farm-specific places to create demand; trade shows like the World Ag Expo and magazines such as Vegetable Grower , Ag Source , Farm Equipment and Tractor House . The team then put together a specific budget for initial demand creation. The teaching team suggested that was the research to date was great, but until they built a robot that could actually tell the difference between a weed and a plant, this would just be a paper exercise. They were engineers, certainly they could do better than that? The Autonomow team started thinking how they could prove that their paper business model was real. To see the slides, click here . PersonalLibraries Last week we asked the PersonalLibraries team: are there enough customers to make this a business? So during the week they ran more hands-on user testing, A/B tests, landing page conversion tests, and bought Google Adwords. The results were not impressive. The feedback they were getting was that the product was a “nice to have” but not a “hair-on-fire” product. Our feedback was, that their data seemed to say that their current users don’t want to spend money and will incur infinite support and infinite cost. Our suggestion was, “run away from the academic researcher market as fast as possible.” We offered that the team might want to expand their user research to think about new features and verticals (document management, law firms, lab managers with discretionary budget, etc.) To see the slides, click here . Agora Cloud Services The Agora team ended last week wondering whether they were 1) a true marketplace for cloud computing, where they provide both matching and exchange capabilities for real-time trading. Or were they 2) an information exchange, providing matching services for cloud computing buyers and sellers, providing matching services. This week they answered the question by “punting.” They decided they were going to start as information services, move to brokering, then prediction and finally evolve into a true market. They interviewed another 8 buyers/sellers/industry experts. Their results on whether they could acquire with Google Adwords was a bit sobering. Their first effort didn’t get much traffic: 6 clicks out of ~2000 impressions. Worse yet, each of these clicks cost about a $1.00. Reason? They had been bidding on keywords that are too generic (e.g. cloud, ec2, Amazon Web Services, etc.) Their ads of “Cloud Demand Prediction” hadn’t been catching the eyes of people searching for these keywords. So they picked more specific keywords such as, (cloud comparison, best cloud providers, etc). And they created ads with specific headlines, such as “Too many cloud providers?”, “Reduce your cloud spend”, etc). They also increased their daily campaign budget to $20.00. What they found was that the keywords that did have traffic volume are extremely expensive. Depending on the keyword, the first page bids were between $5.00 to $25.00 per click! Ouch. The team concluded that AdWords may not be the best channel to create demand. To see the slides, click here . The Week 5 Lecture: Channel Channels are how a company delivers its value proposition (i.e. its product or service) to its customers. There are two major channels – virtual (web/mobile) and physical channels – and the difference is dramatic. In one, physical goods move from a loading dock to a customer or a retail outlet. In another the product is offered and sold online. (If the product is itself bits, it may not only be sold online but is often also delivered or used online.) Our lecture talked out how to choose the right sales channel, how the channel makes money, how they’re motivated, and the economics of a sales channel. To see the slides, click here . —— The lesson for the students this week was failure . What we wanted to teach them wasn’t how to fail fast – any idiot can do that. We wanted to teach them how to recognize failure, learn from it, and pivot. It’s not about failing fast – it’s about learning faster. That’s the lesson at the heart of the search for a repeatable and scalable business model. Now deep into the class most of the teams are starting to rethink their initial assumptions. Which teams will continue to Pivot? Will any completely abandon their current business and pick a new one? Stay tuned. Visit Steve Blank’s blog : www.steveblank.com .

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CHART: America’s Descending Marginal Tax Rates

April 15, 2011

By Catherine Mulbrandon VisualizingEconomics.com (Click picture to enlarge) Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003). Orange is the top rate for income from capital gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax. Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people “qualify” for the top marginal rate. If you are interested here is the first 1040 form for 1913 . Tax Data: Married filing jointly , Capital Gains & Regular , Corporate Visualizing Economics is a website by Catherine Mulbrandon dedicated to publishing infographics about economic data. Visualizing Economics has been featured at Slate.com, NPR.org, WashingtonPost.com, The Big Picture, Seeking Alpha and on MSNBC Find more graphics explaining the U.S. economy at VisualizingEconomics.com

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CHART: Americans’ Race To Buy Bigger Homes

March 31, 2011

By Catherine Mulbrandon VisualizingEconomics.co m Our homes have changed in many ways over the last 70 years, including homes size, building technology, family size and a rise in standard of living. As people’s income increased over the 20th century, they bought bigger and better homes. This caused the median home value to go up even when taking into account the effect of inflation. For example, a full bath costs a lot since you need double plumbing for hot and cold water, while a flush toilet needs a home connected to a sewer system or septic tank. In addition, housing costs include both land and the house; where building space in limited — i.e. cities — land will increase in value with population growth. Median home value calculated by the U.S. Census factors in all of these changes and covers the housing markets in both rural and urban areas. The historical price index created by Robert Shiller, however, looks at home prices as an investment (like stocks), focusing on the resale prices of a subset of the standard, unchanged houses in large metro areas. Visualizing Economics is a website by Catherine Mulbrandon dedicated to publishing infographics about economic data. Visualizing Economics has been featured at Slate.com, NPR.org, WashingtonPost.com, The Big Picture, Seeking Alpha and on MSNBC Find more graphics explaining the U.S. economy at VisualizingEconomics.com Data Source for Housing Price Index from Robert Shiller’s Irrational Exuberance Median Home Values: Historical Census of Housing Tables Home Values ; “An Approach for Calculating Reliable State and National House Price Statistics” Characteristics: Housing Characteristics In The U.S. and Median and Average Square Feet of Floor Area

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Miles Mogulescu: GE: "Imagination at Work" in Building the Corporate State

March 30, 2011

I was watching Meet the Press on Sunday as a panel of Washington insiders offered a variety of views from across the political spectrum ranging from A to B. Halfway through the program an authoritative-sounding voice interjected itself into the proceedings to announce, “Meet the Press is Sponsored by GE: Imagination at Work” while a GE “Imagination at Work” logo filled the screen. And I thought, there you have it: The perfect embodiment of the emerging corporate state in which discussion of our economics and politics is dominated by a handful of multinational conglomerates; the middle class is hollowed out; wealth is concentrated in the top 1% who pay a lower and lower percentage of their personal and corporate income in taxes as the government is increasingly unable to afford basic services like public schools; political leaders blame teachers and unions for our financial plight and undermine collective bargaining; corporate functionaries rotate between business and government; corporations can make unlimited donations to political candidates who advance their interests; and the Washington pundit class calls on politicians to have the “courage” to cut Social Security and Medicare because “America is broke and we can no longer afford it”. GE : You may think they’re the guys who ” bring good things to life ” by manufacturing refrigerators and washing machines in American factories, paying living union wages and benefits, and selling affordable appliances to American consumers. But that was yesterday; this is today. Today, less than 6% of GE’s revenues come from its consumer appliance division. GE’s main businesses are global finance, media, energy, defense contracting, and lobbying the government for tax breaks and subsidies. GE is incorporated in New York and its worldwide headquarters are at 30 Rockefeller Plaza (“30 Rock”) where every Christmas they’re kind enough to display quite a lovely tree for the public to enjoy. But its wealthy top executives, like those of many American-based global corporations, are increasingly untethered from any interest in the economic and social well being of America as a whole. Here’s a snapshot of some of GE’s global businesses: • GE Media : Not only does GE sponsor Meet the Press , which is highly influential in setting the policy agenda in Washington. It owns 49% of NBC Universal whose media assets include not only the NBC TV network (including NBC News) and local stations in America’s largest cities, but Universal Studios (one of the 5 major US film studios), Telemundo, which is the second largest Spanish language TV network in the US, and such cable networks as Bravo, CNBC, MSNBC, SyFy, USA Network, the Weather Channel, and (in partnership with Hearst and Disney/ABC) A&E, the Biography Channel, the History Channel, and Lifetime, along with television networks in other countries around the world. There’s hardly an area of the motion picture, television, and TV news business where GE doesn’t own a substantial stake. • GE Financial Services : GE’s financial arm, GE Capital, is responsible for 30% of GE’s revenues and more than half its profits . If it were classified as a bank, GE would be the 7th largest bank in America. As the New York Times put it, “many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R. I. machines.” Since GE is not classified as a bank, it manages to avoid most of the regulation that applies to banks. Nevertheless, during the 2008 financial crisis, GE deployed a team of top lobbyists (GE spent nearly $40 million in lobbying last year) to convince the federal government to allow it to exploit a loophole ( it owns two small Utah savings and loans ) to become one of the largest recipients of Federal bank bailout funds. Unlike other banks like Bank of America, JP Morgan Chase, and Citigroup, it didn’t take the bailout funds through TARP and thus wasn’t subject to TARP restrictions, such as limits on executive compensation — in 2010, GE CEO and Obama economic advisor Jeffrey Immelt made $15.2 million. Rather it took the bailout funds in the form of $139 billion in Federal guarantees of GE Capital debt under the Temporary Liquidity Guarantee Program (TLGP) , nearly 25% of the total federal funds provided under the program. The Federal guarantees expires in 2012, a date known in banking circles as “the cliff”, since at that time the Federal government will have to make good on the debt if GE and other borrowers don’t honor their obligations. But despite the fact that a large part of GE’s profits are due to financial support from the Federal government, and the Feds are liable for a big part of GE’s debts, GE pays not a single dollar in Federal taxes. • GE Energy : The GE Energy Infrastructure unit of GE is made up of 3 GE companies, GE Energy, GE Oil & Gas and GE Water Process Technologies. While GE is developing a large solar energy business in the hopes of taking advantage of government-subsidized financing, and has launched its “Ecomagination” ad campaign in the hope of marketing itself as a green company, it has a record as one of the largest corporate polluters. Using EPA data, the Political Economy Research Institute found that GE is the 4th biggest producer of air pollution in the US. According to the EPA , only the US government, Honeywell and Chevron produce more Superfund toxic waste sites. But most striking, GE designed and built one of the six nuclear reactors at the Fukushima Daiichi power plant in Japan that is now spewing radiaton, and built two of the others in partnership with Toshiba. These Japanese nuclear plants are based on GE’s Mark 1 boiling-water reactor designs that were marketed by GE as cheaper and easier to build than other designs. But according to the New York Times , “it has long been thought to be more susceptible to failure in an emergency than competing designs.” GE, it brings good things to life. • GE Defense Contracting : GE is a key member of the military/industrial complex which, according to its own reports, in 2009 sold over $5 billion in military products both to the United States and foreign governments, including engines for naval vessels and military aircraft such as fighters, tankers, helicopters, surveillance aircraft and bombers. Among other things, GE provides alternative engines for the F-15 Fighter jets, one of which, costing $30 million, was shot down over Libya last week. Naturally, the nearly $40 million dollars a year GE spends on lobbying seeks to protect Federal spending on GE-manufactured armaments and doesn’t suggest lowering the deficit by cutting America’s defense spending which nearly equals the aggregate total defense spending of every other country in the world combined. • GE Lobbying and Tax Avoidance Divisions : While not officially operating divisions, GE’s tax avoidance, lobbying, and political contribution operations may effectively be among the most profitable areas of the GE empire. According to an investigative report in last week’s New York Times , in 2010 GE reported $14.2 billion in worldwide profits, including $5.1 billion from US operations, but GE owed exactly $0 dollars in Federal taxes. In fact it claimed a tax benefit from Uncle Sam of $3.2 billion. Over the past 5 years, GE has accumulated $26 billion in American profits, yet received $4.1 billion in net Federal tax benefits. Yet contradicting Republican political claims that cutting tax on corporations and the wealthy creates American jobs, since 2002, GE has eliminated 20% of its US work force while expanding job creation overseas. According to the Times : It’s extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax laws firm. Indeed, the company’s slogan ‘Imagination at Work’ fits this department well. The team includes officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress…Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law. It’s a classic example of how the modern corporate state operates. Moderately paid employees at government regulatory agencies and key congressional committees aspire to lucrative jobs at GE and other major corporations when they retire from government if they write regulations and laws which enhance corporate profits. Corporations then rotate some of their employees back for new stints in government service where they insure rules and laws favorable to the corporations. According to the Center for Responsive Politics , GE spent nearly $40 million in lobbying in 2010 (over $200 million in the past decade) and contributed $2,230,270 to Republican and Democratic House and Senate candidates in 2010. This doesn’t count things like an $11 million donation from GE’s foundation to schools in the district of Democratic Congressman Charles Rangel, then Chairman of the House Ways and Means Committee, which “coincidentally” came a month after Rangel reversed his position to support continuation of a tax break which, according to a regulatory filing, had saved GE more than $1 billion on US taxes in the 3 years after it was enacted. And it doesn’t include perhaps GE’s biggest political coup of all, President Obama appointing GE CEO Jeffrey Immelt — the man who presided over GE’s success in avoiding taxes and eliminating American jobs — to replace Paul Volcker as head of Obama’s panel of economic advisers, the newly renamed President’s Council on Jobs and Competitiveness. It’s the ultimate case of regulatory capture in which the industries being regulated by the government come to dominate the agencies charged with regulating them. This time it’s the White House itself. The man who presided over GE’s success in avoiding American taxes on its $14.2 billion in profits and in eliminating 20% of its American workforce gets to advise the president on how to rebuild the economy and create American jobs. (Hint: I don’t think it will include raising taxes on the rich, reducing military spending, strengthening regulation of business, or increasing worker rights.) So there you have GE’s “imagination at work” . A bank that’s not a bank but gets over $100 billion in Federal bank bailout loan guarantees. An energy company that builds the nuclear reactors that are radiating people in Japan. A major defense contractor that profits from America’s wars. A media company that owns TV networks, movie studios and major news operations. A political lobbyist and campaign donor whose executives rotate between business and government and back again and create loopholes that allows the largest corporation in the world to pay no taxes. A corporation whose $15 million a year CEO is appointed by President Obama to be his chief advisor on creating jobs. It’s the very definition of the corporate state at work. Fighting back to protect democratic rights and the income and economic security of the middle class is in some ways a more complicated in an ostensibly democratic, but increasingly corporate-run, country like the United States than it is more directly authoritarian societies like those in the Middle East. But we have no choice but to fight back if America is to continue as a broadly middle class nation where most people can realistically hope that their children will live a better life than they do. The protests sparked by Republican overreaching on behalf of corporations in states like Wisconsin, Ohio and Michigan may be the beginning of a movement to reclaim America’s middle class dream. This past weekend, 250,000-400,000 people marched in London to protest the conservative government’s draconian cuts in social services and the failure of some of Britain’s largest corporation to pay a fair share of taxes. It’s vital that the movement they began cross the Atlantic Perhaps a good next step in America would be a well-organized boycott of GE, accompanied by mass demonstrations at GE headquarters and sales outlets, to make GE the poster child for corporate greed in response to its failure to pay US taxes on its billions in profits while exporting jobs overseas. It wouldn’t, by itself, stop GE. But it might focus the country on the manifest injustices wrought by companies like GE and encourage the emergence of a progressive Tea Party-type movement against the power of the growing corporate state.

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Ian Fletcher: A Review of Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism

March 25, 2011

If you’re not happy with the way the U.S. economy is being run right now, you’ve been pretty much stuck talking to leftists to get any serious in-depth dissidence. With the exception of a few distinguished rightist critics like Paul Craig Roberts, a former Reagan appointee at the Treasury Department, most people who do hard-hitting across-the-board criticism of our present variety of capitalism are liberals and beyond. So if pink isn’t your political color, you’re pretty much stuck with narrow-bore criticism of the recent financial crisis–most of which comes down to “people were stupid and crooked.” Thus it is with great pleasure that I review Ha-Joon Chang’s new book 23 Things They Don’t Tell You About Capitalism . This is one of the toughest assaults on what passes for capitalism in the U.S. these days to come out in decades–but it is not especially a liberal or leftist book, and thus supplies the profound need America has for economic criticism that is both radical and bipartisan. There’s plenty here to offend both Republicans (Americans have no intrinsic right to be rich) and Democrats (immigration makes local workers poorer), but plenty to delight both, insofar as they are looking for real answers. This is a theoretically profound book, but emphatically not a book for theorists. It is thus a book for anyone who has grasped that America is being strangled by a set of myths about what capitalism is and how it works. Debunking these myths is thus job one. Ha-Joon Chang is a South Korean economist currently teaching at Cambridge University in England. His academic specialty up to now has been protectionism and state industrial policy, i.e. two things that conventional economics says can’t work. But his own native land is visible proof that they can. And this is just his starting point for exposing the flaws in conventional economic wisdom. Because Chang is so spot-on with most of what he has to say, I shall keep my commentary to a minimum and just reel off his insights in order. To wit: Thing 1: There is no such thing as a free market . Pace the glorification of the free market in recent years, this is largely a mythical animal. This is not just because of government interference, it is often because the private sector doesn’t want to be free, regardless of what it says. Even when we could hypothetically free up markets, we frequently wouldn’t be better off it we did. Thing 2: Companies should not be run in the interest of their owners . Not entirely, that is. Even the former king of “shareholder value” himself, ex-GE CEO Jack Welch, has recently conceded this. Long-term success requires taking seriously everyone who contributes to a business: not just equity investors but also employees, suppliers, customers, and plant communities. Thing 3: Most people in rich countries are paid more than they should be . Neither you nor I did anything to deserve to be born in this country–or after the invention of antibiotics, for that matter. This doesn’t mean we should feel guilty; it does mean we should remember we succeed in large part because of what society we belong to, not just due to our own efforts. Thing 4: The washing machine has changed the world more than the Internet . The washing machine and other labor-saving devices made feasible the radical change in women’s roles we know as feminism. Similarly, without the humble air conditioner, America would have no Sunbelt. Twitter doesn’t come close. Thing 5: Assume the worst about people and you will get the worst . Yes, people’s behavior is maybe 70 percent self-interested. But the remaining 30 percent is a big chunk, and you can’t make sense of even a capitalist economy without taking it seriously. Companies (and countries!) that understand this do better than those that try to run on selfishness alone. Thing 6: Greater macroeconomic stability has not made the world economy more stable . Brutal anti-inflationary policies can easily do more damage than the inflation they combat. Protecting the value of a nation’s money is less important that protecting its economy as a whole. We’ve had more financial crises the more obsessed with hard money we’ve become. Thing 7: Free-market policies rarely make poor countries rich . As I discussed in Chapter Six of my own book, every developed nation from England down to the present day got that way through protectionism and state industrial policy, not pure free markets. Even the good ol’ USA played this game from Independence until after WWII. Thing 8: Capital has a nationality . Capital mobility causes plenty of mischief in our overly globalized world, but it’s a myth that capital has been denationalized into free-floating ether. Money always belongs to somebody, and those somebodies have passports and home addresses. It matters who’s in charge, and the answer is never “nobody.” Thing 9: We do not live in a post-industrial age . The myth that we do has just led to the neglect of U.S. manufacturing while Japan and Germany remain quite competitive in hard industries despite paying decent wages. You can’t download a ride to work or the supermarket. Thing 10: The U.S. does not have the highest standard of living in the world . Much bad policy, both here and abroad, has been based on the idea that the American version of capitalism is observably superior. But our per-hour average income ranks about 8th in the world on a purchasing-power parity (read the book to find out what that is) basis. Thing 11: Africa is not destined for underdevelopment . Africans aren’t poor because of any mysterious or immutable factors. In the 1960s and 1970s, they were making progress. They’re poor for the same reasons other nations were once poor–which means that their poverty can be fixed if the apply the same solutions other nations have. Thing 12: Governments can pick winners . Not every time, and don’t get careless, but the free market isn’t always right, and the government isn’t always wrong. In the U.S., government was responsible for (in order) the Erie Canal, the Transcontinental Railroad, the Interstate Highway System, and the Internet. Not to mention the aircraft and semiconductor industries. In East Asia, governments did even more. Thing 13: Making rich people richer doesn’t make the rest of us richer . Trickle down economics doesn’t work because wealth doesn’t trickle down. It trickles up , which is why the rich are the rich in the first place. Thing 14: U.S. managers are overpriced . America has the highest-paid corporate managers in the world. We don’t have the best-performing industries. Are we getting our money’s worth? You do the math. Thing 15: People in poor countries are more entrepreneurial than people in rich countries . Yup: they open up fruit stands at the drop of a hat. This doesn’t stop them from being poor, so stop telling them they need to be more “entrepreneurial.” Their problems lie elsewhere. Thing 16: We are not smart enough to leave things to the market. In the real world, markets don’t take care of themselves. They need to be regulated. How much and in what way is legitimate party politics, but an unregulated economy is a dangerous fantasy. Thing 17: More education in itself is not going to make a country richer . You need not just education, but industries for educated people to work in. And paper-pushing education isn’t necessarily the kind of education you need–something America forgets with its neglect of serious vocational training. Again, ask Germany and Japan. Thing 18: What is good for General Motors is not necessarily good for the United States . There was (maybe) once a time when the interests of giant corporations were reasonably closely aligned with the interests of the national economies they reside in. That time is long gone. Multinationals will treat nations as hotels if we let them. Thing 19: Despite the fall of communism, we are still living in planned economies . Capitalist planned economies, that is–only nobody calls it that when we get the results that happy suburban consumers like ourselves want. The very fact that people are whining to Washington to solve our economic problems reveals how important planning is in this country. Thing 20: Equality of opportunity may be not be fair . A “get what you deserve” society sounds good, and in many ways it is, but there need to be some minimums for what even the losers get. Thing 21: Big government makes people more open to change . Because it makes them more able to take risks. Some economies with big welfare states do very well, thank you. It all depends on what kind of big government you have. If big government is always a loser, why is America borrowing money from Sweden ? Thing 22: Financial markets need to become less, not more, efficient . Efficiency in financial markets isn’t the same thing as efficiency in other industries. It can easily just mean “efficiently sinking into debt.” Even we Americans understood this from about 1930 to 1980; time to relearn it. Thing 23: Good economic policy does not require good economists . Most of the really important economic issues, the ones that decide whether nations sink or swim, are within the intellectual reach of intelligent non-economists. Technical Economics with a capital “E” has remarkably little to say about the things that really matter. Concerned citizens need to stop being intimidated by the experts here. On this last score, reading Dr. Chang’s book would be a good place to start.

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Eric J. Weiner: Gaddafi’s Long Reach

March 25, 2011

Regardless of how the Libyan revolt plays out, in the global economy the humanitarian crisis is just one deadly aspect of the fighting. Thousands have been killed and the fabric of society has been shredded in what has become a civil war. But to the nations of Europe that have come to rely on a steady flow of oil and petrodollars from Moammar Gaddafi’s nation, the destruction of what could be called Libya Inc. is likely to be the most painful blow. When the United Nations lifted sanctions on Libya in 2003, after Gaddafi’s regime accepted responsibility for the bombing of a Pan Am jet over Lockerbie, Scotland, many European countries rushed to do business with Gaddafi, despite his erratic history. Why? Because Libya was sitting on a deep, largely untapped reservoir of oil and a mountain of cash. It has more than 40 billion barrels of proven petroleum reserves , ninth most in the world, and its central bank holds $110 billion in foreign exchange reserves while its sovereign wealth fund, the Libyan Investment Authority, has $70 billion more to invest. Seeing the opportunity, Europe pounced. As a result, today just about all of Libya’s major trading partners are European. Take Italy, for example. Italy is by far Libya’s most active business partner, with more than $12 billion in two-way trade annually . Libya supplies almost a quarter of Italy’s oil, and Italy is the world’s largest importer of Libyan crude. Libya also owns 7.5% of the Italian bank UniCredit and has investments in Fiat, the defense conglomerate Finmeccanica, the energy company ENI, the soccer team Juventus and a variety of other Italian businesses. This financial backing helped Italy stave off the most damaging effects of the global recession that started in 2008. In response to international pressure, Italy has frozen some Libyan assets, but none belonging to the country’s central bank or the Libyan Investment Authority. However, Italy’s hardly the only cash-strapped European nation to forge significant economic ties with the Gaddafi regime. In 2009, the European Union’s two-way trading with Libya amounted to more than $37 billion , with Germany, France and Spain among its leading partners. Naturally, the bulk of this was petroleum because Libya supplies more than 10% of Europe’s oil. For a sense of just how much that is, consider that the United States, which had just $2.6 billion in two-way trade with Libya in 2009 and imports virtually no petroleum from the country, gets roughly 10% of its oil from Saudi Arabia. That’s what Europe is losing as Libya burns. In many ways, the nation with the most at stake economically is Britain. Although its annual trade with Libya amounts to less than $2.5 billion , Britain has recently emerged as a major target for Libyan investments. Libya has spent hundreds of millions of dollars on prime London commercial real estate. And last year, a senior executive with the Libyan Investment Authority announced that the fund had earmarked $8 billion exclusively for Britain . This pledge was welcome news for the British government, which has been trying to sell more than $40 billion in state-owned property to help address its yawning budget deficit. In short, it needs the money. Libya’s fascination with Britain stems from Gaddafi’s second-oldest son and presumed political heir, 38-year-old Saif al-Islam, who earned a doctorate from the London School of Economics, owns a $16-million mansion in London’s fashionable Hampstead Garden neighborhood and even opened the Libyan Investment Authority’s first foreign office in London. Over the years, the erudite younger Gaddafi charmed his way into British society, befriending Prince Andrew and visiting Buckingham Palace and Windsor Castle. Of course, now that he’s become a full-throated defender of his father’s savagery, Saif’s erstwhile friends are rushing to distance themselves. The London School of Economics, which has come under heavy criticism for accepting a $2.4-million donation from a Gaddafi charity, is looking into accusations that he plagiarized parts of his doctoral thesis. And his abandoned London home has been occupied by anti-Gaddafi protesters from throughout Britain. But none of these reprisals changes the cold reality that with Libya descending into chaos, Europe is losing a major partner just when its key economies are struggling to regain their footing. Though the timing may be terrible, the outcome shouldn’t be surprising. Europe’s leaders chose to look past the mercurial Gaddafi’s violent past, seeing only Libya’s fortune. And in a matter of weeks, Gaddafi has destroyed everything. As populist movements spread from North Africa to the Arabian Peninsula, where protests have erupted in Bahrain and Yemen, the U.S. will probably face similar issues over its troubling economic alliances, particularly with Saudi Arabia. So U.S. leaders would be wise to pay close attention to what happens with Libya and Europe. An entire continent is wondering: If not the Gaddafis, then who? And it probably won’t be long before America is asking the same questions about its friends as well. Originally published in the Los Angeles Times .

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Dr. Philip Neches: AT&T and T-Mobile: Back to the Future

March 24, 2011

Many analysts complain, with justification, that the proposed merger of T-Mobile into AT&T would create a duopoly in domestic cell phone service. The combined company would have roughly 42% market share; Verizon, the current leader, would come in second at 32%; Sprint would be a poor third at 17%; other carriers divide up the remaining 9%. ( GAO 2009 data ) After three decades of invention, growth, and consolidation, we would be back to 1982. That’s when the FCC granted the first commercial license for cellular service to Advanced Mobile Phone Service, Inc. — a subsidiary of AT&T. The license came with a hard-fought condition: the FCC would license a second carrier in each city. The cell phone, like so much of the technology we take for granted today, was invented at Bell Labs . A 1947 paper by D. H. Ring (that’s really his name!) described the idea of using many low-power transmitters, each serving a relatively small “cell”. The cells would be arranged in a hexagonal “honeycomb” pattern. The paper described a hand-off of a call from cell to cell as the caller moved around. It also described how the same frequency could be re-used in different cells, allowing far more calls to be handled. The concept was far beyond what even Bell Labs could implement in those days of relays and vacuum tubes. It sat on the shelf until the 1960s, when Richard Frenkiel and Joel Engel took up the challenge by applying integrated electronics and computers. President Clinton recognized their work with the National Medal of Technology in 1994. In 1971, AT&T proposed the first cellular service concept to the FCC. Years of hearings followed. The two-carrier decision emerging along the way to first field trials in 1978 in Chicago and Newark. By 1982, it was ready for to go commercial. The same year, AT&T broke up into seven “Baby Bell” regional operating companies and “Ma Bell”: long distance, Bell Labs, and Western Electric. The FCC’s earlier decision to require at least two cell phone carriers per city proved prescient. While the Baby Bells lumbered into the cell phone business, literally hundreds of entrepreneurs stormed out of the gate, each building out service in a single city. A few years earlier, the same thing happened with cable television service. Entrepreneurs wired cities and towns. Then a few entrepreneurs started consolidating local operations into larger and larger regional, and ultimately national, providers. A few, like Comcast in cable and McCaw in wireless, became giants. At the same time that local systems were consolidating into regional and national systems, both cable television and cellular phone service started to replace their original analog technologies with digital. Digital expanded the capability of both services by factors of 10 to 100 (number of channels for cable, number of calls for cellular), while lowering the cost. Plus, digital meant entirely new kinds of wireless services became possible: text messaging, mobile e-mail, mobile Internet, and so on. Demand exploded, and in less than a decade, cellular went from relative luxury to everyday necessity. The United States was the first nation to have cell phones, and was the first market to saturate: today 96% of Americans have cell phones . Market saturation means that carriers have less motivation to innovate to win new customers, because there are few unserved customers left to win. Competition among cellular carriers devolved into a stark battle to retain customers and margins. That’s hard enough to do when you have strong differentiation: it’s very, very hard when there is little difference in the nature, quality, or price of the service. Innovation is still very important in a late-stage market. But it’s more difficult, because the new product or service must fit into the existing base. Old customers will not abandon everything they are used to even for a very compelling innovation. That is why products like Apple’s iPhone and iPad are so hot: they make existing services easier to use and provide a platform for applications that provide new utility on top of existing services. Thus AT&T was willing to concede so much to Apple to be the exclusive provider of cellular service for iPhones. It may have been a Faustian bargain for AT&T, however. While the iPhone got existing AT&T users to upgrade their service and won customers away from other carriers, iPhone users put far more stress on AT&T’s network, driving up their costs. While good for AT&T’s top line, it is not entirely clear that it was good for their bottom line. The cellular industry adopted so-called “friends and family” plans as a way to retain customers (reduce “churn”). These pricing plans offer reduced monthly rates for keeping several phones active with the same carrier. They also eliminate per-minute charges for calls to selected phone numbers, and, more important, to any cell phone served by the same carrier. The larger the user base of a carrier offering a “friends and family” plan, the better the economics turn out for both the carrier and the customer. The customer benefits from access to more cell phone numbers for which per-minute charges are waived. The carrier benefits from having the contract be “stickier” to more customers: fewer customers are likely to give up the benefits of the family plan by switching to another carrier, thus saving the carrier the marketing costs of acquiring another customer or re-acquiring the same customer. Why is this so important? Because of a dirty little secret of the telecommunications service business: it costs more to market to customers than to handle their calls. Thus, the T-Mobile acquisition by AT&T could be particularly bad for Sprint. Ironically, Sprint was the first large carrier to offer “friends and family” pricing, starting in their long-distance business. If Sprint and T-Mobile combined, the resulting carrier would still be third, but a close third (32% Verizon, 30% AT&T, 29% Sprint/T-Mobile). The carriers would be more closely matched on the criterion that could have the most influence on buying decisions: the number of other users your calling plans could access at reduced rates. Three well matched competitors would be better than two giants, a runt, and a crowd of pygmies, some say. Thus, it is conceivable, although perhaps not likely, that the FCC or DOJ will reject the deal out of hand, giving Sprint another shot. The larger story is that the US cell phone business has matured. It is no longer the wild rush of rapidly advancing technology and raw entrepreneurship in pursuit of new users. To find those conditions, one now has to look to the developing world. And indeed, that’s where most of the innovation is happening. But for the US, we could be headed for an effective duopoly of two giant carriers. Back to the future. The author was a senior officer of AT&T and a member of the Bell Labs Executive Council from 1992 to 1996. He also served on the Board of Directors of Evolving Systems, Inc. , a supplier of telecommunications software, from 2005 to 2011.

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Your Home’s Value Never Actually Rose [CHART]

March 24, 2011

By Catherine Mulbrandon VisualizingEconomics.com A $10,000 house in 1890 would be worth almost the same in real dollars in 2010 but more than $350,000 in nominal dollars in 2010. Which matters to the home seller, real or nominal prices? If a seller is holding a mortgage then the question is: Can I sell for more or less than I owe? Since that loan amount is not adjusted for inflation then the nominal value is more importent both the seller and the mortgage holder. It is when nominal prices fall that banks have trouble with high rates of mortgage defaults. But if you are looking at the long-term value of real estate as an investment (compared to stocks or bonds) then you need to take into account the real growth. Data Source for Housing Price Index from Robert Shiller’s Irrational Exuberance . Visualizing Economics is a website by Catherine Mulbrandon dedicated to publishing infographics about economic data. Visualizing Economics has been featured at Slate.com, NPR.org, WashingtonPost.com, The Big Picture, Seeking Alpha and on MSNBC. Find more graphics explaining the U.S. economy at VisualizingEconomics.com

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Japan’s Economy Will Avoid A Meltdown

March 17, 2011

TOKYO (Reuters) – In these dark hours, Japan would do well to heed former White House Chief of Staff Rahm Emanuel’s memorable maxim that you never want a serious crisis to go to waste. As the nation struggles to avert a nuclear catastrophe on the heels of a deadly earthquake and tsunami, it takes a huge leap of faith to foresee any positives emerging from the triple disaster for a stagnant, rapidly aging and heavily indebted economy. Yet a number of experts say the disaster might — just might — shake Japan out of its collective economic and political torpor of the past two decades and provide a new sense of purpose for a nation that has seemingly lost its way. They also say that widespread fear of a Japanese fiscal death spiral is mostly overblown. Masaru Hamasaki, a senior strategist at Toyota Asset Management in Tokyo, said the severity of the challenge facing Japan should not be underestimated. The numbers killed in last Friday’s quake centered on Sendai in northeastern Japan will far exceed the 6,400 toll from the 1995 temblor in Kobe. Many more people have been affected directly and indirectly, for instance by power cuts and the risk of radioactive fallout from the crippled Fukushima Daiichi nuclear power plant. The usually bustling streets of Tokyo were eerily empty this week. And the economy is even less vigorous than in 1995, smack in the middle of Japan’s so-called Lost Decade. “But out of this crisis affecting a large part of the population, a sense of ‘public morality’ is already building up,” Hamasaki said. “If the country’s leaders can harness this spirit in the long term, then I’m sure Japan will move in a positive direction.” This civic duty, an impulse of shared responsibility, is likely to count for more than any spreadsheet in trying to assess the impact on Japan’s bond markets of financing the still unknowable bill of rebuilding after the quake, the strongest on record here. Some pundits fear that adding substantially to a gross debt burden that is already more than twice Japan’s national output will be the straw that breaks the bond market’s back. “The debt will rise significantly. Until now, the country could finance its obligations at relatively low rates. If additional debts come on top now, there will be questions about solvency,” Peter Bofinger, a member of Germany’s “wisemen” council of economic advisers, said in an interview with the German daily Sueddeutsche Zeitung published on Monday. Economics Minister Kaoru Yosano has acknowledged that, unless it changes its ways, Japan faces a fiscal dead end. But the Sendai quake is very unlikely to trigger that day of reckoning. NO FOREIGN MONEY NEEDED On paper, Japan’s liabilities will hit 204 percent of GDP this calendar year, larger than 137 percent for Greece and 113 percent for Ireland, according to the Organization for Economic Co-operation and Development (OECD). But Japan is not about to follow Greece and Ireland into the emergency debt ward. Both countries have needed a bailout arranged by the eurozone and the International Monetary Fund. For a start, the government owes nearly half of the debt to other arms of the government such as the Japan Post Bank and the Government Pension Investment Fund. The Bank of Japan also owns a tidy chunk of Japanese Government Bonds (JGBs). Net debt, taking account also of Japan’s official foreign reserves, will reach 120 percent of GDP this year, according to the OECD. That will be the highest among major economies, but the burden is not significantly greater than that shouldered by Belgium and Italy in the 1990s, both of which avoided a sovereign debt crisis. True, net debt has risen sharply from 80 percent of GDP in 2007, and the government is running a budget deficit of close to 10 percent of GDP even before counting the cost of the quake. But whereas about 70 percent of Greece’s public debt is held by foreigners, domestic investors hold 95.4 percent of Japan’s bonds. This gives Tokyo’s policymakers a huge advantage. “They have much more room to maneuver than Greece or Ireland would have in similar circumstances,” said Marcus Noland of the Peterson Institute of International Economics in Washington. “One has to assume Japanese residents are a much less footloose debt-owning class than, say, London hedge funds.” Quite apart from the fact that low-yielding JGBs have proved a good investment in recent deflationary years, Noland expects banks, insurers and pension funds will readily accede if the government asks them to buy extra quake reconstruction bonds. In a country with a high degree of social cohesion, the loyalty of individual investors in Japan’s hour of need can also be taken for granted. “If the government says ‘we’re going to tighten our belts; cut expenditure in other areas and shift spending to rebuild Sendai; and we’re going to issue more bonds at the margin to make that happen’, I simply do not believe the Japanese public is going to dump Japanese bonds,” Noland said. Jeremy Lawson, an economist with the Institute of International Finance, a lobby group for global banks in Washington, agreed. The trajectory of Japan’s debt is unsustainable, but, in the short term, “domestic residents may display even greater willingness to lend to the government as an act of national solidarity,” Lawson said in a report. A RICH, AGING SOCIETY That’s today, though. What about the future? If Japan’s households are avid buyers of bonds, it is because they are sitting on a mountain of savings — some 1,400 trillion yen ($17,320 billion), compared with approximately 870 trillion yen in outstanding long-term government bonds. Japanese workers built up that huge nest egg as they toiled successfully to rebuild their country from the ashes of World War Two. But the young workforce that catapulted Japan ahead of West Germany in the 1960s to become the world’s second-largest economy is now aging fast. Pensioners are now spending those savings. Little noticed by the rest of the world, Japan’s household savings rate has in fact already plunged to about 3 percent of disposable income from a peak of 18 percent in the early 1980s. Despite the government’s big budget deficit, Japan still enjoys surplus national savings, reflected in a current account surplus, thanks to high corporate savings and a large income stream from its overseas investments. Japan is the world’s largest creditor nation, with net external assets of 225.5 trillion yen, according to official figures. The question preoccupying economists is how long it will take for the savings rate to erode and drive the current account into deficit. At that point, Japan will have to import capital to balance its books. That’s when unexpected shocks like the Sendai quake could trigger a financial as well as a humanitarian crisis by undermining the confidence of foreign investors. “Without policy adjustment, the space for household assets to absorb public debt will continue to shrink over the medium term,” said Kiichi Tokuoka, an economist with the International Monetary Fund. In a January 2010 working paper, he said Japan’s gross public debt could exceed households’ gross financial assets by 2015 or 2020, depending on the accounting treatment. “Although these results do not imply any specific turning point for public debt financing, they suggest that if current trends continue, domestic financing could become more difficult toward the mid-2010s, placing a premium on other sources of funding, including from overseas,” he wrote. BE BOLD George Magnus, senior economic adviser to UBS in London, guessed that three years was too short a time for Japan to reach the turning point. But 10 years was too long because the aging of the workforce was inexorable. “At some point in the medium term, I do think there’s a sporting possibility that Japan will start to run trade deficits and have to start selling debt abroad,” said Magnus, the author of a study on the economics of aging. “And that probably is when the crunch will come, because people will want to see Japan taking material measures to manage its public debt over the longer term.” Crucially, no respected economist is arguing that Japan should think twice about spending right away whatever is needed to put the economy back on its feet. One of the lessons from the recession brought on by the collapse of investment bank Lehman Brothers in 2008 is that the increase in the public debt ratio in Japan and other countries was not due to fiscal spending to stimulate the economy. Rather, it was more due to the abrupt slowdown in economic growth. The government should do the same today, said Sebastian Mallaby, an economist with the Council on Foreign Relations in New York. “It should be willing to act aggressively to increase the budget deficit in order to have the money to rebuild the damaged areas promptly,” he wrote on CFR’s website. “Now is not the time for being cautious or conservative. Now is the time for a bold response, and I’ve got every reason to think that they will do that,” he added. POLITICAL MESS When the time comes to rein in the budget deficit, Japan already knows from years of experience what Greece and Ireland and other countries are just discovering: there is no secret recipe. It’s “simply” a question of agreeing on a politically acceptable mix of tax increases and spending cuts. The IMF and other agencies have zoomed in on Japan’s low rate of consumption tax, five percent, as the most promising candidate to raise the revenue needed to help stabilize the government’s debt-to-GDP ratio. In its 2010 review of Japan, the Fund projected that by 2015 gross debt would reach 250 percent, and net debt 154 percent, unless there was a shift in policy. The government could raise some 2.5 trillion yen for each 1 percentage point rise in the consumption tax. But a hamstrung political process has hobbled policymaking. Prime Minister Naoto Kan is the fifth man to hold the job since 2006, and his popularity ratings have been sinking like a stone, further reducing his chances of getting budget bills through a split parliament. Indeed, just hours before Friday’s earthquake, Kan, accused of illegally receiving campaign funds, was rebuffing calls from an emboldened opposition for his resignation. The tantalizing question now is whether the Sendai tragedy will change not only Japan’s economic and fiscal outlook but also its politics. “Kan needs to show his leadership to craft a big supplementary budget. This is the time to show his leadership by gathering ideas from the ruling and opposition parties very quickly,” said Hamasaki, the Toyota Asset Management strategist. POLITICAL GAME-CHANGER? Pessimists suspect any political truce sealed in a moment of national solidarity will be short-lived once reconstruction is under way and the economy is recouping the output lost due to the disaster. After all, the bursting of Japan’s asset bubble in the early 1990s failed to jolt the political class into enacting the difficult structural reforms the economy needed. Japan’s nominal GDP is stuck at the level it was at in 1992. But Noland with the Peterson Institute for International Economics said that successful crisis management on Kan’s part would go a long way toward reassuring voters still unsure whether his Democratic Party of Japan is a credible alternative to the Liberal Democratic Party. The LDP has governed Japan for most of the past 60 years. It lost power to the DPJ in 2009. “Cementing a real two-party system could create ‘more normal’ politics and push Japan into becoming a truly modern, functioning democracy in the 21st century,” Noland said. “It would make governance more complicated, but it would bring issues such as the coddling of the agricultural sector, immigration reform and defense policies out into the open in a much more transparent, democratic way,” he added. The alternative is that Sendai turns out to be Japan’s “Katrina” moment, Noland said, referring to the U.S. authorities’ ineffectual initial response to the hurricane that ravaged New Orleans in 2005. “If they do a bad job, then Japan’s aging and risk-averse electorate could go flocking back to the LDP and essentially re-establish the status quo ante of the last 60 years,” he said. Seen in this light, the implications for Japan’s economy and investment outlook are profound. Like everyone, Jim O’Neill, chairman of Goldman Sachs Asset Management in London, is waiting to see how fast-changing events at the Fukushima plant play out. But he said the crisis could act as a catalyst in much the same way that the second oil price shock of the late 1970s prompted an all-out national effort by Japan to improve energy efficiency. “My hunch is that this is so big it will galvanize change and force Japan’s leaders to do more,” he said in an email. (Additional reporting by Chikafumi Hodo and Stanley White in Tokyo and Noah Barkin in Berlin; editing by Jim Impoco and Claudia Parsons) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Otaviano Canuto: Whither the U.S. Dollar

March 16, 2011

Is the U.S. dollar really doomed? If it were for some headlines, you would certainly think so. Because of the “Made in the U.S.A” financial crisis, growing budget deficits and debt, increasing dissatisfaction with the international monetary system, and the emerging power of countries such as China, many voices are now proclaiming the eventual demise of the dollar. Not so fast, some discerning minds warn. One of them is Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, and author of the recently released book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System . He came to present his new book to the World Bank this week, sparking a fascinating debate not only about the future of the dollar, but about global politics. “I’m not predicting its demise, but that it [the dollar] will share the stage,” Eichengreen concluded. But to get here, the professor first debunked four prevailing myths: Widespread international use of a currency confers on its issuer geopolitical and strategic leverage. Incumbency is an overwhelming advantage in the competition for reserve currency status. The dollar is now doomed to lose its international currency status. There is room for only one international currency. As Exorbitant Privilege makes clear, it’s a country’s position as a great power that results in the international status of its currency, not the other way around. Regarding the incumbency “myth,” the British pound, for instance, remained the dominant international currency until after World War II, even after the U.S. had overtaken Britain as the leading economy. And what about the “menacing” euro, the emerging Chinese reminbi, and the Special Drawing Rights (SDRs) from the International Monetary Fund? Professor Eichengreen makes clear that despite their growing importance, they cannot yet compete with the currency of the U.S., still the largest economy in the world with the largest and deepest financial markets of any country. But all of the above doesn’t mean that the dollar will remain untouched. In fact, there is room for more than one international currency. “There is no reason that only one country can have financial markets deep and broad enough to make international use of its currency attractive,” writes Eichengreen. For him, the emerging world is one in which several international currencies coexist: dollar, euro, and reminbi. “We are definitely moving into a world with emerging currencies, and multipolar monetary and financial systems,” he explained at the World Bank. Will this be a better international system than what we have now? Only time will tell, but for now many like Professor Eichengreen and I believe such a system will better reflect the reality of our multipolar world, and therefore, make it more stable. This blog was originally posted on the World Bank Institute Growth and Crisis website.

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Dan Dorfman: More Outrage Coming at the Pump

March 13, 2011

Ugh! If you’re planning a getaway for the July 4 weekend, there’s a chance you may have to shell out another $1 to $1.25 a gallon at the gas pump. That essentially is one of the ugly travel scenarios that emerges from a current analysis of future oil prices from Roubini Global Economics, headed by Nouriel Roubini, one of the country’s more prominent economic bears. First, let’s look at the background of this unhappy prospect, which emanates from the volatile Middle East. Thanks to promises of billions in “benefits” to an aroused populace and a strong police hand, Saudi Arabia’s widely anticipated “day of rage” — a day of threatened mass protests — never came to pass last Friday as the monarchy of the world’s largest oil exporter managed to quell student calls for widespread demonstrations throughout the country in a push for Democratic reform. But there’s no escape for the roughly 200 million U.S. drivers, who are experiencing their own days of rage at the gas pump. The agonizing figures tell the story. The average price at the gas pump is now $3.53 a gallon, according to the website GasBuddy.com, up from $3.43 the past week, $3.12 a month ago and $2.78 a year earlier Saudi Arabia may have evaded Friday’s day of rage, but not so oil traders, says Hong Kong trader Selwyn Ortz. The reason, he explains: a lot of them were long oil, had touted the idea that Friday would be a big day for crude in wake of the expected Saudi protests, an event, some thought, that could mark the start of a rise that would drive oil to $200 a barrel. Alas, oil was a mediocre performer that day, falling slightly to a shade above $100 a barrel. That decline largely reflected an earthquake in Japan, which is bound to depress its oil demand, at least temporarily. Meanwhile, the sharp gain in oil prices in recent months and the threat of more uprisings have prompted investment firms throughout Wall Street to reassess where oil prices are headed, given their significant impact on the economy. Roubini Global Economics is one of those firms currently immersed in the process of looking at future oil prices. Preliminarily, its research team has come up with three scenarios, all nasty and each of will thin your wallet and undoubtedly create more days of rages, as explained to me by Shelley Goldberg, Roubini’s director of global resources and commodities strategy. The first scenario — to which the firm accords a 50% probability — calls for oil prices to stay about where they are now and assumes the Saudis, OPEC and the rest of the world will make up any shortfalls. Such a scenario. of course, would suggest that higher prices at the pump — now up to $4 to $4.50 a gallon in growing parts of the country — will be maintained. Roubini’s second scenario — given a 35% probability — pegs oil at $120 a barrel, a price, it’s assumed, that will hold. Based on the rule of thumb that every $10 hike in a barrel of oil is equivalent to about a $0.25-a gallon rise at the pump, $120 oil would theoretically lift the price of gas by $0.50 a gallon from current levels. Prospects of an even bigger jump — an additional $1 to $1.25 a gallon, or maybe higher — are inherent in Roubini’s third scenario, $140 to $150 a barrel oil or perhaps more. This one gets a 10% to 15% probability. The higher end of the $120-$150 range, Goldberg explains, factors in such worrisome possibilities as: –A double-dip recession –Regime upheavals in such OPEC AND non-OPEC countries as Kuwait, Yemen, Bahrain, Syria, Oman and Sudan –A toll on Mideastern infrastructure, notably refineries, pipelines, ships and transportation routes –Enough supply disruptions that the lost oil cannot be made up by OPEC and Saudi Arabia –Significant demand destruction, such as people begin to stop driving or drive less and industry stops producing or produces less Goldberg also sees stepped-up efforts to achieve more production and supply through the exploration of more expensive oil, namely via oil sands, tar sands and deep offshore wells. No one. of course, knows what’s going to happen in the Mideast, but Goldberg figures the dye has been cast. “Higher prices will become the new norm,” she says. Steven Kopits, the managing director of Douglas-Westwood, Ltd., a leading provider of global energy services research, offers also raises the specter of another recession, noting that’s what will occur whenever spending on oil and gasoline exceeds 4% of GDP, which it will do with oil at $90 a barrel. In conjunction with this, he tells me, 10 of the last 11 recessions since World War II took place during periods of sharply rising oil prices and six of the past seven since 1973. The bottom line: More outrage is on the way at the gas pump. What do you think? E-mail me at Dandordan@aol.com.

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Video: Roubini Says Japan Quake ‘Worst Thing’ at Worst Time

March 11, 2011

March 11 (Bloomberg) — Nouriel Roubini, founder of Roubini Global Economics, discusses the earthquake in Japan and the European debt crisis. He talks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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Video: Zandi Says U.S. Economy Poised for `Good, Solid’ Growth

March 4, 2011

March 4 (Bloomberg) — Mark Zandi, chief economist at Moody’s Analytics, and John Ryding, chief economist at RDQ Economics LLC, talk about today’s jobs report and the U.S. economy. The jobless rate unexpectedly fell to 8.9 percent in February, the lowest in almost two years, employers added 192,000 jobs in a sign of growing confidence in the recovery. (Source: Bloomberg)

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Video: Goodhart Says U.K.’s Concern Is Deflation, Not Inflation: Video

March 4, 2011

March 4 (Bloomberg) — Charles Goodhart, a professor at the London School of Economics, discusses the U.K. economy, inflation and interest rates. He talks with Francine Lacqua on Bloomberg Television’s “On The Move.”

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David Morris: And the Academy Award for Cowardice Goes to…

March 3, 2011

From all accounts, Charles Ferguson’s acceptance speech was the highlight of the Oscars. After winning an Oscar for Best Documentary for Inside Job , a compelling and searing indictment of Wall Street’s role in the economic crisis, Ferguson injected some much-needed real world relevance amidst the fabulously glitzy proceedings. “Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail — and that’s wrong.” That bears repeating. Not a single financial executive has gone to jail. The government was not always so cowed by Wall Street. In the 1980s, after deregulation led to the takeover of Savings and Loans by aggressive entrepreneurs who committed fraud on a massive scale, the federal government swung into action. Joe Nocera in the New York Times recalls, “There were a dozen or more Justice Department task forces. Over 1,000 F.B.I. agents were involved. The government attitude was that it would do whatever it took to bring crooked bank executives to justice.” Nearly 1,000 savings and loans — a third of the industry — collapsed, costing taxpayers over $200 billions. And the Department of Justice won 1,000 felony convictions in major cases. The Department of Justice still prosecutes cases of financial malfeasance, as long as the perpetrators are not heads of major financial institutions. Consider its vigorous prosecution of Martha Stewart, who was convicted in March 2004, not even of insider trading but of lying to the SEC and the FBI about insider trading. She served five months in a West Virginia federal prison. Compare that to the way the Department of Justice approached the investigation of John Mack that same year. Mack had just stepped down as President of Morgan Stanley and would soon become its CEO and Chairman of its Board. In the most recent of what are rapidly becoming iconic pieces of an era in Rolling Stone Matt Taibbi tells the story of a young man named Gary Aguirre who joined the SEC in September 2004 and shortly thereafter began investigating an insider-trading complaint against a hedge fund manager named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. “It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller,” Aguirre recalls. “And he wasn’t just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day.” A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million. Aguirre identified Mack, a close friend of Samberg’s, as the person most likely to have tipped Samberg off. He discovered that Mack had been begging Samberg to cut him into a potentially lucrative deal involving a spinoff of the tech company Lucent. “Mack is busting my chops” to give him a piece of the action, Samberg told an employee in an e-mail.” A few days after Samberg sent that e-mail, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank’s clients was Heller Financial. As soon as Mack returned from that trip, he called Samberg. The next morning, Mack was cut into the Lucent deal, an investment that made him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share he could, right before it was snapped up by GE. The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn’t likely to fly, explaining that Mack had “powerful political connections.” (The investment banker had been a fundraising “Ranger” for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.) Aguirre was contacted by Morgan Stanley’s regulatory liaison, a former top aide to Eliot Spitzer. A few days later, another of the firm’s lawyers, Mary Jo White, formerly U.S. attorney of the Southern District of New York, called the SEC director of enforcement. Taibbi caustically and accurately sums up the situation. Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target’s firm is being represented not only by Eliot Spitzer’s former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC’s enforcement division — not Aguirre’s boss, but his boss’s boss’s boss’s boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement. Aguirre didn’t stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. In 2011 neither Congress nor the White House has much stomach for prosecuting Wall Street. Indeed, the four Republicans on the Financial Crisis Inquiry Commission (FCIC) voted to strip the following words from its report: “Wall Street,” “deregulation”. As

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Gaddafi Son’s Book Plans Dropped Amid Plagiarism Charges

March 2, 2011

NEW YORK — In addition to the decadent New Year’s Eve parties , confabs with neoconservative pundits and dinner parties with Wall Street kingpins , the Gaddafi family had aspirations to succeed in the book world. Oxford University Press made a deal with Saif Gaddafi, the second son of Libyan strongman Muammar Gaddafi, to publish as a book his doctoral thesis on “soft power” and democracy, “The Role of Civil Society in the Democratization of Global Governance Institutions.” As one of the most respected publishing houses in academia, the contract was an honor for the young Gaddafi, who was being groomed as his father’s likely successor. In order to boost sales and push it on the bestseller lists, Saif Gaddafi offered to purchase 20,000 copies of the book, reports the London Evening Standard . The publisher says that it has dropped plans to publish the book. A spokesman emailed the following statement to The Huffington Post: In May 2010 Oxford University Press received a book manuscript from Saif al-Islam Alqadhafi elaborating a model of democracy and democratic reform with particular reference to Libya and the Arab world. The manuscript was sent for review by scholars of the highest international standing. They supported the book’s publication on the basis of the evidence then available of its scholarly quality and of the author’s credibility. They also noted its possible contribution to political reform. The Delegates of OUP provisionally approved publication of the work subject to review of the final manuscript, which has not yet been received. Recent events in Libya have completely changed the circumstances surrounding the work and the author, and therefore OUP will not now proceed with publication of the book. Not that you’d have to shell out for the thesis in any case — there are plenty of copies online . And to add to the embarrassment for the venerable publishing house, the London School of Economics, where Saif wrote his thesis, is investigating claims that the work was plagiarized. ( Click here for an extensive list of apparently plagiarized passages in the book.) Experts have found 16 instances where Saif appears to plagiarize academic texts, International Monetary Fund research and a 2005 publication, “Denying Democracy: How the IMF and World Bank Take Power from People,” by Tim Jones and Peter Hardstaff. “LSE is aware that there are allegations of plagiarism concerning the PhD thesis of Saif Gaddafi. The school takes all allegations of plagiarism very seriously and is looking into the matter in accordance with standard LSE procedures,” said a spokesperson for the school. The thesis has been used to mock Saif , whose comments on Libyan TV condemning protesters seem at odds with his own words. Among the passages in the thesis: I adopt the definition of liberal individualism as a political ideal within which liberty is an inalienable right of individuals and a just government must protect individual liberties in its constitution and laws. It is based on the philosophical doctrine that individuals are prior to the collectives they constitute and are entitled to live and act by their own judgment, and so their equal liberty should be restricted only when necessary to secure the equal liberty of all.

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Michael Brenner: Demystifying Our Economic Predicament

February 28, 2011

Transcendental mystery is of a bygone era. Yet our profane secular world also contains extraordinary things that are baffling and defy logical comprehension. Economics is especially rich in these mystifying puzzles. This despite the omnipresence of the experts who declare themselves wizards of the premier social science. Here are a few bewitching mysteries that bedevil us. Number one is the gross discrepancy between a reviving national economy and public penury. Unprecedented deficits are exacting a painful price in austerity. Budgets of states and municipalities across the land are under the knife. Libraries have become luxuries, schools stepchildren, and even police and fire departments are endangered. In aggregate, the 50 states are running deficits of $175 billion. Cities in aggregate suffer a deficit of between $30-40 billion. In Washington, tax revenues are flat so that the deficit continues to mount despite the curtailment of stimulus spending and other austerities, e.g. a freeze on federal employee salaries. However, the numbers tell us that our stuttering recovery has succeeded in bringing GDP very close to where it was before the financial crisis broke in 2008. At that time, governments at all levels enjoyed fiscal good health. How is this possible? Doesn’t GDP today measure what it measured three years ago? Aren’t local and state tax rates set where they were three years ago? Haven’t the one-time federal tax cuts of 2009 expired? ‘Yes’ to all those questions. Indeed, real estate taxes in most jurisdictions have been kept level or actually increased — as in N.Y.C. and in Austin where they were raised by 10% despite stable housing prices. So what’s going on? Intervention by the capricious gods on Mount Olympus? Looking for an answer from the community of economists is frustrating. Rare is the specialist who addresses the question squarely. Certainly, a scouring of the financial press in a fruitless hunt for edification. No need to consult either the Delphic Oracles or the economic seers. For there are clues that point to the solution of this mystery — a deeply unsettling solution. One glaring truth is that those who pay taxes in a manner commensurate with income now are reduced in number relative to those who routinely elude tax by means fair or foul. That latter category includes corporations and very wealthy individuals. Warren Buffett’s secretary is in a higher tax rate than the maestro of Omaha — as he himself has pointed out. Of the Fortune 500 companies, 123 pay less than 23% on corporate revenues even though the official corporate tax rate is 35%. (Tim Geithner urges that the nominal rate drop to 25%). Those taxable earnings themselves represent only a fraction of profits given all the dodges built into tax code that invite accounting antics to hold official profits to a minimum. Then there are the special tax breaks for the oil and gas industry. Then there are the off-shore tax havens that allow corporations to locate their fictive headquarters in places with low or no taxes, Cayman Islands. Those havens are also available to the super rich. Then there is the infinite variety of financial shenanigans that befuddle underfunded, under motivated so-called regulators. The games that have shifted so much national wealth into the accounts of the top 2% are almost all still permitted despite their having brought the global economy to the brink of the precipice. Then there is ever more extensive outsourcing of jobs and facilities abroad. GE, whose former CEO Mr. Jeffrey Immelt is now one of Mr. Obama’s chief economic advisors, cut its payroll by some tens of thousands over the past decade. Its revenues have soared over this period because more and more of its corporate activity takes place in other countries. According to the numbers, much of the ensuing GE revenues are recorded as increases in national GDP. But foreign workers don’t pay taxes to the IRS (nor do they or GE contribute to FICA). The downward effect on government tax revenues if twofold: GE is in a better position to ‘hide’ earnings by showing the greatest profits in whichever of its locations have the lowest tax rates; and the earnings of American employees (who do file IRS returns) have become a smaller and smaller fraction of GE’s corporate wage bill. A similar logic applies to the growing practice of raising ‘productivity’ by forcing white collar workers to work uncompensated overtime and by the reliance on part-time workers who are paid less and receive few if any benefits. Consequently, the inflation-adjusted income of the median household — smack in the middle of the populace — fell 4.2% between 2007 and 2010 (even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation). GDP numbers themselves are distorted. The methodology for their calculation is a simple tabulation of transactions. Every time players in the financial money game trade ‘products’ of dubious value to the ‘real economy,’ like the notorious CDSs and Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs), the national cash register records the transaction as an addition to GDP. Those sorts of pseudo financial transactions have increased as a fraction of all financial dealings. The financial sector as a whole has grown to about 20% of the overall national economy and an even larger share of corporate profits. If we were to assume that 50% of financial transactions fall into the fictive category, then 10% of nominal GDP growth is also fictive. The American economy that allegedly grew at an annual rate of 2.8% in the fourth quarter may actually have grown by only 2.5%. There are other distortions of this kind that tend to overstate the rate of increase in GDP. All of this could be inferred from the stubbornly high rate of unemployment coincidental with record corporate profits. Too, those profits are coincidental with a continuing decline in mean hourly wages for American workers — another telltale sign. Moreover, connivance with the 1990s reformulation of unemployment measures masks the fact that today’s unemployment as stated in 1980 terms is more like 15% than the official 9%. These disparities are incomprehensible if we insist on taking at face value the numbers that are thrown at us about the state of the national economy. A related mystery in embedded in the headline stories about the dire budgetary straits in which the country finds itself. The ‘age of austerity’ has become a commonplace in our public discourse on why America can no longer afford this, that or another thing. The concrete referents are everything from social services for the poor and elderly, to school counseling services, to public transportation on par with any other reasonably prosperous country, to unemployment benefits, to decent health care. By any logical standard this is literally nonsense. The United States today is as rich as it ever has been — according to the numbers. And far richer that in earlier periods when we could afford most of those things — not to mention that other developed countries can afford them. Yet our political life accepts these apocalyptic assertions as Gospel Truth. Indeed, the economics priesthood provides the added reassurance of a scientific laying on of hands. Some of its luminaries actively proselytize in promotion of this creed. They are the intellectual mainstays of think tanks that go a step further to send forth the Word that we cannot even afford some basic things that we’ve had for 75 years — like Social Security. These numerologists are so deft that the obvious is cast into oblivion and the unreal is sealed in supposedly incontrovertible algebraic equations. The cultural equivalent of shamans speaking in tongues. The United States does not pay for things of social value because IT chooses not to — not because it cannot afford them. IT has multiple antecedents: society as a whole; elected representatives; government officials; political parties; all those powerful interests that distort the process in every facet to their own advantage. The choices made in recent years include expending $1 trillion to $2 trillion to hunt spectral terrorists in the far corners of the globe to little effect. It includes the $87 billion spent annually on our intelligence agencies. It includes the huge tax breaks given by the Bush administration concentrated on those in the upper 2% income bracket. Between 2002-2010 that diverted approximately $2.7 trillion dollars out of the Treasury into the pockets of the wealthy (adding the debt servicing of resulting deficits). Barack Obama’s ready acquiescence in their extension means that over the next decade another $3.1 trillion will be similarly diverted. As someone said, “a trillion here, a trillion there, and soon you’re talking about real money.” $7-8 trillion could pay for all the state/municipal budget cuts, the rebuilding of the country’s infrastructure, a serious energy program, environmental clean-up, aid to the elderly. (As for health care, we could pay for first rate coverage of every citizen at a cost one-third lower than what we now spend were we to switch the kind of single payer system that works nearly everywhere else in the developed world — freeing another trillion or so for other purposes). Think of higher education. When I began graduate school at Berkeley, I paid $105 per annum. That was not even tuition; it was a fee that covered maintenance of the student union and the pool complex in Strawberry Canyon. My total debt after receiving my PhD was $300 owed to the federal government for an interest free loan that I wisely invested in a vintage Pontiac convertible. Today, students at state universities pay tuition of between $10,000-16,000 per annum. They accumulate heavy debts on which they pay market rates. The Obama administration now has declared that Perkins Loans grants will start accumulating interest from day 1 rather than upon graduation — adding to students’ financial burden. No wonder that the percentage of American high school graduates attending college is declining to the point where we rank below most developed countries. This did not happen because of ‘hard times’ or inexorable economic forces. Rather, it is due to social choices that the country has made. This also is why the last subway system of any consequence in the United States was built when Nixon and Ford were presidents (D.C. and the San Francisco Bay area). So we suffer dilapidated transport while the residents of better endowed places ride efficient, clean trains in Calcutta, New Delhi, Recife (Brazil), Medellin (Columbia), Cairo, Baku (Azerbaijan); Tashkent (Uzbekistan), Yerevan (Armenia), Busan (South Korea), Izmir and Yekaterinburg — not to speak of the state of the art systems that speed on their way residents of every major city in China. It is concrete realities like this, and those noted above, that should be the starting point for serious intellectual and political discourse about the American economy — not the supposed economic verities that require ‘fiscally responsible’ government officials to make draconian teacher layoffs and to deprive the aged of a decent life. Reality based assessments of the United States’ economic predicaments should begin with a set of bedrock questions. What is the country’s actual wealth? How is it distributed? Why is it distributed in this way? What is the role of government in producing that distribution? What are the consequences of that distribution? What are the reasons for a possible reallocation of national resources? How might it be done? Is that a desirable or undesirable goal? How could the transitions be made at minimal cost while maintaining a smooth functioning of the economy? Some economic tools are useful to refine the answers. Most of the rest is ritual, theoretical filigree for scholarly archives or mere distraction?

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3M Chief Executive: ‘Obama Is Robin Hood-Esque’

February 28, 2011

The CEO of industrial giant 3M has blasted Obama as “anti-business,” joining the ranks of executives who accused the White House of not understanding “what it takes to create jobs.” George Buckley, chief executive of the Maplewood, Minn. company which makes everything from Post-Its to respirators, said U.S. companies could leave the country for Canada or Mexico, the Financial Times reported. “I judge people by their feet, not their mouth,” Buckley said, according to the FT . Speaking about President Barack Obama, he told the FT : “We know what his instincts are – they are Robin Hood-esque. He is anti-business,” he added. Executives have previously compared the President to Hitler and Mussolini. “There is a sense among companies that this is a difficult place to do business,” Buckley told the FT . “It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science,” he added. In January, 3M’s fourth-quarter results revealed management didn’t expect the U.S. market to improve until the unemployment rate, now 9 percent, fell significantly: “”There’s still a lot of smoke without fire,” CEO George Buckley about economic conditions in the U.S. 3M’s U.S. sales rose 8 percent in the fourth quarter. But that was half the rate at which worldwide sales picked up. Sales in Asia, which have been driving 3M’s growth, jumped 35 percent from a year ago. Buckley said mild improvements in unemployment and retail sales data are positive signs, but he advocates a cautious approach in the U.S.” In an attempt to embrace criticism from executives, and to convince U.S. companies to start spending the $1.93 trillion in cash and liquid assets they are currently sitting on, last month, the administration announced the Council on Jobs and Competitiveness. The President named General Electric’s chief executive, Jeffrey Immelt head of the council. Immelt was one of the executives who criticized the Obama administration, telling an investors meeting in Rome last year: “We [the US] are a pathetic exporter… we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in sync.” In the run up to November’s mid-term elections, the Obama administration faced scathing criticism from leading CEOs. “I think this group does not understand what it takes to create jobs,” said Intel CEO Paul Otellini, last year,

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