Ireland’s Paradise Lost

For an American tourist weaned on Gaelic kitsch and screenings of “The Quiet Man,” the landscape of contemporary Ireland comes as something of a shock. Drive from Dublin to the western coast and back, as I did two months ago, and you’ll still find all the thatched-roof farmhouses, winding stone walls and placid sheep that the postcards would lead you to expect. But round every green hill, there’s a swath of miniature McMansions. Past every tumble-down castle, a cascade of condominiums. In sleepy fishing villages that date to the days of Grace O’Malley, Ireland’s Pirate Queen (she was the Sarah Palin of the 16th century), half the houses look the part — but the rest could have been thrown up by the Toll brothers.

It’s as if there were only two eras in Irish history: the Middle Ages and the housing bubble.

This actually isn’t a bad way of thinking about Ireland’s 20th century. The island spent decade after decade isolated, premodern and rural — and then in just a few short years, boom, modernity! The Irish sometimes say that their 1960s didn’t happen until the 1990s, when secularization and the sexual revolution finally began in earnest in what had been one of the most conservative and Catholic countries in the world. But Ireland caught up fast: the kind of social and economic change that took 50 years or more in many places was compressed into a single revolutionary burst.

There was a time, not so very long ago, when everyone wanted to take credit for this transformation. Free-market conservatives hailed Ireland’s rapid growth as an example of the miracles that free trade, tax cuts and deregulation can accomplish. (In 1990, Ireland ranked near the bottom of European Union nations in G.D.P. per capita. In 2005, it ranked second.)

Progressives and secularists suggested that Ireland was thriving because it had finally escaped the Catholic Church’s repressive grip, which kept horizons narrow and families large, and limited female economic opportunity. (An academic paper on this theme, “Contraception and the Celtic Tiger,” earned the Malcolm Gladwell treatment in the pages of The New Yorker.) The European elite regarded Ireland as a case study in the benefits of E.U. integration, since the more tightly the Irish bound themselves to Continental institutions, the faster their gross domestic product rose.

Nobody tells those kinds of stories anymore. The Celtic housing bubble was more inflated than America’s (a lot of those McMansions are half-finished and abandoned), the Celtic banking industry was more reckless in its bets, and Ireland’s debts, private and public, make our budget woes look manageable by comparison. The Irish economy is on everybody’s mind again these days, but that’s because the government has just been forced to apply for a bailout from the E.U., lest Ireland become the green thread that unravels the European quilt.

If the bailout does its work and the Irish situation stabilizes, the world’s attention will move on to the next E.U. country on the brink, whether it’s Portugal, Spain or Greece (again). But when the story of the Great Recession is remembered, Ireland will offer the most potent cautionary tale. Nowhere did the imaginations of utopians run so rampant, and nowhere did they receive a more stinging rebuke.

To the utopians of capitalism, the Irish experience should be a reminder that the biggest booms can produce the biggest busts, and that debt and ruin always shadow prosperity and growth. To the utopians of secularism, the Irish experience should be a reminder that the waning of a powerful religious tradition can breed decadence as well as liberation. (“Ireland found riches a good substitute for its traditional culture,” Christopher Caldwell noted, but now “we may be about to discover what happens when a traditionally poor country returns to poverty without its culture.”)

But it’s the utopians of European integration who should learn the hardest lessons from the Irish story. The continent-wide ripples from Ireland’s banking crisis have vindicated the Euroskeptics who argued that the E.U. was expanded too hastily, and that a single currency couldn’t accommodate such a wide diversity of nations. And the Irish government’s hat-in-hand pilgrimages to Brussels have vindicated every nationalist who feared that economic union would eventually mean political subjugation. The yoke of the European Union is lighter than the yoke of the British Empire, but Ireland has returned to a kind of vassal status all the same.

As for the Irish themselves, their idyllic initiation into global capitalism is over, and now they probably understand the nature of modernity a little better. At times, it can seem to deliver everything you ever wanted, and wealth beyond your dreams. But you always have to pay for it.

Ross Douthat, New York Times

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Full article: http://www.nytimes.com/2010/11/22/opinion/22douthat.html

The loan arranger

AMAZON.COM says soon you will be allowed to lend out electronic books purchased from the Kindle Store. For a whole 14 days. Just once, ever, per title. If the publisher allows it. Not mentioned is the necessity to hop on one foot whilst reciting the Gettysburg Address in a falsetto. An oversight, I’m sure. Barnes & Noble’s Nook has offered the same capability with identical limits since last year. Both lending schemes are bullet points in a marketing presentation, so Amazon is adding its feature to keep parity.

Allowing such ersatz lending is a pretence by booksellers. They wish you to engage in two separate hallucinations. First, that their limited licence to read a work on a device or within software of their choosing is equivalent to the purchase of a physical item. Second, that the vast majority of e-books are persistent objects rather than disposable culture.

If you own a physical book, in much of the world you may sell it, lend it—even burn or bury it. You may also keep the book forever. Each of those characteristics is littered with footnotes and exceptions for e-books. We are granted an illusion of ownership, but may read only within the ecosystem of hardware and software supported by the bookseller with sometimes additional limitations imposed by publishers. Witness Amazon’s remote deletion—since abjured—of improperly sold copies of George Orwell’s “1984” and “Animal Farm” in 2009. This Babbage recalls an Apple executive, Phil Schiller, extolling to him in 2003 the virtues of purchasing downloadable music when that company’s iTunes Store launched, and the dominant model was for recurring subscriptions. Mr Schiller described buying a song as owning it. Asked if one could therefore sell the song, Mr Schiller said no. He explained:

I do think of it as ownership, and it really does fit the definition of legal ownership. [There are] certain boundaries on your rights, just as on everything I own. I can own a car but that doesn’t give me the right to speed 100mph in it.

That was as tendentious then as it is now, and applies just as directly to Apple’s current e-book offerings. True, Apple removed digital rights management (DRM) protection from its music when the recording industry decided its best tool to fight Apple’s near-total ownership of digital downloads was to make it possible for music to be played on devices other than iPods. But the licensing terms for music didn’t change, and books and video remain locked down, however ineffective such protection is.

But the reason for restricting lending, even with the sham of offering it in Amazon’s or Barnes & Noble’s form, is to distract people from the fact that buyers are spending real money to buy a book they may read just once. To judge from the information Amazon provides, the long tail applies to e-books as it does everywhere else. Many different titles are flogged, but the most disposable and ephemeral have the lion’s share of units sold. Dan Brown’s epics are rarely re-read, judging by how many copies are available for one penny or given away in free book bins weeks after release. Allowing the loan of “The Lost Symbol” by any purchaser to any other e-book hardware or software user worldwide turns each buyer into a one-person lending library. Publishers don’t much like libraries, either, despite the chin-wagging otherwise. (In the US, the public lending right or remuneration right doesn’t hold; the first-sale doctrine allows library lending of physical media without additional fees.)

With a physical book, the afterlife of a disposable read is to hand it off to another party: a library sale, a friend or relative, or the free bin outside a used bookstore. Such books are also purchased in the millions and sold for one penny plus shipping online partly as a marketing effort by booksellers who can then include their own catalogs with each sale. An e-book, however, lives in limbo. Neither moving on to the next life, nor returning to this one, it can never be freed.

That will change. Just as with music, DRM will be cracked. As more people possess portable reading devices, the demand and availability for pirated content will also rise. (Many popular e-books can now be found easily on file-sharing sites, something that was not the case even a few months ago, as Adrian Hon recently pointed out.) The end-game is unclear. Authors can’t turn to touring to obtain revenue in the way musicians can, though some can charge steep speaking fees. Nor can authors produce their work in 3D, only readable in certain special theaters. (McSweeney’s has a proposal in that regard.)

All is not lost, however. Despite fewer adults reading fewer books, billions are still sold worldwide each year, with an increasing portion being digital. Publishers and booksellers need to get non-readers to pick up a device and buy books, and existing readers to read more. Lowering the risk of purchasing a book that a reader may not like would reduce the friction between considering a title and clicking the buy button.

In fact, Barnes & Noble and Starbucks are experimenting with a sort of loan in their bricks-and-mortar shops. The bookseller allows its Nook hardware owners to read books willy-nilly on its stores’ Wi-Fi networks for up to an hour a day. Starbucks has partnered with several publishers to allow full access to some titles, but only while a browser is in the store. Barnes & Noble’s effort is a year old and Starbucks’ was launched just a few days ago.

In other words, they are finally doing with digital books what they have long practised with the printed sort. After all, most bookshops nowadays let you pick a book off the shelf and read it at your leisure, sometimes providing comfy armchairs. Cafés have been making books and newspapers available to patrons for centuries, to entice them to stick around for another cuppa.

The college-textbook market provides another replicable business model. Students pay through their noses for new textbooks at the start of term only to resell them at the end to other students or back to the original bookshop at a discount. Alternatively, they rent books for a fee while leaving a deposit which is returned when the book comes back to the shop. Creating a legitimate digital resale market along similar lines ought to be possible. If, that is, publishers can be convinced to let what are in effect mint-condition digital copies to go at a lower price.

Introducing either de facto rental (purchase and resell at prices set by the bookseller) or the actual sort (read a book in a set period of time for a lower fee) would expand general and specialist readership alike, while discouraging a turn to piracy by breaking the appearance of immutable, high prices. At the same time, it would enable publishers, booksellers and authors to sidestep the first-sale doctrine of physical media, and to rake in revenue each time a “used” digital copy passes from hand to hand.

The music and film industries fought a decade-long losing battle for the digital realm that only put them at odds with their best customers. The book business may yet be able to avoid recapitulating all that pain and disruption, not least by pinching ideas from the off-line world.

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Full article and photo: http://www.economist.com/blogs/babbage/2010/11/steal_book

Which MBA?

Pirate copy

What managers can learn from Somali pirates 

PURVEYORS of management-speak are fond of quoting cod insights from military strategists. According to David James, a professor at Henley Business School, they would do better studying the management styles of some of those the armed forces are fighting, such as Somali pirates. Alongside Paul Kearney, a lieutenant-colonel in the Royal Marines, Professor James has been studying the operations of the pirates, as well as insurgents in Afghanistan and Iraq, to see if they have anything to teach legitimate firms. 

The threat to life and liberty aside, Somali pirates’ business model is impressive. According to the professor, each raid costs the pirates around $30,000. On average one raid in three is successful. The reward for a triumphant venture, however, can be in the millions. 

The organisation behind the pirates would be familiar to many ordinary businesses. For a start, they have a similar backend—including the kind of streamlined logistics and operations controls that would be the envy of most companies. Their success has even prompted one village to open a pirate “stock exchange”, where locals can buy shares in up to 70 maritime companies planning raids.

But Professor James believes that the most important lesson firms can learn is one of strategy. He teaches his MBA class that one reason for the pirates’ success is that they avoid “symmetrical” conflict—challenging their targets head on by, for example, lining up against the Western navies patrolling the waters—battles they would surely lose. Instead, they use stealth and surprise, attacking targets at their weakest point. In this way, with only a dozen-or-so sailors, they wrest control of huge assets, in the form of oil tankers.

This is a lesson that serves smaller companies well as they look to take bites out of larger rivals. It might be foolish, for example, for a start-up to take on one of the traditional banks head-to-head—only another large bank could afford the pyrrhic battle that would ensue from it protecting its market. But by picking a small, localised fight a start-up can make an impression before a bank has had time to react. An example, says Professor James, is wonga.com. It has taken market share by attacking banks’ inflexible lending policies by offering loans for the exact amount and length of time the customer wants. It processes the loans extremely quickly and customers can even get immediate approval using an iPhone app. 

Sometimes such an asymmetrical strike can shift the centre of gravity in an industry. Nintendo, a computer-games firm, was competing, and failing, against two much better-resourced rivals—Sony and Microsoft—in a sector where it seemed the only way to be successful was to win an arms race of processing power and ever more sophisticated technology. Nintendo opened a new avenue of attack based on the idea that consumers would enjoy getting physically involved in video games, using a motion-sensitive controller to control the on-screen action. So, using relatively cheap technology, it invented the Wii, in the process opening up a whole new market for previous non-gamers. 

That smaller, nimble competitors make stealth attacks on larger rivals is a well-known phenomenon. Nonetheless, the way that larger companies can defend themselves against attack is a matter of much debate. Professor James says that the key is to quicken decision making. In his analogy, by the time the captain of an oil tanker has spotted the pirates’ inflatables it is too late; big ships take a long time to turn around. Similarly, once a large business has gone through the traditional process of observing an attack, orientating itself, deciding what to do about it and then acting (what Colonel John Boyd, an American military strategist, called an OODA loop) it is too late, the competition is upon it.

To help companies understand the best way to speed up their reaction times, the professor turned to another unpalatable source: insurgents in Afghanistan. Despite stressing that he believes the outcomes of their strategies to be repugnant, he nonetheless says that he admires the management structures that makes them successful. 

One of the main lessons he learned, and which he teaches companies on his executive-education programme, Corporate Insurgency, is that insurgent leaders don’t micro-manage. Leaders of such movements are, in Professor James’s words, “brand agnostic”—they allow their brand to be adopted by autonomous local cells with little central control. The mistake big business makes is to try to protect the brand by making decisions from its headquarters; better, he says, to allow local managers to respond quickly to local events.

He even goes as far as to suggest that companies set up “commando” forces; small units which work outside the traditional command structure of the company and which have a level of autonomy—“not holding the long committee meetings, not having the extended approval and budgeting process”. If a big business as a whole cannot act as a small, nimble player, these business units can.

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Full article and photo: http://www.economist.com/whichmba/somali-pirates

An Age of Creative Destruction

‘Gentlemen: You have undertaken to cheat me. I won’t sue you, for law takes too long. I will ruin you.” Thus Cornelius Vanderbilt writing to business partners who had exploited his absence to gain control of one of his companies. He was as good as his word.

The nature of both ruin and success is the subject of “American Colossus,” H.W. Brands’s account of, as the subtitle has it, “The Triumph of Capitalism” during the period 1865-1900. Mr. Brands paints a vivid portrait of both this understudied age and those industrialists still introduced by high-school teachers as “robber barons”—Vanderbilt, Andrew Carnegie, John D. Rockefeller and J.P. Morgan. Together these men of the 19th century laid the foundations that would allow the use of innovations that we think of as modern, such as trains and automobiles, on a massive scale in the 20th century.

“Colossus” also reminds us of something more subtle: the terrifying difficulty of remaining at the top once one has arrived. Vanderbilt, for example, seemed doomed to be sidelined during his lifetime. He was a “water man” and remained devoted to the steamship even as railroads threatened to relegate river transport to the status of the fax. His hostility to trains was so great he referred to them simply as “them things that go on land.” But the Commodore eventually admitted to himself the looming obsolescence of the river highway—just in time to corner the stock of the New York & Harlem Railroad in the 1860s. Thus did he postpone—albeit only for a few decades—the decline of the great Vanderbilt empire.

Rails to riches: An 1870 cartoon depicting James Fisk’s attempt to stop Cornelius Vanderbilt from gaining control of the Erie Railroad Company

As Mr. Brands relates the tycoons’ stories, he drops some anecdotes wonderfully relevant today. Many Americans these days are buying their first gold shares—but with a certain ambivalence, all too aware that the metal’s price can move suddenly. Mr. Brands reminds us just how suddenly with a description of gold’s gyrations on Friday, Sept. 24, 1869, the day the Treasury signaled the Grant administration’s intention to combat rising gold prices by putting a supply worth $4 million on the market. That day, before Treasury’s move, gold shot to $162 an ounce from $143. Then the government’s gold came online. “As the bells of Trinity pealed forth the hour of noon,” reported the Herald Tribune, “the gold on the indicator stood at 160. Just a moment later, and before the echoes died away, gold fell to 138.”

“Colossus” also reminds us just how colossally wrong bets can be. When New York’s first apartment building, on East 18th Street, was planned in 1869, the reception it received was as cold as a February wind off the Hudson. New Yorkers reckoned that “cohabitation,” as apartment life was called, would fail and that gentlemen would never live “on shelves.”

For all the pleasure that “Colossus” offers in the way of anecdote, two flaws undermine its attractions. First, Mr. Brands frames the book—and indeed all of American history—as a contest between capitalism and democracy. Democracy depends on equality, the author claims, while capitalism needs inequality to function. “In accomplishing its revolution, capitalism threatened to eclipse American democracy,” he writes.

The author’s attachment to a sweeping theme like the democracy-capitalism clash is understandable: It’s the sort of duel that Will and Ariel Durant and other producers of pageant-style history have featured to unify their multivolume works.

Still, this “wasn’t it grand?” mode of writing is imprecise. Mr. Brands laments that capitalism’s triumph in the late 19th century created a disparity between the “wealthy class” and the common man that dwarfs any difference of income in our modern distribution tables. But this pitting of capitalism against democracy will not hold. When the word “class” crops up in economic discussions, watch out: it implies a perception of society held in thrall to a static economy of rigid social tiers. Capitalism might indeed preclude democracy if capitalism meant that rich people really were a permanent class, always able to keep the money they amass and collect an ever greater share. But Americans are an unruly bunch and do not stay in their classes. The lesson of the late 19th century is that genuine capitalism is a force of creative destruction, just as Joseph Schumpeter later recognized. Snapshots of rich versus poor cannot capture the more important dynamic, which occurs over time.

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations—and in thoroughly democratic fashion—this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the “triumph of capitalism” had deadened democracy and created a permanent overclass, Forbes’s 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.

The second failing of “Colossus” is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets—or even to steal them—and therefore deserves the “robber baron” moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia’s petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.

Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur—perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton’s monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: “New Jersey Must Be Free.” With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.

Mr. Brands appreciates the distinction between political entrepreneurs and market entrepreneurs, but he chooses not to highlight it. Thus he misses an opportunity to emphasize a truth about the late 19th century that rings down to our own rocky times: The best growth is spurred by the right kind of ruin.

Miss Shlaes, a senior fellow at the Council on Foreign Relations, is writing a biography of Calvin Coolidge.

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Full article and photo: http://online.wsj.com/article/SB10001424052748704380504575530332139071998.html

The Non-Economist’s Economist

John Kenneth Galbraith avoided technical jargon and wrote witty prose—too bad he got so much wrong

The Dow Jones Industrials spent 25 years in the wilderness after the 1929 Crash. Not until 1954 did the disgraced 30-stock average regain its Sept. 3, 1929, high. And then, its penance complete, it soared. In March 1955, the U.S. Senate Banking and Currency Committee, J. William Fulbright of Arkansas, presiding, opened hearings to determine what dangers lurked in this new bull market. Was it 1929 all over again?

John Kenneth Galbraith (1908-2006), photographed by Richard Avedon in Boston in 1993

One of the witnesses, John Kenneth Galbraith, a 46-year-old Harvard economics professor, seemed especially well-credentialed. His new history of the event that still transfixed America, “The Great Crash, 1929” was on its way to the bookstores and to what would prove to be a commercial triumph. An alumnus of Ontario Agricultural College and the holder of a doctorate in agricultural economics from the University of California at Berkeley, Galbraith had written articles for Fortune magazine and speeches for Adlai Stevenson, the defeated 1952 Democratic presidential candidate. He was a World War II price controller and the author of “American Capitalism: The Concept of Countervailing Power.” When he stepped into a crowded elevator, strangers tried not to stare: he stood 6 feet 8 inches tall.

On the one hand, Galbraith observed, the stock market was not so speculatively charged in 1955 as it had been in 1929 On the other, he insisted, there were worrying signs of excess. Stocks were not so cheap as they had been in the slack and demoralized market of 1953 (though, at 4%, they still outyielded corporate bonds). “The relation of share prices to book value is showing some of the same tendencies as in 1929,” Galbraith went on. “And while it would be a gross exaggeration to say that there has been the same escape from reality that there was in 1929, it does seem to me that enough has happened to indicate that we haven’t yet lost our capacity for speculative self-delusion.”

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Reading List: If Not Galbraith, Who?

Maury Klein tells a great story in “Rainbow’s End: The Crash of 1929” (Oxford, 2001), but he also attempts to answer the great question: What went wrong? For the financial specialist in search of a tree-by-tree history of the forest of the Depression, look no further than Barrie A. Wigmore’s “The Crash and Its Aftermath: A History of the Securities Markets in the United States, 1929-33” (Greenwood Press, 1985).

In the quality of certitude, the libertarian Murray Rothbard yielded to no economist. His revisionist history, “America’s Great Depression” (available through the website of the Mises Institute), contends that it was the meddling Hoover administration that turned recession into calamity. Amity Shlaes draws up a persuasive indictment of the New Deal in her “The Forgotten Man” (HarperCollins, 2007).

“Economics and the Public Welfare” by Benjamin Anderson (Liberty Press, 1979) is in strong contention for the lamest title ever fastened by a publisher on a deserving book. Better, the subtitle: “A Financial and Economic History of the United States: 1914-1946.”

“Where are the Customers’ Yachts? Or A Good Hard Look at Wall Street,” by Fred Schwed Jr. (Simon & Schuster, 1940) is the perfect antidote for any who imagine that the reduced salaries and status of today’s financiers is anything new. Page for page, Schwed’s unassuming survey of the financial field might be the best investment book ever written. Hands-down, it’s the funniest.

An unfunny but essential contribution to the literature of the Federal Reserve is the long-neglected “Theory and Practice of Central Banking” (Harper, 1936) by Henry Parker Willis, the first secretary of the Federal Reserve Board. Willis wrote to protest the against the central bank’s reinvention of itself, quite against the intentions of its founders, as a kind of infernal economic planning machine. He should see it now.

Freeman Tilden’s “A World in Debt” (privately printed, 1983) is a quirky, elegant, long out-of-print treatise by a non-economist on an all-too-timely subject. “The world,” wrote Tilden in 1936, “has several times, and perhaps many times, squandered itself into a position where a total deflation of debt was imperative and unavoidable. We may be entering one more such receivership of civilization.”

If the Obama economic program leaves you cold, puzzled or hot under the collar, turn to Hunter Lewis’s “Where Keynes Went Wrong” (Axios Press, 2009) or “The Critics of Keynesian Economics,” edited by Henry Hazlitt (Arlington House, 1977).

—James Grant

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Re-reading Galbraith is like watching black-and-white footage of the 1955 World Series. The Brooklyn Dodgers are gone—and so is much of the economy over which Galbraith lavished so much of his eviscerating wit. In 1955, “globalization” was a word yet uncoined. Imports and exports each represented only about 4% of GDP, compared with 16.1% and 12.5%, respectively, today. In 1955, regulation was constricting (this feature of the Eisenhower-era economy seems to be making a reappearance) and unions were powerful. There was a lingering, Depression-era suspicion of business and, especially, of Wall Street. The sleep of corporate managements was yet undisturbed by the threat of a hostile takeover financed with junk bonds.

Half a century ago, the “conventional wisdom,” in Galbraith’s familiar phrase, was statism. In “American Capitalism,” the professor heaped scorn on the CEOs and Chamber of Commerce presidents and Republican statesmen who protested against federal regimentation. “In the United States at this time,” noted the critic Lionel Trilling in 1950, “liberalism is not only the dominant but even the sole intellectual tradition.” William F. Buckley’s upstart conservative magazine, National Review, made its debut in 1955 with the now-famous opening line that it “stands athwart history, yelling Stop.” Galbraith seemed not to have noticed that history and he were arm in arm. His was the conventional wisdom.

Concerning the emphatic Milton Friedman, someone once borrowed the Victorian-era quip, “I wish I was as sure of anything as he is of everything.” Galbraith and the author of “Capitalism and Freedom” were oil and water, but they did share certitude. To Galbraith, “free-market capitalism” was an empty Rotary slogan. It didn’t exist and, in Eisenhower-era America, couldn’t. Industrial oligopolies had rendered it obsolete.

Only in the introductory economics textbooks, he believed, did the free interplay between supply and demand determine price. Fortune 500 companies set their own prices. They chaffered with their vendors and customers, who themselves were big enough to throw their weight around in the market. As a system of decentralized decision-making, there was something to be said for capitalism, Galbraith allowed. As a network of oligopolistic fiefdoms, however, it needed federal direction. The day of Adam Smith’s “invisible hand” was over or ending. “Countervailing power,” in the Galbraith formulation, was the new idea.

Corporate bureaucrats—collectively, the “technostructure”—had pushed aside the entrepreneurs, proposed Galbraith channeling Thorstein Veblen. While, under the robber baron model, the firm existed to make profits, the modern behemoth exists to perpetuate itself in power while incidentally earning a profit. Planning is what the technostructure does best—it seems to hate surprises. “This planning,” wrote Galbraith, in “The New Industrial State,” “replaces prices that are established by the market with prices that are established by the firm. The firm, in tacit collaboration with the other firms in the industry, has wholly sufficient power to set and maintain minimum prices.” What was to be done? “The market having been abandoned in favor of planning of prices and demand,” he prescribed, “there is no hope that it will supply [the] last missing element of restraint. All that remains is the state.” It was fine with the former price controller of the Office of Price Administration.

As for the stockholder, he or she was as much a cipher as the manipulated consumer. “He (or she) is a passive and functionless figure, remarkable only on his capacity to share, without effort or even without appreciable risk, in the gains from the growth by which the technostructure measures its success,” according to Galbraith. “No grant of feudal privilege has ever equaled, for effortless return, that of the grandparents who bought and endowed his descendants with a thousand shares of General Motors or General Electric or IBM.” Galbraith was writing near the top of the bull market he had failed to anticipate in 1955. Shareholders were about to re-learn (if they had forgotten) the lessons of “risk.”

In its way, “The New Industrial State” was as mistimed as “The Great Crash.” In 1968, a year after the appearance of the first edition, the planning wheels started to turn at Leasco Data Processing Corp., Great Neck, N.Y. But Leasco’s “planning” took the distinctly un- Galbraithian turn of an unsolicited bid for control of the blue-blooded Chemical Bank of New York. Here was something new under the sun. Saul Steinberg, would-be revolutionary at the head of Leasco, ultimately surrendered before the massed opposition of the New York banking community. (“I always knew there was an Establishment,” Mr. Steinberg mused—”I just used to think I was a part of it.”) But the important thing was the example Mr. Steinberg had set by trying. The barbarians were beginning to form at the corporate gates.

The cosseted, self-perpetuating corporate bureaucracy that Galbraith described in “The New Industrial State” was in for a rude awakening. Deregulation became a Washington watchword under President Carter, capitalism got back its good name under President Reagan and trade barriers fell under President Clinton. Presently came the junk-bond revolution and the growth in an American market for corporate control. Hedge funds and private equity funds prowled for under- and mismanaged public companies to take over, resuscitate and—to be sure, all too often—to overload with debt. The collapse of communism and the rise of digital technology opened up vast new fields of competitive enterprise. Hundreds of millions of eager new hands joined the world labor force, putting downward pressure on costs, prices and profit margins. Wal-Mart delivered everyday low, and lower, prices, and MCI knocked AT&T off its monopolistic pedestal. The technostructure must have been astounded.

Galbraith in his home in Cambridge, Mass., in 1981

Here are the opening lines of “American Capitalism”: “It is told that such are the aerodynamics and wing-loading of the bumblebee that, in principle, it cannot fly. It does, and the knowledge that it defied the august authority of Isaac Newton and Orville Wright must keep the bee in constant fear of a crack-up.” You keep reading because of the promise of more in the same delightful vein. And, indeed, there is much more, including a charming annotated chronology of Galbraith’s life by his son and the editor of this volume, James K. Galbraith.

John F. Kennedy’s ambassador to India, muse to the Democratic left, two-time recipient of the Presidential Medal of Freedom, celebrity author, Galbraith in life was even larger than his towering height. His “A Theory of Price Control,” which was published in 1952 to favorable reviews but infinitesimal sales, was his one and only contribution to the purely professional economics literature. Thereafter this most acerbic critic of free markets prospered by giving the market what it wanted.

Now comes the test of whether his popular writings will endure longer than the memory of his celebrity and the pleasure of his prose. “The Great Crash” has a fighting chance, because of its very lack of analytical pretense. “History that reads like a poem,” raved Mark Van Doren in his review of the 1929 book. Or, he might have judged, that eats like whipped cream.

But the other books in this volume seem destined for only that kind of immortality conferred on amusing period pieces. When, for example, Galbraith complains in “The Affluent Society” that governments can’t borrow enough, or that the Federal Reserve is powerless to resist inflation, you wonder what country he was writing about, or even what planet he was living on.

Not that the professor refused to learn. In the first edition of “The New Industrial State,” for instance, he writes confidently: “While there may be difficulties, and interim failures or retreats are possible and indeed probable, a system of wage and price restraint is inevitable in the industrial system.” A decade or so later, in the edition selected for this volume, that sentence is gone. In its place is another not quite so confident: “The history of controls, in some form or other and by some nomenclature, is still incomplete.”

At the 1955 stock-market hearings, Galbraith was followed at the witness table by the aging speculator and “adviser to presidents” Bernard M. Baruch. The committee wanted to know what the Wall Street legend thought of the learned economist. “I know nothing about him to his detriment,” Baruch replied. “I think economists as a rule—and it is not personal to him—take for granted they know a lot of things. If they really knew so much, they would have all of the money, and we would have none.”

Mr. Grant, the editor of Grant’s Interest Rate Observer, is the author, most recently, of “Mr. Market Miscalculates” (Axios, 2009)

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Full article and photos: http://online.wsj.com/article/SB10001424052748703556604575501883282762648.html

Homo administrans

The biology of business

Biologists have brought rigour to psychology, sociology and even economics. Now they are turning their attention to the softest science of all: management

SCURRYING around the corridors of the business school at the National University of Singapore (NUS) in his white lab coat last year, Michael Zyphur must have made an incongruous sight. Visitors to management schools usually expect the staff to sport suits and ties. Dr Zyphur’s garb was, however, no provocative fashion statement. It is de rigueur for anyone dealing with biological samples, and he routinely collects such samples as part of his research on, of all things, organisational hierarchies. He uses them to look for biological markers, in the form of hormones, that might either cause or reflect patterns of behaviour that are relevant to business.

Since its inception in the early 20th century, management science has been dominated by what Leda Cosmides and John Tooby, two evolutionary psychologists, refer to disparagingly as the standard social science model (SSSM). This assumes that most behavioural differences between individuals are explicable by culture and socialisation, with biology playing at best the softest of second fiddles. Dr Zyphur is part of an insurgency against this idea. What Dr Cosmides and Dr Tooby have done to psychology and sociology, and others have done to economics, he wants to do to management. Consultants often talk of the idea of “scientific” management. He, and others like him, want to make that term meaningful, by applying the rigour of biology.

To do so, they will need to weave together several disparate strands of the subject—genetics, endocrinology, molecular biology and even psychology. If that works, the resulting mixture may provide a new set of tools for the hard-pressed business manager.

To the management born

Say “biology” and “behaviour” in the same sentence, and most minds think of genetics and the vexed question of nature and nurture. In a business context such questions of heredity and environment are the realm of Scott Shane, a professor of management at Case Western Reserve University in Ohio. In a recent book*, Dr Shane proffers a review of the field. Many of his data come from studies of twins—a traditional tool of human geneticists, who are denied the possibility of experimental breeding enjoyed by their confrères who study other species, such as flies and mice.

Identical twins share all of their DNA. Non-identical twins share only half (like all other siblings). Despite a murky past involving the probable fabrication of data by one of the field’s pioneers, Sir Cyril Burt, the science of comparing identical with non-identical twins is still seen as a good way of distinguishing the effects of genes from those of upbringing.

The consensus from twin studies is that genes really do account for a substantial proportion of the differences between individuals—and that applies to business as much as it does to the rest of life. Dr Shane observes genetic influence over which jobs people choose (see chart), how satisfied they are with those jobs, how frequently they change jobs, how important work is to them and how well they perform (or strictly speaking, how poorly: genes account for over a third of variation between individuals in “censured job performance”, a measure that incorporates reprimands, probation and performance-related firings). Salary also depends on DNA. Around 40% of the variation between people’s incomes is attributable to genetics. Genes do not, however, operate in isolation. Environment is important, too. Part of the mistake made by supporters of the SSSM was to treat the two as independent variables when, in reality, they interact in subtle ways.

Richard Arvey, the head of the NUS business school’s department of management and organisation, has been looking into precisely how genes interact with different types of environment to create such things as entrepreneurial zeal and the ability to lead others. Previous research had shown that people exhibiting personality traits like sensation-seeking are more likely to become entrepreneurs than their less outgoing and more level-headed peers. Dr Arvey and his colleagues found the same effect for extroversion (of which sensation-seeking is but one facet). There was, however, an interesting twist. Their study—of 1,285 pairs of identical twins and 849 pairs of same-sex fraternal ones—suggests that genes help explain extroversion only in women. In men, this trait is instilled environmentally. Businesswomen, it seems, are born. But businessmen are made.

In a second twin study, this time just on men, Dr Arvey asked to what extent leaders are born, and to what extent they are made. Inborn leadership traits certainly do exist, but upbringing, he found, matters too. The influence of genes on leadership potential is weakest in boys brought up in rich, supportive families and strongest in those raised in harsher circumstances. The quip that the battle of Waterloo was won on the playing fields of Eton thus seems to have some truth.

Pathways to success

Twin studies such as these point the way, but they provide only superficial explanations of what is going on. To get at the nitty gritty it is necessary to dive into molecular biology. And that is the province of people like Song Zhaoli, who is also at the NUS.

One way genes affect behaviour is through the agency of neurotransmitters, the chemicals that carry messages between nerve cells. Among these chemicals, two of the most important are dopamine and serotonin. Dopamine controls feelings of pleasure and reward. Serotonin regulates mood. Some personality traits have been shown to depend on the amounts of these neurotransmitters that slosh around the junctions between nerve cells. Novelty-seeking, for example, is associated with lots of dopamine. A tendency to depression may mean too little serotonin. And the levels of both are regulated by genes, with different variants of the same underlying gene having different effects.

Recent years have seen a surge of research into the links between particular versions of neurotransmitter-related genes and behavioural outcomes, such as voter turnout, risk-aversion, personal popularity and sexual promiscuity. However, studies of work-related traits have hitherto been conspicuous by their absence.

Dr Song has tried to fill this gap. His team have gathered and analysed DNA from 123 Singaporean couples to see if it can be matched with a host of work-related variables, starting with job satisfaction.

In this case Dr Song first checked how prone each participant in the study was to the doldrums, in order to establish a baseline. He also asked whether they had experienced any particularly stressful events, like sustaining serious injury, getting the sack or losing a lot of money, within the previous year. Then he told participants to report moments of negative mood (anger, guilt, sadness or worry) and job satisfaction (measured on a seven-point scale) four times a day for a week, using a survey app installed on their mobile phones.

He knew from previous research that some forms of melancholia, such as seasonal affective disorder (or winter blues), have been linked to particular versions of a serotonin-receptor gene called HTR2A. When he collated the DNA and survey data from his volunteers, he found those with a particular variant of HTR2A were less likely than those carrying one of its two other possible variants to experience momentary negative mood, even if they had had a more stress-ridden year. Dr Song also found that when carriers of that same variant reported lower negative mood, they also tended to report higher job satisfaction—an effect which was absent among people who had inherited the remaining two versions of the gene.

This suggests that for people fortunate enough to come equipped with the pertinent version of HTR2A, stressful events are less likely to have a negative effect on transient mood. What is more, for these optimists, better mood turns out to be directly related to contentment with their job. In other words, it may be a particular genetic mutation of a serotonin-receptor gene, and not the employer’s incentives, say, that is making people happier with their work.

The hormonal balance-sheet

Neurotransmitters are not the only way an individual’s genetic make-up is translated into action. Hormones also play a part. For example, oxytocin, which is secreted by part of the brain called the hypothalamus, has been shown to promote trust—a crucial factor in all manner of business dealings. The stress hormone cortisol, meanwhile, affects the assessment of the time value of money.

That, at least, was the conclusion of a study by Taiki Takahashi of Hokkaido University in Japan. After taking saliva samples from 18 volunteers, Dr Takahashi asked them what minimum amount of money they would accept in a year’s time in order to forgo an immediate payout of ¥10,000 (around $90 at the time). He found those with a lower base level of the hormone tended to prefer immediate payment, even when the sum in question was piffling compared with the promised future compensation.

Then there is testosterone, the principal male sex hormone (though women make it too). The literature on this hormone’s behavioural effects is vast. High levels of the stuff have been correlated with risk tolerance, creativity and the creation of new ventures. But testosterone is principally about dominance and hierarchy. This is where Dr Zyphur’s mouth swabs come in.

When Dr Zyphur (who is now at the University of Melbourne) was at the NUS, he led a study of how testosterone is related to status and collective effectiveness in groups. He and his colleagues examined levels of the hormone in 92 mixed-sex groups of about half a dozen individuals. Surprisingly, a group member’s testosterone level did not predict his or her status within the group. What the researchers did discover, though, is that the greater the mismatch between testosterone and status, the less effectively a group’s members co-operate. In a corporate setting that lower productivity translates into lower income.

Testosterone crops up in another part of the business equation, too: sales. It appears, for instance, to be a by-product of conspicuous consumption. In an oft-cited study Gad Saad and John Vongas of Concordia University in Montreal found that men’s testosterone levels responded precisely to changes in how they perceived their status. Testosterone shot up, for example, when they got behind the wheel of a sexy sports car and fell when they were made to drive a clunky family saloon car. The researchers also reported that when a man’s status was threatened in the presence of a female by a display of wealth by a male acquaintance, his testosterone levels surged.

As Dr Saad and Dr Vongas point out, a better understanding of this mechanism could help explain many aspects both of marketing and of who makes a successful salesman. Car salesmen, for example, are stereotypically male and aggressive, which tends to indicate high levels of testosterone. Whether that is really the right approach with male customers is, in light of this research, a moot point.

Natural selection

Results such as these are preliminary. But they do offer the possibility of turning aspects of management science into a real science—and an applied science, to boot. Decisions based on an accurate picture of human nature have a better chance of succeeding than those that are not. For instance, if job satisfaction and leadership turn out to have large genetic components, greater emphasis might be placed on selection than on training.

Not everyone is convinced. One quibble is that many investigations of genetics and behaviour have relied on participants’ retrospective reports of their earlier psychological states, which are often inaccurate. This concern, however, is being allayed with the advent of techniques such as Dr Song’s mobile-sampling method.

Another worry is that, despite the fact that most twin studies have been extensively replicated, they may be subject to systematic flaws. If parents exhibit a tendency to treat identical twins more similarly than fraternal ones, for instance, then what researchers see as genetic factors could turn out to be environmental ones.

That particular problem can be examined by looking at twins who have been fostered or adopted apart, and thus raised in separate households. A more serious one, though, has emerged recently. This is that identical twins may not be as identical as appears at first sight. A process called epigenesis, which shuts down genes in response to environmental prompts, may make their effective genomes different from their actual ones.

Statistically, that would not matter too much if the amount of epigenesis were the same in identical and fraternal twins, but research published last year by Art Petronis of the Centre for Addiction and Mental Health in Toronto and his colleagues, suggests it is not. Instead, identical twins are epigenetically closer to each other than the fraternal sort. That means environmentally induced effects that are translated into action by this sort of epigenesis might be being confused by researchers with inherited ones.

Still, this and other concerns about the effectiveness of the new science should pass as more data are gathered. But a separate set of concerns may be increased by better data. These are those of an ethical nature, which pop up whenever scientists broach the nature-nurture nexus. Broadly, such concerns divide into three sorts.

The first involves the fear that genetic determinism cheapens human volition. But as Dr Shane is at pains to stress, researchers like him are by no means genetic fatalists. He draws an analogy with sports wagers. Knowing that you have the favourable version of a gene may shift the odds somewhat, but it no more guarantees that you will be satisfied with your job than knowing of a player’s injury ensures that you will cash in on his team’s loss. Indeed, it might be argued that a better understanding of humanity can help direct efforts to counteract those propensities viewed as detrimental or undesirable, thus ensuring people are less, rather than more, in thrall to their biology.

The second set of ethical worriers are those who fret that biological knowledge may be used to serve nefarious ends. Whenever biology meets behaviour the spectre of social Darwinism and eugenics looms menacingly in the background. Yet, just because genetic information can serve evil ends need not mean that it has to. Dr Shane observes that pretending DNA has no bearing on working life does not make those influences go away, it just makes everyone ignorant of what they are, “Everyone, that is, except those who want to misuse the information.”

The third ethical qualm involves the thorny issue of fairness. Ought employers to use genetic testing to select their workers? Will this not lead down a slippery slope to genetic segregation of the sort depicted in the genetic dystopias beloved of science-fiction?

This pass, however, has already been sold. Workers are already sometimes hired on the basis of personality tests that try to tease out the very genetic predispositions that biologists are looking for. The difference is that the hiring methods do this indirectly, and probably clumsily. Moreover, in a rare example of legislative foresight, politicians in many countries have anticipated the problem. In 2008, for example, America’s Congress passed the Genetic Information Nondiscrimination Act, banning the use of genetic information in job recruitment. Similar measures had previously been adopted in several European countries, including Denmark, Finland, France and Sweden.

Biohazard?

There is one other group of critics. These are those who worry that applying biology to business is dangerous not because it is powerful, but because it isn’t. To the extent they are genetic at all, behavioural outcomes are probably the result of the interaction of myriad genes in ways that are decades from being fully understood. That applies as much to business-related behaviour as to behaviour in any other facet of life.

Still, as Dr Zyphur is keen to note, not all academic work has to be about hard-nosed application in the here and now. Often, the practical applications of science are serendipitous—and may take a long time to arrive. And even if they never arrive, understanding human behaviour is just plain interesting for its own sake. “We in business schools often act like technicians in the way we conceptualise and teach our topics of study,” he laments. “This owes much to the fact that a business school is more like a trade school than it is a part of classic academia.” Now, largely as a result of efforts by Dr Zyphur and others like him, management science looks set for a thorough, biology-inspired overhaul. Expect plenty more lab coats in business-school corridors.

*“Born Entrepreneurs, Born Leaders. How Your Genes Affect Your Work Life”. Oxford University Press. $29.95

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Full article and photos: http://www.economist.com/node/17090697

Aren’t We Clever?

What a contrast. In a year that’s on track to be our planet’s hottest on record, America turned “climate change” into a four-letter word that many U.S. politicians won’t even dare utter in public. If this were just some parlor game, it wouldn’t matter. But the totally bogus “discrediting” of climate science has had serious implications. For starters, it helped scuttle Senate passage of the energy-climate bill needed to scale U.S.-made clean technologies, leaving America at a distinct disadvantage in the next great global industry. And that brings me to the contrast: While American Republicans were turning climate change into a wedge issue, the Chinese Communists were turning it into a work issue.

“There is really no debate about climate change in China,” said Peggy Liu, chairwoman of the Joint U.S.-China Collaboration on Clean Energy, a nonprofit group working to accelerate the greening of China. “China’s leaders are mostly engineers and scientists, so they don’t waste time questioning scientific data.” The push for green in China, she added, “is a practical discussion on health and wealth. There is no need to emphasize future consequences when people already see, eat and breathe pollution every day.”

And because runaway pollution in China means wasted lives, air, water, ecosystems and money — and wasted money means fewer jobs and more political instability — China’s leaders would never go a year (like we will) without energy legislation mandating new ways to do more with less. It’s a three-for-one shot for them. By becoming more energy efficient per unit of G.D.P., China saves money, takes the lead in the next great global industry and earns credit with the world for mitigating climate change.

So while America’s Republicans turned “climate change” into a four-letter word — J-O-K-E — China’s Communists also turned it into a four-letter word — J-O-B-S.

“China is changing from the factory of the world to the clean-tech laboratory of the world,” said Liu. “It has the unique ability to pit low-cost capital with large-scale experiments to find models that work.” China has designated and invested in pilot cities for electric vehicles, smart grids, LED lighting, rural biomass and low-carbon communities. “They’re able to quickly throw spaghetti on the wall to see what clean-tech models stick, and then have the political will to scale them quickly across the country,” Liu added. “This allows China to create jobs and learn quickly.”

But China’s capability limitations require that it reach out for partners. This is a great opportunity for U.S. clean-tech firms — if we nurture them. “While the U.S. is known for radical innovation, China is better at tweak-ovation.” said Liu. Chinese companies are good at making a billion widgets at a penny each but not good at complex system integration or customer service.

We (sort of) have those capabilities. At the World Economic Forum meeting here, I met Mike Biddle, founder of MBA Polymers, which has invented processes for separating plastic from piles of junked computers, appliances and cars and then recycling it into pellets to make new plastic using less than 10 percent of the energy required to make virgin plastic from crude oil. Biddle calls it “above-ground mining.” In the last three years, his company has mined 100 million pounds of new plastic from old plastic.

Biddle’s seed money was provided mostly by U.S. taxpayers through federal research grants, yet today only his tiny headquarters are in the U.S. His factories are in Austria, China and Britain. “I employ 25 people in California and 250 overseas,” he says. His dream is to have a factory in America that would repay all those research grants, but that would require a smart U.S. energy bill. Why?

Americans recycle about 25 percent of their plastic bottles. Most of the rest ends up in landfills or gets shipped to China to be recycled here. Getting people to recycle regularly is a hassle. To overcome that, the European Union, Japan, Taiwan and South Korea — and next year, China — have enacted producer-responsibility laws requiring that anything with a cord or battery — from an electric toothbrush to a laptop to a washing machine — has to be collected and recycled at the manufacturers’ cost. That gives Biddle the assured source of raw material he needs at a reasonable price. (Because recyclers now compete in these countries for junk, the cost to the manufacturers for collecting it is steadily falling.)

“I am in the E.U. and China because the above-ground plastic mines are there or are being created there,” said Biddle, who just won The Economist magazine’s 2010 Innovation Award for energy/environment. “I am not in the U.S. because there aren’t sufficient mines.”

Biddle had enough money to hire one lobbyist to try to persuade the U.S. Congress to copy the recycling regulations of Europe, Japan and China in our energy bill, but, in the end, there was no bill. So we educated him, we paid for his tech breakthroughs — and now Chinese and European workers will harvest his fruit. Aren’t we clever?

Thomas L. Friedman, New York Times

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Full article: http://www.nytimes.com/2010/09/19/opinion/19friedman.html

That ’70s Feeling

TODAY we celebrate the American labor force, but this year’s working-class celebrity hero made his debut almost a month ago. Steven Slater, a flight attendant for JetBlue, ended his career by cursing at his passengers over the intercom and grabbing a couple of beers before sliding down the emergency-evacuation chute — and into popular history.

The press immediately drew parallels between Mr. Slater’s outburst and two iconic moments of 1970s popular culture: Howard Beale’s “I’m mad as hell” rant from the 1976 film “Network” and Johnny Paycheck’s 1977 anthem of alienation, “Take This Job and Shove It.”

But these are more than just parallels: those late ’70s events are part of the cultural foundation of our own time. Less expressions of rebellion than frustration, they mark the final days of a time when the working class actually mattered.

The ’70s began on a remarkably hopeful — and militant — note. Working-class discontent was epidemic: 2.4 million people engaged in major strikes in 1970 alone, all struggling with what Fortune magazine called an “angry, aggressive and acquisitive” mood in the shops.

Most workers weren’t angry over wages, though, but rather the quality of their jobs. Pundits often called it “Lordstown syndrome,” after the General Motors plant in Ohio where a young, hip and interracial group of workers held a three-week strike in 1972. The workers weren’t concerned about better pay; instead, they wanted more control over what was then the fastest assembly line in the world.

Newsweek called the strike an “industrial Woodstock,” an upheaval in employment relations akin to the cultural upheavals of the 1960s. The “blue-collar blues” were so widespread that the Senate opened an investigation into worker “alienation.”

But what felt to some like radical change in the heartland was really the beginning of the end — not just of organized labor’s influence, but of the very presence of workers in national civic life.

When the economy soured in 1974, business executives dismissed workers’ complaints about the quality of their occupational life — and then went gunning for their paychecks and their unions as well, abetted by a conservative political climate and the offshoring of the nation’s industrial core. Inflation, not unemployment, became Public Enemy No. 1, and workers bore the political costs of the fight against it.

Though direct workplace confrontations quickly dropped off, the feelings that had fueled them did not. Analysts began talking of an “inner class war” — more psychological than material, more anxious than angry, more about self-worth than occupational justice.

“Something’s happening to people like me,” Dewey Burton, an assembly-line worker for Ford, told The Times in 1974. “More and more of us are sort of leaving our hopes outside in the rain and coming into the house and just locking the door — you know, just turning the key and ‘click,’ that’s it for what we always thought we could be.”

Johnny Paycheck, a country singer, understood. Throngs of working-class people may have gathered around jukeboxes to raise a glass and chant the famous chorus to his most famous song, but they knew that his urge to rebellion was really just a fantasy: “I’d give the shirt right off of my back / If I had the nerve to say / Take this job and shove it!”

Similarly, in “Network,” Howard Beale, a TV news anchor played by Peter Finch, became famous as “the mad prophet of the airwaves.” But while he and his audiences may have been yelling, “I’m as mad as hell, and I’m not going to take this anymore!” the tag line was more a psychological release than a call to arms. After all, at the end of the film, Beale, already in suicidal despair, is murdered by his employer for meddling with the system.

The overt class conflict of the late ’70s ended a while ago. Workers have learned to internalize and mask powerlessness, but the internal frustration and struggle remain. Any questions about quality of work life, the animating issue of 1970s unrest, have long since disappeared — despite the flat-lining of wages in the decades since. Today the concerns of the working class have less space in our civic imagination than at any time since the Industrial Revolution.

Occasionally a rebel shatters the silence. Like Steven Slater, though, they get more publicity than political traction. Many things about America have changed since the late ’70s, but the soundtrack of working-class life, sadly, remains the same.

Jefferson Cowie, an associate professor of labor history at Cornell, is the author of “Stayin’ Alive: The 1970s and the Last Days of the Working Class.”

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Full article: http://www.nytimes.com/2010/09/06/opinion/06Cowie.html

The 1.6% Recovery

The results of the Obama economic experiment are coming in.

To no one’s surprise except perhaps Vice President Joe Biden’s, second quarter economic growth was revised down yesterday to 1.6% from the prior estimate of 2.4%, which was down from first quarter growth of 3.7%, which was down from the 2009 fourth quarter’s 5%. Economic recoveries are supposed to go in the other direction.

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The downward revision was anticipated given the poor early economic reports for the third quarter, including a plunge in new home sales, mediocre manufacturing data, volatile jobless claims and even (after a healthy period) weaker corporate profits. Many economists fear that third quarter growth could be negative. Even if the economy avoids a double-dip recession, the current pace of growth is too sluggish to create many new jobs or improve middle-class living standards.

As recently as August 3, Treasury Secretary Timothy Geithner took to our competitor’s pages to declare that this couldn’t happen. “Welcome to the Recovery,” he wrote, describing how the $862 billion government stimulus was still rolling out, business investment was booming, and the economy was poised for sustainable growth.

We all make mistakes, but the problem for the American people is that Mr. Geithner’s blunder is conceptual. He and President Obama and their economic coterie really believe that government spending can stimulate growth by triggering private “demand,” that tax rates are irrelevant to investment decisions, that waves of new regulation can be absorbed by business with little impact on costs or hiring, and that politicians can assail capitalists without having any effect on the movement of capital.

This has been the great Washington policy experiment of the last three years, and it isn’t turning out too well. If prosperity were a function of government stimulus, our economy should be booming. The Fed has kept interest rates at near-zero for nearly two years, while Congress has flooded the economy with trillions of dollars in spending, loan guarantees, $8,000 tax credits for housing, “cash for clunkers,” and so much more. Never before has government tried to do so much and achieved so little.

Now that the failure is becoming obvious, the liberal explanation is that things would have been worse without all of this government care and feeding. The same economists who recommended the stimulus are now producing studies, based on their Keynesian demand models, claiming that it “saved or created” millions of jobs, even as the overall economy has lost millions of jobs. The counterfactual is impossible to disprove, but the American people can see the reality with their own eyes.

The nearby table compares growth in the current recovery with the recovery following the recession of 1981-82, the last time the jobless rate exceeded 10%. The contrast is stark.

Then after three quarters the recovery was in high gear. Now it is decelerating. Then tax rates were falling, interest rates were coming down and the regulatory state was in retreat. Now taxes are poised to rise sharply, interest rates can’t get any lower, and federal agencies are hassling business at every turn. Then business investment was exploding. Now companies are sitting on something like $2 trillion, reluctant to take risks when they don’t know what new costs government might next impose on them.

To borrow a phrase, maybe it’s time for a change.

Editorial, Wall Street Journal

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Full article and photo: http://online.wsj.com/article/SB10001424052748704147804575455823740024224.html

The Mark Hurd Show

In the CEO’s job, one strike and you’re usually out. The former head of H-P had two.

Mark Hurd is fired as Hewlett-Packard CEO as the upshot of a questionable sexual harassment complaint—and Oracle’s Larry Ellison thinks the proper analogy is to Apple’s ouster, in 1985, of its wunderkind co-founder Steve Jobs. At the time, recall, Apple was consumed in a debate, not about soft-porn actress Jodie Fisher, but about how to adapt to the decisive triumph of the Wintel standard.

You could almost suspect a backhanded Ellisonian genius at work, deliberately drawing an analogy designed to flush out a far more apt analogy. This one too involves Mr. Jobs—and Al Gore. As an Apple director, the former vice president preserved the company’s chief asset by producing a 2006 report to whitewash Mr. Jobs’s role in backdating management’s stock options.

Mr. Ellison, a friend of Mr. Hurd, in his now-famous letter to the media, could not have meant that the H-P board had deprived itself a visionary genius who would go on to invent new industries. If he meant anything serious, Mr. Ellison meant that H-P directors, in firing Mr. Hurd, had thrown overboard a valuable executive to minimize the public-relations risk to their own hides.

This is exactly the opposite of what Al Gore did. He got little credit at the time, and was undoubtedly glad of it, since his mission was successful only if no one noticed it. As an Apple director and head of a three-member panel assigned to investigate the Apple backdating scandal, he had the courage to be unconvincing—excusing Mr. Jobs of everything except naiveté about the finer points of accounting rules for management stock options.

For a CEO, it’s usually one strike and you’re out. The former head of H-P had two.

The two cases are similar enough in the ways that matter. Mr. Hurd was a CEO highly valued by the stock market. His offenses were piddling enough that even now we can’t get a persuasive statement of them. One difference, though, is that this would have been the second time the H-P board had to mount a rescue operation for Mr. Hurd. In the CEO’s job, one strike and you’re usually out. Mr. Hurd has had two.

Let’s recall a little history. H-P in recent years has been a problem child of Silicon Valley, and of this column. We defended Carly Fiorina against her critics, and her strategic gropings have played a role in the company’s relative success in recent years. We’ll defend Mark Hurd too, for his ruthless devotion to efficiency, for executing on what was essentially Ms. Fiorina’s choice to keep H-P together, to get bigger and try to latch on to the convergence of consumer electronics and information technology toward the cloudization of everything.

An early bump in the road, though, was his role in the 2006 scandal in which the company, attempting to quell leaks from its soap-operatic board, employed private investigators to steal the phone records of board members and journalists. You will remember the flaying and humiliation of H-P’s highly reputed board chairwoman, Patricia Dunn, who became the primary fall person.

You are less likely to recall the unconvincing press conference of Mr. Hurd, in which he tried to project an air of “accountability” while simultaneously claiming to have been remote from the shenanigans.

We gave an ironic rendition of his performance here in a column on Sept. 27, 2006. Mr. Hurd admitted what he couldn’t deny, including directly authorizing the seminal dirty trick, namely using an email scam to lure a reporter into exposing her sources. Otherwise, he adopted every minimizing adjective in the book, as did his board, as did the media, all playing along with the company’s strategy of saving Mr. Hurd at the expense of Ms. Dunn.

Today, all the other stuff you hear may be true—that Mr. Hurd was unpopular because he brutally cut jobs, cut costs, cut research spending, imposed discipline, and did so without conspicuously feeling the pain he imposed on others. In other words, a lot of what you hear are the sickly moanings of the vaunted “H-P way”—a set of admirable teamwork principles that nowadays is mostly invoked to resist unwelcome change.

Such mythologies have a way of becoming entrenched just as they’re least useful. Mr. Hurd’s style of wearing himself out against this brick wall of conceit may have been different than Ms. Fiorina’s style of wearing herself out against it. But both were done in by the same thing, essentially, even as each had their successes in moving the company beyond it. We’re guessing the same will be true of the next CEO too.

Holman Jenkins Jr., Wall Street Journal

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Full article and photo: http://online.wsj.com/article/SB10001424052748704296704575431322299349154.html

The Great American Bond Bubble

If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield.

Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity.

Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.

This suggests that if the household sector owes what the market believes that debt is worth, then effective debt ratios are much lower. On the other hand, if households do repay most of that debt, then the financial sector will be able to write-up hundreds of billions of dollars in loans and mortgages that were marked down, resulting in extraordinary returns. In either scenario, we believe U.S. economic growth is likely to accelerate.

Furthermore, economists generally agree that the most important determinant for long-term economic growth is productivity, not consumer demand. Despite the subpar productivity growth reported for the last quarter, the latest year-over-year productivity growth of 3.9% is almost twice the long-term average. For the first two quarters of this year productivity growth, at over 6%, was the highest since the 1960s.

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.

Yes, we can hear the catcalls now. Stock returns calculated off the broad-based indexes have been horrendous over the last decade. In 2009, the percentage decline in aggregate dividends was the largest since the Great Depression. But remember the last decade began at the peak of the technology bubble.

Those who bought “value” stocks during the tech bubble—stocks with good dividend yields and low price-to-earnings ratios—have done much better. From December 1999 through July 2010, the Russell 3000 Value Index returned 35% cumulatively while the Russell 3000 Index of all stocks still showed a loss.

Today, the 10 largest dividend payers in the U.S. are AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, Phillip Morris International, Pfizer, General Electric and Merck. They sport an average dividend yield of 4%, approximately three percentage points above the current yield on 10-year TIPS and over one percentage point ahead of the yield on standard 10-year Treasury bonds. Their average price-earnings ratio, based on 2010 estimated earnings, is 11.7, versus 13 for the S&P 500 Index. Furthermore, their earnings this year (a year that hardly could be considered booming economically) are projected to cover their dividend by more than 2 to 1.

Due to economic growth the dividends from stocks, in contrast with coupons from bonds, historically have increased more than the rate of inflation. The average dividend income from a portfolio of S&P 500 Index stocks grew at a rate of 5% per year since the index’s inception in 1957, fully one percentage point ahead of inflation over the period. That growth rate includes the disastrous dividend reductions that occurred in 2009, the worst year for dividend cuts by far since the Great Depression.

Those who are now crowding into bonds and bond funds are courting disaster. The last time interest rates on Treasury bonds were as low as they are today was in 1955. The subsequent 10-year annual return to bonds was 1.9%, or just slightly above inflation, and the 30-year annual return was 4.6% per year, less than the rate of inflation.

Furthermore, the possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

With future government finances so precarious, private asset accumulation and dividend income must become the major sources of retirement funding. At current interest rates, government bonds will not be the answer. One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds.

Mr. Siegel is a professor of finance at the University of Pennsylvania’s Wharton School and a senior adviser to WisdomTree Inc. Mr. Schwartz is the director of research at WisdomTree Inc.

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Full article and photo: http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html

Japan as Number Three

Beijing’s rise, Tokyo’s fall and the wealth of nations.

Younger readers may find this hard to believe, but a mere 20 years ago America’s political and academic establishments viewed Japan as the world’s ascendant economic power. “Japan as Number One” was the title of an influential book by Harvard’s Ezra Vogel, and the journalistic fashion was to lament that while Japan had lost to America in war it had triumphed over the U.S. as an economic competitor.

That inevitability has turned to irony on the news that China has now supplanted Japan as the world’s second largest economy. Such a result was hard to imagine a generation ago, and Japan still far outstrips China in per capita GDP and standard of living.

But the relative growth trends are undeniable, as the nearby chart shows. From 1990 through 2009, China grew by an average of nearly 10% a year, while Japan endured a sharp growth deceleration from its postwar glory years to well under 2% a year. As one nation rises rapidly out of poverty, another has at best settled into a prosperous stagnation.

It’s worth pondering the reasons for this Asian reversal, and its implications. One obvious, if too often forgotten, lesson is that the wealth of a nation is not a birthright. Prosperity has to be earned year after year, through sound economic policies that unleash the natural talents of a nation’s people.

[1japanas]

For China, the breakthrough event was Deng Xiaoping’s opening to the world and free markets in 1978. First in agriculture, and later in other industries, China became a remarkably entrepreneurial place. As our Hugo Restall wrote in 2008, the government share of GDP shrank to about 11% in the early 2000s from 31% in 1978. China unilaterally cut tariffs, joined the World Trade Organization, and forced state-owned companies to shape up and meet new competition. China is still benefitting from the growth momentum of those decisions.

Japan, meanwhile, was moving in the opposite direction. In 1984, we wrote an editorial, “Japan as No. 21,” which described how Japan ranked 21st at that time out of 23 developed countries in government revenue as a share of GDP: 27%, according to the Organization for Economic Cooperation and Development (OECD). In spending, it was dead last at 26%. No longer. Japan has imposed a value-added tax and government spending as a share of GDP is closer to 40%.

After its property and stock bubbles burst in 1990, Japan also embarked on what may have been the longest and most expensive Keynesian policy experiment in world history. (See “Barack Obama-san,” Dec. 16, 2008.) This has taken debt as a share of GDP to nearly 200% while doing very little for growth. Japan has also failed to reform its own version of perverse government-sponsored enterprise, the postal savings system, among other domestic barriers to competition.

A visitor to Japan will still see an affluent nation, but its relative decline has been striking. Derek Scissors of the Heritage Foundation notes that Japan now ranks roughly 40th in measures of personal income and that the average Japanese is now poorer than the average citizen of Mississippi. A lost generation of growth has compounding consequences.

Another comparative economic question concerns not merely policy but national will. Emerging from defeat in World War II, the Japanese people were bent on rising again, albeit peacefully. Their social cohesion and corporate discipline built some of the world’s great companies, which still contribute to global well-being.

Tourists stop at a clothing shop in Tokyo Monday, Aug. 16, 2010. Japan lost its place as the world’s No. 2 economy to China in the second quarter as receding global growth sapped momentum and stunted a shaky recovery.

Now Japan’s population is aging, and older countries tend to be more risk-averse. Unlike the U.S. or Australia, Japan has never welcomed immigrants who could supply a younger generation of workers. Its political system seems unable to return to a pro-growth agenda.

Today, China is the more dynamic, confident nation, its people striving to make up for lost centuries and reassert themselves as the dominant regional power. China has its own problems with an aging population (thanks to its one-child policy), but the migration of tens of millions from countryside to cities gives it plenty of youthful talent.

The question is whether China can maintain its fantastic rate of growth as it runs up against the limits of one-party rule. Especially since the financial panic tarnished the U.S. economic model, the Chinese are increasingly touting their version of “state-directed” global business champions.

In a recent report for the U.S. Chamber of Commerce, old China hand James McGregor of APCO Worldwide shows how China is moving away from free market policies by sheltering domestic companies in seven key areas from competition. This will lead to less domestic efficiency and innovation, while courting a global trade backlash. Politically directed capital can flourish for a time but it inevitably founders on the lack of market discipline.

The economic rise of China has nevertheless been a great and welcome contribution to global prosperity, much as Japan’s rise was in the postwar decades. By contrast, Japan’s 20-year stagnation has been a tragedy for the world as well as for the Japanese people. Global prosperity is not a zero-sum game, and each nation needs to make its contribution.

Americans can take some comfort that at least through 2008 the U.S. had retained its global economic standing even as other nations rose and fell. The U.S. remains far and away the world’s largest economy, though China is gaining. The way to avoid Japan’s fate is to avoid the same policy mistakes, which means returning to the policies of the 1980s that revived the U.S. after the last Great Recession.

Editorial, Wall Street Journal

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Full article and photos: http://online.wsj.com/article/SB10001424052748704868604575433212314778700.html

The End of American Optimism

Our brief national encounter with optimism is now well and truly over. We have had the greatest fiscal and monetary stimulus in modern times. We have had a whole series of programs to pay people to buy cars, purchase homes, pay off their mortgages, weatherize their homes, and install solar paneling on their roofs. Yet the recovery remains feeble and the aftershocks of the post-bubble credit collapse are ongoing.

We are at least 2.5 million jobs short of getting back to the unemployment rate of under 8% promised by the Obama administration. Concern grows that we are looking at a double-dip recession and hovering on the brink of a destructive deflation. Things are bad enough for Federal Reserve Chairman Ben Bernanke to have characterized the economic outlook late last month as “unusually uncertain.”

Are we at the end of the post-World War II period of growth? Tons of money have been shoveled in to rescue reckless banks and fill the huge hole in the economy, but nothing is working the way it normally had in all our previous crises.

The Eastbay Works One-Stop Career Center, Oakland, Calif.

Rather, we are in what a number of economists are referring to as the “new normal.” This is a much slower-growing economy that, recent surveys have revealed, is causing many Americans to distance themselves from the long-held assumption that their children will have it better than they.

What was thought to be normal in the context of post-World War II recoveries? One is that four quarters into the recovery, real GDP would expand at an annual rate over 6%. We are coming out of the current recession at a 2.4% growth rate.

We did enjoy a GDP boost from a buildup of inventories anticipating a recovery at normal speed, but it didn’t happen. David Rosenberg, chief economist of Gluskin Sheff, regards it as “frightening” that whereas the “normal” rate of increase in final sales is 4% annually, this time sales have averaged only 1.2%, the weakest revival in recorded history.

At this point after the onset of a recession, employment payrolls have typically exceeded 700,000 jobs above the previous peak. In this recession, we are still down roughly eight million jobs from the December 2007 peak. As for consumer confidence, the Conference Board survey shows an average a full 20 points below the average lows of previous recessions.

There seems to be a structural change in the American economy. The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100%, but in 2007 the debt ratio hit 131% of income. It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%. The pre-bubble norm was 70%. To get to this ratio again, debt would have to be reduced by about $6 trillion.

In the meantime, we may well be looking at a vicious cycle of defaults that in turn would produce credit tightening and still more economic weakness—compounding the caution among borrowers, lenders and public financial authorities.

The most obvious source of distress right now is lack of payroll growth, and it’s likely to get worse. Real unemployment today is well above the headline number of 9.5%. That number held steady only because 1,115,000 people gave up hope of finding work and left the labor force in the last three months. Otherwise the headline unemployment rate would have been around 10.4%.

Now there are at least 14.5 million Americans still searching for work: 1.4 million of them have been jobless for more than 99 weeks, 6.5 million have been jobless for over 27 weeks. This is a stunning reflection of the longer-term unemployment we are coping with.

The unemployment numbers are worse than reported. Last year the Labor Department admitted it over-counted the number of jobs by 1.4 million. Why? Because they used a computer program that tries to extrapolate how many new companies are being created during each month and then estimates the number of jobs these firms should be creating. They were wrong.

Since April, the Labor Department has counted 550,000 nonexistent jobs under this so-called birth/death series. Without these phantom jobs, the economy this year created virtually no jobs—certainly not the 600,000 the administration has been touting.

The Obama administration projects the unemployment rate will drop to 8.7% by the end of next year and 6.8% by 2013. That is totally unrealistic. It means we would have to add nearly 300,000 jobs a month over the next three years. At the rate we’re going, it will take anywhere from six to nine years to climb out of this hole. The labor market may be improving, but the pace is glacial.

If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms. For example, we have a gross mismatch of available skills and demonstrable needs. Businesses struggle to find the skills and talents that are needed to compete in this new world. Millions drawing the dole to sit around should be in training for the jobs of the future that require higher educational skills.

Given that nearly eight in 10 new jobs, according to the administration, will require work-force training or higher education, it furthermore makes no sense that we have reversed the traditional American policy of welcoming skilled immigrants and integrating them into our economy. Because of a recrudescent nativism, we send home thousands upon thousands of foreign students who have gotten masters and doctoral degrees in the hard sciences at American universities. These are people who create jobs, not displace them. The incorporation of immigrants used to be one of the core competencies of our economy. It’s time to return to that successful model.

Higher education is another critical issue. As President Obama pointed out last week in his speech at the University of Texas, we have fallen from first to 12th in college graduation rates for young adults. The unemployment rate for those who have never gone to college is almost double what it is for those who have.

Education may be the key economic issue of our time, Mr. Obama said in his speech, for “countries that out-educate us today . . . will out-compete us tomorrow.” To improve our performance will involve massive increases in scholarship support for higher education, and an increase in H-1B visas for foreign students who get M.A.s and Ph.D.s in the hard sciences.

But if the economic scene these days is daunting, the political scene is downright depressing. We have a paralyzed system. Neither the Democrats nor the Republicans seem able to find common ground to address what is clearly going to be an ongoing employment crisis. Finding that common ground is a job opportunity for real leaders.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

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Full article and photo: http://online.wsj.com/article/SB10001424052748703960004575427332237529948.html

Fire and Imagination

The Obama administration seems to be feeling sorry for itself. Robert Gibbs, the president’s press secretary, is perturbed that Mr. Obama is not getting more hosannas from liberals.

Spare me. The country is a mess. The economy is horrendous, and millions of American families are running out of ammunition in their fight against destitution. Steadily increasing numbers of middle-class families, who never thought they’d be seeking charity, have been showing up at food pantries.

The war in Afghanistan, with its dreadful human toll and debilitating drain on the nation’s financial resources, is proceeding as poorly as ever. As The Times reported on Friday, an ambitious operation that was supposed to showcase the progress of the Afghan Army turned into a tragic, humiliating debacle.

And while schools are hemorrhaging resources because of budget meltdowns, and teachers are losing jobs, and libraries are finding it more and more difficult to remain open, American youngsters are falling further behind their peers in other developed countries in their graduation rates from colleges and universities.

This would be a good time for the Obama crowd to put aside its concern about the absence of giddiness among liberals and re-examine what it might do to improve what is fast becoming a depressing state of affairs.

It’s not just liberals who are gloomy. A Wall Street Journal/NBC News poll this week found that nearly 6 in 10 Americans believe the country is on the wrong track and a majority disapproves of President Obama’s handling of the economy. Nearly two-thirds expect the economy to get worse still.

Mr. Obama’s problem — and the nation’s — is that in the midst of the terrible economic turmoil that the country was in when he took office, he did not make full employment, meaning job creation in both the short and the long term, the nation’s absolute highest priority.

Besides responding to the nation’s greatest need, job creation would have been the one issue most likely to bolster Mr. Obama’s efforts to bring people of different political persuasions together. In the early months of 2009, with job losses soaring past a half-million a month and the country desperate for bold, creative leadership, the president had an opportunity to rally the nation behind an enormous “rebuild America” effort.

Such an effort, properly conceived, would have put millions to work overhauling the nation’s infrastructure, rebuilding our ports and transportation facilities to 21st-century standards, establishing a Manhattan Project-like quest for a brave new world of clean energy, and so on.

We were going to spend staggering amounts of money in any event. There was every reason to use those enormous amounts of public dollars to leverage private capital, as well, for investment in projects and research that the country desperately needs and that would provide enormous benefits for many decades. Think of the returns the nation reaped from its investments in the interstate highway system, the Land Grant colleges, rural electrification, the Erie and Panama canals, the transcontinental railroad, the technology that led to the Internet, the Apollo program, the G.I. bill.

The problem with the U.S. economy today, as it was during the Great Depression, is the absence of sufficient demand for goods and services. Consumers, struggling with sky-high unemployment and staggering debt loads, are tapped out. The economy cannot be made healthy again, and there is no chance of doing anything substantial about budget deficits, as long as so many millions of people are left with essentially no purchasing power. Jobs are the only real answer.

President Obama missed his opportunity early last year to rally the public behind a call for shared sacrifice and a great national mission to rebuild the United States in a way that would create employment for millions and establish a gleaming new industrial platform for the great advances of the 21st century.

It would have taken fire and imagination, but the public was poised to respond to bold leadership. If the Republicans had balked, and they would have, the president had the option of taking his case to the people, as Truman did in his great underdog campaign of 1948.

During the Depression, Franklin Roosevelt explained to the public the difference between wasteful spending and sound government investments. “You cannot borrow your way out of debt,” he said, “but you can invest your way into a sounder future.”

Now, with so much money already spent and Republicans expected to gain seats in the Congressional elections, the president finds himself with a much weaker hand, even if he were inclined to play it boldly.

What that will mean in the real world of ordinary Americans is that even if there is a fretful recovery from the Great Recession, millions will be left out of it. Hope has morphed into widespread gloom as widespread economic suffering becomes the new normal in America.

Bob Herbert, New York Times

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Full article: http://www.nytimes.com/2010/08/14/opinion/14herbert.html

End of the Net Neut Fetish

What the Google-Verizon deal really means for the wireless future.

Historians, if any are interested, will conclude that the unraveling of the net neutrality movement began when the iPhone appeared, instigating a tsunami of demand for mobile Web access.

They will conclude that an ancillary role was played when carriers (even some non-wireless) began talking about metered pricing to meet the deluge of Internet video.

Suddenly, those net neut advocates who live in the real world (e.g., Google) had to face where their advocacy was leading—to usage-based pricing for mobile Web users, a dagger aimed at the heart of their own business models. After all, who would click on a banner ad if it meant paying to do so?

Thus Google and other realists developed a new appreciation of the need for incentives to keep their telco and cable antagonists investing in new broadband capacity. They developed an appreciation of “network management,” though it meant discriminating between urgent and less urgent traffic.

Most of all, they realized (whisper it quietly) that they might soon want to pay out of their own pockets to speed their bits to wireless users, however offensive to the net neutrality gods.

Hence a watershed this week in the little world of the net neut obsessives, as the realists finally parted company with the fetishists. The latter are those Washington-based groups that have emerged in recent years to gobble up Google’s patronage and declaim in favor of “Internet freedom.” You can easily recognize these groups today—they’re the ones taking Google’s name in vain.

The unraveling of the net neut coalition is perhaps the one meaningful result of the new net neut “principles” enunciated this week by former partisans Google and Verizon.

While these principles address in reasonable fashion the largely hypothetical problem of carriers blocking content and services that compete with their own, Verizon and Google insist the terms aren’t meant to apply to wireless. Funny thing—because wireless is precisely what brings these ex-enemies together in the first place. They’re partners in promoting Google’s Android software as a rival platform to Apple’s iPhone.

All their diversionary huffing and puffing, in fact, is a backhanded way of acknowledging reality: The future is mobile, and anything resembling net neutrality on mobile is a nonstarter thanks to the problem of runaway demand and a shortage of spectrum capacity.

Tasteless as it may be to toot our own horn, this column noted the dilemma last year, even forecasting Google’s coming apostasy on net neutrality. Already it was clear that only two economic solutions existed to a coming mobile meltdown. Either wireless subscribers would have to face usage-based pricing, profoundly disturbing the ad-based business models of big players whose services now appear “free” to users. Or Google and its ilk would have to be “willing to subsidize delivery of their services to mobile consumers—which would turn net neut precisely on its head.”

Our point was that the net neut fetish was dead, and good riddance. All along, competition was likely to provide a more reasonable and serviceable definition of “net neutrality” than regulators could ever devise or enforce. That rough-and-ready definition would allow carriers to discriminate in ways that consumers, on balance, are willing to put up with because it enables acceptable service at an acceptable price.

Even now, Google and its CEO Eric Schmidt, in their still-conflicted positioning, argue that the wired Internet has qualities of a natural monopoly, because most homes are dependent on one cable modem supplier. This treats the phone companies’ DSL and fiber services as if they don’t exist. It also overlooks how people actually experience the Internet.

Users don’t just get the Internet at home, but at work and on their mobile devices, and they won’t stand for being denied on one device services and sites they’re used to getting on the others. That is, they won’t unless there’s a good reason related to providing optimum service on a particular device.

You don’t have to look far for an example: Apple iPhone users put up with Apple’s blocking of most Web video on the iPhone because, on the whole, the iPhone still provides a satisfying service.

This is the sensible way ahead as even Google, a business realist, now seems to recognize. The telecom mavens at Strand Consult joke that Google is a “man with deep pockets and short arms, who suddenly disappears when the waiter brings the bill.” Yes, on the wired Net, Google remains entrenched in the position that network providers must continue to bury the cost to users of Google’s services uniformly across the bills of all broadband subscribers.

That won’t work on the wireless battlefield, and Google knows it. Stay tuned as the company’s business interests trump the simple net neutrality that the fetishists believe in—and that Google used to believe in.

Holman W. Jenkins, Wall Street Journal

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Full article: http://online.wsj.com/article/SB10001424052748704164904575421434187090098.html

German Millionaires Criticize Gates’ ‘Giving Pledge’

Negative Reaction to Charity Campaign

 

Microsoft founder Bill Gates.

Germany’s super-rich have rejected an invitation by Bill Gates and Warren Buffett to join their ‘Giving Pledge’ to give away most of their fortune. The pledge has been criticized in Germany, with millionaires saying donations shouldn’t replace duties that would be better carried out by the state.

Last week, Microsoft founder Bill Gates attempted to convince billionaires around the world to agree to give away half their money to charity. But in Germany, the “Giving Pledge,” backed by 40 of the world’s wealthiest people, including Gates and Warren Buffet, has met with skepticism, SPIEGEL has learned.

“For most people that is too ostentatious,” said the asset manager of one of the billionaires contacted by Gates, adding that many of the of the people contacted had already transferred larger proportions of their assets than the Americans to charitable foundations.

Dietmar Hopp, the co-founder of the SAP business software company, has transferred some €2.9 billion to a foundation. Klaus Tschira, another founder of SAP, has handed more than half his wealth to a foundation.

Peter Krämer, a Hamburg-based shipping magnate and multimillionaire, has emerged as one of the strongest critics of the “Giving Pledge.” Krämer, who donated millions of euros in 2005 to “Schools for Africa,” a program operated by UNICEF, explained his opposition to the Gates initiative in a SPIEGEL interview.

SPIEGEL: Forty super wealthy Americans have just announced that they would donate half of their assets, at the very latest after their deaths. As a person who often likes to say that rich people should be asked to contribute more to society, what were your first thoughts?

Krämer: I find the US initiative highly problematic. You can write donations off in your taxes to a large degree in the USA. So the rich make a choice: Would I rather donate or pay taxes? The donors are taking the place of the state. That’s unacceptable.

SPIEGEL: But doesn’t the money that is donated serve the common good?

Krämer: It is all just a bad transfer of power from the state to billionaires. So it’s not the state that determines what is good for the people, but rather the rich want to decide. That’s a development that I find really bad. What legitimacy do these people have to decide where massive sums of money will flow?

SPIEGEL: It is their money at the end of the day.

Krämer: In this case, 40 superwealthy people want to decide what their money will be used for. That runs counter to the democratically legitimate state. In the end the billionaires are indulging in hobbies that might be in the common good, but are very personal.

SPIEGEL: Do the donations also have to do with the fact that the idea of state and society is such different one in the United States?

Krämer: Yes, one cannot forget that the US has a desolate social system and that alone is reason enough that donations are already a part of everyday life there. But it would have been a greater deed on the part of Mr. Gates or Mr. Buffet if they had given the money to small communities in the US so that they can fulfil public duties.

SPIEGEL: Should wealthy Germans also give up some of their money?

Krämer: No, not in this form. It would make more sense, for example, to work with and donate to established organizations.

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Full article and photo: http://www.spiegel.de/international/germany/0,1518,710972,00.html

Canada, Land of Smaller Government

Its corporate income tax rate is 18% and falling. America’s is 35%.

When Americans look to Canada, they generally think of an ally, though one dominated by socialist economic policies. But the Canada of the 1970s and early 1980s—the era of left-wing Prime Minister Pierre Trudeau—no longer exists. America’s northern neighbor has transformed itself economically over the last 20 years.

The Canadian reforms began in 1988 with a U.S. free trade pact that would lead to the North American Free Trade Agreement. But change really began to take off in 1993. A socialist-leaning government in Saskatchewan started by reducing spending and moving towards a balanced budget. This was followed by historic reforms by the Conservatives in Alberta, who relied on spending reductions to balance their budget quickly.

In 1995, the federal government, led by the Liberal Party, passed the most important budget in three generations. Federal spending was reduced almost 10% over two years and federal employment was slashed 14%. By 1998, the federal government was in surplus and reducing the nearly $650 billion national debt. Provincial governments similarly focused on eliminating deficits by paring spending and reducing debt, and then they started to offer tax relief.

All government spending peaked at 53% of Canadian GDP in 1992 and fell steadily to just under 40% by 2008. (Government spending in the U.S. was 38.8% of GDP that year.) The recession has caused government spending to increase in both countries. But if present trends continue, within two or three years Canada will have a smaller government as a share of its economy than the U.S.

Canadian taxes have also come down at the federal and provincial level. They were reduced with the stated goal of improving incentives for work effort, savings, investment and entrepreneurship.

Jean Chrétien (a Liberal) won elections in 1993, 1997 and 2000 by promising to balance the books, to prioritize federal spending to ensure that government was doing what was needed, and also to deliver tax relief. Mr. Chrétien’s former finance minister, Paul Martin, became prime minister in 2003, but he lost power to the Conservative Party in 2006, in part because he moved away from some of the Chrétien principles.

Tellingly, the last three Canadian elections have all had key debates on tax relief—not whether there should be tax cuts but rather what type of tax cuts. Beginning in 2001 under a Liberal government, even the politically sensitive federal corporate income tax rate has been reduced. It is now 18%, down from 28%, and the plan is to reduce it to 15% in 2012. The U.S. federal rate is 35%.

Yet much of the tax relief since 2000 has been on personal income taxes. The bottom two personal income tax rates have been reduced, and the income thresholds for all four rates have been increased and indexed to inflation. Canada has also reduced capital gains taxes twice (the rate is now 14.5%), cut the national sales tax to 5% from 7%, increased contribution limits to the Canadian equivalent of 401(k)s, and created new accounts similar to Roth IRAs.

Government austerity has been accompanied by prosperity. According to the Organization for Economic Cooperation and Development (OECD), between 1997 and 2007 Canada’s economic performance outstripped the OECD average and led the G-7 countries. Growth in total employment in Canada averaged 2.1%, compared to an OECD average of 1.1%.

During the mid-1990s, Canada’s commitment to reform allowed it to tackle two formerly untouchable programs: welfare and the Canada Pension Plan (CPP), equivalent to Social Security in the U.S. Over three years, federal and provincial governments agreed to changes that included investing surplus contributions in market instruments such as stocks amd bonds, curtailing some benefits, and increasing the contribution rate. The CPP is financially solvent and will be able to weather the retiring baby boomers.

The one area Canada has been slow to reform is health care, which continues to be dominated by government. However, some provinces have allowed a series of small experiments: a completely private emergency hospital in Montreal and several private clinics in Vancouver. British Columbia and Alberta also are experimenting with market-based payments to hospitals. While these are incremental steps, the path in Canada is fairly clear: More markets and choice will exist in the future. The trend in the U.S. is the opposite.

Most strikingly, Canada is emerging more quickly from the recession than almost any industrialized country. It’s unemployment rate, which peaked at 9% in August 2009, has already fallen to 7.9%. Americans can learn much by looking north.

Mr. Clemens is the director of research at the Pacific Research Institute and a co-author of “The Canadian Century: Moving Out of America’s Shadow” (Key Porter Books, 2010).

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Full article: http://online.wsj.com/article/SB10001424052748703977004575393221638794924.html

Defining Prosperity Down

I’m starting to have a sick feeling about prospects for American workers — but not, or not entirely, for the reasons you might think.

Yes, growth is slowing, and the odds are that unemployment will rise, not fall, in the months ahead. That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal.

And I worry that those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is “structural,” a permanent part of the economic landscape — and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality.

Not long ago, anyone predicting that one in six American workers would soon be unemployed or underemployed, and that the average unemployed worker would have been jobless for 35 weeks, would have been dismissed as outlandishly pessimistic — in part because if anything like that happened, policy makers would surely be pulling out all the stops on behalf of job creation.

But now it has happened, and what do we see?

First, we see Congress sitting on its hands, with Republicans and conservative Democrats refusing to spend anything to create jobs, and unwilling even to mitigate the suffering of the jobless.

We’re told that we can’t afford to help the unemployed — that we must get budget deficits down immediately or the “bond vigilantes” will send U.S. borrowing costs sky-high. Some of us have tried to point out that those bond vigilantes are, as far as anyone can tell, figments of the deficit hawks’ imagination — far from fleeing U.S. debt, investors have been buying it eagerly, driving interest rates to historic lows. But the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything else — everything else, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.

The point is that a large part of Congress — large enough to block any action on jobs — cares a lot about taxes on the richest 1 percent of the population, but very little about the plight of Americans who can’t find work.

Well, if Congress won’t act, what about the Federal Reserve? The Fed, after all, is supposed to pursue two goals: full employment and price stability, usually defined in practice as an inflation rate of about 2 percent. Since unemployment is very high and inflation well below target, you might expect the Fed to be taking aggressive action to boost the economy. But it isn’t.

It’s true that the Fed has already pushed one pedal to the metal: short-term interest rates, its usual policy tool, are near zero. Still, Ben Bernanke, the Fed chairman, has assured us that he has other options, like holding more mortgage-backed securities and promising to keep short-term rates low. And a large body of research suggests that the Fed could boost the economy by committing to an inflation target higher than 2 percent.

But the Fed hasn’t done any of these things. Instead, some officials are defining success down.

For example, last week Richard Fisher, president of the Federal Reserve Bank of Dallas, argued that the Fed bears no responsibility for the economy’s weakness, which he attributed to business uncertainty about future regulations — a view that’s popular in conservative circles, but completely at odds with all the actual evidence. In effect, he responded to the Fed’s failure to achieve one of its two main goals by taking down the goalpost.

He then moved the other goalpost, defining the Fed’s aim not as roughly 2 percent inflation, but rather as that of “keeping inflation extremely low and stable.”

In short, it’s all good. And I predict — having seen this movie before, in Japan — that if and when prices start falling, when below-target inflation becomes deflation, some Fed officials will explain that that’s O.K., too.

What lies down this path? Here’s what I consider all too likely: Two years from now unemployment will still be extremely high, quite possibly higher than it is now. But instead of taking responsibility for fixing the situation, politicians and Fed officials alike will declare that high unemployment is structural, beyond their control. And as I said, over time these excuses may turn into a self-fulfilling prophecy, as the long-term unemployed lose their skills and their connections with the work force, and become unemployable.

I’d like to imagine that public outrage will prevent this outcome. But while Americans are indeed angry, their anger is unfocused. And so I worry that our governing elite, which just isn’t all that into the unemployed, will allow the jobs slump to go on and on and on.

Paul Krugman, New York Times

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Full article: http://www.nytimes.com/2010/08/02/opinion/02krugman.html

Another Dead-End Summit

Going up the garden path, again. Barack Obama accompanied by fellow ramblers Jose Manuel Barroso, Silvio Berlusconi, Angela Merkel at Nicolas Sarkozy during the G-8 summit in Canada on June 25.

Marked by the EU-US divide over the best way out of the crisis, the world leaders at the G-20 summit in Toronto spurned Europe’s proposals to tax banks and regulate markets. The only consensus reached was on deficit reduction, an objective championed by all 27 EU member states. European papers are scathing in their editorials on the G-20 gathering.

“A summit that could just as well not have been held,” writes Poland’s Dziennik Gazeta Prawna, offering its final verdict on last weekend’s G-20 summit. “In Toronto, the G-20 leaders didn’t solve a single economic problem,” the daily adds. “The world’s most influential politicians were unable to agree on anything tangible,” particularly “on the principle of a global bank levy or on the instruments to bolster bank capital.”

Likewise, France’s Libération pronounces “the ‘Gs’ at a standstill.” “The Huntsville G-8 and Toronto G-20 displayed more differences of opinion than progress in getting out of the crisis. The idea of a bank levy or international financial tax has been shelved indefinitely, and everyone pledged to cut deficits, to be sure, but on their own terms.”

Germany’s Frankfurter Allgemeine Zeitung, which advocates liberalizing international trade as the crisis remedy, says the G-8 and last weekend’s G-20 once again proved how ineffectual summits are. “The fact that certain industrialized countries are incapable of listening to emerging countries’ wishes and opinions jeopardizes the future of the G-20,” writes the FAZ, particularly in view of the EU’s attempt to tax financial transactions in the face of opposition from emerging countries that were spared by the crisis.

“Their pique should induce Europeans to wonder whether such taxes make any sense and give up on them,” the German daily opines. “If the point of the G-20 is to sign off on European ideas, we might as well give it up. And if the G-20 is to become a serious international economic forum, it would be a pipedream to imagine that European notions are the measure of all things,” the FAZ editorial concludes.

Every Man for Himself

“The G-20 has ushered in the return of ‘every man for himself’,” bemoans France’s Le Figaro. “The attempt to define a consensus-based economic policy to get out of the crisis proved abortive. Between a Germany obsessed with cutting deficits … a United States that is fretful about hamstringing growth by excessive austerity and a France halfway between the two, a common guideline is nowhere in sight. The G-20, which was created at the peak of financial turmoil, has proved its utility in times of crisis. But the meeting in Toronto also bared its limitations. Global economic governance of one sort or another, which is already so hard to hammer out at the European level, is not about to be put in place overnight.”

In fact, explains Germany’s Die Tageszeitung, “The disagreements within the G-8 and G-20 now force (the conferees) to refocus on matters that can really be changed: For Europeans today, that means Europe.” So, concludes the TAZ, “The best news from this summit is that Merkel and Sarkozy seemed determined to tax financial transactions in Europe — or in the euro zone if London holds out.”

In spite of all, notes the EUobserver, “the statement on halving public deficits by 2013 was hailed as a victory for European politicians.” “By setting that target, the G-20 came to a close under the banner of German-brand rigour,” remarks La Repubblica. “The match played out” in Canada “was not Germany vs. the US,” even if “Angela Merkel might give the impression she won the day,” explains the Italian daily. “After having foisted its doctrine on Europe, Germany is now exporting it worldwide. Barack Obama, the last of the Keynesian leaders, seems to be beating a retreat. He did not convince Berlin of the benefits of states’ spending their way to growth. But appearances are deceiving, and Merkel’s triumph will soon prove a Pyrrhic victory. It serves to assuage the anxiety of the German public,” which favors fiscal rigour, and to “accelerate the marginalization of Europe” by shifting even faster “the geometries of power towards the new dynamics between America, China, India, Brazil and Russia.”

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Full article and photo: http://www.spiegel.de/international/europe/0,1518,703570,00.html

Published and Perished

Glossy magazines—and parties—for the shiny time before Wall Street’s fall.

If a hustling Candide had told the story of the Great Wall Street Meltdown, it might read something like this book—a not-so-innocent’s chronicle of crafty charlatans and vulpine finaglers who left the hero dazed and diminished in the bankruptcy of his dreams.

Randall Lane’s notion with “The Zeroes” is to use the sad tale of his slick-magazine enterprise, Doubledown Media, as a proxy for the now-familiar story of the financial collapse. Doubledown published giveaway titles aimed at the nouveaux riches spawned by the big bubble. The publications had names like Trader Monthly, Dealmaker, Private Air, Corporate Leader and Cigar Report. The idea was to use other people’s money to leverage them into an international, multi-media publishing colossus that would make the founders as rich as their target readers.

“The Zeroes” was embargoed—until today—by the publisher in a marketing ploy meant to suggest that the sizzling content had to be safeguarded against leaks. But the book’s hot stuff turns out to be mostly lukewarm. The big news: The juiced ex-Mets baseball player-turned-stock-picker Lenny Dykstra supposedly traded access to Jim Cramer, CNBC’s screaming “Mad Money” man, for $250,000 in penny stock; the psychedelic-art hack Peter Max is a wily operator; and Wall Street sharks made even more money and behaved even worse than you imagined as the markets careened toward disaster in the first decade—the Zeroes—of the new century.

Mr. Lane, who started out in journalism helping compile Forbes magazine’s billionaire scorecards, is an ingenuous narrator who likes to remind the reader that he was essentially a schlump living in a fourth-floor walkup while his glossies burnished the egos and tweaked the appetites of Wall Street’s new wildcatters.

As the boom inflates, Mr. Lane teams up with a London-based publishing wizard in 2004 to launch Trader Monthly. Its pitch-perfect slogan: “See it. Make it. Spend it.” Over the next few years, they add editions in London and Dubai and acquire or start other titles. Soon the pair comes under the spell of a business-mag vet named Jim Dunning, who pumps his own millions into the enterprise and spins a vision of tiny Doubledown quadrupling down in a bid to become an international marketing machine stalking the new “working wealthy.”

The hunt for money to grow on puts Lane & Co. on a treadmill to oblivion. Mr. Lane meets with a grotesque assortment of bankers, venture capitalists, merger partners, potential acquirers and other scalawags. Black books and deal sheets are exchanged. Credit lines are dangled and jerked away. At one point his venture is valued at $25 million; at another, $17 million.

Such healthy valuations were strange because as “The Zeroes” goes along it becomes obvious that, while Mr. Lane’s company is churning out a half-million free copies a month, it is really in the business of staging parties. Advertisers and potential advertisers pay Doubledown for the privilege of pouring the latest designer vodka down the gullets of Wall Street’s new aristocracy, peddling $10,000 watches on the wrists of arm-candy models and enticing rich marks into $300,000 Maybach luxury sedans and time-share condos in Las Vegas.

Mr. Lane’s commercial bacchanals are tame compared with the blasts staged by others. One trader tells him of a golf outing where each twosome was assigned its own stripper. “The women would dangle on the back of the cart from hole to hole,” Mr. Lane writes, “and then prostrate themselves, legs open, on the putting greens, providing the traders a target.”

It isn’t until page 171 that the reader learns that all of Mr. Lane’s frenetic activity produced $3 million in annual losses for Doubledown in 2005, 2006 and 2007. The party addiction was so strong that on Sept. 16, 2008—the day the feds took over AIG, 24 hours after Lehman Brothers cratered—Dealmaker magazine gave a party for a thousand shell-shocked Wall Streeters.

Many sketchy types cross our hero’s path, but none can match Lenny Dykstra. The ballplayer nicknamed “Nails” had somehow morphed into Jim Cramer’s stock-handicapping protégé. Mr. Dykstra had just sold his West Coast car-wash business for $25 million and bought Wayne Gretzky’s L.A. mansion; he drove a Maybach, flew in his own jets and had an investment scheme for rich pro athletes called “The Players Club.” As portrayed in “The Zeroes,” Mr. Dykstra (who piggybacked on a pro’s stock tips) seems seriously demented. Among other tics, he likes to stay up for four or five days at a stretch before crashing. He freely admits to Mr. Lane that he used steroids while playing ball. Despite everything, Mr. Lane goes into business with him; it all ends in tears and surreal litigation.

Mr. Lane gets involved with a host of other characters: Henry Hill, the real-life “Goodfellas” turncoat booted from the federal witness-protection program; Jacob the Jeweler, the money launderer for Detroit’s Black Mafia drug gang; a thieving Caribbean prime minister; and Peter Max. The artist signs on to peddle paintings of the Wall Street icons celebrated in Mr. Lane’s magazines. Mr. Max’s ingenious “One-Plus-Three” gimmick is to do his supposedly single portraits as inseparable tetraptychs—and charge the subjects four times his usual rate.

All of this was as doomed as the credit-default-swap lunacy of those days. Despite his familiarity with money culture, Mr. Lane breaks the sacred code: He dumps $283,000 of his own—and $115,000 of his mother’s!— into the sinking ship and spends another $130,000 redeeming his personal pledge for the office lease. Doubledown winds up in Chapter 7 bankruptcy, its titles, contents and lists fetching $50,000 from a newsletter publisher.

He muses that, as in the old days of Wall Street partnerships, he had risked his own stake in his business. He’d lost half a million dollars but bought peace of mind. “Maybe, in that example,” he suggests, “there was a lesson for Wall Street.” Nope. After the bailout, bankers’ and traders’ bonuses for 2009 set a record. “The game played on, timeless and unabated,” Mr. Lane concedes, sadder and inescapably wiser.

Mr. Kosner is the author of “It’s News to Me,” a memoir of his career as editor of Newsweek, New York magazine, Esquire and the New York Daily News.

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Full article and photo: http://online.wsj.com/article/SB10001424052748703615104575328882208469658.html

Why Friedrich Hayek Is Making a Comeback

With the failure of Keynesian stimulus, the late Austrian economist’s ideas on state power and crony capitalism are getting a new hearing.

He was born in the 19th century, wrote his most influential book more than 65 years ago, and he’s not quite as well known or beloved as the sexy Mexican actress who shares his last name. Yet somehow, Friedrich Hayek is on the rise.

When Glenn Beck recently explored Hayek’s classic, “The Road to Serfdom,” on his TV show, the book went to No. 1 on Amazon and remains in the top 10. Hayek’s persona co-starred with his old sparring partner John Maynard Keynes in a rap video “Fear the Boom and Bust” that has been viewed over 1.4 million times on YouTube and subtitled in 10 languages.

Why the sudden interest in the ideas of a Vienna-born, Nobel Prize-winning economist largely forgotten by mainstream economists?

Friedrich Augustus Von Hayek, ca. 1940.

Hayek is not the only dead economist to have garnered new attention. Most of the living ones lost credibility when the Great Recession ended the much-hyped Great Moderation. And fears of another Great Depression caused a natural look to the past. When Federal Reserve Chairman Ben Bernanke zealously expanded the Fed’s balance sheet, he was surely remembering Milton Friedman’s indictment of the Fed’s inaction in the 1930s. On the fiscal side, Keynes was also suddenly in vogue again. The stimulus package was passed with much talk of Keynesian multipliers and boosting aggregate demand.

But now that the stimulus has barely dented the unemployment rate, and with government spending and deficits soaring, it’s natural to turn to Hayek. He championed four important ideas worth thinking about in these troubled times.

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren’t buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.

Second, Hayek highlighted the Fed’s role in the business cycle. Former Fed Chairman Alan Greenspan’s artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.

Third, as Hayek contended in “The Road to Serfdom,” political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak and write. Economic control becomes political control.

Even when the state tries to steer only part of the economy in the name of the “public good,” the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don’t attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn’t be confused with the real thing.

The fourth timely idea of Hayek’s is that order can emerge not just from the top down but from the bottom up. The American people are suffering from top-down fatigue. President Obama has expanded federal control of health care. He’d like to do the same with the energy market. Through Fannie and Freddie, the government is running the mortgage market. It now also owns shares in flagship American companies. The president flouts the rule of law by extracting promises from BP rather than letting the courts do their job. By increasing the size of government, he has left fewer resources for the rest of us to direct through our own decisions.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map.

Despite the caricatures of his critics, Hayek never said that totalitarianism was the inevitable result of expanding government’s role in the economy. He simply warned us of the possibility and the costs of heading in that direction. We should heed his warning. I don’t know if we’re on the road to serfdom, but wherever we’re headed, Hayek would certainly counsel us to turn around.

Mr. Roberts teaches economics at George Mason University and co-created the “Fear the Boom and Bust” rap video with filmmaker John Papola. His latest book is “The Price of Everything” (Princeton, 2009).

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Full article and photo: http://online.wsj.com/article/SB10001424052748704911704575326500718166146.html

Five Best Books on American Moguls

T.J. Stiles says these mogul biographies offer rich rewards

1. Andrew Carnegie

By Joseph Frazier Wall

Oxford, 1970

In the past few decades we have seen a sweeping reassessment of the so-called robber barons of the 19th and early 20th centuries. The trend began in 1970 with Joseph Frazier Wall’s “Andrew Carnegie”—a groundbreaking work that remains a pleasure to read. By turns a thoughtful sifter of the evidence, a sharp and amusing portraitist, and a storyteller with real panache, Wall brings a gift for clarity to both historical context and the blow-by-blow of business battles. His tales of intrigue among Carnegie’s partners are particularly vivid. Carnegie wore many guises—he got his start as an entrepreneur through sweetheart deals, proved a ruthlessly efficient steelmaker and aspired to influence world affairs—and this book artfully integrates them all.

2. The Life and Legend of Jay Gould

By Maury Klein

Johns Hopkins, 1986

Jay Gould’s “reputation for being cold and aloof,” writes Maury Klein, “owed much to the fact that he was a shy, reserved man whose emotions registered on so small a scale, such as tearing bits of paper or tapping a pencil, that only initiates recognized them.” Such insight and literary grace explain why Klein’s “The Life and Legend of Jay Gould” remains the definitive work on this controversial tycoon. The author narrates with wry humor and verve such episodes as the corruption-riddled battle among financiers for control of the Erie Railroad in 1868 and Gould’s attempt to corner the gold market in 1869. But Klein’s greatest contribution may be in describing Gould’s later years, when he proved a master corporate strategist, building an empire around the Missouri Pacific railroad.

3. Morgan

By Jean Strouse

Random House, 1999

As America’s leading banker, J.P. Morgan played a role unlike any other business titan of his age, influencing one industry after another. He reorganized the chaotic railroads and forged U.S. Steel and General Electric—in other words, he was the father of the trusts that others set out to bust. “When the federal government ran out of gold in 1895, Morgan raised $65 million and made sure it stayed in the Treasury’s coffers,” writes Jean Strouse in this elegant biography. “When a panic started in New York in 1907, he led teams of bankers to stop it.” Strouse is masterly, whether addressing finance, family, art or the human condition. Her portrait of Morgan’s first rare-book librarian, Belle da Costa Greene—the daughter of Harvard’s first black graduate, she passed as Portuguese—is but one example of Strouse’s literary gifts and appreciation for the importance of secondary characters in a good biography.

4. Fallen Founder

By Nancy Isenberg

Viking, 2007

It is not easy to get a fair hearing when you have killed the man on the $10 bill. But Aaron Burr is treated with scholarly care and writerly sympathy by Nancy Isenberg in “Fallen Founder.” A hero in the American Revolution and the country’s third vice president, Burr founded the forerunner of J.P. Morgan Chase: the Manhattan Co., a water company and bank. He pioneered modern political methods by systematically identifying and organizing voters, contributors and activists. Isenberg offers evidence that Burr was no villain in the 1804 duel that killed Alexander Hamilton. Three years later, Burr was arrested for what his enemies called a conspiracy to set up an independent state in the west; he was tried for treason and exonerated, then went on to become an influential New York lawyer. An astonishing life.

5. Pulitzer

By James McGrath Morris

Harper, 2010

Today’s reporters and media tycoons would do well to study James McGrath Morris’s life of Joseph Pulitzer, the journalist, editor and entrepreneur. A proverbial penniless immigrant (a German-speaking Hungarian Jew), Pulitzer fought for the Union in the Civil War, then moved to St. Louis. There he learned English and the news business. His rapid rise in journalism was interwoven with politics, a natural twist, since newspapers were overtly partisan. He briefly held elected office but found greatness as a newspaper owner. Morris is fascinating on Pulitzer as a working (make that hard-working) reporter and editor who understood how to grab his readers—and saw where his industry was going (or could go).

Mr. Stiles is the author of “The First Tycoon: The Epic Life of Cornelius Vanderbilt,” winner of the 2000 National Book Award and the 2010 Pulitzer Prize, now available in paperback from Vintage.

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Full article: http://online.wsj.com/article/SB10001424052748703315404575250451003452566.html

Tough on Wrinkles, Soft on Sales

Japanese cosmetics companies are known as some of the most technically advanced in the world, with promises of creams and emulsions that use rare ingredients to stop wrinkles and create a flawless complexion.

But these days, they are finding one problem tough to conquer: the U.S. market.

Shu Uemura, a Japanese beauty brand that’s best-known here for a sophisticated eyelash curler, will soon cease to have a retail presence in America, moving to online-only sales in the U.S. Kanebo, whose pricey Sensai luxury brand featured unusual ingredients such as a rare form of silk, quietly pulled out of 30 retail locations last year and now is sold at only one U.S. store, Manhattan’s Bergdorf Goodman.

Shiseido Co., Japan’s venerable leading cosmetics company, is pushing forward in the U.S., with its recent purchase of the Bare Escentuals brand, but even after 45 years of selling in the U.S., Shiseido still has a relatively minor presence in the market.

The retreat of Shu Uemura and Kanebo represents a surprising comedown for companies that represent an established beauty tradition—Japanese women have long prized ageless, porcelain-white skin—and a national reputation for quality and high-tech prowess. “The Japanese woman is the most sophisticated consumer in the world. These brands are well-respected and well-known in Japan,” says Mark Loomis, the president of Estée Lauder Japan. “When they go overseas, this recognition is not automatic. You have to adjust your strategy.”

The pullbacks come at a time when Japanese and American beauty ideals are closer than they have ever been. The Japanese concept of bihaku, which literally means “beautiful white” and refers to Japanese women’s quest to achieve an alabaster complexion, long carried uncomfortable racial overtones here and was at odds with Americans’ love of tanning.

Recently, however, the aesthetic in the U.S. has shifted, thanks to growing awareness that excessive sun exposure damages skin and causes wrinkles. (Japanese women have always walked around with parasols under the summer sun.) Americans now spend more money than ever on anti-aging products that target wrinkles. And “brightening” products, which have long been popular in Japan, are gaining ground in the U.S. for the purpose of lightening dark spots and evening out skin color.

Japan’s Hits and Misses

  • The Shu Uemura eyelash curler became popular with American women.
  • Future Solution LX is one of Shiseido’s best U.S. sellers.
  • Shiseido White Lucent Brightening Moisturizing Emulsion promises an eventoned complexion.
  • Kanebo Sensai Premier “The Cream” (below) retails for $650.

“The brightening/whitening market is becoming as large as anti-aging” in the U.S., says Tomoko Yamagishi-Dressler, Shiseido’s vice president for marketing in the U.S. Shiseido launched its White Lucent intensive brightening serum in the States in 2005, and since then it has achieved double-digit growth.

Despite the growing U.S. interest in anti-aging and skin-care products and Japanese companies’ reputation as global leaders in this segment, Japanese companies have still had a rough time in the world’s biggest cosmetics market. Through aggressive marketing, including cultivating key relationships with beauty editors at magazines, editorial placement and social networking, Shiseido has become the No. 4 prestige brand in the U.S. Ten years ago, it wasn’t in the top ten.

But in the year that ended March 2009, only about 20% of its sales were from the U.S. market, compared with 45% from Asia and 34% from Europe. “We are still weak in the U.S.,” said its chief executive, Shinzo Maeda, in an interview earlier this year.

To bolster its U.S. operations, Shiseido in January bought Bare Escentuals, a San Francisco-based mineral-makeup line, for $1.7 billion, marking the largest acquisition in its history.

Japanese companies “have amazing product formulations,” says John Demsey, group president of Estée Lauder Cos. But so far that hasn’t been enough. “Japan has been so successful at building up their presence in the U.S. in the electronic and automotive industries. There has been a disconnect on the beauty side,” he adds.

The challenges for Japanese brands in the U.S. are myriad. Consumers aren’t familiar with the brands; on Shiseido’s website, it explains: “Shiseido is pronounced “She-Say-Doe.” Also, Japanese companies have high distribution costs for the products they have to ship from Japan, and operating costs are high, because they tend to sell via department stores, where training sales staff and acquiring counter space are costly endeavors.

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Shu Uemura is pulling out of U.S. retail stores after failing to catch on.

This is a tough time for high-end beauty brands of all sorts. Sales of luxury beauty products have fallen in the U.S. since the recession started, as Americans have traded down to drugstore products or simply bought fewer cosmetics.

Also, American and Japanese women still take sharply different approaches to skin care. Though skin-care awareness has increased in the U.S., the amount of money and time the U.S. consumer spends on her regimen is still far lower than that of her Japanese counterpart. The average Japanese woman spends 60% of her cosmetics budget on skin care, compared with 30% for American women.

A Shiseido survey found nearly 69% of Japanese women used cleanser, toner and moisturizer religiously at night, compared with only 17% of American women.

Indeed, Shiseido has documented that the average Japanese woman employs a much larger array of products each evening—as many as six products. First, she removes her make-up with an oil-based product. Then comes cleansing the face. This is followed by a lotion—a toner-like skin softener—and then possibly an “essence,” or serum. Finally, she pats on an emulsion, which is less viscous than a cream, and then a traditional cream. All of this is achieved while performing an elaborate facial massage meant to help prevent sagging and wrinkling.

“The psyche of the American consumer is about a quick fix, and not about prevention,” says Ms. Yamagishi-Dressler of Shiseido. “It’s all about, ‘What can this product do for me now?’ We have to adapt to that.”

Kanebo, which entered the U.S. market in 2000, incurred a loss on its U.S. operations every year, according to its spokesman. Kanebo said the costs of operating in the U.S. were very high, since its only retail channel was department stores. It didn’t advertise in the U.S. much, making it hard to build an image for its Sensai line. In the U.S., “achieving profitability was tough,” a Kanebo spokesman said. The company is now focusing on expanding its presence in Asia.

Shu Uemura had several popular items, such as a cleansing oil, but it was too much of a niche brand to achieve the scale it needed in the vast U.S. market. Its parent company, L’Oréal USA, said in a statement that it wanted “to focus on the strength of its strategic brands including Lancome, Ralph Lauren, Giorgio Armani, Yves Saint Laurent, Kiehl’s Since 1851 and other fragrance brands in its portfolio” but declined to comment beyond that.

Shu Uemura’s fans in the U.S. have mixed feelings. Christina Carroll, 32, an attorney who lives in Arlington, Va., first bought Shu Uemura’s cleansing oil in Japan a few years ago. She loved it but switched brands after about a year, searching for “a lower-cost option,” she said.

But she hasn’t given up on Japanese brands as a whole. “I think there is an implicit perception that Japanese beauty brands are luxury brands by default,” says Ms. Carroll.

“It might also have something to do with the fact that it’s an imported product that comes with certain cultural associations—that Japanese culture, by default, prizes quality, elegance, and minimalism.”

Mariko Sanchanta, Wall Street Journal

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Full article and photos: http://online.wsj.com/article/SB10001424052748704250104575238334269862558.html

Net-Worth Obsession

NAME Joey Kincer NET WORTH $201,000 INCOME $65,000 AGE 32 DEBT $2,000 RESIDENCE Calif. ASSETS $203,000

Joey Kincer is the kind of guy who likes to keep records. Kincer is a 32-year-old Web developer who lives in San Juan Capistrano, southeast of Los Angeles, and among the things he tracks on his personal home page at kinless.com are his collection of action figures based on the Mega Man video games (“Not for sale,” the site warns sternly), the piano awards he received as a child (“My mom kept track of them all,” he says) and a photo gallery of female celebrity crushes that he refers to as his Dream Team.

His highest achievement in record gathering, however, is contained in a Quicken file, where he has tracked his personal finances for 16 years, ever since he was in 11th grade. On a recent Wednesday evening, Kincer punched a few buttons on a keyboard and projected his entire financial history onto a giant screen hanging from the ceiling of his bedroom for me to see. There was the $3.38 he spent on chips and dip on March 16, 1996. A birthday card for a friend a few weeks later cost $3.18. Deposits arrived in small amounts every couple of weeks thanks to a job playing piano at church.

This trove of data came in handy a few years ago when Kincer happened upon a Web site called NetworthIQ, which allows people to record their net worths and display the ups and downs for anyone to view. Most people who share their data do so anonymously, but Kincer posts a link to his personal Web site, where he uses his real name. Kincer especially liked that the site allowed him to compare himself with others. It appealed to the Mega Man player in him. “NetworthIQ is kind of a game,” he said. “Can I get ahead of everyone? Can I be up there with the big shots?”

Net worth is the number you get when you subtract what you owe from what you own. You start with things like cash on hand, retirement savings and home value and subtract your mortgage, as well as credit-card, student-loan and other debts. Net worth paints a bigger picture than income; it rewards the saver and reveals the drain that big borrowers put on their finances. And it vividly reminds people who think only in terms of monthly payments that their debts may be with them for a good long while.

Figuring net worth isn’t hard, and programs like Quicken make it especially easy. Mint.com, a popular personal-financial-management service, introduced a net-worth feature in 2008 that links to credit-card, brokerage and mortgage accounts. The real-time, intraday updates allow people to obsessively check in on the microscopic daily ups and downs of their personal wealth.

The net-worth number, as Kincer found, is more appealing when you have someone else’s to compare it with. We tend to have an intense curiosity about our neighbors and friends, especially those who seem to earn about what we do but spend a lot more. Do they skimp on retirement savings or their children’s college funds? Are they not burdened by student loans? Do they have a trust fund? Have they simply maxed out every credit card they can get their hands on? There’s no way to answer these questions without seeing a breakdown of net worth.

So it should come as no great surprise that the curious are turning up at NetworthIQ to see what other people’s money really looks like. “This was our way of making money a little more social,” said Todd Kalhar, one of the founding executive partners at NetworthIQ, which is now part of Strands, an online-media company whose moneyStrands site competes with Mint. “People had been talking about stocks forever. We wanted to add a bit more context. The guy talking about stocks might have been bankrupt 10 times.”

Joey Kincer’s net worth is about $201,000, much higher than the $120,000 median figure for U.S. families from 2007, the last year for which the Federal Reserve Board released household net-worth numbers. Among NetworthIQ users who, like him, earned no more than an associate’s degree, that makes him a big shot. But when he compares himself with all the people his age and all Californiaresidents, he’s just a bit above average.

He earns about $65,000 a year largely as a Web developer but is determined to save enough money for a substantial down payment on a detached house, not merely a condo or a town home. And he wants to live in a particular area of central Orange County, where housing prices, while lower than they once were, are still a bit beyond his means.

And so he lives with his parents, paying $700 a month and sleeping in his childhood bedroom. There is a Garfield clock on the wall, and above a twin bed is a photo gallery of the Dream Team, including photos of Daisy Fuentes and Hilary Duff in their younger days. He recently put much of his Mega Man memorabilia in storage. “I’m trying to make my room look less like a 10-year-old’s,” he said. It is perhaps not an ideal arrangement for a young, single man. But by living at home, he is able to save $1,500 to $2,000 each month, which allows his net worth to grow at a steeper trajectory than it would otherwise.

Most of the hand-wringing we do around money essentially comes down to two basic questions: How am I doing? And, Am I going to be O.K.? Net worth is a pretty good answer to the first question and, over time, it offers hints as to how things might ultimately turn out. It’s an easy number to calculate and satisfies the desire for a single numerical grade.

But does our almost irresistible urge to rank ourselves against others based on any available data serve as a source of inspiration? Or does it lead to endless striving in search of some ever-elusive achievement? “I think this is a profound problem, this aspect of humans in the West,” said Andrew Oswald, a professor of behavioral science at the Warwick Business School in England. “We’re now extraordinarily rich by almost any standard of human history. But because we are creatures of comparison, it’s harder to get happier and happier.”

Eric Mill wasn’t thinking about his happiness when he created a Web site called Ohnomymoney two years ago. He was thinking in part about societal taboos — and how to thumb his nose at them. The site shows five numbers: his credit-card and student-loan debt, his checking- and savings-account balances and his net worth, which is currently about negative $12,400. The site updates most of the figures automatically every day through a feed from Wesabe, another site, like Mint, that pulls data from personal financial accounts.

At the bottom of the Ohnomymoney home page, there are two sentences of explanation in a tiny font size: “This is Eric Mill’s money. This site made against the advice of everyone who loves him.”

What was their advice? “It’s something they don’t understand, so they assume that it’s risky,” Mill, who is 25, says. “My girlfriend. My family. One friend criticized it from a classiness perspective. He thought it was uncouth to display something like this, though at the time I had a net worth of negative $20,000, so it wasn’t like I was flaunting anything.”

What he was trying to do when he began the site in May 2008, he says, was start a conversation. Since March 2009, Mill has worked for the Sunlight Foundation, a Washington-based nonprofit group that tries to make government workings more transparent. His site turns that notion on himself. “The taboo around talking about money is ill-founded,” he says. “When you’re the only person dealing with it, you’re subject to all of the dysfunctions we all have. If we could all be a little less uptight and more communicative and social about it, we’d be getting better advice, and it wouldn’t be the sort of thing that we stress about privately.”

So Mill’s money is laid bare for the world to see. In the fall of 2008, he became a freelance Web developer. The timing could not have been worse. “I had $3,000 and no firm gigs,” he says, adding that at one point a potential client, after telling him that he had seen Mill’s negative net worth online, tried to lowball him on a job, letting him know that he assumed that Mill probably needed the money. “During that time, my emotional well-being was completely tied to the number in my savings account.”

It wasn’t a happy time, but during this period, Mill figured out how to feel comfortable handling his money. Mill now saves a quarter to half of his take-home pay in a savings account in an online bank, but he is not making as many extra payments as he could on the $20,000 or so in student loans he is carrying, nor does he have any money set aside for retirement. “I put a much higher value on flexibility,” he says. “And I feel like the better investment right now is in me. It’s much more important that I have as much freedom and liquidity as I can.”

Net worth is not precisely calibrated with financial freedom. If Mill used all of his savings to pay down some debt, his net-worth figure would remain the same, but he would have no emergency fund if he lost his job. For this reason, he has come to think of the figure as a number that doesn’t really tell his whole story.

Some financial advisers agree. “To me, it’s an irrelevant number,” says Spencer Sherman, author of “The Cure for Money Madness” and a founder and the chief executive of Abacus Wealth Partners. “If people have a billion in net worth and are spending half a billion in a year, they’re really poor.” After all, they’re on pace to be broke in 24 months. (Sherman’s preferred measure of financial health for retirees is a ratio that compares net worth, excluding home equity, with the amount of money people take from their portfolios each year. He generally doesn’t want clients spending more than 4 to 6 percent of their holdings annually.) Mill acknowledges that his philosophy of financial openness has its limits. “This would be hard for me to do if I was totally affluent,” Mill told me. He balked at revealing his salary for this article, even though some of his friends already know what it is. “I don’t want to cause any tension with my co-workers,” he says, allowing only that the figure was at the upper end of the midfive figures.

I talked to one NetworthIQ user, a South Florida woman, who has about $856,000 in net worth. She blogs about her financial life at adventures-of-sam.blogspot.com, but says she would never reveal her name on the site. She worries that doing so would inject tension into her offline life. Her friends might think she was bragging about her frugal habits or implicitly criticizing their spending. Indeed, talking about wealth or good fortune can seem coarse or boastful, and maybe some people don’t want poor relatives to know to what extent they could be helping — and aren’t.

When Stephanie Grant learned a few months ago that a decent-size income-tax refund was coming her way, she had already dropped out of school twice, run up $37,000 in debt from credit cards and student loans and was the divorced mother of 3-year-old twins. Hers is a catalog of the sort of financial pitfalls that can set young adults back for many years.

Rather than spend the tax refund on the Nintendo Wii she wanted, Grant, who is 31 and lives in Edina, Minn., put it toward paying off her debt. Then, she began tracking her net worth in public, in part to shame herself into sticking to a financial plan, and recorded her progress on a blog, superpositron.blogspot.com. She followed the debt-reduction system of the financial coach Dave Ramsey, paying the smallest loans off first to build momentum. And she posted her numbers on NetworthIQ after seeing a link to it from the forums on Ramsey’s Web site.

“I liked the number it came up with,” she says, noting that her net worth includes her $4,000 or so of retirement savings, the value of her car and her $1,000 emergency fund. “My assets actually made a difference. I don’t have much, but the negative number was less negative than it would have been without them.” This is a common revelation for financial novices: you are more than the sum of your debts.

Initially, the idea of laying herself bare on a blog and on NetworthIQ caused a lot of anxiety. “You’re saying I have a secret and here it is for everyone to see,” she says. “But once it’s out there, and especially now that it’s not just a flat line saying ‘negative $23,000,’ and it is moving up a little bit, there’s a sense of pride and accomplishment that goes along with that. I know people are visiting, and it makes me want to pay something else off so I can post another entry that’s something good.” She’s currently putting a third of her monthly take-home pay from her job as a benefits analyst toward debt payments.

All of this has led to some odd reversals in her life. She looks forward to getting her bills in the mail, for instance, because it means it’s time to update her total debt. “Which might be a little bit sick,” she said. “But I know it’s lower than the last month. I know it for a fact.”

Grant often wonders about the people who are far ahead of her in the NetworthIQ standings. Did they get lucky? Are they lottery winners? Or did they get smart about money before she did? She tries not to beat herself up over it. “For people with the same income as me but higher net worth, it tells me that I can get there, too. It just takes discipline,” she says. “I know it has only been a couple of months now, but I kind of feel like I’ve made a life change.”

She admits that some of her pleasure is fueled as much by competition as self-satisfaction. “I’m not that far off from the person right above me” on the NetworthIQ list, she says. “I can probably catch them this month. And maybe next month I can get to the next one.”

That attitude is familiar to Michael McBride, an economics professor at the University of California, Irvine. “We crave information, not just to outdo others but to know how we ourselves are doing,” says McBride, who has studied how people’s well-being is affected when they compare their incomes against those of others. “When I pass out tests, the first thing students want to know is what the mean was. They don’t know how to interpret their score unless they know how well others did.”

Oswald, the professor of behavioral science, says the craving for comparison may be rooted in our biology. “It’s easier said than done to break through two million years of evolution,” he says. “A million years ago, you could watch what others were doing and mimic that to get food and resources. Or if you were high up the monkey pack, you could get the best mates.”

But what, exactly, are we comparing? Numbers like net worth can become inadequate shorthand. “We use it for something it was never intended to be used for: a sense of self-worth and status,” Milo Benningfield, a financial planner in San Francisco, told me. He urges his clients to stop thinking about other people and think instead about what they want and need. “I tell them to think of this as a topography of the choices you’re making about how you’re spending your lives. The only question I have is whether these are the choices you want to be making as you move forward. I think that takes the pressure away from looking right and left to other people around you and focuses it on your own life goals and your own vision of success.”

Joey Kincer, the Web developer who still lives with his parents, has never had a negative net worth. He stayed employed throughout the recession and got a better job near the end of it.

But when the stock market collapsed in 2008 and early 2009, Kincer worried that the holy-grail number he tracked, his net worth, could drop. “My 401(k) was falling,” he says. “It was affecting my net worth, and I didn’t want to see it doing that, so I took other measures to make sure it stayed flat.” He spent less money on eating out, DVDs and electronics in order to keep that public net-worth figure from dipping.

This might seem like a joyless way to live, but Kincer doesn’t see it that way. “I’m social,” he says. “I have friends from all different branches of my life. But I don’t go out that much. If I have the choice to stay home and earn money, I’ll do that. I’ve seen just about every one of my friends struggle financially. They’re killing themselves, and I’m thinking to myself that I’m not going to live like that.”

Ron Lieber writes the Your Money column for The Times and helps oversee Bucks, a blog about personal finance.

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Full article and photo: http://www.nytimes.com/2010/05/16/magazine/16Worth-t.html

Minds on the Move

A new kind of free trade as universities around the world compete for students and scholars.

A couple of years ago, as the State Department official whose purview included global education, I toured a dust-baked 2,500-acre campus outside Doha called Education City. Rising across the landscape were grandiose outposts of such American universities as Cornell, Carnegie Mellon and Georgetown—all invited by the royal family of Qatar to teach their specialties to the elite of that rich and tiny nation on the Persian Gulf: engineering at Texas A&M-Doha, journalism at Northwestern-Doha and so on. The professors were nearly all Americans, drawn in part by salary bonuses and in part by a pioneer spirit. The presence of American universities in such a far-away place is but one emblem of the globalization of higher education, a trend that is remaking hidebound institutions and moving minds (and ideas) around the world.

Ben Wildavsky, the author of “The Great Brain Race,” has been to Education City. In fact, while researching this comprehensive and fascinating book, he seems to have been everywhere. Formerly in charge of college ratings for U.S. News & World Report and now a fellow at Brookings and at the Kauffman Foundation, Mr. Wildavsky has toured the horizon and conducted dozens of interviews along the way. He reports on American universities, notably NYU, branching out internationally; on foreign governments, like China’s, spending vast sums to improve their own institutions, partly to attract scholars and students from abroad; on for-profit businesses, like Laureate and the Washington Post Co.’s Kaplan Inc., planting campuses in remote global locations; and, perhaps in too much detail, on the attempt to rank international universities. (According to Times Higher Education, a London-based magazine, Harvard is No. 1; Peking University, No. 52.)

Why all this activity? It is the “quest to build knowledge-based economies that has led so many governments to scramble to improve their education systems,” Mr. Wildavsky writes. But there are other reasons, including “the notion that a well-educated person today must be exposed to ideas and people without regard to national boundaries” and, less high-mindedly, “the financial attraction for many Western universities of overseas students who pay full freight.”

From 1999 to 2009, Mr. Wildavsky writes, the number of students studying outside their home countries increased by 57%—to three million. The U.S., with a 22% market share of this group, hosts more foreign students than any other country, but its prominence is threatened by such nations as Australia, where foreign students comprise a fifth of university enrollments, and Germany, which attracts 190,000 Chinese students. Meanwhile, India and China are making multi-billion-dollar investments to improve the quality of their universities, especially in the sciences.

But most impressive are the efforts of countries that in the past had little interest in academic excellence. “Perhaps the most audacious attempt to create a world-class university from scratch is taking place in Saudi Arabia,” Mr. Wildavsky observes. The King Abdullah University of Science and Technology opened its doors in 2009, funded with a donation of $10 billion from the king himself, thus instantly becoming the sixth-richest university in the world. The university’s partners include Stanford, Cambridge, Imperial College London and the University of California at Berkeley. Its new president, a professor of mechanical engineering named Choon Fong Shih, is, Mr. Wildavsky notes, “the emblematic example of this emerging worldwide university culture.” He is the son of a Chinese father and a Malaysian mother; he earned his undergraduate degree in Singapore, his master’s degree at McGill in Montreal and his Ph.D. at Harvard. He led a research group at General Electric, taught for years at Brown University and then became president of the National University of Singapore, before being hired away by King Abdullah.

Of course King Abdullah University will do more than teach a new generation of scientists and engineers. By permitting men and women to take classes together and by receiving international scholars and new ideas, it will be a catalyst for economic and social change in Saudi Arabia and beyond. This is Mr. Wildavsky’s major argument. The globalization of education is producing what he calls a “free trade in minds”—beneficial not only to countries sending their students abroad and countries accepting them but also, through positive externalities, to the broader world.

Some nations, including India and Russia, continue to see education as a zero-sum game and erect barriers to the free flow of students and scholars—much as they put up tariffs against foreign steel. Even the University of Tennessee once established a quota on foreign graduate students (since dropped). But like free trade in conventional goods and services, free trade in minds helps everyone.

“Innovation overseas,” Mr. Wildavsky says, “can actually enhance America’s financial well-being. That is because ideas can’t be contained within national boundaries, meaning that America’s share of the world’s research production matters far less than the proven ability of U.S. entrepreneurs, financiers, and consumers to take advantage of cutting-edge research wherever it comes from.”

Mr. Wildavsky is not completely upbeat about the global-education boom. No university seems to have gotten the model right yet. Some U.S. schools have closed their foreign branches for lack of students, others hesitate to branch out, worried about protecting their brands. The future may lie with private firms like Laureate, but foreign cartels actively try to keep them out. Still, something big is happening. Making the most of human capital—a key to competitiveness and prosperity—is more and more the work of globalized universities competing for the best thinkers and the best ideas.

Mr. Glassman, a former under secretary of state for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas.

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Full article and photo: http://online.wsj.com/article/SB10001424052748703691804575254431373634638.html

The Goldilocks recovery

Strict financial regulation and a new commodity boom have turned “boring” Canada into an economic star

THEIR economy is so intertwined with their neighbour’s that when the United States plunged into recession, Canadians assumed they would be dragged along for the ride. Newspapers took to illustrating their economic stories with pictures of Depression-era bread lines. Yet whereas the United States has still not officially declared its recession over, Canada is nine months into recovery from its mildest and shortest downturn in recent history. Unemployment has been falling since last August, and proportionately fewer jobs were lost than south of the border.

Jim Flaherty, the finance minister, attributes Canada’s strong performance to its “boring” financial system. Prodded by tight regulation, the banks were much more conservative in their lending than their American counterparts. Those that did dabble in subprime loans were able to withdraw quickly. This prudence kept a lid on house prices while those in America were soaring, but it paid off when the bust hit. The volume and value of home sales in Canada are now at record highs. In some areas the market looks downright frothy: a modest house in Ottawa listed at C$439,000 ($435,000) recently sold for $600,000. “A lot of homes are selling in one day, and often for over the asking price,” says David Cullwick, a local estate agent. Rising prices have bolstered the construction industry and sellers of furniture and building materials.

True to form, the authorities are moving to halt the party. During the recession the Bank of Canada cut its benchmark interest rate (to 0.25%), injected extra liquidity and bought up mortgage-backed securities. At its April policy meeting the bank withdrew its pledge not to raise rates. Analysts expect an increase in June. The government has ended tax credits for first-time house buyers and for renovations, which were granted in 2008 to stimulate demand.

For the other component of the country’s resilience—resurgent appetites for its exports of oil, gas, and minerals—Canadians have to thank policymakers in Beijing more than those in Ottawa. At their low point, prices for Canada’s commodity exports were still 50% higher than in previous recessions. Since then, they have rallied strongly. The impact is illustrated by the fortunes of Teck Resources, a Vancouver-based mining firm. It staggered into the recession loaded with a $9.8 billion debt taken on to buy the assets of a coal-mining company. For a while its survival was in doubt. Last month Teck not only announced that it had repaid the debt but also that it would pay a dividend.

The energy industry is coming back to life, with new investments planned for in Alberta’s oil sands. Last month Sinopec, a Chinese oil company, announced it would pay $4.65 billion for a 9% stake in Syncrude Canada, the largest operator in the sands. Such investments are controversial because of their environmental impact. But they are welcome in Alberta, where the government posted an unprecedented budget deficit last year.

“Our regional economies are so diverse that there is always something leaning against the wind,” says Philip Cross, the chief economist at the government statistics agency. But the combination of commodity revenues and investors seeking safety in Canadian assets has caused the currency to take off. After falling as low as 77 American cents during the recession, the Canadian dollar has now returned to rough parity with the greenback.

That is a tribute to the country’s success. But the central bank warns that a strong loonie, as the currency is known, will slow the recovery. It would be particularly harmful to manufacturing exporters, who were battered by the recession (car production fell by 31% in 2009). That might lead to further specialisation in natural resources. For now, concern about the loonie is muted, because most companies adapted to a stronger exchange rate during its previous run-up in 2007. Many of those that did not went bust. But if the currency continues to rise, the squeals will surely grow.

The government of Stephen Harper, the Conservative prime minister, might have expected to receive more praise for the economy’s robust performance. If it has not, that may be partly because it insisted that the recession was imported from the outside world. Much of the country’s resilience stems from policies—such as bank regulation and sound public finances—which predate Mr Harper. The Bank of Canada can share some of the credit too. But Britons might note that Mr Harper has managed to govern for four years without a parliamentary majority, and that this has not prevented Canada from sailing through the recession.

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Full article and photo: http://www.economist.com/world/americas/displaystory.cfm?story_id=16060113&source=hptextfeature

The We’re-Not-Europe Party

The bill comes due for a life of fairness at the expense of growth.

One of the constant criticisms of Barack Obama’s first year is that he’s making us “more like Europe.” But that’s hard to define and lacks broad political appeal. Until now.

Any U.S. politician purporting to run the presidency of the United States should be asked why the economic policies he or she is proposing won’t take us where Europe arrived this week.

In an astounding moment, to avoid the failure of little, indulgent, profligate Greece, the European Union this week pledged nearly $1 trillion to inject green blood into Europe’s economic vampires.

For Americans, this has been a two-week cram course in what not to be if you hope to have a vibrant future. What was once an unfocused criticism of Mr. Obama and the Democrats, that they are nudging America toward a European-style social-market economy, came to awful life in the panicked, stricken faces of Europe’s leadership: Merkel, Sarkozy, Brown, Papandreou. They look like that because Europe has just seen the bond-market devil.

The bond market is a good bargain—if you live more or less within your means. The Europeans, however, pushed a good bargain into a Faustian bargain, which the world calls a sovereign debt crisis.

In the German legend, Faust was a scholar who sold his soul to the devil many years hence in return for a life now of intellectual brilliance and physical comfort. In our version of the legend, Europe’s governments told the devil that, more than anything, they wanted a life of social protection and income fairness no matter the cost. Life was good. A fortnight ago, the bond devil arrived and asked for his money.

In the U.S., the Obama White House and the Democrats have decided to wage politics into November by positioning the Republicans as the party of obstruction, which won’t vote for things the nation “needs,” such as ObamaCare. Some Republicans voting against these proposals seem to understand, as do their most ardent supporters, that they are opposing such ideas and policies because the Democrats have pushed far beyond the traditional centrist comfort zone of most Americans. A Democratic Party whose current budget takes U.S. spending from a recent average of about 21% of GDP up to 25% is outside that comfort zone. It’s headed toward the euro zone.

After Europe’s abject humiliation, the chance is at hand for the Republicans to do some useful self-definition. They should make clear to the American people that the GOP is “The We’re Not Europe Party.” Their Democratic opposition could not attempt such a claim because they do not wish to.

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British Prime Minister Gordon Brown

The state of Europe can be summed up in one word: stagnation. Jean-Claude Trichet, the European Central Bank president who just agreed to monetize the debt that Europeans can’t or won’t pay, noted in a 2006 speech that “over the period from 1996 to 2005, euro area output grew on average 1.3 percentage points less than in the U.S., and the gap appears to be persistent.”

Angus Maddison, the eminent European historian of world economic development who died days before Europe’s debt crisis, wrote in 2001: “The most disturbing aspect of West European performance since 1973 has been the staggering rise in unemployment. In 1994-8 the average level was nearly 11% of the labor force. This is higher than the depressed years of the 1930s.”

Stagnation isn’t death. Economies don’t die. Greece proves that. They slow down. Europe’s low growth rates allow its populations to pretend that real, productive work is being done somewhere by someone. But new jobs are created slowly, if at all. Younger workers lose heart.

Economic stagnation is a kind of purgatory. Once there, it’s not clear how you get out. The economist Douglass North, in his 1993 Nobel Prize acceptance speech, said that one of the vexing problems of his discipline is, “Why do economies once on a path of growth or stagnation tend to persist?” Japan also seems unable to free itself from stagnation.

The antidote to stagnation is economic growth. Not just growth, but strong growth. A 4% growth rate, which Europe will never see again, pays social dividends innumerably greater than 2.5% growth. Which path are we on?

Barack Obama would never say it is his intention to make the U.S. go stagnant by suppressing wealth creation in return for a Faustian deal on social equity. But his health system required an astonishing array of new taxes on growth industries. He is raising taxes on incomes, dividends, capital gains and interest. His energy reform requires massive taxes. His government revels in “keeping a boot on the neck” of a struggling private firm. Wall Street’s business is being criminalized.

Economic stagnation arrives like a slow poison. Look at the floundering United Kingdom, whose failed prime minister, Gordon Brown, said on leaving, “I tried to make the country fairer.” Maybe there’s a more important goal.

A We’re-Not-Europe Party would promise the American people to avoid and oppose any policy that makes us more like them and less like us.

Daniel Henninger, Wall Street Journal

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The World’s Dollar Drug

Expect the greenback to remain the world’s reserve currency, but that won’t be a sign of U.S. strength.

For all the talk about the problems of Greece and their implications for the euro zone, there is another currency that presents equally profound problems: the U.S. dollar. The dollar is, as everyone knows, the world’s reserve currency, and it widely seen as a boon and an anchor for the emerging global economic system. It is also the only thing standing between the United States and its own moment of reckoning, and that is not a good thing.

The evolution of the dollar as the world’s reserve currency tracked the emergence of the U.S. as a dominant power. The Bretton Woods agreement of 1944 designated the dollar as the currency of last resort because the U.S. accounted for a significant percentage of world manufacturing and held much of the world’s gold in Fort Knox and other depositories. The British at first demurred but were forced to accept the primacy of the greenback in 1946 when faced with a choice between bowing to the dollar or defaulting on their loans because the Americans would not lend to them otherwise.

Bretton Woods obligated participating countries to determine their exchange rates and the value of their currencies in relation to the dollar, with gold as the underpinning. Then, in 1971, President Richard Nixon ushered in the era of fiat currency when he announced that the U.S. government would no longer allow foreign nations to redeem their U.S. dollars for gold.

The move came in response to rising inflation in the U.S. It also came in response to competitive pressures from Germany and Japan, which were beginning to undermine American manufacturing—a decline that has continued unabated since and can only be laid at China’s door by a willful forgetting of the legacy of a host of lower-cost competitors over the past 40 years. By the early 1970s, the U.S. was importing heavily from new manufacturing centers outside America (though not yet running trade deficits) and being forced to redeem ever larger amounts of dollars for rapidly dwindling reserves of gold.

After 1971, currencies began to float against one another. This fiat system is what exists today, with notable outliers such as China, which continues to peg the value of its currency to the dollar. It does so primarily because when Beijing began to liberalize its economy in the early 1980s, the dollar was the most important avenue of access to the U.S., the world’s most vital and dynamic economy.

Over the past decade, the relative position of the U.S. has shifted. It is no longer a creditor to the world but rather a large debtor. It is a net importer of manufactured goods—though its manufacturing sector remains quite large even while employing fewer workers. Its national economy is the world’s largest but is surpassed by the multinational euro-zone. And China’s economy, while still perhaps not much more than a third the size of the U.S., is growing three to four times as rapidly and accumulating dollars at a torrid clip.

Yet the dollar remains the linchpin of the global system. The financial crisis brought global grumblings about the U.S. currency, about the toxicity of the U.S. financial system, and about the need and desire for an alternate global currency. The Chinese were vocal in their desire to find a new anchor, and the Europeans echoed the sentiment along with others. But words are easy. Even the Chinese, who have made moves toward pegging the yuan against a basket of currencies, still find that having tethered their system to the dollar they can’t simply walk away because they would rather things were different.

The dollar’s dominance has clear short-term benefits for the U.S. Unlike Greece or just about any other country, when the American federal government wants to take on additional debt it has the advantage of a world that must buy dollars. Because much of global trade is conducted in dollars, especially Chinese trade, governments and institutions throughout the world have little choice but to invest in U.S. assets. The U.S. government also has the ability to print that global reserve currency when dire straits demand it. That gives the U.S. considerable latitude to spend its way out of a crisis without confronting real structural challenges.

Greece is being forced to adopt more austere government fiscal policies, as are Latvia and many other smaller countries. Having to turn to global markets with cap in hand is a bitter pill but could force reforms that will eventually leave those economies in stellar shape. The U.S. has been able to forestall deep reforms because it has the dollar.

But while the presence of the dollar keeps money flowing in and the system well-oiled, it no longer reflects the world’s economic pecking order. For all the talk of currency manipulation by Beijing, it is equally true that China’s peg to the dollar is currently propping up an otherwise shaky American economy. The Chinese have become the ultimate offshore bank for American capital, and there is no evidence they deploy it to less American benefit than Americans themselves do. The Chinese government invests conservatively in U.S. bonds, and spends heavily on a domestic economy that produces goods for American consumers.

The U.S. government uses its dollars—and the ability to print them and borrow them—poorly. Large amounts of debt fund consumption of goods and health care. While today’s needs are important, without sufficient investment those dollars will dissipate. You’d lend someone money to open a business or invent a new energy source, but not for dinner and a movie. Yet because of the dollar, America tends to get the money it wants. And so the dollar as an anchor of the global system forestalls fiscal crisis in the U.S. while allowing for gradual decay of the American economy.

This can go on for many years. The world needs a reserve currency to reduce costs and allow market players to assess value across different countries and economies. But that need for the dollar shouldn’t be confused for American strength.

India continues to use English as a lingua franca, more than 60 years after the British departed, not because Britain remains a world empire but because India needs a common tongue and English was already in place. The dollar today serves the same purpose for the world. The ubiquity of the dollar allows Americans to believe that their country will automatically retain its rightful place as global economic leader. That’s a dangerous dream, an economic opiate from which we would do well to wean ourselves.

Mr. Karabell is president of River Twice Research and the author of “Superfusion: How China and America Became One Economy” (Simon & Schuster, 2009).

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Full article and photo: http://online.wsj.com/article/SB10001424052748704342604575222701291563876.html

The Real Euro Crisis

The EU’s bailout postpones the day of fiscal reckoning.

A trillion dollars is a lot of money, even these days, and the European Union has demonstrated that a check for €750 billion ($972 billion) can produce a rally in European debt markets and global equities. Too bad the larger price for Sunday night’s “shock and awe” intervention is likely to be paid in the further erosion of Europe’s fiscal and monetary credibility.

French Finance Minister Christine Lagarde noted Monday’s exuberant market reaction with satisfaction, saying that the “message had gotten through” that Euroland would defend its currency. Yes, creditors no doubt love that governments have guaranteed their high-yield loans to Greece, Portugal, Spain and any other profligate government that comes under bond-market siege. What investor doesn’t like a risk-free loan that pays 9%?

But there is no such thing as a free sovereign bailout, and the EU’s intervention merely transfers those risks from banks and other creditors to taxpayers and the European Central Bank. The real gamble is being made by politicians who are calculating that, by taking the risk of sovereign default off the table for now, they are giving the global economic recovery time to build and making it easier to address Europe’s fiscal woes.

In a sense, Europe has decided to TARP itself. German taxpayers have undertaken to underwrite the spending of Southern European governments, with Greece playing AIG, and Portugal starring as Citigroup. Spain, we suppose, is Goldman Sachs. Perhaps it will all work. But our guess is that Germany and France will have a harder time shedding responsibility for the fiscal policies of entire nations than the U.S. Treasury has had selling shares in bailed-out banks.

There is also the small matter of the rule of law. Such bailouts are expressly prohibited by the 1992 Maastricht treaty, and that promise is now in tatters. In the euro’s first serious test, the political class blinked. The resulting moral hazard will haunt the single currency for years and reduce the incentive for governments to keep their fiscal houses in order.

Most dangerous, the European Central Bank has also been dragooned into this bailout through a program to buy euro-zone bonds in unspecified amounts. The ECB says that it will “sterilize” its bond purchases by selling other assets, so the intervention won’t affect monetary policy. In Switzerland on Monday, ECB President Jean-Claude Trichet also denied that the ECB decision, announced at the same time as the fiscal rescue, was taken under political pressure.

But the timing smacks of a coordinated campaign and so undermines the ECB’s most precious asset—its reputation for political independence and an unwavering commitment to price stability. The bonds the ECB will buy are the sovereign debt of individual nations, which looks to us as if the central bank will directly monetize debt. Mr. Trichet should ask the U.S. Federal Reserve if buying mortgage-backed securities has had no effect on monetary policy. The Frenchman’s assurances are hard to credit.

While the sheer size of the bailout fund impressed investors, it also raises questions about the borrowing capacity of the euro zone as a whole. In 2009, the 16 countries of the euro zone ran collective deficits of €565 billion, or 6.3% of GDP. Every member of the European Union had a fiscal deficit.

That’s understandable in a recession, but the markets have been sending a message that this spending path is unsustainable. Sunday’s “bazooka,” to borrow former Treasury Secretary Hank Paulson’s famous 2008 metaphor, has silenced the bond messengers for now. But if Europe’s political class doesn’t use this opening to shape up, the crisis will return—and there will be no richer nations left to do the rescuing.

The real euro crisis, in short, is one of overspending and policies that sabotage economic growth. Sunday’s shock and awe campaign has merely postponed that reckoning—and at a fearsome price.

Editorial, Wall Street Journal

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Full article and photo: http://online.wsj.com/article/SB10001424052748703674704575233891226203932.html

The Beijing consensus is to keep quiet

The China model

In the West people worry that developing countries want to copy “the China model”. Such talk makes people in China uncomfortable

CHINESE officials said the opening of the World Expo in Shanghai on April 30th would be simple and frugal. It wasn’t. The display of fireworks, laser beams, fountains and dancers rivalled the extravagance of Beijing’s Olympic ceremonies in 2008. The government’s urge to show off Chinese dynamism proved irresistible. For many, the razzmatazz lit up the China model for all the world to admire.

The multi-billion-dollar expo embodies this supposed model, which has won China many admirers in developing countries and beyond. A survey by the Pew Research Centre, an American polling organisation, found that 85% of Nigerians viewed China favourably last year (compared with 79% in 2008), as did 50% of Americans (up from 39% in 2008) and 26% of Japanese (up from 14%, see chart). China’s ability to organise the largest ever World Expo, including a massive upgrade to Shanghai’s infrastructure, with an apparent minimum of the bickering that plagues democracies, is part of what dazzles.

Scholars and officials in China itself, however, are divided over whether there is a China model (or “Beijing consensus” as it was dubbed in 2004 by Joshua Cooper Ramo, an American consultant, playing on the idea of a declining “Washington consensus”), and if so what the model is and whether it is wise to talk about it. The Communist Party is diffident about laying claim to any development model that other countries might copy. Official websites widely noted a report by a pro-Party newspaper in Hong Kong, Ta Kung Pao, calling the expo “a display platform for the China model”. But Chinese leaders avoid using the term and in public describe the expo in less China-centred language.

Not so China’s publishing industry, which in recent months has been cashing in on an upsurge of debate in China about the notion of a China model (one-party rule, an eclectic approach to free markets and a big role for state enterprise being among its commonly identified ingredients). In November a prominent Party-run publisher produced a 630-page tome titled “China Model: A New Development Model from the Sixty Years of the People’s Republic”. In January came the more modest “China Model: Experiences and Difficulties”. Another China-model book was launched in April and debated at an expo-related forum in Shanghai. Its enthusiastic authors include Zhao Qizheng, a former top Party propaganda official, and John Naisbitt, an American futurologist.

Western publishers have been no less enthused by China’s continued rapid growth. The most recent entry in the field is “The Beijing Consensus, How China’s Authoritarian Model Will Dominate the Twenty-First Century” by Stefan Halper, an American academic. Mr Halper, who has served as an official in various Republican administrations, argues that “just as globalisation is shrinking the world, China is shrinking the West” by quietly limiting the projection of its values.

But despite China’s status as “the world’s largest billboard advertisement for the new alternative” of going capitalist and staying autocratic, Party leaders are, as Mr Halper describes it, gripped by a fear of losing control and of China descending into chaos. It is this fear, he says, that is a driving force behind China’s worrying external behaviour. Party rule, the argument runs, depends on economic growth, which in turn depends on resources supplied by unsavoury countries. Politicians in Africa in fact rarely talk about following a “Beijing consensus”. But they love the flow of aid from China that comes without Western lectures about governance and human rights.

The same fear makes Chinese leaders reluctant to wax lyrical about a China model. They are acutely aware of American sensitivity to any talk suggesting the emergence of a rival power and ideology—and conflict with America could wreck China’s economic growth.

In 2003 Chinese officials began talking of the country’s “peaceful rise”, only to drop the term a few months later amid worries that even the word “rise” would upset the flighty Americans. Zhao Qizheng, the former propaganda official, writes that he prefers “China case” to “China model”. Li Junru, a senior Party theorist, said in December that talk of a China model was “very dangerous” because complacency might set in that would sap enthusiasm for further reforms.

Some Chinese lament that this is already happening. Political reform, which the late architect of China’s developmental model, Deng Xiaoping, once argued was essential for economic liberalisation, has barely progressed since he crushed the Tiananmen Square protests in 1989. Liu Yawei of the Carter Centre, an American human-rights group wrote last month that efforts by Chinese scholars to promote the idea of a China model have become “so intense and effective” that political reform has been “swept aside”.

Chinese leaders’ fear of chaos suggests they themselves are not convinced that they have found the right path. Talk of a model is made all the harder by the stability-threatening problems that breakneck growth engenders, from environmental destruction to rampant corruption and a growing gap between rich and poor. One of China’s more outspoken media organisations, Caixin, this week published an article by Joseph Nye, an American academic. In it Mr Nye writes of the risks posed by China’s uncertain political trajectory. “Generations change, power often creates hubris and appetites sometimes grow with eating,” he says.

One Western diplomat, using the term made famous by Mr Nye, describes the expo as a “competition between soft powers”. But if China’s soft power is in the ascendant and America’s declining—as many Chinese commentators write—the event, which is due to end on October 31st, hardly shows it. True, China succeeded in persuading a record number of countries to take part. But visitor turnout has been far lower than organisers had anticipated. And queues outside America’s dour pavilion have been among the longest.

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Full article and photos: http://www.economist.com/world/asia/displayStory.cfm?story_id=16059990&source=features_box3