Ways of the World

Skepticism and the Economy

2012-01-30T19:23:00.002-05:00

The U.S. economy is trying to move ahead. There are grudging gains in the job market and existing home sales, and the broad measure of gross domestic product – GDP – grew at a 2.8% rate in the fourth quarter, the best since the middle of 2010. The stock market has generally been firming since the beginning of January and various surveys of consumer sentiment have been improving.

There remains an air of skepticism. Usually the rebound from a recession mirrors its force. Steep declines are followed by sharp gains, and more gradual contractions followed by gentler climbs. But this cycle has been marked by hesitancy. Consumer spending, for instance, picked up during 2010, but slowed again in the summer of 2011; construction of both buildings and houses has remained at very low levels. Business inventories of materials and merchandise seemed to be recovering but contracted anew in the middle of 2011. There have been fears of "double-dip", that is, of more recession after a string of lackluster gains in the economy.

Employment Conditions Improve . . . .
It's hard to pick this apart and identify a single pattern. People are most concerned about jobs and unemployment, and these have seemed to be moving favorably, if not forcefully so. We can take heart that businesses added some 466,000 jobs in the last three months of 2011, after an almost identical 465,000 during the prior three months. Many of those are in health care and food services, which may not be very high-paying. But 66,000 were added in manufacturing over that six-month span and 88,000 in professional and technical services, suggesting that a good portion of the new positions are better paying. The employment report for January will be out Friday, and all of this may change, although forecasters project some growth.

In addition, while the unemployment rate remains stubbornly high at 8.5%, the number of people filing claims for unemployment insurance has been coming down. So fewer people appear to be losing their jobs of late. There has historically been a break in labor market conditions whenever the number of these new claimants goes above or below 400,000 a week. More than 400,000 tends to happen only in recessions, while conditions are noticeably better below that threshold. So it is encouraging that ten of the last 12 weeks have been in a range around 375,000, including several weeks with the smallest numbers of new claims since the spring of 2008.

. . . . and Consumers Are More Confident
Economic data are fine, but do ordinary people, the backbone of the economy, actually notice these developments? If they're not the specific people involved in the hiring or other developments, their impact might not matter to other than data mavens. A survey of consumers taken by the University of Michigan suggests that people have indeed been aware. A boost to that survey's "index of consumer sentiment" has reflected in part a sense that employment opportunities might be improving; the overall index was up more than 5 points in January and is up 20 points from a low in August. The share of participants who said they are feeling better because they are hearing about companies hiring new workers was the largest since 1983.

But Worries Abound over Government Indecision . . .
Still, people remain skeptical. Other questions in the survey show that even though people have heard about new hiring, they don't expect that to produce much progress in lowering unemployment and they're also not optimistic about their own finances improving much. Further, the Michigan press release states that "confidence in government policies remains near an all-time low." Moreover, "every sustained recovery in the past half century has been foreshadowed by rising confidence in government economic policies."

Consumers are not the only ones concerned with the tenor of government policies. Another survey, this one a major undertaking by Harvard Business School and released just two weeks ago, describes considerable worry among business leaders. This new report has a lot in it and we will devote an entire article to it. Our main point for the moment is that several thousand business executives polled just in October cite concerns over various regulatory and tax issues that they see as potentially harmful to fundamental U.S. competitiveness.

. . . in Europe and the U.S.
Finally, today, as we have been writing, the stock market has moved down and up like a yo-yo once again. As we have talked about any number of times here, it continues that European policymakers still seem to have difficulty devising concrete actions to help the debt crises plaguing several countries there. Greek officials met on the weekend with bond-holders, and press reports suggested progress was being made toward an agreement on writing down some of Greece's debt so it could manage the rest. But no definitive conclusion was reached. Each time one of these meetings takes place involving various groups of European officials, it seems that some kind of resolution is about to be announced. But nothing definitive has yet resulted.

The U.S. has its own version of "policy-it is" too. The latest such development is an announcement that the Obama Administration is postponing the publication of its 2013 budget documents by a week. These "always" come out the first Monday in February, but this year, it will be the following week, on February 13. If this were isolated, it perhaps wouldn't matter much, but it follows the debt ceiling debacle and the downgrade of our credit over precisely such considerations.

These comments have no relation to one's political views. The immediate concern is that with the current tenuous state of the Western world economies, we need first of all for those governments to take clear and decisive steps. The private sector, as we have noted here, is trying to move forward. A number of emerging market countries are also moving forward. We need the policymakers in the Western industrialized countries to do what they are supposed to do, make the policies they are responsible for. Then skeptical consumers and uncertain business leaders can know what they face in conducting their own lives and businesses.

Trinity Church Appearance with Barbara Crafton

2012-01-21T12:08:00.002-05:00

Well. Barbara Crafton and I seem to have had a fine time at Trinity Church three days ago. We had a good discussion in front of a pretty fair-sized audience about a number of public issues of these days as part of Trinity Institute's current series "Wall Street Dialogues". Our conversation was indeed a "dialogue", which started with Mitt Romney's just revealed tax rate and moved through education, health care and the structural sources of inequality, among other topics. It was gratifying to talk back and forth for some 45 minutes, and then have the questions from the audience and the internet bring out new and different aspects of the issues.

Perhaps some of you watched, but if not, you might still want see the presentation. Go here: http://www.trinitywallstreet.org/news/articles/wall-street-dialogues-would-jesus-pay-taxes.

As to the substance of Ways of the World, it's been a while since we talked to you about "the economy", and several sectors have shown some signs of life in recent reports. So watch for commentary on that to appear here soon. The Trinity Church event brought up several issues that bear our greater exploration, so those will come as well. As always, let us know what's on your minds, too.

"Wall Street Dialogues" Jan 18 at Trinity Church

2012-01-07T14:58:00.004-05:00

We are pleased – and somewhat daunted! – to tell you that we will appear with Barbara Crafton at Trinity Church, Wall Street, on January 18. In response to the Occupy Wall Street movement, Trinity Institute is conducting a series of five discussions called "Wall Street Dialogues" on successive Wednesdays beginning this coming week, January 11, at 1:00PM. These will tackle current controversies regarding economic inequality, wealth and power and the morality of capitalism. The title for Mother Crafton's and my presentation is "Would Jesus Pay Taxes?" She will interview me on such questions as what might be a "fair share" for the rich to pay in taxes.

Speakers on the other weeks include Professors Gary Dorrien of Union Seminary and Kathryn Tanner of Yale Divinity School, James Copland of the Manhattan Institute and Ben Roberts of Occupy Café, an online discussion site for the Occupy movement.

These events will include some formal presentation and then Q&A with the audience. They are intended to last an hour and will be live-streamed on Trinity's website.

Go to http://www.trinitywallstreet.org/news/features/trinity-institute-presents-wall-street-dialogues for more color.

Join us, if you can, on January 18, or watch on your computer.

Commentary on some of the other presentations will appear here as well, and we also welcome any thoughts you might have on any of these issues.

I Got a Flock of Chickens for Christmas!

2011-12-27T16:25:00.003-05:00

It's one of my favorite presents and certainly the one carrying the most pleasure. How nice it is to know that some family in a faraway place will be able to eat eggs and raise even more chickens, thanks to the programs of Episcopal Relief and Development that distribute these animals and farm tools and other supportive items.

The Geranium Farm has a connection with ER-D -- see the links in the menu above to Gifts for Life and Pennies from Heaven, or their website directly, www.er-d.org -- but I would write to advocate for it as an example of a worthwhile charity anyway. In a purely personal opinion, I like the dual nature of its mission: its people and resources are on the scene soon after disaster strikes, using the good offices of Anglican Communion dioceses all over the world to facilitate relief programs. But ER-D doesn't stop there. It pitches in with rebuilding and with general development needs. Moreover, this isn't confined just to foreign or just to domestic sites. ER-D works everywhere. So they pitched in in New Orleans and Mississippi and Joplin, MO, and in Haiti and most currently in the flood-ravaged Philippines.

Ways of the World first talked specifically about Episcopal Relief and Development a couple of years ago when a reader wrote to Geranium Farm colleague Joanna Depue at More or Less Church and complained that the salary of the President of ER-D seemed too high for any sort of charity. As the Farm's economist and numbers person, I volunteered to check this out. We consulted a directory of charities, Charity Navigator, which compares expenses across organizations, and we also looked at ER-D's "Form 990", the massive report they file each year with the IRS to document their tax-exempt status. We found right away that the President's salary is far from too large, especially for a New York-based organization. At the same time, as one might imagine, the recent economic turmoil has caused charity finances to contract and expand more than is typical. A new look at current financial statements for ER-D itself shows that it, in fact, experienced some backtracking in 2009, but that was followed by renewed expansion in 2010. Through it all, at least 85% of donors' contributions have gone to actual program activities, and in 2010, it was 89%. An indicator of fund-raising efficiency highlighted by Forbes Magazine for the mega-charities it studies checks the cost of raising $1.00 in contributions. In 2009, ER-D spent 11 cents, very close to the average of 10 cents for much larger organizations, and this may have been as low as 7 cents in 2010.

So, as you consider your year-end charitable donations, we urge you to think seriously of Episcopal Relief & Development, and we do so for two reasons. First, it has a great mission that seeks to serve many in need throughout the world, and Second, it is a well-managed institution with strong financial backing and a restrained cost structure.

Get yourself a flock of chickens! Or help dig a well in a village needing more water. Or start a monthly plan that sends whatever amount every single month to the area of greatest need. As a certain TV personality has been known to say, "It's a good thing!"

Christopher Hitchens, the King James Bible and the 10 Commandments

2011-12-17T18:41:00.003-05:00

This year is, of course, 2011, and among other distinctions, it is the 400th Anniversary of the publication of the King James Bible, the most renowned English translation of the Sacred Text, which also stands as a classic in English literature. We had been intending to write about it for some time, but, as often happens, exigencies of the day got in the way.

At the same time, renowned "atheist" Christopher Hitchens passed away Thursday from throat cancer. Ways of the World often acknowledges the passing of major public figures, so it seems perfectly reasonable to stop and comment about Hitchens. We are, first, sorry that he was so ill and had such a difficult time. Perhaps he has found some peace and rest in the last two days.

We haven't actually read any of Hitchens' work. So we've been surprised as we "googled" yesterday and today to find that some of his recent pieces for Vanity Fair magazine are lengthy essays on the King James Bible, which he celebrates, and the Ten Commandments, which he "edits". While Hitchens is a boisterous critic of religion, it's clearly not out of ignorance or even bald disdain. He has obviously studied a great deal about the topic and has opinions based on reason.

In this way, he contributes to our own understanding of our own beliefs. If we note his arguments and ponder them, we might actually strengthen our own faith. By analogy, we can describe similar contributions to the Presidential campaign by at least two of the Republican contenders. Ron Paul has strong, but well thought-out notions of foreign policy and monetary policy. We don't like the implications of those notions, if they were to be carried out, but the fact that he raises them makes us and the other candidates develop better arguments for our own positions. In the same way, Herman Cain's "9-9-9" plan may not be favored by many. But it was the first concrete proposal for fiscal reform from among these candidates, and its concrete catchiness forced the others to begin to specify their own schemes. So these two, by offering their interpretations and proposals, have contributed positively to the overall discussion.

Now, why might Ways of the World be the place on the Geranium Farm where you read about the King James Bible? For two broad reasons, one of which we might even call the Hitchens Argument. Ahead of that, our interest as an economist was piqued by the fact that a leading theologian, Alastair McGrath, in his commemorative In the Beginning, starts that book with a detailed explication of the history of printing.[1] English translations of the Bible were both dependent upon and important to the development of printing technology. Having the Bible available in the language of the people was a key ingredient in the Reformation. The William Tyndale translation, which began to appear around 1526, was printed in Germany and unbound pages were smuggled into England. Tyndale was burned at the stake in 1536 for his work, but its popularity in England was hardly diminished. It was only through the tool of mass production through printing that circulation could be made to ordinary as well as very rich readers.

Hitchens, as well as McGrath, explained in his May 2011 Vanity Fair column[2] the import of the 1611 King James version to the development of the English language and also to the solidification of the nation of England as separate from the rest of Europe.

Four hundred years ago, just as William Shakespeare was reaching the height of his powers and showing the new scope and variety of the English language, and just as “England” itself was becoming more of a nation-state and less an offshore dependency of Europe, an extraordinary committee of clergymen and scholars completed the task of rendering the Old and New Testaments into English, and claimed that the result was the “Authorized” or “King James” version. This was a fairly conservative attempt to stabilize the Crown and the kingdom, heal the breach between competing English and Scottish Christian sects, and bind the majesty of the King to his devout people. “The powers that be,” it had Saint Paul saying in his Epistle to the Romans, “are ordained of God.” This and other phrasings, not all of them so authoritarian and conformist, continue to echo in our language: “When I was a child, I spake as a child”; “Eat, drink, and be merry”; “From strength to strength”; “Grind the faces of the poor”; “salt of the earth”; “Our Father, which art in heaven.” It’s near impossible to imagine our idiom and vernacular, let alone our liturgy, without them. Not many committees in history have come up with such crystalline prose.

Further,

Though I am sometimes reluctant to admit it, there really is something “timeless” in the Tyndale/King James synthesis. For generations, it provided a common stock of references and allusions, rivaled only by Shakespeare in this respect. It resounded in the minds and memories of literate people, as well as of those who acquired it only by listening. From the stricken beach of Dunkirk in 1940, faced with a devil’s choice between annihilation and surrender, a British officer sent a cable back home. It contained the three words “but if not … ” All of those who received it were at once aware of what it signified. In the Book of Daniel, the Babylonian tyrant Nebuchadnezzar tells the three Jewish heretics Shadrach, Meshach, and Abednego that if they refuse to bow to his sacred idol they will be flung into a “burning fiery furnace.” They made him an answer: “If it be so, our god whom we serve is able to deliver us from the burning fiery furnace, and he will deliver us out of thy hand, o King. / But if not, be it known unto thee, o king, that we will not serve thy gods, nor worship the golden image which thou hast set up.

A culture that does not possess this common store of image and allegory will be a perilously thin one. To seek restlessly to update it or make it “relevant” is to miss the point, like yearning for a hip-hop Shakespeare. “Man is born unto trouble as the sparks fly upward,” says the Book of Job. Want to try to improve that for Twitter?

We commend this entire piece to your consideration. And back in April 2010, Hitchens wrote a critique of the Ten Commandments[3] containing both praise and disagreement with God's and Moses' intentions. For example, there are repeated references to the treatment of one's slaves and servants and not coveting your neighbors' slaves and chattel. Are these rules then directed only at people wealthy enough to "have staff"? Hitchens asks. And he grapples with the age-old questions of what is meant by "neighbor" and by "killing". Try these yourself. They are indeed good questions.

We have wondered over the last couple of days where Hitchens might be now. Did he have an "exit interview" with St. Peter and/or God? Wonder what they might have said to each other? Despite Hitchens' repeated protestations to the contrary, might he actually have believed in God and was just fed up with human attempts to create worship organizations? Seems to me the man protesteth too much! God rest his soul!

===========================
[1] Alastair McGrath. In the Beginning. New York: Anchor Books. 2002.

[2] Christopher Hitchens. "When the King Saved God". Vanity Fair. May 2011. http://www.vanityfair.com/culture/features/2011/05/hitchens-201105, accessed December 17, 2011.

[3] Christopher Hitchens. "The New Commandments". Vanity Fair. April 2010. http://www.vanityfair.com/culture/features/2010/04/hitchens-201004, accessed December 17, 2011.

"Killing Lincoln" -- With an Elaboration

2011-12-07T14:50:00.007-05:00

[December 17, 2011] We add to the bottom of this article a narrative by another historian about this time in American History. Our original article attracted the attention of people at Richmond Hill, an ecumenical Christian community in Richmond, Virginia. They recommended to us the volume Richmond's Unhealed History by Benjamin Campbell. We added that information as a "Comment" below our article. Then a couple of days later, Mr. Campbell himself wrote to us and shared his version of the aftermath of the fall of Richmond the week before Palm Sunday in 1865. His narrative reads very much like O'Reilly and Dugard's, and it leaves us with the same unsettled, mixed feeling that we got from Killing Lincoln. Mr. Campbell was nice enough to put his material in a Word document for our use, and we simply add it to the bottom of this commentary. We hope you will read it, and we are pleased that we can contribute an outlet for further discussion of these crucial days in our country's history. Just scroll down the page here to find Mr. Campbell's text.

We have just finished blowing through the recent Bill O'Reilly volume Killing Lincoln, and we want to commend it to your attention. We heard about it when it first came out in September and we thought it sounded interesting, but it was hardly high on the priority list. Then I wound up in the hospital last week, having my gallbladder removed. A woman in the next bed had the book and she was raving about it as a really riveting read. So on the way home, my roommate and I stopped at a nearby bookstore and picked up a copy; it sounded like just the thing for the first few days of recuperation.

Some of you may have misgivings about material authored by the well-known Fox News host. Be assured that this is a piece of straight history. O'Reilly and his co-author, history writer Martin Dugard, tell the story of those dramatic days in April of 1865. There is no ideology or political overtone; there is none of O'Reilly himself in the book.

What there is, is electrifying narrative told as much as possible in the present tense, immersing us in the events, actions and feelings: a real "you are there" sensation. We experience the famished hunger of the Confederate soldiers in the final few days before Lee's surrender, but we also grasp their fierce motivation that enables them to keep fighting on with spirit. We understand the strength of the rivalry between infantry and cavalry in the Union Army that more than once allows the Southerners to escape, undermining a clear-cut victory yet again.

We meet Lincoln, traveling all too near the battle front in Virginia and entering the tragically destroyed Richmond after its fall. We can feel his mixed emotions of joy over the imminent victory but weighty concern over the labor that will be required to put the country back together. He has a light-heartedness too, so that the night following Lee's surrender, when the crowd celebrating on the White House lawn calls out for a speech, he instead spies a Navy band standing nearby and asks them to play "Dixie". "I always thought that 'Dixie' was one of the best tunes I ever heard. Our adversaries over the way … have attempted to appropriate it. But I insist that yesterday we fairly captured it."

We get acquainted with John Wilkes Booth and his associates. We sense Booth's hatred of Lincoln and his deep-seated belief that the only proper role for African-Americans in society is serving their white masters. We hear the intricate plot to take out not just Lincoln, but Johnson, Secretary of State Seward and General Grant, presumably leaving the national leadership in vacuous chaos. Booth thinks Lincoln is so unpopular after the drudgery and loss in the protracted War that Booth will be seen as a national hero.

We learn that Lincoln was shot on the evening of Good Friday, that the young doctor in the audience that night at Ford's Theater, who so ably administers first aid, is all of 23 years old. He stays with Lincoln all night long, ministering to him by relieving the pressure on Lincoln's brain from the blood clotting around the bullet entry point. He had also directed a pair of older doctors at the Theater in an early version of CPR to get Lincoln breathing again. Far more senior physicians, including those on the White House staff, approve this work as exactly the right approaches.

We learn, too, that a sometime smuggler who harbored and abetted the escape of Booth and a co-conspirator over the Potomac from Maryland into safer Virginia went unpunished. At his trial, the damning testimony describing Thomas Jones' role was given by a "non-white resident of southern Maryland" and was thus ignored by the court. These days, we might forget how awful it was for "non-whites" in those and later years.

According to review comments on Amazon and Barnes & Noble, Killing Lincoln has been criticized for inaccuracies, which O'Reilly maintains have been corrected in later printings [it's been out about 12 weeks, and my copy is part of the eighth printing!]; it's been criticized for the "thriller" style and it's been criticized for not offering up "new insights" into this major event for historians. Well, first of all, the book is not aimed at professional historians, it's aimed at the general public, whose comments on those bookseller websites indicate are quite taken with it, as we were. We ourselves would wish for more than the cursory bibliography, and we could imagine a "scholars edition" distributed online with footnote-type references to show the sources of specific events and descriptions. But the main consideration is that O'Reilly and Dugard have heightened the interest of ordinary people in a very important period in the United States of America and encouraged them to read. May they do this again.

Finally, we guess that perhaps a review of Killing Lincoln might not be what you'd expect from Ways of the World at the present time; you want to know what's going on with the never-ending crisis in Europe and perhaps something about recent jobs developments. With a very recent hospital stay – I'm indeed recovering just fine, as you can see – I might even have something to say about health-care. We'll get to those things. But, as you can also see, I learned a lot and suggest that you too – or especially a high-schooler you know – might well get something out of it. Have a good read!

+ + + + +

From Benjamin Campbell, author of Richmond's Unhealed History:

When Petersburg, under siege for the entire winter of 1864-65 and 30 miles south of Richmond just off the James, fell on the morning of Passion Sunday, two weeks before Easter of 1865, word was sent to Richmond that the Confederate army was in flight to the west, along the Appomattox River. A soldier came into St. Paul's Church at the 11:00 service, where Jefferson Davis was seated in his usual pew on the center aisle, and told him. The Rev. Mr. Minnegerode was preaching. The President left the service. The order was given to evacuate the entire city.

By evening all the Confederate government and treasury was gone across the river, on the Southside railroad toward Danville. The last Confederate troops to march south across the river were given orders to set fire to the warehouse that held tobacco. They did so. The next-door warehouse held munitions, and a third neighboring warehouse held kegs of whiskey. As the troops withdrew across the footbridge, the winds fanned the flames and the munitions warehouse blew up. Then the whiskey warehouse was engulfed. Perhaps 30 blocks of the city, the entire industrial center between the Capitol on the hill and the river, were destroyed. Whiskey was running in the gutters and the populace was said to be on its hands and knees during the night, lapping it up. Two warships at the dock were scuttled and exploded with terrifying concussions.

The next morning, Monday, Mayor Mayo rode his carriage to the east through the burning city to the Yankee lines four miles away and asked the troops to come in and put out the fire. They did so, "colored" and white troops racing each other to get to the city.

Tuesday morning, President Lincoln, who had been staying on a ship at Grant's headquarters downriver at City Point near Petersburg, came upriver to the city. The sidewheeler Malvern couldn't get through obstructions in the James seven miles south of Richmond, so Admiral Porter, Lincoln, and his son Tad continued upriver on a launch that was rowed by twelve sailors. They landed at the city docks, and Lincoln was met by African American dock workers. He and Tad walked with the sailors, armed only with carbines, 15 blocks up Main Street, amid silent crowds and still smoldering ruins, then turned and went up the hill to the White House of the Confederacy. There he met General Weitzel, the Yankee commander who had lately learned of his arrival, and sat in President Davis' chair. Then, followed by a cheering crowd of freed slaves, he rode in a carriage to the Capitol. Then he visited the still smoldering Burned District and the notorious prisons where Yankee soldiers had been kept. Finally he returned to the docks and boarded the Malvern, which had made it up the James, to spend the night. Wednesday morning he went back to City Point, then continued on down the James to the [Chesapeake] Bay and back up to the Potomac and Washington, arriving in time to celebrate the surrender at Appomattox on Palm Sunday.

Ted Forstmann

2011-11-22T22:32:00.003-05:00

A brief note about the passing Sunday of financier Theodore Forstmann. Mr. Forstmann was a founder of Forstmann, Little and Company in the late 1970s. The firm was a pioneer of the so-called leveraged buyout, or LBO, a practice of issuing debt with which to buy up whole companies. It was a precursor to the active "private equity" transactions of recent years.

Ways of the World remembers Mr. Forstmann, who died of brain cancer at age 71, because he did this well, made good use of the money generated and was not in it for the celebrity. Several of the firm's late transactions during the technology bubble around 2000 resulted in losses, but generally, the companies involved and their managements were markedly improved through the shake-ups that the LBO actions brought about.

So much bad publicity has accrued recently to Wall Street types and to the abuse of debt and leverage, that we really do need to highlight someone like Mr. Forstmann. As in our critical commentary below about recent U.S. Congress deficiencies, the positive sentiments about Mr. Forstmann come from press at both ends of the political spectrum. We found information in the New York Times and we cite in particular an editorial today in the Wall Street Journal which documents Forstmann's work with underprivileged children. He founded the Children's Scholarship Fund with $50 million of his own money and has raised nearly $500 million all together. The fund provides private school educations and has served 123,000 children with affiliate organizations in 33 states.

To quote the Journal: "Ted Forstmann lived a life of purpose that showed how entrepreneurs who succeed both create wealth and spread it around in ways that enrich us all."

The "Super Committee" Does Nothing

2011-11-22T22:17:00.005-05:00

In recent days, we have continued to ponder the concerns of the Occupy movement, and we were starting to prepare an article based on an important statement issued a week ago by the Right Rev. Mark Sisk, Episcopal Bishop of New York. We have in mind to combine quotes from his statement with some recently published information on inequality, poverty and economic mobility.

However, we have to put that off a bit in order to stop and comment on our Congress.

Last summer, during the budget and debt-ceiling brouhaha, their actions consisted of a stop-gap bill along with the appointment of a special "Super-Committee", which was given the mission of designing spending and tax measures that would halt the exorbitant expansion of our national debt. This bi-partisan blue-ribbon group was to report by November 23 and its decisions were to have been accepted and ratified as is, without amendment, by the Congress before December 23. Instead, the committee announced late Monday afternoon that they have been unable to reach any agreement – about anything.

Good grief.

We've consulted conservative and liberal press reports, and both sides express the same disgust we just did. It's really discouraging, just before Thanksgiving, to feel such disdain for our national leadership.

The Washington Post neatly summarizes the deadlock: "Although Republicans offered to raise taxes by $300 billion over the next decade, they insisted on conditions that all but guaranteed that the wealthy would not be hit hard. And Democrats refused to agree to deep cuts in spending on health care for the poor and the elderly unless the rich were forced to make greater sacrifices."[1]

Always understand that "raising taxes" and "cutting spending" are meant in these usages to be relative to baseline projections, not current levels. So no one is talking about an absolute decrease in Medicaid or Medicare spending, but about a reduction in the growth rate of those programs. Further, it is widely accepted by many on both sides that some orderly restraint of medical expenditures is needed and there have been concrete proposals from others to start work toward that end.

The concept of taxing the "wealthy" is fuzzier. As you have read in this blog before, the "wealthy" pay a good portion of our taxes now and that share has increased since the Bush Tax Cuts were enacted in 2001. Even so, it is argued by many that allowing these tax cuts to expire at the end of 2012, at least for upper income brackets – so their taxes go up – is one of fairest ways to restrain our budget deficit.

Apparently over the past three months, no progress was made in finding routes to compromise on these issues. Reuters news service indicates that a number of secret sessions worked toward "trust building" among committee members, but the evidently premature leak of one specific proposal to the press about two weeks ago eroded much of that effect.[2]

Even as the Super Committee failed to do its job, several major issues will present themselves to Congress during December. A collection of current tax breaks will expire on December 31, most notably the reduction in the payroll tax rate every employee is currently enjoying. So everyone across the income board will see some tax increase in their first January paycheck. Companies have been writing off the value of business investments in new capital equipment all at once for tax purposes and that will end. A special tax credit for other business R&D will end. And the extended unemployment insurance benefits – out to 99 weeks – will expire, reverting to 26 weeks. In the ordinary course of annual budget work, a temporary spending authorization expires in mid-December and will need to be renewed or individual department appropriations bills will need to be enacted all at once to avoid a government shutdown. Then, by next spring, the debt will reach the current debt ceiling, and we will need to go through some process of raising it again. Since that will be in the middle of the Republican primary season and on the edge of the major campaigning, it seems hard to visualize that definitive work will occur at that time on long-term solutions. Spending cuts, especially in defense, were mandated in last August's "stop-gap" legislation, subject to Super Committee over-ride; since the Committee did not act, those will take effect, but that won't happen until January 2013.[3]

We keep looking today as we write for some constructive conclusion. Perhaps one of you can offer one. Our government is not alone in facing these disputes and having trouble working through them. Virtually all of Europe is up against the same kinds of issues, and they have largely been unable to compromise toward a positive end either. In the U.S. this inaction has been combined in the last several days with further revelations about the way many Members of Congress become personally rich while in office; they can make their own personal investments based on information they receive from companies, regulators and institutions as part of their work.[4] For the rest of us, that practice is called "trading on inside information" and it is illegal. But Congress is exempt from those laws. As some have said lately, if you want to find some of the now-infamous 1%, go to Capitol Hill.
____________________________
The footnotes that follow are just ordinary news stories. But we cite them to indicate in particular that the information and concern indeed come from media known to lean both toward the Left and toward the Right. It's not often one finds such agreement. A headnote to the Insider Trading story in [4] says that both the Republican Speaker of the House and the Democrat House Minority Leader objected to the "60 Minutes" story. Legislation has already been introduced to correct the situation. We'll see.

[1]Lori Montgomery & Paul Kane, "Supercommittee announces failure in effort to tame debt," The Washington Post, November 21, 2011. www.washingtonpost.com. Accessed November 22, 2011.

[2]Richard Cowen, et.al., "Insight: Super Committee Had Glimpse of Elusive Compromise", www.reuters.com. November 22, 2011. Accessed November 22, 2011.

[3]Wall Street Journal Research, "Looking Ahead" [box attached to "Debt Panel Fails to Reach Deal"]. www.wsj.com. Accessed November 21, 2011.

[4]Steve Kroft, "Congress: Trading Stock on Inside Information?" CBS "60 Minutes". Segment aired November 13, 2011. Web transcript: http://www.cbsnews.com/8301-18560_162-57323527/congress-trading-stock-on-inside-information. Accessed November 22, 2011.

Mediation in Store for "Occupy London" and St. Paul's Cathedral

2011-11-01T22:28:00.006-04:00

We have been deeply concerned in recent days with the crisis of leadership at St. Paul's Cathedral in London over the intrusion onto their property of people participating in the London version of Occupy Wall Street, an entity calling itself Occupy London Stock Exchange (OccupyLSX). Three officials of the venerable and deeply significant institution of St. Paul's have resigned during the last week over the closing of the Cathedral for some days, the first closure since the air-raids over London in World War II. The resignations include the Dean of the Cathedral and the Chancellor, who each resigned for opposite reasons, the Chancellor because he was appalled that the Cathedral would shut out these people and the general public, and the Dean because he was criticized for doing so and for supporting legal action to have the protesters removed from Cathedral grounds.

Then, just late this afternoon (Tuesday, November 1), Episcopal News Service reported that the Cathedral, now being guided by the Bishop of London, has backed away from a strong legal stance. In kind, the City of London has paused in its own legal actions while an effort at connection is made with the protesters.

In a most imaginative move, the Cathedral has engaged Ken Costa, a prominent investment banker and active layperson in the Church of England, to lead an effort to interact with the protesters. Costa, formerly a senior executive at UBS and Lazard International in London, is the Chairman of Alpha International, an organization that presents courses in Christianity to people generally unacquainted with religion. A Warden of his local Church of England parish, he is also the author of God at Work, a book that endeavors to connect business and God. Costa will, according to the Cathedral's website, "spearhead an initiative reconnecting the financial with the ethical. Mr Costa will be supported by a number of City, Church and public figures, including [former Cathedral Chancellor] Giles Fraser, who although no longer [on the Cathedral staff], will help ensure that the diverse voices of the protest are involved in this."

This is the most positive development we have seen in the entirety of the Occupy Wall Street movement, and it is heartwarming to see that some constructive effort is being made to connect the protest with the piece of society against which it is protesting. Isn't it exciting that it's the Church who seems to be taking the leadership role here, and it's not a financial critic who's coordinating the response, but a financial market participant. We will watch it closely. And if you notice some similarity between the themes of Mr. Costa's work and those of Ways of the World, so do we. You'll hear much more about this effort from us.

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See the Episcopal News Service story: http://www.episcopalchurch.org/81808_130370_ENG_HTM.htm
St. Paul's website: http://www.stpauls.co.uk/
The site connected with Mr. Costa's work: http://godatwork.org.uk/ . See especially his article beginning on the homepage in which he describes a visit at OccupyLSX; this was written for the Financial Times and I read it there Monday, not aware of Costa's connection to the Church.

The Complex Jobs Puzzle

2011-10-24T15:59:00.003-04:00

Do you know that, across the United States, 4,014,000 people got new jobs in August? and at the end of that month, companies and governments reported openings for more of 3,056,000?

That's pretty startling, isn't it? From the news coverage, it looks more that hardly anyone is getting any job these days.

There is a catch, of course, that in this big, fluid U.S. economy, a lot of people also got laid off, fired or quit. These separations totaled 3,968,000. Thus, there was a net increase of about 46,000 net new jobs in August: 4.01 million hires less 3.97 million separations. These numbers come from the Labor Department's monthly survey of hires, layoffs and openings; it is appropriately dubbed the JOLTS data.[1] Indeed. The numbers of hires and openings show obvious steep drops during the recession, and they have come back somewhat, as we see here for hires.
In the graph, we call your attention also to the aftermath of the 2001 recession. By 2003, some 18 months after the subsequent recovery had evidently started, we were all concerned at what we were calling the "jobless recovery". It is visible here in the lack of improvement in hiring until the second half of that year. So the malaise we are currently feeling about jobs and employment following the 2008-2009 contraction is hardly a new phenomenon.

Separations from employment include both layoffs and voluntary quits. The situation with layoffs has improved dramatically from the worse months of the recession, as seen here, with just 1.66 million in August, compared to the 2.34 million monthly average during the winter and spring of 2009. However, the very recent pattern shows some indication of renewed increases, with a three-month average at 1.71 million through August, up from 1.60 million back in the early spring of this year. Voluntary quits have increased a bit too lately. But that is usually interpreted as a good sign, that people are finding new work or other activity to give them the confidence to quit a job they currently hold.

Overall Jobs Improvement, But It's Modest
As we've thought about the seeming lack of jobs in the U.S. recently and the stubbornly high unemployment rate since the recession, job dynamics such as these are one of the facts that keep coming up. The U.S. economy is huge, dynamic and varied. Patterns of layoffs and hires differ from region to region and industry to industry. Employees work for more than 6 million companies that do business in some 9 million different jobsites.

All together, these data show some improvement in labor market conditions, and to our way of thinking, a surprising dynamism that often gets lost in the quick looks we take at unemployment rates and employment totals. Clearly, though, the clawback from the severity of the recession is still much less than it takes to generate sustainable gains in that aggregate employment measure and a meaningful fall in unemployment.

Why Would Employers Add New Workers?
To prompt an employer to add an employee, there generally needs to be some sense of growth in demand for the business's products that exceeds the load on the existing workforce. Sometimes you can fulfill extra demand by using overtime or restructuring production to raise productivity. But if it looks like the demand will be sustained at a higher pace, then you would consider adding workers. You might also consider doing so if your cost structure can be reduced and you have some confidence that costs won't suddenly turn higher. However, in this post-recession period, it's been hard to see consistent demand gains, and uncertainty about costs and taxes has, if anything, only increased.

Much of the legislation meant to correct these conditions and promote new jobs is only temporary, so if there's a cost restraint or tax relief this year, in most proposals, that would reverse right after the General Election next November. It doesn't really pay, then for employers to invest in expanding their hiring much in response, only to have the assistance fade after the new workers have on the payroll just a few months. Then the employment equation changes again.

Industries Vary Greatly: One-Size-Fits-All Policy Doesn't Fit
The complexity of this is seen in other compilations of the value of production, labor costs and profits, which portray widely differing cost relationships among industries. For instance, in the manufacturing sector, which has seen its role in the U.S. economy decline significantly, Commerce Department figures show that pension and insurance costs per employee amounted to $12,300 in 2010, twice as much as in all of private industry, which had an average of $6,200. Such costs in the finance industry, $10,100, are not even as high as in manufacturing. In retailing and food services, which are known for their skimpy benefit systems, the comparable calculation shows retail at $3,250 and food services (reported as a combination with entertainment and other recreation) at a mere $1,625.[2] Turnover, both hiring and separations, in those industries is much more frequent. Often, of course, these industries consist of small businesses that have flexibility in hiring – and in letting go. Many observers cite small businesses as key to overall job growth.

Such considerations are significant in trying to design government policies intended to help job creation. Kelly Edmiston, an economist at the Kansas City Federal Reserve Bank, has explained that jobs policies that target small business might well generate job growth, but the jobs themselves might not be very productive or very long-lasting. In promoting economic development in local communities, he advocates a balanced approach that is supportive of "organic growth" for businesses of all kinds. He recommends that governments "focus on developing an attractive and supportive environment that might enable any business, whether small or large, to flourish, and to allow the market to sort out which businesses succeed. Many communities have had success in creating this environment. They have developed and fostered a high quality workforce through great schools, community colleges, and universities. They have . . . built and maintained high-quality public infrastructure [and] created a business climate with reasonable levels of taxation and regulation . . . ."[3]

Our look at these jobs data and varying employment costs – and note that we didn't even mention wages – suggests that broad solutions to the overall scarcity of employment opportunities won't fit simple formulas. As we saw, however, even as there is shrinkage in some areas, there is job growth in others, some of which looks pretty sizable. The diversity of the U.S. economy is a real plus.
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[1]Bureau of Labor Statistics, U.S. Department of Labor. Job Openings and Labor Turnover. Latest release here: http://www.bls.gov/news.release/pdf/jolts.pdf . Graph via Haver Analytics, Inc.

[2]Bureau of Economic Analysis, U.S. Department of Commerce. National Income Accounts, Section 6 "Income and Employment by Industry" http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 , accessed October 23, 2011.

[3] Kelly Edmiston. "The Role of Small and Large Businesses in Economic Development", Economic Review, Federal Reserve Bank of Kansas City, Second Quarter 2007, pp. 73-97. http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2q07edmi.pdf

Occupy Wall Street: Responses to Commenters

2011-10-10T16:17:00.005-04:00

Many thanks to all of you who commented last week on the Occupy Wall Street issue. You made strong points, and I promised a couple of you that I would respond in some form or another to your arguments or questions. As you might imagine, almost every idea could generate books or at least entire essays. I did a bit of quick research among government publications and databases, so we can at least get a start. Here are three topics.

Could Jesus Be with the Wealthy Too?
First – and foremost – one of you wrote that asking for Jesus to be among the Occupiers was a good thing, that Jesus surely belonged with them and "not with the smug wealthy". We want to offer a different take on that. We want Jesus to hang out with the wealthy, if they are thoughtful people, but especially if they are smug. They obviously need Him. One of our hopes for Ways of the World is to help raise the consciousness of our readers to realize that Jesus is in fact right there next to them as they conduct their daily business and to help raise the consciousness of those in the Church about ministering in the business world. Yes, Jesus belongs with the poor, but He's got big arms – He can enfold them around everyone; it doesn't have to be an either-one-or-the-other situation.

To the more mundane matters, several of you expressed distress and disgust over the widening breach between rich and poor, and our other two responses today address this concern. One of you offered some source material that seems to show that a very large part of wealth increases in this country goes to the people who are already among the very highest ranking. Others, you indicate, are not just lagging, but have experienced reversals in recent decades.

The Gaping Wealth Gap – and Debt
We consulted the Federal Reserve's "Survey of Consumer Finances", an extensive and detailed study conducted every three years for the Fed by NORC, the National Opinion Research Center at the University of Chicago. Using tables from the Fed that cover the surveys from 1989 through 2007, we were in fact able to approximate Commenter CJGolfs' assertion that in recent years 80% to as much as 90% of the gains in net worth have gone to the top households.

When we talk about wealth, we usually think of assets, and it's the concentration of assets that is seen to give the upper brackets the "power" we associate with wealth. But wealth and power are also subject to society's debt position. Another of our Commenters last week called our attention to some recent work by Edward Wolff, a professor at NYU and specialist in consumer wealth analysis, who highlights this aspect in a 2010 report based on the Fed's Survey. Its subtitle is "Rising Debt and the Middle-Class Squeeze". As we also found from a cursory analysis of the data, the financial position of the middle classes of the wealth distribution has been squeezed by relatively less growth in assets than for those at the top, and it has also been squeezed by considerably greater debt from 1989 to 2007. For the middle 50%, debt in 1989 was 63% of their net worth; in 2001 it had risen to 68%, but in 2007, it equaled 91% of net worth. Wolff's numbers are not so dramatic, but they give the same impression.

Wolff argues that people took on this added debt in order to maintain their consumption, because their incomes were restrained, not to go on some lavish spending binge. As we noted at the beginning, each of these issues can generate quite lengthy responses and we don't want to go into detail right here and right now. Suffice for the present that nominal incomes climbed throughout this period, but in recent years, purchasing power has been harmed by rising food and gasoline prices. For middle America, this is a real burden on daily expenses. We also borrowed to buy big houses and we're heavily weighted down by student loans. We'll come back to this, as we note below.

Impact of the Great Recession
All this said, these data end in 2007, just before the Great Recession. The Fed did a partial update of its survey in 2009, and a much different picture is evolving. The values of household net worth appear to have dropped on the order of 20%, according to the summary information in one Fed report, and 62.5% of households experienced a decline, notably and most especially those at the top. The next regular survey covers 2010, and it should be published early in 2012. So we will obviously revisit this whole issue then for a more complete view.

What If We Look at the Same People Through Time
In our third response, we want to highlight the dynamism and the rapid change that always characterizes our economy. One aspect of people's complaints over equality and inequality which concerns us is that much of the information represents independent snapshots at different points in time. Only a few surveys follow the same people through time, so we can see what happens to specific individuals.

One program that does do this is the Census Bureau's Survey of Income and Program Participation, or SIPP. It is taken to collect information about the evolution of people's incomes, where they come from and how they develop over time; it forms the basis for assessing the effectiveness of welfare programs and other means-tested benefits. The survey follows groups of the same people in cycles of roughly four years.

So it can tell you, for instance, that for people in the bottom one-fifth of the income distribution in 2004, 30% had moved up to a higher one-fifth bracket by 2007, that is, in just three years, and 11.6% of them moved up two brackets or more. At the other end, of the people in the top 20% in 2004, 32% had moved down by 2007, 10.7% of them by two or more brackets. In the middle, just 44.4% remained in the middle one-fifth bracket after three years, with almost equal shares moving up or down. This, of course, was when the economy in general was moving along pretty well. These comparisons won't matter as much probably for the recessionary period. But the point this does make is that significant numbers of people move up and down in the pecking order all the time. So it's not as if a specific cell or cadre of folk have a permanent monopoly on the top spots and keep pushing the other folks down. The U.S. economy doesn't work like that; as we see it's much more fluid, even in very short periods of time.

We still owe you all some discussion on corporations and the role of profits and banking regulation; we could probably talk about taxes and tax shares once a month every month for several years and not get that sufficiently covered. And we still want to get back to job creation. That's a really fluid topic too, as something called JOLTS data can tell us. Stay tuned.

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Sources consulted:
Federal Reserve Board. "2007 Survey of Consumer Finances": http://www.federalreserve.gov/econresdata/scf/scf_2007.htm
and the 2009 update:
http://www.federalreserve.gov/econresdata/scf/scf_2009p.htm.

Edward N. Wolff. "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – an Update to 2007." Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. Working Paper No. 589, March 2010. Available here: http://www.levyinstitute.org/pubs/wp_589.pdf .

U.S. Census Bureau. "Survey of Income and Program Participation": http://www.census.gov/sipp/index.html

Steve Jobs . . . .

2011-10-05T21:55:00.003-04:00

. . . . the Chairman of Apple, passed away today, October 5, at age 56.

In our household, we were watching a game show on network television at about 7:45 tonight, when the network's news department interrupted it to present the bulletin reporting Jobs' death. I can't recall such an interruption for a business leader ever before.

Many of us use Apple's products and they have provided the technological infrastructure for increasingly popular social networking, up to and including the political revolutions this past spring in Egypt, Algeria and Libya.

The music industry has been changed forever by the iPod, which will celebrate its 10th Anniversary on October 23rd.

Henry Ford enabled us all to drive and Steve Jobs has helped us all communicate better with each other, as we carry our worlds around in our pockets.

Thank you, Mr. Jobs. Thank you, too, for your bravery and fortitude in the face of serious illness and the grace with which you facilitated a professional transition as your illness overtook you. May you rest in peace and may your family find comfort in your legacy.

"Occupy Wall Street"

2011-10-04T18:41:00.003-04:00

I live right at the Brooklyn end of the Brooklyn Bridge. This past Saturday, October 1, at about 5:30 in the afternoon, I was starting out on a simple errand in the neighborhood. I got to the corner to cross the approach to the Bridge and found lots of police and considerable consternation. A police department communications van was parked in the bike lane, and city buses were backing into the Brooklyn-bound lanes and then across the Bridge itself. Traffic at the busy intersection was stopped in all directions and horns were honking.

It was reaction to the "Occupy Wall Street" protesters, who were at the other end of the Bridge in Manhattan trying to swarm across the Bridge in the car lanes. Some of the protesters report that police on the Manhattan side at first seemed to be willing to have the hundreds of people do that, but then changed their minds and tried to stop them. I don't know anything about the police policy here, only that these marchers had no permit and had made no advance plan; traffic was snarled all over lower Manhattan as a consequence. You have probably read that as many as 700 protesters were then arrested. The city buses I had seen were loaded up and then traveled to police stations in Brooklyn and Manhattan.

This defiant action stood in sharp contrast to two other events that took place on the Bridge during the weekend. United Way New York sponsored a march on Saturday morning to call attention to the high poverty rate newly reported for New York City. Those people moved in a tightly knit group over the Bridge's pedestrian walkway and on up to a nearby park where there were refreshments and rest facilities. They made their point in an orderly manner. The next morning, a more casual bunch of people came together across the pedestrian part of the Bridge and made their way to another local park with a similar rest arrangement along with a mariachi band. Those people were supporting diabetes research, some of them told me.

At first, I wasn't going to write here about the Occupy Wall Street people; even some news organizations have pointedly ignored them. But the publicity is growing and the "movement" is spreading. Perhaps this is a liberal response to the Tea Party. Their complaints are garnering support on a number of fronts. They are concerned about corporate greed, Wall Street greed, dishonesty and corruption, the growing gap between rich and poor and other perceived maladies of society.

One of the missions of Ways of the World is to answer, explain or give background about some of these issues. Perhaps the simple picture the Occupiers describe is incomplete. Two current examples. First, it is said that the rich don't pay a fair share of taxes. We've touched on this before, but it bears repeating. As of 2008, the latest published IRS tabulation, the top 5% of taxpayers paid 59% of total income taxes*. A more comprehensive view compiled by the Congressional Budget Office shows that in 2007, the top 20% of individual taxpayers covered almost 70% of all federal taxes. So "the rich" provide a lot of support to the government. Perhaps more is desired, but it's hardly that they get off cheaply.

Second, the Wall Street demonstrators are mad because banks got bailed out during the crisis in 2008 and 2009. Long-time readers of Ways of the World were with us during that time. You might recall that while we didn't really favor those rescue operations, we didn't even want to consider the alternative, which would have been an even more massive breakdown of the financial system. Now, we can check into U.S. Treasury press releases and reports to see how these bailouts have turned out. The public monies invested by the Treasury in these banks through the "TARP" program are being returned, and back in March, the program turned a profit: more has been returned than was originally doled out. Through July, that profit had run to $10 billion and the Treasury estimates that the government will get back about $20 billion more than was invested by the time the program is concluded.

Surely society is plagued by various ills and certainly those inequities and problems should be brought to our attention. That very questioning prompts us to look for answers in any number of ways, two of which we have just illustrated. We'd still rather have the demonstrators conduct themselves in the respectful manner that they are arguing they want private and public officials to practice with them. We aren't ignoring the other, more civil demonstrators: we will indeed address here the question about poverty which they raised. Meantime, we find it ironic that the Occupy Wall Street project, now midway through its third week, is being supported by funders whose funds were originally generated through the very capitalist system the demonstrators are quarrelling against.

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*This figure is corrected from 43% in the original version of this article. I read the wrong line off the IRS table where these figures are presented.

A 9/11 Follow-up: the Thrill of a Parking Ticket

2011-09-12T12:20:00.006-04:00

St. Ann and the Holy Trinity, the church I attend in Brooklyn Heights, had a special "event" Sunday afternoon called "Sanctuary Still", a day of reflection on the role of Brooklyn and our church in embracing and comforting people in distress over that deep tragedy. Local writers read poems and essays, and representatives of four outside music organizations who hold concerts in the church performed, as well as the church's own choir and organist. Our Borough President (who are sort of quasi-mayors in each New York City borough), City Councilman, State Senator and the commander of our local NYPD precinct were present and gave remarks. The church was full – meaning at least 500 people were there. It was a lovely and meaningful thing.

Two thoughts from it.

Borough President Marty Markowitz shared he had been at a mosque earlier this Sunday morning deep in the heart of Brooklyn. The commemoration the men and women of that mosque were making for the anniversary was that each of them donated a pint of blood.

One of the writers explained that he earns his day-to-day living working in the Brooklyn criminal justice system. One of the hardest things he found right after 9/11 was giving the kind of serious attention to ordinary, run-of-the-mill street crimes which those mundane affairs needed. What could compare to what we had just suffered? But then he realized that the order of the day must be made to stand. I identified with this: in that 2001 moment, I realized that my own best contribution right then was to go about my regular job as a Wall Street economist to show that the terrorists couldn't stop us. Similarly, this writer Tim McLoughlin said he realized that there are rules of society and they must be enforced; this was his work. The order of society must not be allowed to break down. He said that, in turn, a few days later he got a parking ticket on one of our main neighborhood streets, and he cried. That was exactly what needed to happen: life was going on, someone was enforcing the rules of society, and he was thrilled to get a parking ticket. The terrorists had not prevailed.

9/11: Two Images

2011-09-10T23:27:00.009-04:00

As some of you may know, on the morning of September 11, 2001, I was attending a breakfast meeting in the ballroom of the Marriott Hotel at the World Trade Center. During the speech by the CEO of a major brokerage firm, the gentleman next to me nudged me and whispered, "Are we having an earthquake?" The chandeliers began to rattle and seconds later, there was a loud boom. All 250 of us jumped up and ran. My escape took me to Battery Park at the very tip of Manhattan and then to Jersey City via tugboat. After more travel in New Jersey and through Midtown Manhattan, I eventually got home in Brooklyn Heights at about 6:30 that night. The real journey that began for me that morning has taken me to a number of other places, up to and including the Geranium Farm and even beyond.

The image of the early days that has remained constantly in my mind's eye is this one.

One of the hardest parts of those days was the sense of loss that was aroused even from just looking out windows and seeing the empty space in the skyline. There was great symbolism in that emptiness. So, in recent months, my spirits have been lifted by the rising of the new One World Trade Center building. It is heartwarming indeed to feel the sense of renewal embedded in that structure. And it is particularly satisfying to see the 80 floors of structural steel as it appears this weekend:

Good wishes to everyone this weekend. May the commemoration of this occasion be worthwhile and gratifying for all of you.

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The photo of the firemen is evidently in the public domain, since we found it on several websites. The striking view of the new Trade Center building was taken by Andy Ramirez of KNXV-TV, ABC15 in Phoenix, AZ, who is spending the weekend in New York; it is copyrighted by Scripps Media, Inc.

Economics Questions with No Quick Answers

2011-08-30T22:24:00.006-04:00

It's easy to get exasperated these days with the stubborn sluggishness in the U.S. economy. One cause is the continuing dramatic correction in the homebuilding sector. Usually after a recession, the prevailing low interest rates encourage a rebound in new home construction and in sales of existing homes. Subsequent furnishing and/or remodeling spurs demand for furniture, appliances and other home accessories, setting off more generalized gains in retailing and manufacturing. At present, hardly any of this is happening as housing construction starts and home sales languish near record lows.

Lots of People Still Late with Mortgage Payments
As a career business economist, we wish we had some ready answers to this conundrum in a sector that ordinarily might lead a renewed and sustained expansion. What we can talk about are a couple of extraordinary and historic conditions that are contributing to the lingering economy-wide sluggishness. For instance, the Mortgage Bankers Association last week published the survey of its member institutions' delinquency and foreclosure trends for the second quarter of 2011. These new data show that 8.44% of all mortgages have payments past due. This figure has been steady since last fall, arresting an all-too-brief improvement that had begun early in 2010, when the portion with late payments pierced 10% of all mortgages being serviced by these firms. The traditional range for this late-payment measure is 4% - 5%. Mortgages badly past due, that is with payments more than 90 days in arrears, were 3.61% of total mortgages in the second quarter, also tracing a flat trend since last autumn after a partial improvement from an early 2010 peak. The historic level of this gauge of severely late payments is 0.5% - 1.0%.

We don't know, since we've never been at recent levels of these measures ever before, if these delinquency conditions have to improve first in order for consumer demand to be re-energized or if, instead, it goes the other way, and some kind of government policies to try to spur job creation are needed first in order to set off both consumer spending and an improvement in the loan delinquency situation. Note that this is just late payments, before we even get to foreclosure.

And House Prices Still Very Weak
House prices are intertwined with this. The Federal Housing Finance Agency, FHFA, last week released its latest data on home prices. Encouragingly, the basic, sale-related "purchase-only" index increased 0.9% in June from May, following 0.4% in May and 0.3% in April. The June amount is the largest monthly price increase since September 2005. However, it still leaves the index down 5.6% from a year ago and the resulting second quarter average only a minuscule 0.09% higher than the first quarter. Before late 2007, this price measure had never declined at all year-to-year; one version of the index runs back to 1975.

In this report, the FHFA included a new index based on more comprehensive coverage of purchase and financing transactions. This measure includes sales and also appraisals connected with mortgage refinancings. FHFA has consulted county registers of deeds and other sources to compile a series that now includes homes with so-called non-conforming mortgages, i.e., jumbo loans, and purely cash transactions that don't involve a financial institution. This index is compiled quarterly and called the "Expanded Data Home Price Index"; it was still declining in the second quarter, by 1.1% from the first quarter and it was down 6.1% from the year before.

If people feel nervous about the value of their homes, even if they don't plan to sell anytime soon, they may feel less wealthy in general and therefore spend less. But until the last four years, there had never been a sustained decline in home prices, so there's no historical precedent for assessing the impact of this condition either. And also no formula for a government policy that might help fix it. Besides, the government has its own budget issues to deal with at the moment.

A final indication of the disrupted housing sector is the vacancy rate in homes that are usually owned rather than rented. In the 20 years before late 2005, that measure of empty houses had averaged 1.6% and had never been more than 2.0%. But it reached 2.9% in 2008 and has since come back only to 2.5%. The reduction in vacant housing is welcome, but at that level we're still in largely uncharted waters by historical standards.

Some Negatives At Least Less Negative Now
Are there factors in the economy that look more positive? Or are the pessimists right that another recession might be coming? We saw a sharp drop in the stock market right after the debt ceiling/credit downgrade debacle in early August, but that drop seems to have been arrested, and several recent days have seen strong gains in stock prices. Gasoline prices got to almost $4.00 nationwide during May, but they have retreated somewhat; Monday's national average was reported by the Energy Department at $3.63/gallon for regular. This frees up some of consumers' incomes for spending on other things. Their spending did go up fairly vigorously in July, according to Commerce Department data out just on Monday, with gains in a variety of goods and services. Europe is held back by its own debt crisis, but various other large countries, such as China, India and Brazil, continue strong growth and spreading purchasing power that is building a middle class among their populations. The deleterious effects of the March earthquake in Japan are fading.

None of these forces is concrete enough to ensure sustained growth in the U.S., but neither are they definitive constraints. We think growth here will continue, but with a frustrating sluggishness. The first indication will be this Friday's employment report for August, and it will feature impacts from the strike of 45,000 workers at Verizon. So if you see a low number of new jobs, or even a small drop, don't be dismayed at that alone. [The way these statistics are compiled, strikes don't have a direct effect on the unemployment rate. The rate could suffer from knock-on effects in other sectors, but the strike probably didn't last long enough for much of that to develop.] Good luck to all of us in the months ahead.
* * * * *
Some of the housing discussion above is taken from a commentary we wrote for Haver.com, the website of Haver Analytics, Inc. Here's a link. http://www.haver.com/comment/comment.html?c=110826c.html There are interesting graphs there of more of these indicators, which help give these developments more perspective.
* * * * *
Entirely separately, we note with interest and concern the resignation of Steve Jobs as CEO of Apple. You may know that Jobs has been ill for some time with pancreatic cancer, and that now appears to have gotten the best of him as leader of a major company. Under his leadership, Apple has introduced iEverything – seemingly – for communications. Even the likes of Barbara Crafton and other priests of our acquaintance are avid users of iPhone and iPad. We offer Mr. Jobs our moral support and indeed our prayers in coming months. May the company continue with such imaginative and fun products.

The U.S. Government Debt Downgrade

2011-08-08T22:39:00.003-04:00

Readers of recent Ways of the World articles will not be surprised to see that we are most upset by credit-rating company Standard & Poor's downgrade of U.S. Government debt from AAA to AA+, which they announced Friday night. Regular readers will probably also know that it's not Standard & Poor's that we're upset with. We have watched with increasing dismay as our elected officials in Washington toyed around the edges with an agreement to rein in the size and scope of the federal government and restrain its borrowing. Their lack of cooperation in the Debt Ceiling negotiations brought the Government to within hours of running up against cash constraints that would have meant somebody wouldn't get paid on time, whether it was a bondholder or an employee or the recipient of federal grant moneys – or a soldier or a social security beneficiary.

The agreement that was finally hammered out yielded fuzzy terms that increase the Debt Ceiling enough to last until after next year's Presidential election and call for minimal spending cuts in the meantime. A bi-partisan select committee of Congress will convene between now and November to draft more substantive spending cuts and possibly some revenue enhancements. This plan, which authors said is meant to reduce the deficit by $2.1 trillion over the next ten years, was not enough for Standard & Poor's, which had stated previously that its rating would be based on a $4 trillion cut. When that did not result, S&P's Sovereign Rating Committee voted a cut of its own, from a AAA rating for U.S. Treasury debt to AA+. Some argue that S&P made a $2 trillion error in their calculations, and while this may be true, their decision is based on a number of factors within a broad picture, not just a set of far distant numerical projections.

What's Really Bi-Partisan? Our Criticism
Recriminations came fast during the weekend, and were followed by a 600-point plunge in the Dow Jones Industrial Average stock index during Monday's trading. Our own criticism extends to both political parties. Some Republicans seem not to have understood the basics of the Debt Ceiling issue at all; they seemed to think that a vote to take on more debt could be a decision independent of the condition of the federal budget. They didn't realize that the mere existence of a deficit of any size demanded an increase in the Debt Ceiling so the shortfall could be financed. They seemed to scoff at the notion of default, even though it was mere hours away by the time of the final votes. But some Democrats also voted against the final bill, apparently because it contains no mandated tax increases; their votes indicate that they were not really aware of the urgency either. A person who was aware and whom we admire in this regard is Gabrielle Giffords, who made her first appearance on the House Floor since her shooting, and quite publicly cast her vote in favor of the Debt Ceiling plan.

Further, the Administration didn't really help. The Treasury could have announced that, of course, if cash were constrained, it would pay bondholders first, thereby sustaining the debt covenant with lenders. But they did not and in fact refused to make public any list of priorities in the payments they would make in the event the legislation failed. The President himself only acceded to a plan as it was shaping up on the Sunday, just two days ahead of the deadline.

S&P Named Brinksmanship as a Major Ingredient
So there's much blame to go around. This "brinksmanship" had an explicit part in the Standard & Poor's decision. The plethora of argumentation that followed S&P's announcement only serves to make their point more pointedly. Democrats argue that spending cuts will hurt the economy, and Republicans argue that tax hikes will hurt the economy. And none of this addresses the fundamental questions of what the American people really want the priorities of government to be. Further, we've heard how important it is to extend expiring unemployment benefits and the reduced rate of payroll tax payments in order to help the economy along. But in the short-term, these act like spending increases and tax cuts in their impact on the deficit, hardly the direction any policy move should take in order to reduce said deficit.

The Economy Doesn't Know What It's Doing Either
With all of this negativity, it's little wonder the stock market dropped like a stone on Monday. The economy itself is sending off mixed signals. Some companies have maintained very good profit growth, but they seem to be squirreling away the resulting cash surplus, even in regular bank accounts, rather than investing in liquid financial market instruments, much less in new facilities or other kinds of expansion. The latest employment report was mildly better, with 117,000 new jobs in July, including 154,000 private-sector positions. But a decrease in the unemployment rate from 9.2% in June to 9.1% last month resulted from a decline in the number of people looking for work, so the baseline labor force shrank, hardly an expression of confidence from would-be workers.

One more note, and something a stock trader referred to in the middle of Monday afternoon's market debacle, following a public statement by the President about the debt downgrade. Mr. Obama mentioned again that taxpayers at the upper end of the income structure don't pay enough income tax. The need for them to pay their "fair share" has become a mantra for the Administration. It's hard to know what share is really fair. IRS data for 2008 (latest available) show that the top 10% of earners paid 69.9% of the total income tax collected that year. The bottom 50% of the income distribution paid just 2.7% of the income tax. Further, in the wake of the much maligned Bush tax cuts, the portion of total taxes paid by that top 10% rose from 65.7% in 2002 to the 69.9% in 2008, and the share paid by the lower 50% decreased from 3.5% to 2.7%. What would it mean to tax the rich more? They in fact pay a lot of the freight now.

What Does It All Mean?
We wish we could say more about where this will all go and what it might mean to you. Part of the problem is simply that it's August and many people in decision-making positions are on vacation, Congress included. The debt downgrade might be expected to raise interest rates on consumer credit, mortgages and the like, because of increased risk suggested by the new rating on the Government's debt. But in the midst of the stock market's drop, Treasury rates fell, showing that even with that rating, they are still the "safe haven" investment for many investors. Perhaps how it matters to you is that stock market plunge; as we watched one cable TV business network's coverage of the market Monday afternoon, traders they interviewed were ambivalent about whether the day's blowout would herald a quick rebound or whether it marked a major turn. Ah, stay tuned. The only thing constant is change.

The U.S. Government Debt Negotiations in Crisis

2011-07-23T11:46:00.003-04:00

This is our third attempt at this article. We want to talk to you about the federal government debt and budget crisis. Maybe by the time you are reading this commentary, concrete decisions will have been made by Congressional leaders and the President, and the imminent threats of default, downgrade and disorder will have passed. We hope so.

Back in April we wrote about this situation here because Standard & Poor's, the credit rating company, had red-flagged U.S. Government debt for their "credit-watch", the period of doubt and concern that would precede a downgrade. Since then, talks have been held and plans have been proposed, but up to now, just 10 days before the Treasury predicts it will run out of cash, officials on both sides of the political aisle have refused to make even modest concessions on basic principles which are needed to bring an agreement in the middle. Everyone who seems about to do so is immediately branded as a traitor who is selling out, and then either the President or the Speaker of the House stomps out of the meeting room in disgust.

This is clearly no way to run a country.

We like the Gang of Six plan, which was announced Tuesday. We have misgivings about some of its items, but it's a fine and firm step in the right direction. Three fairly liberal Democratic Senators and three fairly conservative Republican Senators crafted a seven-page statement of concrete steps they agree on, which can be taken to cut spending and enhance revenues. Some parts of the their plan simplify the tax code, also a benefit. The President has said he would agree on a short-term increase in the Debt Ceiling so that the associated formal legislation could be drafted and enacted. This sounds reasonable to us. But who are we and what do we know?

What we do know is that the FAA yesterday announced its contingency plans if it has to shut down because its funding disappears next week. Air-traffic controllers are deemed "essential" and would be kept on, but other personnel would be furloughed as early as this coming Friday. This is just the first of such specific, detailed arrangements among government departments that will have to be made rapidly until we hear that the negotiations have achieved some kind of truce.

We know that the U.S. Conference of Mayors, meeting this weekend in Los Angeles, is expressing dismay and discouragement over the budget cuts they have to make, even as Washington "dithers", to quote one of them. Mayors from both political parties and from both small towns and big cities all face the same circumstances: they have already made sizable layoffs and their uncertainty grows with every day there is no federal budget agreement.

We know that financial markets haven't a clue what will happen if this unprecedented debt situation is not resolved quickly. We cannot say enough about what a key role U.S. Government debt has in everyone's finances. Rates on Treasury notes and bonds form the base for interest rate levels for many types of assets and credits around the world and in your own town. Companies keep amounts of cash on hand to pay various bills and expenses; a consulting firm that helps companies manage this cash prudently and flexibly has said that they aren't sure what to advise. The rules companies follow tend to let them keep unlimited amounts of their cash in Treasury securities. No one ever dreamed that the U.S. Government would default or be late with interest or bond payments, or that the debt would have anything other than the very highest credit rating. Banks want to know if the Federal Reserve will demand extra collateral for routine loans the Fed makes to them, if Treasury securities no longer have the highest rating. We know only that the Treasury and Federal Reserve officials began to meet just in the last few days to draft their contingency actions.

If this turmoil is still going on by the time you read this article, contact your Congressional Representative and your Senators. Tell them how important it is to come to an agreement. The gains some leaders think they are holding out for could well be eaten up by the chaos that will ensue in the financial system if this controversy is not settled – yesterday.

The Great Awakening and the American Revolution

2011-07-09T12:21:00.002-04:00

Our annual Independence Day articles highlight the interrelationship of the American Revolution and the social position of ordinary people in the world. What was "revolutionary" was not just a war and government independence, but recognition by society's traditional leaders and by ordinary people themselves that they indeed had a substantive role to fill in the way the world works. In our previous pieces, we've considered [2008] actions by households and families, especially wives, in combating the Townsend Duties – the "taxation without representation". Then [2009], we were startled to learn about a grass-roots movement in western Massachusetts, led by a blacksmith, among other locals, which overthrew the regional British government well before the Declaration of Independence or even Lexington and Concord. Last year [2010], we followed the rise of Ben Franklin, a printer's son with only modest formal education, to successful publisher and then statesman.

Long before any of these developments, there had been the Great Awakening of the 1740s. We had always thought that had been a period of religious revival, but we had not extrapolated its impact to the rest of society. New publications, one in particular by Thomas Kidd of Baylor University[1] drew our attention to that aspect back in the spring, and we knew immediately that this was something else "revolutionary" we wanted to share with you here.

At the outset, it's important to understand that in the early Colonial Period, religion in most colonies was not free. Yes, people had emigrated from their homelands to North America due to religious persecution, but in many communities here, the newcomers still established just one church. This is meant in the technical sense of the word "establishment": only one church was allowed by law and it was financed with a mandatory tax, often called "the tithe". In Massachusetts and Connecticut, it was the Congregational Church, in New York the Dutch Reformed, and in Virginia and some other southern regions, the Anglican Church. Only Pennsylvania had multiple denominations at first. As an example of how this played out, in the 1720s the Connecticut legislature enacted a "Toleration Act" exempting Anglicans, Presbyterians and Quakers from the tax that supported the Congregational Churches, but local officials were so restrictive in the licensing requirements, that by 1730 there were just one Anglican and one Presbyterian church and no Quaker meetings.

Another restriction on church expansion was a rigid requirement that clergy have a degree from a recognized English or European university; in America, only Harvard and Yale had qualified divinity schools. So prospective clergy had to come from families that could afford the education and the travel. There was no Anglican bishop here, and among other complications that created, there could be no Anglican ordinations here. There was a shortage of clergy everywhere, and many ministers served several congregations in far-flung towns and rural areas.

Restlessness among church leadership and people was thus already growing when George Whitefield, an Anglican minister, traveled to America in the late 1730s. He was not the very first of the Great Awakening preachers, but he popularized the experience, becoming perhaps the first "celebrity" in America. Whitefield was gifted with a booming voice and grandiose style. While he certainly preached in churches, he began holding meetings outdoors because his crowds were growing. In 1739, he went on a "barnstorming . . . tour . . . that evoked a mass response of dimensions never before witnessed in America." [2] Whitefield spoke to large crowds in Philadelphia and New York before arriving in Boston in September 1740. He gave his first sermon there in "fashionable Brattle Street Church" and spoke in several other churches. On a Saturday afternoon, something like 15,000 people gathered on Boston Common to hear him, and at the concluding meeting of his three-week visit, possibly 20,000 or more. The population of Boston at that time was about 17,000. [3]

The message of Whitefield's sermons emphasized that everyone could be "saved" who was Born Again. The expectation of universal salvation through New Birth was a new theme. It spoke to everyone, not just clergy and Established Churches. Moreover, Whitefield and his compatriots also blared out, everyone, even clergy, had to express the experience of New Birth in order to be saved. Education alone and ordination were not enough to qualify. Nor were good works the key. The key was the grace of salvation. Further, each person found this for themselves. It was not conferred in some official confirmation ceremony, nor was the intercession of some intermediary official required. More, anyone who had been saved might want to share the story of this life-changing experience with any gathering of people. That is, "preaching" could, in this setting, be done by ordinary lay people. Extensive formal education and passage through a battery of qualifying tests and screenings would not be necessary to lead a service or even organize a church.

As you might think, such arrangements were disconcerting to officials of Established churches. In many communities, the more open and flamboyant worship styles were not well received by church hierarchy. So people and clergy who adopted them often separated from established churches, some indeed forming organizations known as Separate Churches. "New Light" preachers tended to berate "Old Light" ministers who would not express a "Born Again" experience. Some preachers extended this criticism to any of the well-to-do. Such messages could be seen as the beginnings of social justice as a theme.

At the same time, all of this had great appeal to common people. It was an outlet that spoke directly to them, and it chastised those of higher social standing. So it enabled the challenge of authority from below. Ordinary people could speak to public audiences. Even Blacks and women got up in front of meetings. The preachers reached out the African-Americans and conducted missions to Native Americans. The preachers meant it when they said "anyone" might be saved. The people gained self-respect, fellowship and a support system.

This "Awakening" had obvious implications for churches. The emerging Baptist denomination expanded greatly. Also, those with more sedate styles, such as the Anglicans, made gains as people whose proclivities toward formality prompted them to become more active in those kinds of worship. Such multiplicity of churches and worship made it apparent by the 1770s and 1780s that there was no longer a consensus about Established Churches and a characteristic of the American Revolution was the move to "disestablishment" and the eventual adoption of the First Amendment.

The implications of the Great Awakening for the American Revolution also seem obvious to us here by now. People challenged authority. Existing monopolies of leadership and power were broken. The burst of revival meetings dissipated after some years, but the changes to social relationships were permanent. One writer distills it down nicely: "Rather than believing that God's will was necessarily interpreted by the monarch or his bishops, the colonists viewed themselves as more capable of performing the task. The chain of authority no longer ran from God to ruler to people, but from God to people to ruler." [4]

========================

[1] Thomas S. Kidd. God of Liberty: A Religious History of the American Revolution. New York: Basic Books. 2010.

[2] Gary B. Nash. The Urban Crucible: the Northern Seaports and the Origins of the American Revolution. Cambridge, MA: Harvard University Press. Abridged Edition 1986, page 128.

[3] Nash, loc. cit. and page 33.

[4] "Significance of the Great Awakening: Roots of Revolution." http://www.great-awakening.com/. Accessed July 1, 2011.

Other works we consulted:
Patricia U. Bonomi. Under the Cope of Heaven. New York: Oxford University Press. Original 1986; Updated 2003. A social history, disputes the previously held view that religion had been relatively unimportant in the colonies. This work is now widely quoted as a classic discussion of the Great Awakening.

Christine Leigh Heyrman. "The First Great Awakening: Divining America." TeacherServe@, National Humanities Center http://nationalhumanitiescenter.org/ Accessed June 25, 2011.

State and Local Governments: a Follow-Up

2011-06-22T22:20:00.005-04:00

In our article Monday on state and local government budgets, we emphasized the dilemmas those governments face as they try to work on their financial problems. Our conclusion was that a strong first step can come through changes in pension plans, which require more and more funding at times when financial resources are spread thin. Sure enough, today's Wall Street Journal reports that tomorrow, June 23, the City Council in Atlanta is expected to pass a bill causing a shift in pension plans of new employees from "defined benefit" to "defined contribution". Also, that City's employees, as well as numerous other municipal employees around the country, have not been part of the national Social Security system. But the Council's bill will include joining that system too in order to further limit the pension contributions the City Government must try to make.

The Journal quotes researchers at two national associations, one of State Legislatures and the other of State Retirement Administrators, who both explain how pension plans of many governmental units are being reorganized and/or having their terms and benefit qualifications altered. Most unions are not happy about this and there are also numerous court cases challenging the governments' ability to rearrange these plans. Stay tuned for more: work on this whole issue, while it has started, has a long way to go.

At the same time, we had a lovely note yesterday from reader Gerri Bachelor of Cary, North Carolina, which stands as a moving and meaningful statement of why all of this is so hard – especially for the people who are in the midst of this financial turmoil and just trying to do their jobs. Gerri has given us permission to share her thoughts with you.

I'm a government employee and have been all my life. Half my working life was as a high school science teacher. The last half has been working at the state level to improve education.

Why have I continued there?
Partly because I believe in public education.
Partly because I want to teach, not research.
Partly because, even though what I earn is much less than the private sector, I do get a retirement program and health insurance.
Partly because the people I work with care as much about students as I do. Probably even more.

So I have stayed,
even though I was furloughed to balance the budget
even though I have not gotten a raise in 3 years
even though my health care cost has gone up and the amount put in my retirement account has gone down
even though I have been vilified and slandered

But mostly, I love those kids. And because of it, I feel God has called me to let them know.

State & Local Governments: Employee Pay a Key Budget Issue

2011-06-20T15:13:00.015-04:00

New York City's government fiscal year begins July 1, so work on its budget is in full swing. A friend and I have both recently participated in making our views known about a couple of proposed spending cuts. She took part in a demonstration at City Hall urging restoration of funding for grants for English-as-a-Second-Language classes at a community center in Queens. I wrote to our City Councilman and State Assemblywoman to protest the proposed closing of fire stations, particularly the one closest to the thriving DUMBO neighborhood in Brooklyn.

These issues are unfortunately typical at present of dilemmas facing state and local governments all over the country. These governments, unlike the federal government, generally cannot enact budgets that would result in deficits; they must at least aim for fiscal balance. Even the federal government, of course, has lately learned that citizens and credit markets want it to have a budget that at least attempts to rein in its deficit. So the activities of all governments are coming under scrutiny.

Recession Cuts Receipts, Raises Spending Needs
The state and local situation is a direct result of the financial crisis and recession. These caused their aggregate tax receipts to fall 9% from the economy's peak to its trough. The subsequent recovery only brought receipts back to their previous high late in 2010, and even that mild move had support from hikes in property tax rates. Income and sales taxes have remained sluggish and are still below their pre-recession amounts. The stock market drop has also hurt the values of these government's pension funds; this factor has put additional upward pressure on spending, and our discussion here will describe that additional weight on budgets.

Spending pressures in general grow inexorably, causing dilemmas and hard decisions for many government officials. We looked at the introductory budget statements several mayors wrote to accompany their budget submissions. Most bemoan the cuts and layoffs they have ask for. Even in such a relatively prosperous area as Houston, Mayor Annise D. Parker says layoffs are needed in the Fire Department. However, she explains that these will be administrative personnel, and she thanks the firemen's union for their flexibility in negotiating a compensation package which prevented the layoffs of firemen themselves.

Employee Pay a Big Part of These Governments' Outlays
Such an emphasis on compensation packages is important. State and local governments are structured differently from the federal government. Federal outlays are dominated by benefit payments and grant programs. During calendar year 2010, these were $2.3 trillion of the total federal expenditures of $3.9 trillion, right at 60%. The federal government had about 4.3 million employees and their total compensation was $456.2 billion, just under 12% of the spending total, even including the military. By contrast, state and local governments' main activities are providing services, such as education and law enforcement, that mean they employ many workers, 19.5 million all told. Their main outlay is thus compensation, which during 2010 was $1.0 trillion and accounted for 47% of their total spending. The most direct way to control spending is therefore through controls on compensation, and if wage and benefit rates cannot be constrained, then the way to cut is by laying people off.

This isn't very attractive, and until the last couple of weeks, efforts at limiting spending have been marked by emotional rhetoric and demonstrations, such as crowds packing into the Wisconsin State Capitol Building and hanging over its balconies, not by serious efforts at cooperative solutions. How can we approach this quagmire? Can we do anything to clear out some of the muck?

We've always had the impression that state and local government workers were really not very well paid anyway. So we looked at some data on this from the U.S. Bureau of Labor Statistics; their figures on compensation by industry and occupation will shed some light on this question. These are hourly pay rates for an individual, "average" worker as of this past March.

Managers and professionals collect about $2 less in hourly cash wages than similar workers in the private sector, but their benefits are actually about $1 higher, especially for insurance and retirement plans. As well, over the past five years, the state and local retirement plan costs have grown much more, 35%, than those for private sector workers, 11%. Insurance costs have risen 23% for state and local managers since late 2005, but they've gone up even a bit more, 24%, for private sector managers. Government managers' cash wages have increased only 5.5% across the whole of the last five-year period versus about 13% for private industry managers.

Office and administrative support personnel in these governments do much better than similar workers in the private sector. They make about $1.25 more an hour in wages, and their benefits are $4.25 more; retirement, insurance and vacation benefits are all much higher. Notably, retirement benefits have ballooned by 41% over the past five years for state and local office workers, but only about 9% in the private sector. Cash wages for these state and local workers have risen 12.5% compared to about 10.5% in the private sector.

Now, in trying to prescribe solutions to the state and local government budget squeeze, we can certainly talk about what programs we want to cut. This involves serious discussion about what the functions of these governments should be, the same approach we need to use for the federal budget, as we highlighted here back in April. But in addition, it's pretty obvious that we need to work on compensation arrangements; benefits seem outsized compared to private sector workers and they're generally expanding much more rapidly. It also seems that, at least for managers, wages are already being restrained as some offset. Health insurance costs are increasing, but this is the case for everyone, and probably needs its own separate solution.

Retirement Plans a Major Source of Concern
What we're left with here as a special case is the retirement plans. We wrote back in the fall about Social Security and the need for reform there. The same kind of situation holds true here. Nearly all of state and local governments have so-called "defined benefit" plans for their employees. Private companies used to have them too, in which the arrangement calls for a pension benefit that's some percentage of wages earned. For the employer to pay this targeted amount, they have to set aside some "contribution" now which, after investment, is expected to provide the required amounts of money in ten or twenty years when current employees are retired. This works as long as stock prices and other asset values rise or if other types of income, such as bond interest, are large enough to generate the required amounts. But if stock prices have fallen and interest rates are low, this may not result. Actuaries make projections of what will be needed and employers should raise their contributions to make up any projected shortfall. If government funds are not available, the amount of the "unfunded liability" may grow. Estimates of state and local governments' current such liability range from $1 to $3 trillion, as calculated by analysts at the Pew Center on the States and professors at three prominent universities.[*] Ouch.

Many private companies get around these circumstances by changing to "defined contribution" plans. They make no promise about the eventual size of pension payments to retirees. Instead the vast majority of private plans are now 401(k)-type programs, with both employer and employee investing funds; the size of the pension benefit will be some portion of whatever funds are actually available when they are needed. This may sound skimpy at first, but we'd guess that the outcomes well down the road may be very similar, since the funds that are really available depend on how asset values do in the future, regardless of which type of plan there is.

First Signs of Building Sentiment Toward Retirement Plan Changes . . .
In the meantime, for state and local governments, these are very messy issues, and the processes for altering any pay arrangement are very complex. They often involve union negotiations and legislative actions, both of which are subject to complicated political trade-offs. Until very recently, we had little reason to be optimistic about orderly solutions. Often, the most direct solution is to reduce the government's obligations by cutting the number of employees, that is, simply laying them off.

However, as we indicated earlier, union leaders and the Mayor's office in Houston figured out how to smooth a path to reform that minimizes layoffs. Then a couple of weeks ago, New Jersey Governor Chris Christie, Republican, and some Democratic legislative leaders worked out a different kind of deal for that state's employees. Further, while it's one thing to have a Republican governor propose such reforms, now Democrats Andrew Cuomo of New York and Jerry Brown of California have started to work on similar moves for their states; Brown even vetoed his legislature's first pass at its 2012 budget and sent it back for them to try again.

Even from AARP!
Then, just last Friday, June 17, a group who's a major representative of seniors' issues, the AARP, indicated that it may be changing its position on social security reform. They realize that something must and will be done to alter the social security program, and they decided that they want to be part of the process. This ends years of blunt refusal to support any movement on that front. While this move isn't directly related to state and local government budgets, it may help everyone understand better that all of these baby-boomer retirement issues are serious and need more planning and care than they've had until now.

So there will be much more to these stories, and we didn't even talk about state and local governments' service priorities and programs, such as Medicaid and education, just how their employees are paid. But that is just as important a first step toward fiscal renewal and balance throughout government.

[*]The Pew Center on the States. "The Widening Gap: The Great Recession's Impact on State Pension and Retiree Halth Care Costs". www.pewcenteronthestates.org. April 2011.

Jeffrey Brown, Robert Clark and Joshua Rauh. "The Economics of State and Local Public Pensions". National Bureau of Economic Research Working Paper 16792, www.nber.org/w16792. February 2011.

"Ways of the World" on Its 5th Anniversary

2011-05-17T18:51:00.002-04:00

This month, Ways of the World becomes five years old. Sixty months and 176 articles and features [the blogger.com software the Farm uses counts them; we don't]. Some of you have been with us from the start, but others have only just got acquainted. Maybe it's worth pausing today and checking in with what we might be about here. What is an Episcopal Church-affiliated website doing with an old Wall Street economist anyway?

We've adopted a broad-based orientation. Yes, "economics" means the stock market and unemployment and government debt, and we talk about all of those. We've also covered energy and the environment and poverty and immigration. Economics, though, is at root an approach to the interpretation of how and why people make the choices in life that they do. What is there in art that we value? and how can the artist make a living? The same for church membership, even; what is there in "church" that we value so we devote time, talent and treasure to that institution. We've had articles about both of these and there are specialists who make those kinds of issues their entire career.

We're interested not just in individual decision-making, but in the interaction of people in society. So we've talked about terrorism, the fall of the Berlin Wall and the revolution in Egypt. Each July 4, we commemorate the American Revolution – not the war battles or even the Founding Fathers, but the actions of ordinary common people as they restructured their own government and their relationships in business and with their neighbors, near and far, reordering society as it had basically never been known. This year, we'll play with this notion relative to churches in America.

We also pray here about people and events of the world. We've offered prayers for Rogation Days, when the church intercedes for the coming farm crop growing season and also for business and industry. We remember those who have died: Geraldine Ferraro most recently and also Gerald Ford and John Templeton and Tim Russert, among others. We pray for people we might not hold in high regard: Ken Lay of Enron, Robert Mugabe of Zimbabwe, the gunman who committed the cold-blooded shootings in Tucson this past January, as well as their victims.

Two articles deserve special mention because they evoked deep responses from you. In early December 2008, we lamented the death of the Wal-Mart worker in a post-Thanksgiving Day shoppers stampede. Seventeen of you came back with comments that week in which you expressed grief and distress; you obviously needed to vent and I'm glad that we could provide such an outlet. Then, this past January, as we noted, we wrote about the rebellion in Egypt; we talked about Egypt's economy and how it functions – or doesn't – in providing for the welfare of its people. One of you responded in words that might make a mission statement for Ways of the World: "I always get so much out of your posts on world affairs. Clear facts in an easy to understand manner. But at the same time, no agenda and no dumbing down." Thank you for this, Laura. I could never have hoped for a higher compliment. A priest I know has said somewhat the same in different words: "You make me stop and think before I form a judgment now on all these things that go on."

It is hopefully clear that pursuing Ways of the World is a gratifying activity. Two years ago, we were added to the Geranium Farm website's "Subscriptions" menu, and since then almost 900 of you have signed up. Judging just from the email addresses, some of you work in churches and some in business as well as a potpourri of you who just want to understand more about how the world works and why that might be the way it appears to be. Probably, in that regard, no one has learned more than I have. We do try to make it clear and, obviously, we can't hide behind jargon. If we don't accomplish this, let us know!

Thank you all for your responses. And by all means, thanks over and over to Barbara Crafton and the others on the Geranium Farm crew. It's an honor to be among you.

So we move on now to the next issue, most immediately the struggles of states and cities to make budgets in these confused times. Other news doesn't stop while we research and write on any given topic. We see already today that the March earthquake in Japan has impacted industrial production in this country, especially in the auto industry, new home construction remains in the doldrums and there are efforts toward shifting big transport trucks away from diesel to natural gas for fuel. This last reminds us that even as the economy presents problems, it also fosters efforts toward solutions. A goal of Ways of the World is to keep that progress in your line of sight, as well as helping us all understand better the sources and consequences of the shifting and turmoil throughout the world. The only thing constant is change.

So stay tuned. I don't think we'll ever run out of material!

On a Plane from Denver to New York, May 2, 2011

2011-05-04T09:42:00.002-04:00

I'm on the way home from a friend's wedding in Colorado, which took place during the weekend.

Early Sunday afternoon, her Dad, a retired Air Force officer, and I had occasion to drive through the grounds of the Air Force Academy. Sam ran an errand in the Commissary (grocery store) and when he returned to the car, he said, "They checked ID at the entrance – they never do that, only at the checkout. One of the security guys told me there is a Code Bravo in force." Sure enough, at the exit from the Academy, only one lane was open each way, and there was a uniformed military guard as well as the civilian security service that normally monitors the Gates. Later, we heard from other wedding guests that when they toured the Academy earlier in the weekend, one of the gates had been closed altogether and military personnel were visible in several locations. Conversation then followed about what might have happened to prompt the heightened military attention. A Taliban threat in Afghanistan had been reported in the press that morning and several members of Gadhafi's family had been killed just a few days before. Either of those developments, our host indicated, might be enough to motivate the greater security.

Late Sunday night and during Monday morning, of course, we learned of the dramatic event that most likely was the specific reason: the killing of bin Laden.

The wedding itself was an extraordinary occasion, so much so that I had considered devoting an entire Ways of the World article to it. I've known the Bride's Mother Kathy forever – literally – as our families were already neighbors in Kansas City when I was born. Kathy's husband Sam comes from a town in Missouri not far from there. With his military career, they've lived in Japan and numerous U.S. locations. I went to college in Texas and had a first job there, then moved to New York. Across all these years and all this geography, we have kept up our lifelong friendship.

Their son Jim is a Navy pilot; during tours in Japan, he married a Japanese woman, and their son was born in Germany.

Their daughter Debbie, the Bride, went to college and graduate school in Chicago. Friends there introduced her to her eventual husband. His parents are German and Indonesian and live in Germany. Since Indonesia was once a Dutch colony, his mother's family settled in Holland, where his grandparents and one aunt live now. Another aunt lives in France while a third is from Berlin. Vincent still has numerous friends in Germany, several of whom attended the wedding.

So here we all were in an old mining town above Colorado Springs, instant friends who had traveled there from Japan, Germany, the Netherlands, France, also China and at least ten U.S. states. The marriage service was conducted by a Methodist minister at the local Episcopal Church. A "Welcome" greeting in the program for the ceremony was printed in ten languages. Music, of course, is a universal language, and at the party, people enjoyed American, German and even African dance music. What a joyous time!

How odd then to layer on top of this the killing of Osama bin Laden, a genuine mortal enemy of the United States. By Monday morning, I had moved on from the wedding scene to the home of one of my cousins who lives in the south part of Denver, where I learned about it. When my cousin said, "Oh, you haven't heard news; you don't know. They took out bin Laden!" I gasped. "Oh, my — goodness!" I blurted, my breath gone momentarily. I had been in the World Trade Center on September 11. This matters in a very personal way.

But then what do you do? what do you say? The wedding had been Saturday night. There was another party Sunday night at the corner of Vesey and Church Streets at Ground Zero to celebrate this, er, uh, killing. Vengeance! Hooray!

Oops. Does that sound a bit awkward?

Now there's a quandary. Is this vengeance rightfully ours? And another part to the quandary: Bin Laden, while a Biggie, is only one terrorist. Surely, SURELY, there will be reprisals.

Later Monday, as I went through security at Denver International Airport, I heard myself thanking the TSA personnel. "Thank you. After yesterday, I'm really glad you're here." One of them replied, "Some people are saying they think we don't need this anymore now." "Oh, no," I said, "right now, we really need this!" She nodded vigorously in agreement.

The plane took off and went straight out from Denver airport toward the East. The Rocky Mountains were at our back and the expanse of the Great Plains was opening up. It's not quite the season yet for the image, but I heard myself again, now singing ever so softly as the plane climbed higher in the sky,

"O beautiful for spacious skies,
For amber waves of grain,
For purple mountain majesties
Above the fruited plain!
America! America!
God shed His grace on thee,
And crown thy good with brotherhood
From sea to shining sea!

"O beautiful for patriot dream
That sees beyond the years
Thine alabaster cities gleam
Undimmed by human tears.
America! America!
God shed His grace on thee,
And crown thy good with brotherhood
From sea to shining sea."

U.S. Debt Rating Called into Question

2011-04-19T14:32:00.004-04:00

On Friday, April 15, the U.S. Government had debt outstanding of $14.268 trillion, equal to roughly 95.5% of the nation's gross domestic product. See this graph of the debt as a ratio to GDP to see how it has leaped over just the last three years.

For years, the debt of the U.S. Government has held status as the virtual definition of a safe haven in the world's financial markets. Our national government has the highest level "AAA" credit ratings from the two well-known and respected credit analysis companies, Moody's and Standard & Poor's (S&P). This has been such a firm standard that the values for many other U.S. and world debt-market assets are frequently quoted not in terms of their own interest rate or a price per se, but by the spread between their interest rate and the going rate on U.S. Government bonds or notes. U.S. issues have thus been the benchmark for valuing nearly all other debt, both in this country and elsewhere.

Such a strong position suggests that the U.S. Government has been perceived as the most rigorous in establishing and enforcing its own spending and taxing rules and that those policies engender a healthy economy largely free of disabling distortions. That is, the prestigious position of our debt in the world carries with it a significant responsibility for – we won't apologize for our words here – being adult in our budget and financing practices.

11th Hour Fiscal Policy Action
What we have seen, though, over the last year, has been disregard of these standards by our fiscal policymakers even as deficits and consequent debt have been enormous. In three separate situations, they have skirted definitive, decisive actions to bring these conditions under control. Both Democrats and Republicans have contributed to the disorderly environment. First, for the current fiscal year 2011, spending authorizations that should have been enacted by Congress before the year began on October 1 were just handled ten days ago and only then, in the face of a threat that government operations would shut down due to lack of legal authority to spend money. This was saved by a literal 11th-hour, 11:00PM agreement on the night the latest temporary spending resolution was due to expire. No one was really satisfied by the terms of the final agreement, but at least there was no disruption of ordinary government services.

Secondly, concerning the upcoming fiscal year 2012 budget, the President, to his credit, had started on the right foot. He nominated a bi-partisan commission to study and advise him on ways to get spending and the deficit under control; they reported in November and December. But in February, when he presented his own budget for fiscal 2012, he basically ignored their recommendations in a plan that proposed little action toward improving the long-term budget outlook. House Republicans recently presented a plan of their own, but the President's immediate reaction to their concrete proposal was an attack[1], rather than an outreach toward negotiation that might lead to mutually acceptable principles for budget and debt reform.

Debt, Too, Nears a "Deadline"

Now, thirdly, there is also argument over raising the debt ceiling. The Treasury estimates that the debt will reach the statutory $14.294 trillion limit by about May 16. We have experienced such debt ceiling limitations before. Since the legislation to raise the ceiling must be acted upon for the Treasury to be able to borrow more money, Members of Congress traditionally demand that some personally desirable programs or favors be incorporated into the bill. This time, some prominent Republicans have stated that they oppose raising the limit at all. This stance to disallow any increase in the debt at all is hardly realistic when there is a concurrent deficit in the balance of spending and receipts. Theirs is obviously a negotiating position, but it seems ill-advised with such large numbers and such an obvious disagreement on the conditions anyone might demand in order to acquiesce in an increase.

For their part, Administration officials have irresponsibly raised a spectre of credit default if the debt ceiling is reached. In fact, there would not be any outright default. Maturing bonds could be re-financed and current inflows of revenue would more than cover interest expenses. Spending would, to be sure, be constrained to the amount of receipts since there could be no new debt, and there would certainly be disruptions in programs. But that is not a "default" in which existing debtholders go unpaid. Some other countries do face that prospect and it is reckless to express our situation in the same terms. Further, since, as we pointed out, there is probably less than a month before the current ceiling is reached, it's unnerving that with this looming, Congress has taken off on its traditional two-week Easter recess, and the Senate Majority Leader and the Speaker of the House are both out of the country. [They're in China and Pakistan, respectively, so they're hardly on pleasure kicks, but being at home working on our primary national priority might be the better use of their time just now.]

A Red Flag on our Credit Rating
So in the midst of all this, yesterday morning, Monday, April 18, just before the stock market opened for trading, Standard & Poor's woke us all up to the seriousness of the dilly-dallying on our budget situation in the face of the current massive deficits and rapidly increasing debt load. Issuing an official statement[2], they said that, while they affirm our AAA rating, they have changed their expectations for that rating going forward from "stable" to "negative". S&P initiated the "negative outlook" designation in 1989 and this is the first time they have applied it to the U.S. Government. The S&P analysts assess that there is a one-in-three chance that the rating could be cut sometime over the next two years. They anticipate, they wrote, that the current political posturing means the issue won't receive serious action until after the 2012 elections, and they fear the added cost of the deficits and debt that will pile up in the meantime. We would no longer have fiscal relationships in our economy that are as good as, much less better than, other AAA-rated countries, S&P explains. Other countries, especially the U.K. and France, have already enacted budget reform programs and are implementing those. We can't even talk to each other yet.

We have written here several times before about several fiscal policy needs: rationalizing social security, consciously discussing and choosing among the tasks and missions we want the federal government to fulfill, reducing wasteful spending. This week in particular, having just filed 2010 tax returns, we could also mention simplifying the tax code. While one sees that an election campaign might stimulate the national conversation that would facilitate these decisions by our elected officials, S&P believes there has already been ample opportunity for this, and, since we've already said so here, we would endorse their argument. One can always find some reason to postpone difficult decision-making. But the issues themselves will continue to fester. Several of our economist colleagues actually thanked S&P yesterday for calling out our politicians and asking them to practice statemanship. That is surely what is needed. We hope they rise to the occasion.
_____________________
[1]The President spoke at George Washington University on April 13 in what had been expected to be a major fiscal policy statement. Unfortunately, he took a harshly negative tone commenting on the Republican proposal, so that his approach came across as combative, not collaborative.

[2]Here's the Standard & Poor's statement. http://www2.standardandpoors.com/spf/pdf/events/UnitedStatesofAmericaRatingAffirmedOutlookRevisedToNegative.pdf

Geraldine Ferraro

2011-03-27T13:09:00.005-04:00

The passing of Geraldine Ferraro touches us. Many of us who read these Ways of the World articles, eMos and other Geranium Farm content, and especially those of us who write them, owe her and her associates huge debts of gratitude for what they accomplished in their own right and for the paths they blazed for the rest of us. Here are two illustrations of those gifts of Geraldine Ferraro.

Gail Collins, in When Everything Changed, her recent compendium of the evolution of women in modern society, quotes Madeleine Kunin, who ran for governor of Vermont in 1984, the year of Ferraro's Vice Presidential candidacy. Collins sets the stage and Kunin's remarks follow: "Ferraro arrived to campaign with [Kunin]. Thousands of people turned out to greet them. 'Fathers brought their daughters to see us, carrying them on their shoulders, holding them in their arms, leading them by the hand. "I want her to see this, to know this, so she'll remember," a man said as he asked a bystander to snap our picture together: Gerry Ferraro, Daddy, the baby, and me.'"[1]

Ms. Ferraro and Sarah Palin appeared together on Fox News this past election night, November 2, 2010. Watch the video http://www.youtube.com/watch?v=UMj_yxlw4Hk It's an extraordinary moment.

Thank you, Gerry. May you rest in peace.

___________________

[1]Gail Collins. When Everything Changed: the Amazing Journey of American Women from 1960 to the Present. New York: Little, Brown and Company. 2009. Page 324.

Japan

2011-03-14T21:21:00.002-04:00

We have so much to talk about – a follow-up to our article about oil prices last week, the "sequel" to it on food prices, the condition of state and local government budgets and so on – but clearly this Monday, there is only one topic: Japan.

First, here is a statement from the Archbishop of Nippon Sei Ko Kai, the province of the Anglican Communion in Japan: http://www.anglicancommunion.org/acns/news.cfm/2011/3/14/ACNS4815. Archbishop Uematsu describes about the churches there the same kinds of issues we are hearing about homes and other buildings: worrying that facilities near the sea might have been totally destroyed and simply not knowing their condition and/or the condition of their people due to the breakdown in communications. Writing Monday afternoon Tokyo time, he says that he has spoken to the Bishop of Tohoku, who was able to phone him Saturday. The Archbishop is establishing relief efforts. Indeed, we also refer you to the site of Episcopal Relief & Development, www.er-d.org, which is already mounting a fund-raising effort here in the U.S. for this purpose. Archbishop Uematsu asks our prayers as well. Absolutely.

O God,
who in Jesus stills the storm and soothes the troubled heart,
bring hope and courage to all
who are affected by this earthquake as we wait in uncertainty.
Bring assurance that you will be with us in whatever lies ahead.
Give us courage to endure all that we now face,
for you are our refuge and strength.
You are God, and we need you.
We pray in the name of Jesus Christ, our Savior and Lord.

[adapted from Evangelical Lutheran Worship: Pastoral Care, page 174.
© Evangelical Lutheran Church in America. From www.elca.org. Accessed March 14, 2011.]

Some of the Disaster's Impact
In my former Wall Street career, I worked for the New York office of Nomura Securities, the largest Japanese securities dealer, and I still receive email material from my colleagues there. My inbox began to fill at midday Sunday – that would have been shortly after midnight Monday morning in Japan – with extensive analysis of the impact of the earthquake and tsunami on the industry of the country. Here are a couple of the major points.

The region directly impacted by the quake encompasses plants and other facilities accounting for just under 7% of industrial output in Japan. The industries with the largest concentrations there include mining, agriculture and food manufacturing, metals – especially steel, electrical machinery, precision equipment and electric power generation. The electrical machinery and precision sectors contain a large amount of IT-related industry. In this last category, semiconductors are very important and there is also a major manufacturer of the screening material used on LCD TVs. Sony, Pioneer and Casio are familiar names whose plants are presently shut down. In some cases, the shutdown is due to power outages, not plant damage, so those could reopen relatively quickly, but there may well be bottlenecks in world semiconductor production and availability.

Among food products, there are a number of beer breweries in the region. Asahi, Kirin and Sapporo brands are particularly affected, with 10% to 40% of each company's total output impacted. At one plant, storage tanks collapsed, at another, the plant itself suffered major damage, and electricity seems to be out everywhere.

Obviously, by contrast, some sectors will get boosts due to the nature of the disaster. Companies that inspect and repair nuclear power plants and construction and construction equipment-makers are examples. In a different vein, the Nomura analysts cite Alfresa Holdings and Medipal, which are wholesale distributors of pharmaceuticals and cosmetics; these and other companies "may suspend regular wholesaling activities . . . to create emergency distribution networks in the Tohoku region".

The loss is great, unimaginable for us. But in the Japanese reaction, we see immediate evidence of adaptability and courage in the face of the sorrow and mourning. Still, even as the Nomura commentators try to describe for us a basic assessment of this massive disaster for business and industry, they also give a caveat; that statement is not meant to tug at readers' hearts, but it does: "This report is based on the existing knowledge of our analysts . . . . We have not yet discussed any issues with company representatives, as disaster response is currently their top priority." Indeed it is. Just now, as we have finished typing this paragraph, a new headline reports yet another explosion at Unit 2 of the Fukushima Daiichi nuclear power plant. Lord, have mercy on them.

Oil Supply & Demand Put Us on Tenterhooks Once Again

2011-03-08T15:25:00.004-05:00

Regular gasoline sold for a national average of $3.52 last week, according to Department of Energy data reported Monday. The increase for the last two weeks was 33.1 cents, the second largest increase ever over a two-week span, with only the spurt during Hurricane Katrina larger. The $3.52 price is 28% above a year ago and a record for this time of year; even in the high-priced period of 2008, the level around March 1 was right at $3.15.

Such a surge, plus increases in food prices, pose dilemmas for policymakers in the U.S. and in a number of those Middle Eastern and Asian countries, as well as discomfort for the people who have to pay them. Clearly the Mideast turmoil is responsible for the sudden, large energy price gains. But these prices were already headed upward to some extent, having started the current uptrend at the end of last September. So there must be some other force at work on both energy and food prices. We'll save food for a "part 2" article and continue here with the steep oil price rises.

Besides the Mid-East violence, two non-political causes for these price advances are readily identified. One is the very fundamental demand/supply balance: world demand is growing and exceeds supply. Second, many express concern that inflationary monetary policies are contributing to the upward push in the prices of these basic necessities of life. The connection here is hard to measure, but there may be some justification for it.

A new study by economists at the International Monetary Fund (IMF) published just in January explores these two connections, supply/demand and money, for oil prices. Cevik and Saadi Sedik performed statistical analysis to assess the impact on crude oil prices of demand growth in the world economy, over against growth in the supply of oil; they also try to gauge the impact on prices of the amount of money in the world economy as generated by four major central banks. They represent energy demand by growth in industrial output in 45 countries, which they place in two groups, developed and emerging.[1]

The results of Cevik and Saadi Sedik's statistical regression calculations are very interesting. Using monthly data, they show that since 1998, oil supplies have had some influence on oil prices; as supplies expand more, prices tend to decline, although the magnitude of the decline can be quite variable. The amount of money available for use in world trade and finance is related positively to oil prices; as excess liquidity increases, so do oil prices. Again, though, this relationship, though, is subject to considerable variability through time. Much more significant as a determinant of oil price trends is demand growth in the various countries; moreover, demand in emerging markets has more than twice the measurable impact of demand in settled industrial countries, and the reliability of the emerging market relationship is much tighter than the supply and monetary relationships.

We would think probably that demand in big countries should lead because they simply use more oil, lots more. But they are also working hard to conserve it. In the U.S., for example, the current rate of petroleum usage is just under 19.2 million barrels a day (b/d, a barrel contains 42 gallons), down from 2007's peak of almost 21 million b/d. The International Energy Agency estimates that demand among advanced countries as a whole has receded to about 46.5 million b/d in the latter months of 2010 from a peak of 49.3 in 2007. By contrast, the I.E.A. estimates that China's usage in the fourth quarter of 2010 was 10.0 million b/d, more than 30% greater than 2007's 7.6 million b/d. Demand among other developing countries is up over that period by about 10%. Further, most of these countries' economies did not suffer a recession, but continued to grow in 2008 and 2009. These numbers alone, even before we get to Cevik and Saadi Sedik's statistical analysis, highlight the rapidly expanding importance of the developing countries in energy markets.

The longer trends from 1998 through the middle of 2010 tell a fine story that growing prosperity in emerging countries is pressuring energy prices. But obviously the very short-term situation now features near civil-war conditions in Libya. How does this complicate our lives? Just yesterday, Monday, March 7, the Energy Information Administration of the U.S. Department of Energy gave us some comments toward an answer in their article, "Libyan supply disruption may have both direct and indirect effects"[2].

First, while Libya's crude oil output is just 2% of the world's total, the oil they do have is among the highest quality stock. It is easy to refine and has low sulfur content. Energy Department specialists explain that this means almost any refinery in the world can process the oil; its treatment is not restricted to only the newest or most elaborate facilities. Such oil is not easily replaced by substitutes, such as Saudi Arabia has. Libya also sells to customers in both Europe and Asia. Italian refineries buy Libyan crude and make a number of derivative products to sell to an even broader customer base. So the near shut-down of Libyan production can put more pressure on refinery inventories and prices than would constrained supplies from other regions.

Somewhat offsetting this push in the short run, this late winter season is a time of relatively light oil usage in both the U.S. and Europe, the Energy Department underscores, and the disruption in Libyan supply has a lesser impact than it would in late spring and summer. Should the disorder last well into the spring, when refineries will gear up for the large volume of summer driving, that could intensify pressure on supplies and make prices go higher still.

So where do these forces leave us? Briefly, on tenterhooks. The danger to the world economy of this price surge is readily apparent. Still, just in these last hours as we been writing here, we see from Reuters news service and other news sources that Mr. Gadhafi and his supporters may be trying to arrange an "exit strategy". This news accompanies announcements from several world oil companies that they are ceasing the purchase of Libyan oil altogether, thereby cutting off the country's income, which may hasten a resolution. Also, other OPEC nations have expressed willingness to provide extra oil to world markets, to the extent they can substitute. So there are constructive signs in the midst of the turmoil.

Two final thoughts: in this mix of wildly swinging world events, we continue to be heartened by the onrush toward freedom of the peoples of these countries and the repeated indications they are breaking out of repression and poverty. And then, we repeat one of our recurring Ways of the World themes and apply it to these energy prices. The higher prices are not totally harmful. They can provide extra wherewithal for people and companies to develop technologies that make better, more economical use of these raw materials. These are technical and technological issues; we can work on them. Better days are coming, we assert – hopefully.

______________________
[1]Serhan Cevik and Tahsin Saadi Sedik. "A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?" Washington, D.C.: International Monetary Fund. Working Paper No. 11/1. January 2011. The paper also discusses supply, demand and monetary factors as they affect the price of a bottle of fine wine. The numbers are different, but the shape of the relationships is the same as with oil The emerging markets are indeed beginning to play discernible roles in world business.

[2]Libyan supply disruption may have both direct and indirect effects. Washington, D.C.: U.S. Department of Energy, "Today in Energy" March 7, 2011. Accessed March 8, 2011.

Egypt: a New Day Dawns

2011-02-12T15:42:00.002-05:00

"My Lord, What a Morning!"

The people of Egypt have won!

Some scattered thoughts as their country begins a new life.

First comes a fervent prayer that what happens in the next days will bring them peace and a road to genuine opportunity and prosperity.

Second is a recognition that the Egyptian people are strong and proud. I have a friend in California whose sister has lived for many years in a neighboring country. Kim, who visits there regularly, wrote to me in an email Friday afternoon, "the Egyptian people are great. Very nice, wonderful spirit, fun, [they] had been suppressed and tortured for so long. . . . The army . . . and the people are one. The people have respect for the army in Egypt. . . . When the army wouldn't fire on the people, and actually formed a buffer between the people and the police, I knew the people had won."

Perhaps a manifestation of the people's spirit is the fact that they spent Saturday afternoon sweeping up Tahrir Square with mops and brooms. They were sweeping up the dirt and their own debris from living there the past number of days, but they were also sweeping up "the old" and making it ready for "the new".

Third, I am quite amazed at the force, the electricity suddenly evident in any people who have cellphones and social networks. Little did I realize when I wrote here on January 18 about my young holiday guests and their smartphones and their apps, that their counterparts in North Africa were on the way to making literal revolution with theirs.

Fourth, this is now a broader phenomenon, running through that region like an express train. This morning, the train has already steamed ahead to the next stop, Algeria, where thousand of people have defied a ban on demonstrations to do just that.

Lastly, all this excitement notwithstanding, there is, of course, room for considerable apprehension. Will Muslim extremists get the upper hand in a new government? Various pundits, along with my friend Kim, make logical arguments on both sides of this significant issue. Perhaps the mere fact that we are all sensitive to it can foster realism and restraint in facing it.

Also, further concern comes because one cause of the Egyptian people's discomfort has not gone away. A source of economic stress particularly impacting people of lower incomes is that prices of food and energy are rising sharply around the world. This pocketbook issue will clearly be the topic of a more focused and detailed discussion here very soon; for the moment, though, we have to know that it will continue to weigh on the welfare of peoples in Egypt and elsewhere, sapping their purchasing power and/or straining the government programs that provide subsidies which must now increase.

All of this means challenges for the people and for those who would administer their interim government in the immediate future. Part of our prayer is that such mundane matters don't hamper their strides toward political and social freedom.

In this historic moment, we leave you today with some of the words to the spiritual whose title formed our exclamation at the beginning:

My Lord, what a morning!
My Lord, what a morning!
Oh, my Lord, what a morning
when the stars begin to fall.

Oh, you will hear the trumpet sound
to wake the nations underground,
Looking to my Lord's right hand
when the stars begin to fall.

Egypt

2011-02-08T19:27:00.007-05:00

It rained in Cairo Sunday, the 13th day of demonstrations. According to news service Radio France Internationale, "Despite poor weather and signs of protest fatigue, thousands of people remain on [Tahrir or 'Liberation' Square]. A Coptic priest and Muslim sheikh stood together to commemorate the dead, as the crowd shouted 'a single hand, a single hand' to show interfaith solidarity. Prayers of both faiths followed." The Wall Street Journal describes a joint parade of sorts that involved scholars from a Muslim university carrying a Quran, mingling with Coptic Christians holding a crucifix.

Who are the demonstrators? what do they want? News services and various commentators give differing interpretations of the events, and sometimes the same commentator has more than one vision. However, as evident in the above report, some demonstrators from different groups can come together for common purposes. We've explored a bit of the backstory to these goings-on. We're not political scientists, so we're not about to draw hard-and-fast conclusions. But we can share some facts and hopefully they will make some of this more comprehensible.

Population, GDP and Poverty
There were roundly 80.5 million Egyptians, as of July 1, 2010, the 16th largest country by population, according to the CIA World Factbook[1]. The next country in rank, number 17, is nearby Turkey, with 77.8 million people. Turkey's economy produced a gross domestic product of $958.3 billion last year, also 17th in size rank; for its population, then, per capita production of goods and services was $12,300, making it 94th in line for per capita GDP. But Egypt's total GDP was only $500.9 billion, and its per capita output $6,200, 136th of 229 countries tabulated by the CIA.[2] So even though there are as many Egyptians as Turks, their production is much smaller, and individuals are much farther down in the world pecking order.

Similarly, poverty rates are higher in Egypt. The World Bank calculates the share of the population who live on $2 a day or less.[3] In 2005 in Egypt, this was 18.5%, while only half that much in Turkey, 9.0%. For the region right around Egypt, known as "Middle East North Africa" (MENA), the share was 16.8%; the rate varies widely, generally according as various MENA countries have oil or not. Yemen, also the site of recent disturbances, is at 46%. Turkey's neighbors, a specific group of developing countries in Europe and Central Asia, averaged 8.9% in 2005. Sub-Saharan Africa, in sharp contrast, runs upwards of 70%, while Latin America averages about 17%. So clearly, many people in Egypt are poor, but this is not the extreme condition it is elsewhere and is comparable to many places where governments seem to be in better standing with the populace.

Employment
Reported unemployment is also not extraordinarily high in Egypt. Recent reports from the Egyptian national statistics office and from the International Labor Organization show the rate hovering at about 9%. These rates are calculated from among people who actually want jobs, the so-called "economically active population". In Egypt this group was only about 48%of the total population over age 15, so there are many people, mostly women, who do not look for work. Egypt is one of only a handful of countries with such a low "participation rate". That's why reported "unemployment" can be relatively modest; many people have given up job-hunting or never even tried. They may also, of course, be needing to stay home for family, school or illness. Or, they may be occupied in an "informal economy", where their activity and their incomes are not reported to government offices.

As to the share of people who actually have [reported] jobs in Egypt; this was 43% of adults in 2008. Some ten other countries have "employment rates" that low, including – interestingly, Turkey at 42%, and also, among other countries with recent social unrest, Tunisia at 41%, Yemen at 39% and Jordan at 38%. So an unhappy population may go along with weak employment conditions, but that connection is not absolute.

Ease of Doing Business
Some other kinds of gauges may help us understand why it is Egypt where people have gone over the edge in their disgust with government. The World Bank, we've come to understand better, is interested not just in poverty relief per se, but also in bolstering economic structures that can bring sustained strength and vigor to a country's ways of pursuing livelihoods.

Among 183 countries followed by the World Bank, Egypt ranks 94th in 2011 in the "ease of doing business". This is a composite rating of such factors as the legal and registration procedures needed to open a business, enforcing contracts, getting credit and protecting investors, the tax burden – both the amount and the ways taxes are collected – and the ability to effect an orderly closing-down. Extensive surveying of these systems in each country tries to measure the numbers of government approval procedures involved, the amount of time they take and the monetary cost they impose. Egypt's rating puts it pretty much in the middle. Notably, though, in 2006, when these rankings were first reported in their current style, Egypt was 141st of 155 countries. So while it's far from "easy" to start and run a company in Egypt, it's much better than it was just a short time ago. The Egyptian government has clearly been working on reforms of its bureaucratic practices. Indeed, the World Bank indicates that Egypt ranks among the highest in "improvement". Still, of this year's 183 countries, it's well down in "construction permits" 154, the tax burden 136, enforcing contracts 143 and closing a business 131. So there's a ways to go.

Higher Education
We've read in press reports lately that, while Egypt sees to the education of its population, graduates are ill-prepared for careers when they get out of school. We didn't research data on this, but we learned that in 2008 the Mubarak Administration commissioned a study of its higher education system by the World Bank and the Organization for Economic Cooperation and Development (OECD). They issued a report in the spring of 2010, calling for substantive changes to the emphasis and curricula in institutions providing post-secondary education. This report adds to an organized effort already in place in the Egyptian government to work on this significant issue; obviously there hasn't been time yet for them to act on the recommendations.[5]

Freedom
We also obviously hear about oppression and corruption. Three measures here document these conditions.

Freedom House – do you know them? See footnote [6] – rates "political rights" and "civil liberties" for 194 countries and 14 other territories. Freedom House analysts and academic scholars assess such qualities as genuine multi-party politics, real elections and government functioning for the political index and personal autonomy, associational rights and the rule of law on the civil index. On a scale of 1 to 7 (higher is not better), Egypt's political rights stand at 6 and civil liberties at 5. The organization groups the countries as "Free", "Partly Free" and "Not Free" according to their combined numerical score. The break between Partly Free and Not Free is between 10 and 11 points, making Egypt "Not Free"; there are 22 countries with the same scores as Egypt, including, notably including its neighbors Algeria, Jordan and Yemen, which are also currently seeing unrest. There are 25 countries with Not-Free scores that are higher still.

The Heritage Foundation calculates an Index of Economic Freedom[7]. Using numerical data, this measures degrees of freedom in ten areas, including among them doing business, the size of government (bigger is not better), the ability to hire and fire workers, property rights and financial choices. Egypt's score for this year is 59.1, just lower than the world average of 59.7 and the average for its region of 60.6. The U.S. stands 9th on this scale at 77.8; the highest score is Hong Kong's 89.7. The Heritage Foundation Index encompasses a rating on corruption, which led us to

Transparency International computes the Corruption Perception Index. The group defines corruption as "the abuse of entrusted power for private gain. . . . The Corruption Perceptions Index (CPI) ranks countries according to the perception of corruption in the public sector."[8] Egypt is tied for 98th place with Burkina Faso and Mexico(!) out of 178 countries. Its score is 3.1 on a scale of 0 to 10, indicating "highly corrupt" to "highly clean" (higher IS better). Denmark, New Zealand and Singapore are at the top, with 9.3 points, and Somalia is alone at 178th, with 1.1. A separate Transparency International study discusses several conflicts-of-interest built right into Egypt government regulations; for instance, it is necessary to get consent from the president's office to institute the judicial investigation of a government official.[9] Connections and "facilitation payments" are necessary to get required approvals for any number of business or personal activities; a good illustration lies in the very title of a World Bank report, "From Privilege to Competition: Unlocking Private-Led Growth . . . ."[10]

In all of these reports, we found comments that Egypt is trying to improve. It has a corrupt government by many standards, but it has stated that it wants to work on this issue. It has enacted economic reforms, such that the World Bank rates it 13th in improving the business climate over the past five years. As we noted, there's already been a study and recommendations on how to make the higher education system more responsive to the nation's needs.

That these actions and improvements are followed by the unleashing of popular outrage and demonstrations need not be totally surprising. As we read about and watched these current conditions and events, we were reminded of what we learned last year in examining terrorism. Here's what we said then, "Notably, terrorism tends to emerge in countries where there is some amount of freedom, but which freedom may be limited or unpredictable. There has been little incidence of international terrorism from fully democratic countries or from countries where political power is held in an absolute dictatorship in which all dissent is successfully suppressed. It's countries in a kind of twilight or transition away from authoritarianism that seem most susceptible to spawning those groups."[11] Obviously, there are different triggering events now in Egypt and the rest of the MENA region, and the response from the crowd here isn't acts of terrorism, but outright, open rebellion. But it's fascinating that once there seems to be something the people can reach out for, the spirit bursts forth with incredible energy. We can't wait to see how it all turns out – and we pray for the best.

------------------------------------------------------------
[1] https://www.cia.gov/library/publications/the-world-factbook/index.html. Whatever you may think about the mission and work of the CIA, its "World Factbook" collection of basic economic and political information on some 229 countries is extremely detailed and useful; numerical data are also calculated on a consistent basis so, as with the items we mention, countries can be compared.

[2] These GDP numbers are calculated on a "purchasing power parity" basis, so they adjust for differences in exchange rates and differences in prices of individual goods and services in different countries.

[3] The $2/day standard was established in 2008 when the data were recalibrated to purchasing power in 2005; it updates the previous $1.00/day.

[4] See www.doingbusiness.org for complete datasets and explanations of this fascinating issue. The U.S. ranks fifth this year, behind Singapore, Hong Kong, New Zealand and the U.K.

[5]http://siteresources.worldbank.org/INTEGYPT/Resources/REPORTHigherEducationinEgypt-2010FINAL-ENGLISH.pdf

[6] www.freedomhouse.org. From their website, accessed February 8, 2011: "Freedom House is an independent watchdog organization that supports the expansion of freedom around the world. Freedom House supports democratic change, monitors freedom, and advocates for democracy and human rights. Since its founding in 1941 by prominent Americans concerned with the mounting threats to peace and democracy, Freedom House has been a vigorous proponent of democratic values and a steadfast opponent of dictatorships of the far left and the far right. Eleanor Roosevelt and Wendell Willkie served as Freedom House’s first honorary co-chairpersons." Our data are from their annual survey Freedom in the World, released for 2011 just on January 13.

[7] www.heritage.org/index/ The report for 2011 was issued on January 12.

[8] www.transparency.org Transparency International is a world-wide organization, founded in 1993 and headquartered in Berlin. It doesn't compile the index from its own assessments, but uses other, "third-party" sources deliberately, believing that corruption indeed lies in the eyes of the beholder and in how participants in a country's affairs perceive and experience it. Two well-known economic forecasting firms plus the Asian Development Bank, the African Development Bank and the Bertelsmann Foundation are among the rating sources. The 2010 report was issued on October 26, 2010.

[9] "The Good Governance Challenge: Egypt, Lebanon, Morocco and Palestine", March 2010. http://www.transparency.org/content/download/51657/826927/NIS_Regional_Mena_web_English.pdf

[10] Najy Benhassine, et.al. Washington, D.C.: The World Bank. November 8, 2009. http://siteresources.worldbank.org/INTMENA/Resources/Privilege_complete_final.pdf

[11]"Terrorism and Terrorists" Ways of the World, January 12, 2010. http://ways-of-the-world.blogspot.com/2010/01/terrorism-and-terrorists.html . Accessed February 8, 2011.

The State of the Union, 2011

2011-01-26T11:32:00.003-05:00

Carolyn from New Jersey, a good friend and faithful reader, asks for comment on the State of the Union speech last night – "both of them", she writes. We are pleased to oblige. You let us know – any of you, not just Carolyn! – if you have specific questions beyond our summary comments here.

In a straw poll yesterday by the Wall Street Journal, they suggested several terms readers could choose to describe "the state of the union"; we picked "improving."

First, the President made some helpful proposals about simplifying tax codes and cutting the overall 35% corporate rate, about emphasizing spending on education and infrastructure and about holding "nondefense, discretionary spending" to current levels for five years. As you might recall from an article we wrote soon after the November election, that segment of spending is a modest fraction of the total budget, but at least these proposals are all concrete ones, generally headed in the direction of deficit restraint. Second, Representative Ryan's response sounded bolder on such deficit-reduction initiatives, but much less specific. He promises a "Budget Resolution" that will quantify what the Republicans intend; we almost can't wait to see this, to see how serious they might really be in designating explicit spending cuts.

In thinking about these issues this morning, as the Dow Jones stock index trades above 12,000 for the first time in over 2-1/2 years, we realize we owe you some commentary too on the economy. We'll do that very soon; suffice it for the moment that new home sales are reported today up unexpectedly for December and other reports have been indicating a firming in consumer and business activity. Such a pattern gives a more constructive backdrop for Congress and the President to establish longer-term government policy trajectories. We look forward to seeing how that plays out. In the meantime, our own views on several crucial issues, such as social security, health care and the deficit itself are contained in Ways of the World articles on September 1, 2010, March 22, 2010, and that November piece, respectively.

Videogames, Innovation and the Future

2011-01-18T15:44:00.005-05:00

Over the Christmas holidays, two seemingly unrelated events grabbed our attention. First, Time Magazine picked Mark Zuckerberg, the founder of Facebook, as its "Person of the Year". And second, my roommate's godson visited us from the West Coast; Bill* came with his duffle bag and his smartphone. While Chris and I both have cellphones, neither of them is a souped-up model, so all of Bill's pictures and "apps" were a novelty for us. Another young cousin joined us one afternoon and the two of them talked to each other in what I decided is a new foreign language, "App-ese". They immediately began emailing each other, sharing apps and playing games.

Videogames a Source of New Technology
There are two reasons Ways of the World has some interest in this vignette, over and above relating the family events of the holiday season. First, video games are a leading-edge technology from which business and government applications are emerging. This, of course, seems backwards. Historically, as highlighted in a recent Op-Ed piece in the Wall Street Journal[1], many technological innovations have come from government, especially the military, and then moved to the private sector and finally to the toy market. Granted, many of today's games have military themes, but even so, the path for origination and adaptation is the reverse of traditional practice.

Andy Kessler, a former Wall Street hedge fund manager who now writes on these topics, points out in that Wall Street Journal article another new wrinkle in this technology: connectivity and networking. Many of the games are played in teams, in which individuals in different towns and regions collaborate on strategy, tactics and implementation. The distances and geographical separation are not barriers to the performance of the game. Later on and in different venues, players will show up for work in offices, plants and stores equipped with genuinely useful skills; they'll think nothing of conducting meetings with far-flung colleagues. Further, despite the irritations of advertising to us users, the age of mobile ads is with us and helps pay for the availability of all this on our hand-held machines.

Advancements Come Despite the Recession
The second major point about the growth of these videogames and their associated equipment and networks is that much of this development has taken place during a terrible period in the economy at large. We get so focused on what bank has failed recently and how high the unemployment rate is that we may not catch the significance of these favorable advancements. Moreover, this aspect is not distinctive to this recession. Innovation is no respecter of the business cycle. These new ideas and new "toys" can come just as well, if not more easily, when overall times are tough as when there's an expanding business environment.

People can have good ideas at any time. The sparks of innovation and entrepreneurship may even be pushed by hard times. Suppose, for instance, that we need to find ways to cut costs because we can't pass our costs through fully to our prices at those times; we'll figure out a new way to operate that we'll still be able to make good use of when fortunes improve. Or suppose we got laid off from our big corporate job. Maybe we can turn our sewing or crafts or electronics hobby into a business to boost our income. These are not trivial notions. While puzzling over this phenomenon in recent days, we've learned that a whole raft of well known companies have got started during recessions. Here are some[2]:

Proctor & Gamble: the panic of 1837
Barnes & Noble: the Depression that followed the panic of 1873
The Hoover Company and Neiman Marcus: after the panic of 1907
Macy's, Carvel, United Technologies, Global Van Lines: the Great Depression of the 1930s
Newman's Own and Sun Microsystems: the 1981-82 recession (before now, the worst since the Great Depression)

These are only a few of the multitude of firms that started during periods of drastic economic conditions over the last 200 years and have sustained themselves through to today. A study by scholars at the Ewing Kauffman Foundation[3] compiled a tally of two groups of companies, the Fortune 500 list of the largest companies and the Inc. Magazine list of the 1,000 fastest-growing companies. They find that almost half of these notable firms were founded during recessions.

Good Ideas, Easier Supply Chains Both Help
How can this happen? The numbers of recession-era firms are so large that it's clearly not accidental. Sometimes, it's just the novelty of the idea itself. In 1982, everyone knew Paul Newman, whose homemade salad dressing already had a following; both his carefully crafted products and the company's aim to serve charities with its profits were easy to market, regardless of the tenor of the times.

There's also a fundamental characteristic of recessions that we've talked about before: their cleansing and healing effect directly on business operations. In extensive polling of new business managers in the early 2000s, survey-takers for the Entrepreneurship Research Consortium[4] learned that budding companies face three major kinds of uncertainties: operational, financial and competitive. The most basic is the operational uncertainty; specifically, can the new firms obtain raw materials, attract skilled, productive employees and then get access to a distribution system? The competitive environment and the availability of financing are important, but not relevant if the firm can't first make the product and/or deliver a reliable service. During a boom, all of the operational factors are squeezed: raw materials are expensive, the employees we need are gainfully engaged elsewhere and distributors have all they can do to put out what they have already. But during a recession, all of these conditions are reversed. Prices come down, labor resources become more available and distributors are hungry for something new and different to offer to retain or regain their customer base. There's room to maneuver.

A Bottom-Up Economy
The U.S. economy is incredibly dynamic and all of this just happens, in a bottom-up process. Top-down government stimulus programs may help in some ways, but the genuine source of new growth for economies comes from these adaptations and innovations by people, like Bill Gates and Paul Allen, who formed Microsoft in April 1975, just at the bottom of the 1974-75 recession. Or Robert Wood Johnson, who, with his two brothers, started producing a bandage that would become Band-Aids in New Brunswick, New Jersey, in 1887, right in the middle of another recession.

So it's no accident at all that Facebook and Android phones and all the associated products have taken off like rockets over the past three years, and my young Christmas-tide guests are showing us the way.
_____________________
*Name changed to protect the guilty!

[1] Andy Kessler, "How Videogames Are Changing the Economy", The Wall Street Journal. January 3, 2011, page A17.

[2] Thomas A. Meyer. INNOVATE! How Great Companies Get Started in Terrible Times. Hoboken, NJ: John Wiley & Sons, Inc. 2010. Chapter 1: "Recession".

[3] Dane Stangler. "The Economic Future Just Happened." Ewing Marion Kauffman Foundation. June 9, 2009. http://www.kauffman.org/research-and-policy/the-economic-future-just-happened.aspx. Accessed January 18, 2011.

[4] Nancy M. Carter, Paul D. Reynolds and William B. Gartner. "Perceptions of Entrepreneurial Climate" in Gartner, Shaver, Carter & Reynolds. Handbook of Entrepreneurial Dynamics. Thousand Oaks, CA: Sage Publications, Inc. 2004. Pages 412-421.

Prayers over the Shootings in Arizona

2011-01-09T22:21:00.002-05:00

For the beginning of a new year, we have an article in process on innovation and new technology. But we put that aside briefly to reflect on the sad events January 8 in Tucson, Arizona. Rather than commentary, we offer prayer – prayer for the country, for those in public service, for those injured, especially Representative Giffords, and a prayer of mourning for those killed. The last one includes, notably, a petition for the redemption of the murderer; in the weeks that followed 9/11, I was present when a priest at Trinity Wall Street prayed for the perpetrators of that attack, and her deep feeling for them helped me see a rationale for "praying for your enemies". Join us in offering these prayers, perhaps Monday, January 10, at 11:00AM, when President Obama has recommended a national moment of silence over this entire affair:

For the Nation
Lord God Almighty, you have made all the peoples of the earth for your glory, to serve you in freedom and in peace: Give to the people of our country a zeal for justice and the strength of forbearance, that we may use our liberty in accordance with your gracious will; through Jesus Christ our Lord, who lives and reigns with you and the Holy Spirit, one God, for ever and ever. Amen.
The Book of Common Prayer, page 258

For Social Service
Heavenly Father, whose blessed Son came not to be served but to serve: Bless all who, following in his steps, give themselves to the service of others; that with wisdom, patience, and courage, they may minister in his Name to the suffering, … the needy and the ordinary people of our communities; for the love of him who laid down his life for us, your Son our Savior Jesus Christ, who lives and reigns with you and the Holy Spirit, one God, for ever and ever. Amen.
Adapted from The Book of Common Prayer, page 260

For People Critically Ill, or Facing Great Uncertainty
God of the present moment,
God who in Jesus stills the storm
And soothes the frantic heart;
Bring hope and courage to Representative Giffords, her family and the others wounded
as they wait in uncertainty.
Bring hope that you will make them the equal
of whatever lies ahead.
Bring them courage to endure what cannot be avoided,
for your will is health and wholeness;
you are God, and we need you.
A New Zealand Prayer Book, page 747

Prayer for Those Who Die at the Hands of Another
Hear our prayers, O God,
for those who die
at the hands of another.
Bless the departed;
grant them life with you,
Bless the murderer;
grant him a new life,
the opportunity to be redeemed,
a second chance.
Bless those who mourn;
grant them peace;
for Jesus Christ's sake we pray.
Amen.
Prayers of Our Hearts in Word and Action. By Vienna Cobb Anderson. The Crossroads Publishing Company, 1991, page 84.

'Twas The Week Before Christmas

2010-12-21T17:26:00.002-05:00

'Twas the week before Christmas and all through Wall Street
Many creatures were stirring – they had deadlines to meet . . . .

Poor Clement Moore. We won't mangle his fine text anymore. But in fact, for the week before Christmas, there's lots going on – on Wall Street and especially in Washington. Nobody has "settled [their] brains for a long winter's nap". Normally by this time, Congress is long gone, the rest of the federal government is pretty still, and Wall Street is busy, but with Christmas partying more than trading. Not so this year.

That Tax Bill
Let us hit a couple of the high spots. Congress finally passed a tax bill last Thursday evening. The basic feature of this bill – extension of the current income tax rate structure for two more years – is easy to misinterpret, so we will try to describe it in a gingerly fashion. Notice that we didn't use the term "tax cuts". After as many as nine years, these tax rates hardly seem like a tax "cut" any longer and certainly allowing the rates to go up would hit just like a tax "increase", even if it isn't formally called by that name.

Extending the current rates for middle income taxpayers was never much disputed. Contention focused on those in upper income brackets. Many of us perhaps thought that these well-to-do people are quite comfortable and wouldn't miss the 5% or so more of their income that they'd be paying to Uncle Sam. Maybe. But some research we did several months ago for a different need taught us something about who those upper-income people are. According to the Federal Reserve's Survey of Consumer Finances, the largest asset of the top 10% of wealth-holders is equity in a business. Not a portfolio of shares of stock, but ownership interest in their own company. So this group encompasses proprietors of the country's small businesses. It's not as if they were settled back in their palatial mansions, collecting their dividends and interest; for the most part, they're out there in the mix, working hard – and employing well more than half the country's workforce. We'll talk about this issue and these people more in a subsequent article, probably during the upcoming tax season. For now, it's clearly advantageous to the economy and to the rest of us that we didn't hike their taxes in the face of the fragile recovery we're experiencing.

An addition to the bill will actually put cash in everyone's hands beginning in January: a one-year reduction of two percentage points in the social security payroll tax. As you may recall from our article on social security in late summer, this action of reducing social security funds' receipts is not particularly good for the financial condition of that system. But it will lift everyone's take-home pay in the short run, providing cash for stepped-up spending or for paying down on credit-card and other debt. For a year, that may well be a beneficial trade-off. We will need the discipline this time next year to let it expire, however.

Latest Wrinkles in Federal Reserve Policy
What is the Federal Reserve up to these days? Why was the Fed Chairman Ben Bernanke on the 60 Minutes CBS-TV program a couple of weeks ago?

The Fed has two main functions, banking regulation and lending, and economic stabilization through monetary policy. The monetary policy role has a two-pronged goal mandated by federal law: maintaining stable inflation and minimizing unemployment. At present, inflation is low and unemployment is high. The economic recovery doesn't seem strong enough on its own to improve the unemployment situation, as Mr. Bernanke explained on 60 Minutes, so the Fed is more or less required to at least try some action toward that end. This is not straightforward, though, since the Fed's key policy interest rate, the so-called federal funds rate, is virtually at 0 percent; so they can't pursue the usual course of lowering that short-term interest rate. The Fed is taking a different tack, which Mr. Bernanke also tried to help us understand through his TV appearance. Business investment and home mortgage lending really involve longer-term financial commitments. The Fed is trying to facilitate a decline in longer-term interest rates by buying Treasury bonds, $600 billion worth by next May, about $75 billion a month.

So far, long-term rates have risen, which is not exactly the desired result. Ten-year Treasury yields traded at 2.57% in the early November week when the Fed announced its bond-buying approach, and last week, they averaged 3.41%, an increase of 0.84%. We can guess that the bond markets are concerned about the Government's budget, and that overshadowed the Federal Reserve's added demand for the government bonds. Still, these interest rates may have increased more without the Fed's buying.

Separately, the Federal Reserve is also supplying funds to central banks in Europe. As government debt strains hurt financial conditions in various countries – Ireland's credit rating was slashed five notches on the widely followed Moody's scale last Friday – the Fed has been lending in currency markets through a "swap" arrangement. Today, in an indication that those policymakers haven't gone on Christmas break yet either, they announced the extension of these arrangements until next August. The central banks borrowing dollars in these transactions lend them on to banks in their own countries, suggesting that the Federal Reserve is serving as an indirect lender to financial institutions in a number of other countries as well as the United States.

Private Economy Might Be Picking Up
At the same time, in the private sector, some economic indicators are showing signs of improvement. U.S. consumers appear to be doing what they usually do just before Christmas: shop. Weekly chain store reports issued today for last week show some encouraging vigor on top of a sizable increase in overall retail sales for the month of November. Industrial production also increased last month. And perhaps most notable, the latest available figures show a decline in the number of people filing claims for unemployment insurance benefits. A four-week average of these initial claims was 423,000 in the week ended December 11, the smallest number since August of 2008, just as the financial panic was really setting in.

So, as the year closes out, in the midst of our caution, we're seeing some better signs: perhaps consumer spending is picking up and both fiscal and monetary policies in the U.S. are supportive of growth. There's even an early hint in that unemployment insurance data that labor market conditions might be getting more heartening.

Maybe Congress can get out of Washington soon, now, and leave the skies to Santa Claus!

Merry Christmas!

Barbara Crafton Quoted in Forbes Magazine

2010-11-21T18:52:00.004-05:00

Our article below talks about government economic and spending policies. Sometime back, Mother Crafton talked about the politicians themselves. Someone at Forbes Magazine, perhaps Steve Forbes himself, saw this comment and found meaning in it for Forbes' readers. Indeed, there is for us too; see it yourself: http://www.forbes.com/2010/11/17/other-comments-steve-forbes-opinions_2.html. This isn't her first appearance in this right-leaning business and investment magazine. That's intriguing, isn't it?

Voter Concerns and the Recent Election

2010-11-21T17:13:00.005-05:00

The incoming 112th Congress includes the largest turnover from one political party to the other since 1948. The Republicans gain control of the House of Representatives in a show of voter dissatisfaction with the now-demoted Democratic leadership. Our reading of the associated media reports and opinion polls suggests there are three reasons:
(1) People perceive that the federal government didn't do enough for the economy and job creation.
(2) They believe that the budget deficits last year and this are way too large and that spending in particular is way out of control.
(3) Many people believe that the health-care bill constitutes wrong-headed policy. They also resent the behind-closed-doors way it was cobbled together and the "deals" that were made in order to get it passed.

We're not a political guru and hopefully not even a political talking-head. But we do have some thoughts on these issues. Being the long-experienced two-handed economist that we are ("on the one hand . . . but on the other hand . . . "), we have comments that speak firmly to both sides of these points – and also down the middle.

More Jobs in the Economy Requires Less Uncertainty
First of all, government doesn't create jobs. Businesses do. Government stimulus programs do help and the big one in 2009 no doubt provided considerable support to the economy and to employment. It didn't look that way in the unemployment rate, which continued to go right on up during the roll-out of the stimulus projects. But we'd argue that it would have been higher yet without all those spending projects, many of which are still in process.

At the same time [See: "on the other hand"] the best thing the government could do now may not involve more spending. The action that might be best is to set up a constructive environment for the private economy to operate in and to minimize the uncertainty that business leaders already face. In this regard, the outgoing Congress was plainly irresponsible in recessing for an election campaign without acting on the approaching expiration of the Bush tax cuts. As you might imagine, given the current state of the economy, we'd extend these for everyone. But even if the choice would be to let them expire, business leaders and consumers (that's us!) deserve to know that, so they can plan. Similarly, the uncertainty and confusion attached to the health care legislation aggravates this condition.

The Deficit
Number 2: What about the deficit? We've already started to see some proposals and actions on it. The Republicans and even the President seem to favor a suspension or ban on so-called earmarks. These are spending projects, actually not unlike those stimulus projects, that direct funds to the District or State of a specific Member of Congress or Senator. They are proposed only by that person and they are not subject to the standard budgetary appropriations process, so there is no examination of the project's worth, merit or cost. A classic example is a jet airport in Johnstown, PA, where a single commuter airline runs three flights a day from there to Dulles Airport near Washington. The construction cost $150 million and federal subsidies are required to maintain that amount of passenger service. It will probably be constructive to put some brakes on such scatter-shot government spending.

Some people think this is the key to reducing spending and the deficit; indeed 50% of participants in a recent survey by the Kaiser Foundation believe cutting "waste" will actually balance the budget. But it won't. An independent organization, Citizens Against Government Waste, keeps an accounting of earmarks, in particular. In fiscal year 2010, these totaled about $16.5 billion. This sounds like a good deal of money. But total spending in that fiscal period was $3.456 trillion, an average of $9.5 billion a day. So all the earmarks together are less than two days' worth of federal government outlays, in fact about 42 hours' worth. As long as no one thinks this is a genuine solution to runaway government spending, it can certainly serve as a strong symbol of Congress' intentions.

Even Elimination of Some Whole Departments Won't Do It
Some Republicans and others have suggested chopping so-called "discretionary" spending. These programs are also characterized by identifiable projects and activities; appropriations for them must be enacted specifically every year. Defense is the largest category; others include education, energy, EPA, State Department, national parks and so on. In fiscal 2010, these were estimated at a total of $1.306 trillion, about 38% of total spending. Since these have to be renewed every year, they might be seen as the easiest to restrain. One specific proposal calls for fixed dollar amounts to be cut; another proposal recommends a standard 5% cut across-the-board. We did a quick add of several departments that might be seen as the most discretionary: Energy, Education, Interior, EPA, NASA, National Science Foundation and Small Business Administration. Suppose we chopped those completely [just for the sake of this argument, not for real!]. Their 2010 expenditures came to $180 billion, just barely 5% of total federal government outlays. We suppose 5% is good, but it doesn't really get spending "under control". What would we do for an encore the next year?

Entitlement Reform
So you know by now where we're going. We're going to have to tackle entitlements: social security, Medicare, Medicaid, food stamps and civil service retirement. These are programs that have their own upward spending momentum. The laws governing the way the benefits of those programs are calculated need to be changed in order to rein them in. We've already described social security here (September 1, 2010), and we're impressed that the co-chairs of President Obama's deficit commission have proposed action on these specific issues. Working on this won't be easy; indeed, as of this past week, the required super-majority of the 18 total members of the commission had been unable to agree on a common approach. Again, as we said in the social security article, and also last spring in our discussions of the "sustainability" of government budgets and borrowing, this has nothing to do with anyone's politics. As these programs have matured, the populations for whom they were developed have grown well beyond the projections at the time, even before individual cost increases are considered. We have bemoaned here, too, the fact that the March 2010 health-care legislation did not address the "supply-side" of medicine, so that incentives toward cost reduction by practitioners and producers have not been put into place. That would have been a real contribution to long-term solutions to the problems of health care cost and access.

Health Care Reform: The Question Isn't Really Even Who Pays
Which brings us to point (3) above. The health care law was indeed passed in the dead of night. Many of you who read these articles hold it as a high priority that government should provide – or support the provision of – health care. What we are arguing right now is that whether the government does it and money goes to the providers through the tax system or whether the private sector bears most of it and funnels money through the private insurance system, the first "reform" that matters is encouraging the optimal mix of cost and quality in the production of medical services. The U.S. economy will be trapped in a health care cost spiral until that is achieved. This alone still deserves a Presidential or Congressional commission to hash it out before real "reform" can be possible.

Poverty: A Social Issue as Well as an Economic One

2010-10-26T11:46:00.003-04:00

Poverty. We might describe it as not having enough money to assure adequate shelter and "three squares a day" for your household. This is a condition generated by the economy, then, right? And with the current bad economy, poverty has increased. Well, yes. But "poverty" is more than this simplistic description, as we've found in some recent explorations of numerical evidence about who is poor and why.

Certainly, the current economic conditions have led to greater poverty. In data for 2009 published last month by the Census Bureau[1], another 3.7 million people fell into that category, bringing the total number to 43.6 million, amounting to 14.3% of the total population. The 2008 figure was 39.8 million, 13.2% of the population.

This sense of being "in poverty" is a specific designation, based on the income required to feed your family. The Census Bureau conducts an annual survey of some 100,000 people asking about income, job status and characteristics of your household, among other items. Some years ago, similar kinds of government survey work indicated that low-income families needed to spend about 30% of their income on food in order to maintain a "nutritious" diet. So price data were collected and the cost of such a diet was calculated, then multiplied by 3 to obtain the minimum income needed to cover that and other family needs. Through the years, this threshold income level has been adjusted in line with inflation. In 2009, it came to $21,954 for a family of four.

Certainly, if you did not work, your chances of being "in poverty" are fairly significant. Last year, people over age 16 who did not work constituted somewhat over a quarter of the total population and more than one-fifth of them, 22.7%, were in poverty. This share is half again as high as that for the total population. [The Census Bureau and the Labor Department count eligible workers beginning at age 16.] In contrast, among people who worked, the poverty rate was just under 7%, half of the rate for the total population.

The bigger story with poverty lies in the shape of families. People, including both adults and children, who live in a family where there are two parents also see low poverty: 7-1/4% last year, a number also about half the rate for the total population. But people in families headed by a single woman face poverty at a 32.5% rate, that is, nearly one-third of those women and children are in poverty. These people, 14.7 million of them in 2009, constitute 34% of all those in poverty even as they are just less than 15% of the population. Tough stuff. And that's whether somebody in the family works or not. For those in which no one does work, the poverty rate is a whopping – pardon the informal expression – 71.5%, making this almost a defining characteristic of poverty. If even one person works part-time, this drops to slightly above 50%. Clearly work pays, but in every household work situation – one full-time worker, two full-time workers, two part-time workers, and so on – the rates are markedly higher if the household is headed by a single woman rather than by a married couple or a single man.

When we first saw this, we thought, oh well, to fight poverty, just encourage people to make marriage commitments, to form this mutual relationship of respect and support. It's obviously crucial to the economic well-being of the entire household. That's easy for us to say. Some of you who are acquainted with policies and actions in this arena will know that social service programs to this end have indeed been tried, and they do help some. But the problem is more complicated than our simple recipe, "encourage marriage". A study described in a recent volume of The Annals of the American Academy of Political and Social Science[2] outlines the conundrum: young women who were interviewed by the writers in fact valued marriage and understood its importance. But they could not see the men in their communities as people who would yield up the kind of respect and support they thought would be necessary. They weren't about to enter into a committed relationship with those men.

We don't have an answer to this. We are aware of a number of initiatives, both private and government funded, on the local, state and national levels, which focus on young men (14-21 years of age) who have fathered children but do not live in the same household. Such programs assist young dads by encouraging them to continue their education, finding work so that they can provide some financial support and helping them to become emotionally involved in the lives of their children, from whom they may be estranged because of difficult relationships with the mothers.

We could also define "poverty" in a different way. Now many years ago, writer George Gilder spoke of it not in terms of current numerical income, but in terms of awareness of opportunity and willingness to seize such opportunities or at least strive for them. If people were genuinely poor, he suggested, it was because they could not conceptualize that there might be a way out. On the other hand, even if their incomes were low, they might not be impoverished if they could see that there are ways to improve their lives and if they then reached toward that improvement. The entire issue of The Annals we reference above takes this kind of approach in wanting to connect policymakers and scholarly elites to the culture of the people who are "in poverty." We hope they've made some headway.

[1] Carmen DeNavas-Walt, Bernadette D. Proctor and Jessica C. Smith. Income, Poverty, and Health Insurance Coverage in the United States: 2009. Washington, D.C.: U.S. Bureau of the Census, September 2010.

[2] Kathryn Edin and Marie Kefalas. Promises I Can Keep: Why Poor Women Put Motherhood Before Marriage. Berkeley: University of California Press. 2005. Discussed in Small, Harding & Lamont. "Reconsidering Culture and Poverty", The Annals of the American Academy of Political and Social Science, Volume 629, May 2010, page 12.

Election Day: A Sacred Occasion

2010-10-05T09:48:00.003-04:00

We are hard at work on an article about the latest poverty data that the U.S. Census Bureau released a couple of weeks ago. Before we get to that, though, we feel compelled to pause and take notice of the current election season. We can't remember a noisier "mid-term" election campaign. Each of you has some collection of contests to consider and make a commitment on. There's much "throw-the-bums-out" sentiment, and whichever side of that you are on, there's a clarion call to pay attention to issues and people and make a choice.

Two comments to that end. If a candidate argues that they want to "cut government spending", ask or try to find out how they might intend to do that. What programs will they cut? How will they reform entitlements? The specifics of their answers may not actually matter right now; what matters is whether they've done some careful study to find concrete approaches to this nearly imponderable situation. It's not a time for platitudes. Also, think yourselves about what it is you want government to do. What is distinctively a government role and what can be left to private institutions or causes? In other words, what are your own criteria for the appropriate functions of government?

In this light, here is a prayer, a brief litany, from the Book of Common Prayer (page 821). We quoted the final paragraph of this two years ago, just on the eve of that election. In reviewing that post, we note the point made at the time by the Rev. Stephen Muncie, Rector of Grace Church Brooklyn Heights. Election day is a "sacred occasion", he said, "a day set aside" for us to make known our choices about our governments. Blessings on all of us as we do this, and thanks, too, that we have the privilege, without fear or intimidation, of voting the way we each believe is right.

+ + + + + + +

For Sound Government
O Lord our Governor, bless the leaders of our land, that we may be a people at peace among ourselves and a blessing to other nations of the earth.
Lord, keep this nation under your care.

To the President and members of the Cabinet, to Governors of States, Mayors of Cities, and to all in administrative authority, grant wisdom and grace in the exercise of their duties.
Give grace to your servants, O Lord.

To Senators and Representatives, and those who make our laws in States, Cities, and Towns, give courage, wisdom, and foresight to provide for the needs of all our people, and to fulfill our obligations in the community of nations.
Give grace to your servants, O Lord.

To the Judges and officers of our Courts give understanding and integrity, that human rights may be safeguarded and justice served.
Give grace to your servants, O Lord.

And finally, teach our people to rely on your strength and to accept their responsibilities to their fellow citizens, that they may elect trustworthy leaders and make wise decisions for the well‑being of our society; that we may serve you faithfully in our generation and honor your holy Name.
For yours is the kingdom, O Lord, and you are exalted as head above all. Amen.

2010-09-20T16:28:00.009-04:00

This Just In: The Recession Ended
The latest U.S. recession is now "officially" declared to have ended in June 2009. These declarations are made, not by the government, but by an academic organization, the National Bureau for Economic Research, NBER. The group's Business Cycle Dating Committee consists of seven leading professors of macroeconomics; it met yesterday in a conference call and made this decision, announced just hours ago.

Gains during the second half of last year in gross domestic product and gross domestic income (personal income and business profits) were the main drivers of the call on the economy's turning point, according to the Committee's statement; these developments stood up to annual mid-year data revisions and recalibrations by the Commerce Department, which allowed the Committee to believe they are sustained and not some statistical fluke. At the same time, the Committee are not "Pollyannas", and their statement is very cautiously worded. The recession ended in June 2009 and a recovery began. But, they remind us, this does not necessarily imply that economic troubles are over. They point out that in the recession during 2001, employment did not turn up for 21 months after the nominal "trough" in economic activity. This time, jobs began to increase, at least to some extent, six months after the trough.

This report recognizes what numerous business economists have said for some time, that the economy stopped contracting in the middle of 2009. At that point forces toward renewed expansion began a process of economic healing. In this cycle, this is turning out to be a long convalescence, a necessary process in our view, as we explained in our own August 23 article. Still, the official designation of "recovery" may well help business, investor and consumer confidence and inspire heartier activity going forward. Surely this and other news already gave a boost to the stock market, which gained almost 1-1/2 percent in today's trading.

Gasoline Prices in Other Countries
In our article last month about the current state of the U.S. economy, we complained about the stubbornly high cost of gasoline as a burden on U.S. consumers' budgets. We heard back, seemingly within minutes, from two readers who have spent considerable time in Europe. "But, Carol, gasoline is cheap in the U.S.!" they exclaimed. "Americans are spoiled." Or words to that effect. There was even some suggestion that gasoline – or the oil companies – here might be subsidized.

So we consulted some websites to learn more about the pattern of gasoline prices around the world. These price figures are conveniently provided for a collection of countries by the International Energy Agency, a Paris-based center of information on all sorts of energy products and policies.

The following table gives prices in U.S. dollars for a gallon of gasoline in five countries during August. The answer about such significant price differentials is readily apparent.

Thus, the differential is almost all due to differing tax rates. The costs of the fuel itself, even including refining, transporting to the gas stations and marketing, are remarkably close for the U.S. and European countries. Japan, in relative geographic isolation, is somewhat higher, but not really a lot.

What of these taxes? Why should they be so different? We selected the U.K. to check out and we examined some reports on the government's budget. Writers for the Institute for Fiscal Studies explain that fuel taxes are indeed meant to discourage personal driving. The tax on gasoline was revamped in 1993 to include an automatic escalator clause, so the levy rate increases on a schedule. The increases have occasionally been delayed, but the latest one just took effect this past April. Further, the Value Added Tax, or VAT, in the U.K. is calculated, not on the actual cost of the fuel, but on the combined cost of the fuel and its excise tax, a double-taxation hit. A separate indicator of the policy intention is found in the licensing fee on vehicles, which is scaled by the size of the vehicle and its engine. So policy in the U.K. is environmentally oriented, besides, of course, trying to raise some revenue for the government.

In the U.S., by contrast, the federal gasoline tax is dedicated to highway construction. Its revenues go to the Federal Highway Trust Fund. So while the tax raises the cost of the gasoline to consumers, those revenues go to help make driving easier. There have even been recent efforts to raise the tax rate, not to discourage driving, but toward rebuilding some now deteriorating roadways. Otherwise, we do find some subsidies for oil companies, in such areas as investment in oil exploration, which can be expensed all at once on the oil companies' tax returns instead of depreciated through time, as for most business investment. These are not large, massive giveaways, but it can probably be said that tax policies are relatively supportive of the oil industry and that they help to hold down the underlying cost of gasoline production. Still, this seems to be limited and vague, not a clear priority.

So where does this leave U.S. consumers? Yes, we pay much less for gasoline – by a factor of more than two times – than people in many other countries. However, we're still paying prices that are quite elevated by our own standards. See the graph. After the through-the-roof performance in 2008, there was a great fall, but the lower levels in early 2009 were not sustained very long, and we seem to be stuck with $2.70 a gallon for regular, an amount that has thrown off the budgeting of our income and is clearly one of the restraints on our feeble economic recovery.

Fixing Social Security: A Big Deal -- or Overblown?

2010-09-01T22:48:00.003-04:00

A couple of weeks ago, the Social Security program marked its 75th anniversary. This huge program is a mainstay for the finances of the growing "senior" population. In July, there were 53.4 million beneficiaries, more than one-sixth of the total U.S. population. However, we frequently hear questions and concerns in the media about Social Security's own financial condition. Indeed, a faithful reader writes and asks about the current partisan hype. Is it so bad off – the reader asks – as some bemoan? Or does it really only need tweaking, as others argue?

There is actually a pretty clear answer, one that mainly needs us to strip away the hype and the emotional outbursts from both political parties and just get down to work.

Benefit Payments Larger than Receipts; Deficit Will Eat Up the Fund
The story is basically that Social Security benefit payouts are growing faster than contributions. This year, with the recession hurting the payrolls from which contributions are made, benefit payments will actually be larger than contributions, so there will be an outright deficit. The Social Security program as a whole will therefore eat just a bit into its portfolio of Treasury securities in order to make all the scheduled payments. After a couple of years of renewed surpluses, benefit payments will again be larger than receipts in 2015 and will remain so, relentlessly eating through the Trust Fund assets. At present, Social Security officials project that the Fund will run completely dry by 2037.

After that time, under current law, benefit payments will be limited just to the amount of current receipts. So the payments would have to drop sharply. The Social Security Administration actuary's office estimates that they would have to come down by 25% or that the payroll tax would have to be raised by some 4 percentage points to roughly 16.5% from the current 12.4% – or some combination of these two changes – in order to restore balance.

Early Action Would Save Everyone Money
These are draconian amounts and seem pretty unfair to impose on retirees and workers in 27 years, especially when we know about the situation now. If, instead, we take some legislative action soon, the adjustments can be considerably smaller. The system would be "whole" for the next 75 years if Congress would take prompt action to lower benefits 13% or raise the tax rate to 14.4%, or some combination of changes to benefits and taxes that would only need to be about half the size of delayed changes. So, in brief, we can "tweak" now – albeit a pretty good-sized "tweak" – or we will have to chop later.

The last time there was an overhaul of Social Security was 1983. At that time, the system was allowed to run out of assets. Congress was finally moved to act when they had to vote temporary borrowing authority for the Social Security Administration in order to prevent benefit cuts. Now, we know what will happen, so we have no excuse for not fulfilling our obligations.

Problem Is Numerical, Doesn't Have To Be Political
Thus, everyone is wrong and everyone is right about the need to work on Social Security. It is wrong to say that the system is broken drastically and has to be completely redesigned. It is also wrong to downplay the need for action. The issue is serious and deserves close attention. An advantage is that since the problem has its origins in numbers, not politics, there should be room for dispassionate discussion of reforms that might be desirable. The looming shortfall is not the fault of some irresponsible policymaker or bureaucrat, and we don't have to spend time on the diagnostics and fact-finding. So maybe we could explore some design ideas.

In the current issue of the Social Security Bulletin, a quarterly journal of the Social Security Administration, Chief Actuary Stephen Goss gives us some helpful background that comes from the very fundamentals of how many people there are and how long they live. The prior episode of shortfalls came because the life expectancies of beneficiaries were becoming longer and longer. In 1935, 65-year-old men could look to 11.9 more years of life and women, 13.2 years. By 1983, men aged 65 were up to 14.3 more years of expected life and women to 18.6 years. So, then, one of the obvious ways to solve a deficit of benefits versus receipts was to raise the retirement age to absorb some of this longer benefit period. Younger workers are thus experiencing so-called "full retirement age" at 66 and eventually 67 compared to the original 65.

Probable lifespans are still increasing, but now there is an additional issue, Mr. Goss emphasizes, the decreasing number of workers per beneficiary. For the past 35 years, the ratio of workers to beneficiaries has hovered in a range of 3.2 to 3.4, or right at 30 beneficiaries per 100 workers. Now, this relationship has already started to change, because after the Baby Boom, the birth rate dropped sharply. As a result, there are fewer workers per beneficiary: the ratio went down through 3.0 workers per beneficiary during 2009 and it is likely be just 2.1 by 2035, translating to 48 beneficiaries for every 100 workers, a 60% increase. These are firm projections, because the people involved are nearly all alive today, and we know how many of them there are.

Remedies Can Simply Change Formulas or Alter Basic Structure
Thus, Goss argues, trying to fix the impending deficit problem by fiddling with the retirement age might not be enough or might be less effective in curbing the growth of benefits relative to contributions. In separate analysis, the Congressional Budget Office points out that there are numerous other items in the tax and benefit formulas that might be altered: the earnings ceiling where workers stop owing the payroll tax, the income scale used in calculating the initial benefit, and so on. All of these variables could be changed.

This is where some, mainly Republicans, have argued for "privatization", the outside investment of some portion of an individual's Social Security "account", in the expectation of raising more income through private sector assets. In the past, we've been an advocate of that approach as an adjunct to other efforts. But after the recent plunge in stock values, it no longer seems as prudent, regardless of one's political persuasion. Another approach we've heard talk about lately involves shifting the structure of the benefit calculation toward the "defined contribution" system that is used for 401(k) plans and a growing number of corporate plans. Then the benefit payment becomes a distribution that depends on the current value of the account, rather than on some pre-ordained formula. And the liability of the fund's managers or trustees becomes simply the current value of the fund, rather than an actuarial projection that forces repeated balancing adjustments.

This is the time for discussion of these notions. In the current hyper-partisan political environment, it's probably foolhardy to think the discussions could be "dispassionate", but it's much better to deal with all of it now when we can all be more thoughtful about it.

Finally, this is a huge issue, and we all have a stake in it. If you have comments or further questions, please write us; we'll see what we can find out.

Sources:
Stephen C. Goss. "The Future Financial Status of the Social Security Program," Social Security Bulletin, Vol. 30, No. 3, August 2010, pp. 111-125.

Data are from www.ssa.gov, "Actuarial Publications" [i.e. tables] and 2010 Trustees Annual Report, published August 5, 2010, and all accessed September 1, 2010.

Noah Meyerson, Charles Pineles-Mark, and Michael Simpson. Social Security Policy Options. Washington, D.C.: Congressional Budget Office, July 2010, especially pp. 1-16.

The Sluggish Economic Recovery

2010-08-23T15:33:00.004-04:00

Assessing the economy is always tricky business, but these days it seems all the more so. Every new indicator seems to portray a different vision of current conditions. For instance, week before last, the Federal Reserve's Open Market Committee issued a policy statement in which members complained that the economy's output was sluggish and that household spending was increasing only gradually. The Committee was so concerned that it enacted a policy shift intended to give the economy more support. But reports just a few days later showed upturns for July in both industrial output and in retail sales. At the same time, housing remains stubbornly constrained; construction starts of new houses looked better in July, increasing by 1.7% from June, but May and June numbers were revised lower as more complete information was reported to the Census Bureau, so the new figure for July, 546,000, is actually lower than the original report for June, 549,000.

The stock market mirrors this uncertainty; during trading today, August 23, the Dow Jones Industrial Average (DJIA) surged as much as 101 points from Friday evening's close, then dropped abruptly to a loss of 22 points. Now, at this hour, 3:08PM, it is up 23 points. Several recent days have seen wider swings, and over the last three months, the index has oscillated in a band of nearly 1,500 points. Clearly, investors continue to be unable to sense a trend toward momentum in either direction.

Recessions Correct Excesses
What can we make of this muddled situation? Usually, a recession corrects excesses in business inventories and homebuilding. Stores and manufacturers have generally accumulated too much merchandise and contractors have gotten ahead of demand in homebuilding. The processes of recession curtail manufacturing and construction activity, and after a time, they become better aligned with consumers' ability to buy goods and new homes. In this current case, inventories have gone through that correction. The drop in industrial production (and also in imports of goods) acted to slash inventories back to levels more appropriate for the pace of spending. Then—usually – inventories stop falling and business activity stabilizes and starts to grow again. Some of the subsequent restocking of store shelves and warehouses has indeed begun.

Also, usually, the fall in interest rates that accompanies the recession sets the stage for renewed gains in home construction. This renewal helps push consumer buying of furniture and appliances back up as well. This entire sector is experiencing it differently this time. Interest rates certainly fell, and remain very low. But a burst of renewed lending and buying is not happening – and may not happen for some time ahead.

Consumer Borrowing Excesses Were Really Great
We talked back in the spring about sustainable government budgets, and in some sense, we need to have the same kind of discussion about consumer budgets. Look at these two graphs. The first one shows consumer debt as a percent of consumers' liquid assets. Here we include credit card debt, installment loans, mortgages and some other smaller items. We see that prior to 2000, people's debt never approached their holdings of bank deposits, bonds and other safe financial assets. In general, then, people had ready cash to more than cover their obligations. That changed dramatically during the 1990s and especially the first part of the 2000s. See that at the peak in 2005, people's debt exceeded 125% of their quick, ready cash; for some, this would have been a far higher number.

As if that weren't enough, many people were borrowing on their home equity. The low interest rates made it easy to tap that otherwise inaccessible source of funds; people refinanced their mortgages and borrowed more than their current mortgage amount. With the low interest rates, their payments may easily have been no larger than before and that unlocked money was available for them to spend. In the second graph, we see that from 2003 through 2006 this "home equity withdrawal" supported more than 6% of consumers total spending. Back in the 1990s, by contrast, such liquidation of home equity was never more than an occasional funding source for spending.

Protracted Correction Not Helped by High-Priced Gas
In the subsequent recession, the tables have turned, of course, and part of what the economy is going through at present is the reformation of consumer finances. This process of debt reduction and liquidity rebuilding is holding the economy back right now, but we have to believe that it's a good thing. We're getting liabilities back in line with assets and we're returning equity to our homes. We learned, much to our shock over the last three years, that home prices can fall, bringing us up short when we least expect. We're correcting our behavior, some of the correction forced through foreclosure and other unpleasant disciplines.

We're also experiencing one other burden, the price of gasoline. Energy continues to absorb more than 10% of the measure we have compiled that we call consumer "take-home pay". This share is lower than in 2008, when gas hit $4/gallon, but, at almost $3/gallon, it's well above the 7-8%that prevailed prior to 2005. As we've noted here separately, people are working at cutting energy use, but these costs are still a constraint on our ability to buy other things.

But We're Building a Firmer Foundation for Later Growth
Our graphs here do show that the necessary financial adjustments are occurring, but this is an unusual phenomenon, so it's hard to know how long it will last. Also note that these processes don't lend themselves to formula antidotes, such as "shovel-ready" government stimulus programs. We can guess that more vigorous growth will return to the economy "next year", but that's only a guess. Fortunately for the world's economy, there is growth elsewhere; the so-called "emerging markets" are indeed emerging and demand from them will help everyone recover. And again, what the U.S. is experiencing now is a good thing for the long term; consumers and the economy as a whole will be operating on a much healthier base going forward.

A Lesson in Race Relations

2010-07-27T10:45:00.004-04:00

Shirley Sherrod. Many of us had never heard this name at the beginning of last week. How quickly things change.

We're moved to write our own article on this issue because we want so much for some good to come out of this extraordinary and extraordinarily unkind incident. There can be good if we all learn something beneficial and put it to use in the future. I wish Ms. Sherrod didn't have to suffer so that might happen, but that part can't be changed now. At this point, we wish her well and we wish her renewed respect and peace in her own life.

Her speech to the NAACP dinner in March told a terrific story of personal growth, of redemption. She came to understand that people were worthy of attention and assistance just for being themselves, not for some inherited characteristic that might distinguish them from someone else. In the end, she fought for her client with all the vigor she had. She saved their farm for them, and this past week, in turn, they helped save her beaten-up reputation for her.

In the meantime, none of this was pretty. It started because, in an official resolution a couple of weeks ago, the NAACP called the Tea Party a racist institution. Someone who was offended by this sought to show that the NAACP could be racist too. Andrew Breitbart, quoted Saturday by Politics Daily columnist Matt Lewis, said that his point in posting the now infamous clip of the speech was not so much the speech itself, but the audience's reaction to Ms. Sherrod's statements. As she told of thinking to do less for the farmer and shunting him off to a lawyer "of his own kind", the crowd cheered and clapped in approval. Surely these people were also exhibiting racist attitudes, Breitbart said he reasoned.

Sometimes fighting fire with fire works. Forest fires can indeed be successfully addressed this way. But there is no subtlety in a forest fire. We don't have to concentrate or search to grasp the point of what 's going on, as would have been necessary here. I wonder if anyone did. We could recite here a list of people who instead took actions on their knee-jerk reactions and did damage to Ms. Sherrod and themselves. But you know all that by now.

What we would offer here are responses from two conservative commentators. Their reactions show how widespread the feelings about the injustice are and why we are prompted to emphasize them ourselves. When she heard the entire speech, Ann Coulter – Ann Coulter – argued to Sean Hannity on Fox News [Wednesday, July 21] that it had been an important and a "lovely" speech, full of maturity and grace. He was hesitant, so she repeated her sentiments to give them further weight. This was something we should all pay attention to, she implied.

In her column in Saturday's Wall Street Journal, Peggy Noonan, one-time speechwriter for Ronald Reagan, tells considerable of Ms. Sherrod's story: the murder of her father in 1965 and the non-punishment of his killers, Ms. Sherrod's recognitions that there was work for her in the South and again that helping the white farmer was as important as helping a black farmer. Ms. Noonan recommends, and we pass on to you: make a video of this speech [link here] required viewing for teenagers in high schools. Make it an occasion for recognition and discussion of race and also of respect for all persons. If we all learn, maybe Ms. Sherrod can feel some small gratification that her troubles led to something worthwhile.

We have to say one more thing. We are all the more aghast at the reactions of those who summarily dismissed Ms. Sherrod from her job and called on their "zero-tolerance" policy. We've learned that Ms. Sherrod is hardly a nameless face in the civil rights movement. She is married to William Sherrod, who was a founder of the Student Nonviolent Coordinating Committee in the 1960s. We learn this from Eleanor Clift, the Newsweek columnist, also writing for Politics Daily. The title of her column is "Andrew Breitbart Debacle Just a Warm-Up for Racial Politics Ahead". We pray not. May we all listen and learn and take a deep breath every time we want to use that word.

Ben Franklin and the Making of America

2010-07-13T15:43:00.003-04:00

Each year around July 4, Ways of the World explores some facet of historical American society. Independence and Revolution involved not just political and military issues, but social and economic ones as well. In these articles, we have emphasized the role of common, ordinary people, the decisive leadership they showed and the actions they took that effected massive changes in the structure of society and lifestyles.

This time, we want to talk about one of the Founding Fathers, Ben Franklin, who in many ways personifies the kinds of changes that were taking place.

First, an editorial note: in the last couple of our articles, on immigration and the Gulf oil spill, we were quoting specific facts and numbers and we were anxious to document those. So we used footnote references right in the text. In this piece, facts and care are still important, but the style is less rigid. We won't use such detailed data or footnotes. Be sure, though, to see our list of sources at the end, which come from well-known historians and biographies. We also take some poetic license; not everything below is described in chronological order. Hopefully, we won't offend any real expert's historic sensibilities.

Reading, Writing and Printing
Franklin was born in Boston in 1706, the 13th of 15 children and the youngest son. His father Josiah was a dyer and candlemaker in Boston, but with so many older male siblings, there was no chance Ben would inherit any of the family business. Further, Josiah could afford only the most minimal schooling for Ben; he attended Boston Grammar School – later called Boston Latin – for only about a year and was tutored at home for some months. Fortunately, he did learn to read well and was introduced to classic literature, about which he was very enthusiastic. He also liked to write; he taught himself to draft arguments by dismantling some famous piece, scrambling the author's points and then trying to reassemble them into a sensible statement.

To earn money, Ben was apprenticed to his older brother James, who had a printing business. James began a newspaper, the New England Courant. Very early on, commentary and opinion in the paper ran afoul of the Massachusetts colonial authorities. After the second of these incidents, Ben left town, moving to Philadelphia.

Ironically, Ben attracted positive attention from government officials in New York, New Jersey and Pennsylvania with his book collection and his writing skills. After spending a couple of years in London, he was able to open his own printing and publishing operation in Philadelphia, which he ran from 1728 to 1748. The firm produced the Pennsylvania Gazette and in 1732, the first edition of Poor Richard's Almanack. They were contractors for the New Jersey governor, printing copies of laws, other official documents and paper currency. Franklin, in fact, had managed to design a currency that was hard to counterfeit. He "retired" from the business in 1748, at age 42, and would continue to draw income from the firm for another 18 years. He then entered public life, although he was already well known for his numerous essays, letters and, of course, Poor Richard.

So here was a man who started from little and was making his own way. His name even personifies this: "Franklin" is derived from the Middle English frankelein, which means freeholder, a landowner who is not part of the nobility – exactly what Americans are. Gordon Wood, a Pulitzer-Prize historian we have cited here several times in the past, wants not to push this "self-made" concept too far. Wood highlights the patronage granted to Franklin by those government officials and others, indicating that there was significant outside support. Even so, with no well-placed family background and lacking the school connections others had – Harvard, Yale and the like – he still succeeded to a great extent even before he entered the scientific and government service that eventually brought him world renown.

Loyal Subject and London Diplomat
Importantly, at the same time, Franklin remained loyal to the Crown. Even as he encouraged the new society in America and the spirit evolving around and through him, he expected that America would become a nation within the strengthening British Empire. In the late 1750s, he became a representative for Pennsylvania and later for Massachusetts at the Royal Court in London and the Privy Council. He even thought for a time that he would be named to positions in the London government itself.

So it was that he was surprised to learn that the Prime Minister still expected his appointment as agent for the Massachusetts Assembly to be approved by the Royal Governor. "But I represent the people," he argued. "The people can name who they want as their agent." Well, no, they couldn't. At the time, other political issues interrupted and that particular Prime Minister was turned out of office. His successor demanded no such endorsement and Franklin was allowed to remain in that role.

Americans Worthy in Their Own Right
Additionally, the great issue of taxation without representation began to grate on Franklin. The decisive Stamp Act in 1765 brought all of the American representatives in London to the office of Prime Minister Grenville to plead their case that the colonies could be taxed only by their own legislatures. Franklin, while arguing forcefully for this principle – and in fact serving as the spokesperson before Parliament when they voted the Stamp Act's repeal – still persisted at trying to forge accommodation between rulers and colonists. He argued that perhaps import duties could be seen differently since they concerned foreign relations. But then, Parliament enacted the burdensome Townshend duties. As we've described here before, the American colonists' reaction to this dramatic; they aimed to live without imports so they wouldn't have to pay the duties. Some years before, Parliament had tried to limit manufacturing activity in the colonies, viewing the region as a source of raw materials and a market for final goods. But those goods themselves would be produced in England, benefiting the producers there, not businesses in America. That prohibition was dropped, but Franklin then saw with the Townshend duties that Parliament seemed to be taking still another opportunity to pull money in from the colonies. He wrote to his son William that he was becoming convinced that there was apparently no middle ground, that "Parliament has a power to make all laws for us, or that it has the power to make no laws for us."

Franklin was sent home in early 1775 when a scandal erupted over under-handed business dealings by the Royal Governor of Massachusetts. Franklin had tried to smooth relations between the colonies and London, but his attempt to keep the Americans and the English together actually came across as playing both sides against the middle. No one was happy. Franklin surely felt bad as he left London, by now understanding that separation was on the way. There were other, personal stakes for him as well. His son William was holding a government office in the colonies and he believed that the Crown should continue to rule in America. While father and son remained in contact through later years, their personal relationship was broken in the move to Independence.

Individuals Worthy in Their Own Right
Daniel Walker Howe, another Pulitzer-Prize historian, gives the description of Franklin that prompts us to write about him in this series of articles about how America became itself. Howe's discussion covers the concept of "self-construction", of "making something of oneself", which was a new idea in colonial America. "The prevailing attitude toward self-construction . . . was that individuals are valuable in their own right and that they should develop their full potential while exercising self-control. [This encompasses] not only the existence of a self . . . but also the capacity of the individual for critical reflection upon that self, with the power to modify it through conscious effort." This perspective then prompts questions about the structure of society: how is government organized to foster self-development? Can some individuals' fulfillment be achieved without the exploitation of others'? Howe points out that "classical political theory . . . had taken it for granted that some persons would be excluded from participation in this process and even sacrificed to the development of others." In America, though, there were conscious efforts to "apply the doctrine of self-development to people previously excluded from it" and to suffer internal struggles for that to happen. We note with interest, then that late in life, Franklin himself belonged to an anti-slavery organization.

So Ben Franklin, born in 1706, 26 years before George Washington, was perhaps the first American to rise from modest circumstances to great leadership and to understand what that process meant and why it mattered, not only to himself but to his new country.

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Obviously, any bibliography on Ben Franklin would be voluminous. Here is what we consulted. We do not refer directly here to his Autobiography, but it is mentioned frequently in all of these sources.

Daniel Walker Howe. Making the American Self. New York: Oxford University Press, 2009. Originally published by Harvard University Press, 1997. Pp. 4, 9, 22.

Walter Isaacson. Benjamin Franklin: an American Life. New York: Simon & Schuster Paperbacks. 2004.

Benjamin Franklin: An Illustrated History of His Life and Times. New York: TIME Books, TIME, Inc. 2010. The price of this book is $12.99. The numerous portraits, sketches and photographs of objects are easily worth several times that. Find it at your local supermarket! Thanks to two friends for pointing it out to us.

Gordon Wood. The Americanization of Benjamin Franklin. New York: The Penguin Group. 2004.

Gordon Wood. "The Invention of Benjamin Franklin". Chapter 2 of Revolutionary Characters: What Made the Founders Different. New York: The Penguin Group. 2007.

The Gulf Oil Spill: A Red Flag for Energy Conservation

2010-06-28T23:35:00.002-04:00

The Gulf of Mexico oil spill is a major disaster. It evokes numerous topics for discussion and elaboration. In response to our query, "what about this would you like us to explore?" friends have asked about the ecology and economy of the Gulf region – which has output valued at $234 billion annually according to a 2009 study by the Harte Research Institute of Texas A&M University[1]. Other friends want to know about clean-up methods – the standard ones include everything you've been hearing about: chemical dispersants, sand berms, relief wells and others, according to an aptly named article "How Do You Clean Up an Oil Spill?" on Howstuffworks.com [2]. In addition, the Presiding Bishop of the Episcopal Church, in a recent Sunday bulletin insert essay, calls our attention to oil usage and our dependence on oil companies.[3] It is this aspect we will focus on here.

We are in fact making progress reducing our consumption of oil. In 2005, the United States went through an average of 20.8 million barrels of oil every day. In 2009, this had dropped to 18.7 million barrels per day (b/d). Some of this 10% reduction is due to the recession and is being partially reversed now as the economy works toward recovery. Even so, projections made in early June by the U.S. Department of Energy point toward oil use in 2011 of 19.1 million b/d, which would still be lower than any other year since 1998.[4]

We're anxious to have you know this, since it seems to be in contradiction with a statement by the Presiding Bishop that "…we continue to extract and use [oil] at increasing rates and with apparently decreasing care." Surely she is right – as she goes on in her discussion emphasizing the interconnectedness of people, plants and animals with each other and the oil – to bemoan the fact that the spilling oil is creating a huge mess and harming innumerable innocent victims. But we would assert that there is much more to this situation that's constructive, which we and church leaders might consider and lift up in response.

First, let's take some credit for our reduced use of oil. This is no small accomplishment. And it's even more impressive when measured against the size of the economy. Converted to the heat-equivalent BTUs [you know that BTU measure from your air-conditioner], oil and natural gas consumed per dollar of GDP has gone from 11.66 in 1973 to 4.51 in 2009. This measure has decreased consistently throughout these years; it went up only in 1987 and 1988, and then by very marginal amounts.[5]

Several actions contribute to this result. Our personal vehicles are increasingly more economical. In 2008, cars averaged 22.6 miles per gallon, up from 20.2 in 1990. Vans, pickups and SUVs achieved 18.1 mpg in 2008, up from 16.1 in 1990. We're also averaging fewer miles of driving for both types of vehicles. Also, despite the growth in population and the number of homes, the so-called primary use of energy in residences has held to a flat trend over the past 20 years. The use of electricity in households has expanded somewhat, but the use of natural gas and petroleum has not. Similar patterns prevail for businesses, offices and industry.[6]

Second, continuing progress along these lines can feel "good". With enhanced knowledge and technology, we don't have to feel deprived as we continue to restrain energy consumption. Do you know anyone who feels deprived driving a Toyota Prius? Or a hybrid Ford Escape? They'll usually tell you they enjoy driving by gas stations instead of stopping at them. And the Prius is a very good-looking car with a nice ride.

In another vein, a year ago on Earth Day, we discussed the Empire State Building's "green" renovation. That work is still going on, but the building is already showing progress. It received an Energy Star rating of 90 from the EPA in late May, putting it above 90% of buildings nationally, regardless of age. A press release from the building tells that some full-floor tenants are managing on 2.5 watts of energy per square foot, including air-conditioning, compared with an industry standard of more than 6 watts per square foot.[7] It was formerly thought that the best way to retrofit a building for energy efficiency was to tear it down and start completely over. The Empire State Building shows that substantial reforms are plausible and profitable in an existing structure, even if it is 79 years old.

Even apparent "failures" can have their own contributions to make. We were surprised to read good things about the Boeing 787 Dreamliner plane, despite the repeated disappointments over malfunctions during the testing of its operating systems. But Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute, informs that the plane's body is constructed of a 50-percent carbon-composite material which saves substantial weight, and the innovations in its engines, aerodynamics and other parts will save one-fifth of its fuel at no extra cost. Boeing is using some of the components on all the rest of the planes it makes. Lovins also reports that Wal-Mart, everyone's favorite firm to beat up on, is innovating in its freight-delivery system, and has cut its truck fleet's diesel use per ton mile by 38% between 2004 and 2008. If every trucker made the same changes that one factor by itself would cut U.S. oil use by 6%.[8]

So indeed we agree with the Presiding Bishop that the Gulf oil spill throws up a huge red flag about our oil consumption and the absolute necessity for curtailing it. Her presentation stops short, though, in simply reciting a litany of the near-term damage the spill is likely to cause. The ugly conditions she describes are indisputable, but they are hardly the end of this story. They're in fact barely the beginning of how we can handle the future of oil use. Many of the remedies are already in place if we just look for them and expand their application. It's probably one of the more worthy and rewarding challenges of our day.

1. David W. Yoskowitz. "The Productive Value of the Gulf of Mexico", Chapter 2 of James C. Cato, Editor, Gulf of Mexico Origins, Waters, and Biota, Volume 2, Ocean and Coastal Economy. College Station, TX: Texas A& M University Press. 2009. Page 25.

2. Josh Clark. "How do you clean up an oil spill?" http://www.Howstuffworks.com. September 2008 (approx.). Accessed June 15, 2010.

3. The Most Rev. Katharine Jefferts Schori, "A Lesson from the Gulf Oil Spill: We Are All Connected", Episcopal Life weekly bulletin insert, June 20, 2010, http://www.episcopalchurch.org/documents/ENSW_insert_062010_eng_color_lettersize.pdf. Accessed June 28, 2010.

4. U.S. Energy Information Administration. Short-Term Energy Outlook, "Table 3d. World Liquid Fuels Consumption". June 8, 2010. http://www.eia.doe.gov/emeu/steo/pub/jun10.pdf . Accessed June 20, 2010.

5. U.S. Energy Information Administration. Monthly Energy Review, Table 1.7 "Primary Energy Consumption per Real Dollar of Gross Domestic Product. May 2010. Page 16. http://www.eia.doe.gov/emeu/mer/contents.html. Accessed June 20, 2010. An update is due June 30.

6. U.S. Energy Information Administration. Op.cit. Table 1.8 "Motor Vehicle Mileage, Fuel Consumption and Fuel Rates", Page 17, and Table 2.1 "Energy Consumption by Sector", Pages 23ff.

7. Empire State Building Company L.L.C., "Empire State Building Receives Energy Star Rating of 90 from EPA". May 27, 2010. http://www.esbnycleasing.com/release.phtml?id=287. Accessed June 28, 2010.

8. Amory Lovins. "Freeing America From Its Addiction to Oil", Snowmass, CO: Rocky Mountain Institute. http://www.rmi.org/rmi/Library/2010-01_FreeingAmericaAddictionOil. Accessed June 19, 2010.

Immigration FAQs

2010-06-12T10:42:00.003-04:00

1. How many "immigrants" are there?
The foreign-born population of the U.S. was 37.3 million in March 2008, according to Census Bureau data, 12-1/2% of the total at that time of 299.1 million Americans. Just over 40% of those, 15 million, have become U.S. citizens. The other 22.2 million are in the U.S. under a variety of terms: work visas, student visas, tourist visas, green cards and, oh yes, no legal status at all.

2. Do we know how many of those are "illegals"?
We have some good ideas about that. Two organizations, one in government and one private, have made separate estimates and they're pretty close together: about 11.8-11.9 million in 2008. These are from the Department of Homeland Security's Office of Immigration Statistics, and the Pew Hispanic Center, a prominent research center on Hispanic issues in particular and immigration in general.

3. If the Unauthorized Immigrants are trying to hide out in this country, how can we know about such numbers?
The Census Bureau takes a couple of different major surveys of demographic data, the Current Population Survey (CPS), which is monthly and generates the familiar unemployment rate, and the American Communities Survey (ACS), which is annual and used to be the "long form" on the big Census. The CPS polls about 65,000 people every month; once a year in March it is expanded to 100,000 and asks extra questions about income, where people were born and other facts. The ACS covers about 3,000,000 people with numerous detailed questions. Importantly, these surveys are only meant to count, not to screen. So they do not ask people about their legal status as U.S. residents. Apparently, a considerable number of undocumented immigrants reply, because in each case, the totals of foreign-born population can be combined with data from other government agencies on the legal status of immigrants to arrive at a number of un-legal immigrants. The DHS bases its estimates on the American Communities Survey, while the Pew researchers use the Current Population Survey. The fact that the two calculations each come from a different tally gives the numbers added credibility.[1]

4. Where are they all from?
In a word, Mexico. That oversimplifies, but of more than 200 countries in the world, the concentration of just the one is startling. Of the total foreign-born in 2008, nearly one-third, 31.2%, are from Mexico alone. Another 23% come from the rest of Latin America. Asians are 27% and Europeans, about 12.5%.[2]

5. And the undocumented?
Homeland Security estimates that 7 million are from Mexico, 61% of all unauthorized immigrants. El Salvador is next, followed by Guatemala, but these are much smaller, at about 500,000 each. Other countries with at least 200,000 undocumented residents in the U.S. include the Philippines, India, Korea and China, as well as a few other Latin countries.

6. How many of the undocumented residents work?
In fact, a noticeably larger proportion of immigrants participate in the labor force than do U.S. citizens. Among U.S. citizens of working age (over 16), just over 65% are employed or looking for work. For all immigrants who are not citizens, 69.5% are in the labor force. And the Pew analysts estimate that 72.5% of unauthorized immigrants work, or seek work. That indeed is generally why they come here in the first place.[3]

7. What do these people do for a living?
Do they all pick lettuce or wash dishes in restaurants? Well, not exactly all, but there are industries where there is a disproportionate share. Employees who are immigrants but not citizens are 17% of agriculture industry employees, 19% of construction industry employees and 14% of "leisure and hospitality" workers. In total, these immigrants are 9% of all employees.

8. Are they all poor?
This answer depends on your perspective. By U.S. standards, yes. The average native U.S. worker makes $35,300 a year, but the Pew Hispanic Center estimates that unauthorized immigrants pull down just $22,500. Total household income for native households is $50,000, while for unauthorized immigrants it is just $36,000. In 2008, 10% of U.S. citizens were "in poverty", according to Census Bureau criteria, but the poverty rate for unauthorized immigrants was 21%.

But the income numbers are rich compared, in particular, with Mexico. Average household income there in 2007 was just over $13,000.[4]

Journalist Gabriel Thompson reports in his experience as a lettuce picker in Arizona in 2008 that the workers there made $8.37 an hour. That amount in Mexico, he says, would have covered almost an entire day for similar work.[5]

9. Is that wage differential why they come?
Well, yes, but there are much broader issues in why they come. Both Pew Research Center and Gallup, Inc., polls taken on a global basis show significant restlessness among populations.[6] Gallup's surveys cover about 260,000 adults in 135 countries. Their results show about one-sixth of those people would like to move permanently to some other country. Not surprisingly people in developing countries overwhelmingly wish they could move to a developed country. The U.S. is the top destination country, while in relation to size, Singapore has the highest value of Gallup's so-call Potential Net Migration Index. The three countries with the most negative net migration ratios, that is, where the largest percentage of the population wants to move away, are Democratic Republic of the Congo, Zimbabwe and Sierra Leone.

Gallup reports that their survey, taken during 2007-2009, yield numbers for Mexico of 14 million adults wanting to move and 6.2 million of those to the U.S. in particular. The total population of Mexico is about 110 million.

Pew's survey work is a round of its Global Attitudes Project, which took place in the spring of 2009; it covered 26,000 people in 24 countries and the Palestinian Territories. This is a separate initiative at Pew from the Pew Hispanic Center. However, a recent report from the Global Attitudes Project highlights responses from Mexico specifically.

The September 2009 report describes a collection of problems rated "very big" by respondents, including crime, the drug wars, the economy and political corruption. Respondents told the Pew surveyors that people they know who've moved to the U.S. have better lives and that a large majority of those who moved have achieved their goals.

This survey saw 33% of participants reply that they would like to go live in the U.S. Of those, remarkably, 55% said they would do so even if they had no legal authorization.

10. Are these immigrants burdens on U.S. society? Do they take jobs from American workers?
This is complicated. Here are two aspects of their situation. Non-citizen immigrants obviously cannot vote and they are ineligible for benefits from a number of welfare-type programs. But their children are entitled to public education and none of them can be denied emergency medical care. This means that regions where there are concentrations of unauthorized immigrants may experience drains on some public systems. California is a prime example.

However – and this is a big however – these people do pay taxes. It was a surprise to us to realize this, but it is so. They pay tax on roughly the same basis as anyone who rents the home they live in. Gabriel Thompson explains it this way [7]

"Undocumented immigrants pay sales tax and, as renters, effectively pay property tax. Immigrants working with Individual Tax ID Numbers (ITINs) pay income taxes, while those using fake Social Security numbers pay between $6 and $7 billion into the retirement system; as this is money they will never be able to [access], it serves as a subsidy to cover retirement paychecks for American workers."

Further, as we have seen, immigrants work for cheap in many situations. As we've noted, the wage that seem low to us may look very attractive to residents of many other countries. Do profit-seeking U.S. employers under-pay because they can find workers who will accept those wage rates? Or would American workers refuse these jobs even if they paid better?

In at least one case we can describe, Americans have backed away from the job market, leaving opportunities for other willing workers. About 15 years ago, the share of teen and 20s kids enrolled in school who were available to work was right at 50%. That proportion has dropped steadily, and in 2009, it fell to below 40%. This one segment of the population, people aged 16 to 24 and in school, would add some 3 million workers to the labor force, if they participated at the same rate as their age-group did in the mid-1990s. The current recession may account for discouraging some of these people from job-hunting, but clearly something else has led to the long-term pull-back from the time-honored practice of "working your way through school".

The jobs many kids do are exactly the ones many immigrants do – bussing tables in restaurants, helping out on construction sites and a perennial favorite, mowing lawns. Did the kids back away because of the influx of immigrant competition? Or do student loans and generous parents' wallets mean that 3 million kids simply don't have to bother?

What we see is that besides the obvious legal questions and border security issues, immigration questions are tied up in numerous other considerations about labor markets and social forces. We picked just one factor, that fewer high school and college students work, to highlight here. Gabriel Thompson, in his new book we recommend highly, describes other, difficult issues with the jobs many immigrants try to work at and their managers. See the citation below in footnote [5]. He's a community organizer and his wants to organize the workers so they can make more money and work under better conditions.

Obviously, we haven't touched on so-called immigration reform or even mentioned the new Arizona law that spurred the current interest. It's all a huge topic. Let us know what else about it is on your mind.

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[1]Michael Hoefer, Nancy Rytina, and Bryan C. Baker. "Estimates of the Unauthorized Immigrant Population Residing in the United States: January 2009", Department of Homeland Security: Office of Immigration Statistics. January 2010.

Jeffrey S. Passel and D'Vera Cohn. "A Portrait of Unauthorized Immigrants in the United States". Pew Hispanic Center. April 14, 2009. www.pewhispanic.org. Passel is a leading authority on immigration issues, and seemingly everyone who discusses them cites his analysis. And as we've said before here, Pew is very generous and gives away volumes of data and reports.

[2]U.S. Census Bureau. "Foreign-Born Population of the United States" Annual Data Tables associated with the Current Population Survey. http://www.census.gov/population/www/socdemo/foreign/cps2008.html. Accessed June 12, 2010.

[3] Ibid.

[4] Calculated from data in pesos from the National Statistics Institute of Mexico.

[5] Gabriel Thompson. Working in the Shadows: A Year of Doing the Jobs [Most] Americans Won't Do. New York: Nation Books, A Member of the Perseus Books Group. 2010. Page 42.

[6] Jon Clifton. "Roughly 6.2 Million Mexicans Express Desire to Move to U.S." Washington, D.C.: Gallup, Inc. June 7, 2010. Accessed June 11, 2010.

Neil Esipova and Julie Ray. "700 Million Worldwide Desire to Migrate Permanently". Washington, D.C.: Gallup, Inc. November 2, 2009. Accessed June 11, 2010.

"Most Mexicans See Better Life in U.S. – One-in-Three Would Migrate" September 23, 2009. Washington, D.C.: Pew Global Attitudes Project. Report available on www.pewglobal.org; accessed June 12, 2010. The co-chairs of the overall project are Madeleine Albright and John Danforth.

[7] Gabriel Thompson. Op. cit. Page 166.

[8] U.S. Bureau of Labor Statistics via Haver Analytics, Inc. "EMPL" database.

European Bailout Plan Follows Violence in Greece and Malfunctioning U.S. Stock Market

2010-05-10T22:40:00.004-04:00

This past weekend, while most of us were off celebrating Mother's Day, European ministers and economic policymakers were laboring in Brussels to cobble together a scheme to alleviate the current euro financial crisis. As the declines in stock markets elsewhere attested Thursday and Friday, the government debt debacle in Greece was on its way to inflicting harm quite far away from the Mediterranean Sea. The policymakers met late Sunday night and on into Monday morning in an effort to get an agreement before markets opened in Asia. The announcements came around 9:00PM Sunday night Eastern time, which was 3:00AM Monday in Brussels and 11:00AM in Tokyo. World stock markets indeed surged on the news, with Tokyo up 1.6%, Germany up 5.3% and London up 5.2%; markets in France, Italy and Belgium were even stronger. In the late New York morning as we write, the Dow Jones has gained just over 4%.

Violence in the Streets of Athens . . .
This drama came about in the wake of several disturbing events. The rioting in Greece we talked about here last week continued and on Wednesday a bank was firebombed and three people killed. We've heard about people committing suicide over financial reverses and turmoil, and that's sad enough. But we have to say, in a decades-long career, we've never heard of such mass violence directed at government financial policies. Yes, the people are angry that their wages and pensions will be cut. But government isn't seizing their property and kidnapping their families or constraining their civil rights, or even censoring the press. At the same time, German voters yesterday showed their displeasure at having to help the Greeks by voting out some members of parliament from the majority party and eliminating that majority in the upper house of parliament. Tough stuff.

. . . Prompts Formation of Huge Bailout Program
The plan calls for almost $1 trillion in potential bailout funds to be contributed by all the members of the European Union. To distinguish, the Euro Zone (sometimes called the Euro Area) is the group of 16 countries that use the euro as their currency. Additionally, 11 other countries are banded together with them in a customs union, or free trade zone; the broader group of 27 then is called the European Union, or EU. The rescue money is meant to be available for any member country running into debt financing strains or other major financial tangles.

Greece Is Just Part of the Problem
Finances indeed got tangled on several fronts at the end of last week. Stock markets everywhere had reacted to the Greek budget deficit problem and the expectation that other governments, especially Spain and Portugal, might face the same situation. The trading glitch that caused U.S. stocks to plummet Thursday afternoon upset everyone (more on this below). The oil spill in the Gulf of Mexico is making people tense about risks, as are repeated interruptions in air travel in Europe due to volcanic ash in the atmosphere. Also, last week, less visible but more fundamental, liquidity showed further strains in European bond markets. In their nervousness, investors who had U.S. dollars didn't want to lend them to others, so interest rates on short-term dollar loans headed markedly higher. This is problematic because such short-term transactions may be needed to pay for imports, to cover some payrolls, to complete some other financial interchanges in the highly interconnected global financial network. It was getting perilously close to the market freeze conditions of autumn 2008.

Thus, besides the large weekend EU bailout arrangement, the U.S. Federal Reserve arranged a dollar-lending facility with its counterpart central banks in Europe, the U.K., Canada, Switzerland and Japan. It announced this renewed program at 9:15 Sunday night, about the same time the main EU bailout facility was being announced. The Fed will lend dollars to these official banks, who can, in turn, lend them on to banks in their countries. This is meant to increase the supply of dollars in world markets and help pull related interest rates back down. This same "swap facility" was used from December 2007 through this past January; at its peak in December 2008, it provided $580 billion to foreign banks.

Budgets Still Have To Be Cut
Clearly, these two huge programs of the EU and the Fed only address symptoms. They are meant to "buy time" for fundamental issues to be dealt with. The Greek Parliament actually did at least some of what it is supposed to do last Thursday in enacting legislation that will cut government spending and raise taxes. But the Greek people need time to calm down. And other Parliaments need to take similar kinds of budgetary actions. The U.K., with its own government presently in a blur after last Thursday's inconclusive election results, will also need to buckle down when the new leaders get into place and get its own budget situation rationalized. Nobody gets a free ride.

U.S. Stock Market Goes Bungee Jumping
Then, there's that awful U.S. stock market trading glitch. On Thursday, the Dow Jones Average was already down about 500 points at mid-afternoon, when a sudden downdraft pushed it off another 500. The charts of that look like a bungee jump. Fortunately, the bounce of the bungee did take place, and almost as fast as the downward plunge. What is this? There is extensive electronic trading and in some transactions no human input is involved. Surely no human intervention caused Accenture's shares, as one example, to fall from $40 to 18 cents in minutes. One electronic trading company did announce that they had stopped trading on the downside since they felt their "algorithm" would exacerbate the drop, but others argue that the removal of that automated response system may have made it worse by removing liquidity – there's that word again – from the whole system, causing it all to fall even more.

These mathematical trading routines, or algorithms, activate when prices cross thresholds determined by analytical formulas. Not all trading is conducted this way, indeed, perhaps only a fraction. Generally, it is very efficient, helping to smooth the timing of trades, particularly when investors are shifting a large holding. But as we saw the other day, things can go wrong and they can get very wrong in a hurry. There can be two types of problems. The formulas might be based in statistical probabilities, and it's possible that prices and trading volumes can move outside the usual probability range. We can measure the margin for error, but when a result comes there, sometimes the best we can do is say, "Oh, that's an outlier." We may not be able to react to the outlier before the trading formula pushes prices on a trajectory outside the carefully demarcated region. Secondly, these algorithms work as long as the players are "us" versus "the rest of the market". Then our action can be counterbalanced with a re-action. But when "the rest of the market" is using a similar tool, then we're all on taking the same kinds of action at the same time and it all goes one way – as it did Thursday.

Stock exchange officials were to meet this morning at the Securities and Exchange Commission in Washington to assess more carefully what might have happened. We hope they have better answers than we do. Automatic trading stoppages, called circuit breakers, have been used in the past to interrupt undesirable patterns, and perhaps strengthening those for today's bigger, faster market systems can help.

Better News, Though, on the Jobs Front
Fortunately, in the middle of all this turmoil, there was good news on U.S. economic fundamentals with the April jobs report showing sizable and widespread employment growth. Banks and other financial institutions are also in much better shape than they were in the 2008 crisis period. So perhaps we won't have a major setback to recovery. But these recent events serve as serious warnings that all of us need to stay cautious in buying, selling, investing and especially borrowing.

Sustainable Debt: Greece vs. the U.S.

2010-05-04T21:24:00.003-04:00

Greek civil servants are on strike today and tomorrow, following riots over the weekend, as the Government prepares to enact various austerity measures promised in return for bailout funding from the EU and the International Monetary Fund. The country has debt maturing on May 19 and would not likely otherwise have had the cash to pay it off. International investors have stopped granting Greece new credit.

As we described in our previous article on debt sustainability, civil service wages and public pensions are both more generous than Greece's economy can generate revenue to cover. So the European financial authorities and the IMF are trying to spur the Greek government to start reforms. Obviously, those are not popular with people whose salaries and pension benefits are likely to be reduced.

Meanwhile, back at the ranch, what is the situation in the U.S.? Is the U.S. debt "sustainable"? Also, Mother Crafton recently commented in a note to us, "So many make the simple analogy between a family's need to live within its income and a nation's relationship to its own debt. I know [this is] not that simple, but am not sure how. "

U.S. Debt Has Been "Sustainable"
On the "sustainability" question, there are two key ingredients. (1) How does the growth rate of the economy match up to the real interest rate on the debt? And (2) what is the debt's weight on the overall economy? If the economy is vigorous, it can generate more revenue to finance government activity. So even if there is some current budget deficit and some outstanding debt, the country can service that debt, that is, it can meet its interest payments, and in that otherwise vibrant scenario, investors would be likely to roll maturing debt they hold into new issues. The U.S. has been here for a long time. Gross domestic product (GDP) growth averaged 3 to 3-1/2% annually over the 25 years to 2007, while interest costs have actually declined in real terms (after netting out inflation) and have run noticeably below the growth rate since 1998. Thus, the margin of economic growth over interest cost has been favorable. The budget deficit has averaged about 2.5% of GDP over the last 20 years. As to item (2), the debt ran about 36% of GDP over the last decade, rising just the last two years during the recession. Overall, the budget and debt situation have been manageable up to now.

Future Prospects Are Clouded, Though
But there is concern at present, since the deficits last year and this are so very large. And the long-term outlook doesn't appear promising. The fiscal year 2009 deficit was $1.413 trillion or 9.9% of GDP and pushed the debt to 53% of GDP. [Fiscal years run from October 1 to September 30, so we are just over half way through fiscal 2010.] Recent estimates of this year's deficit run about $1.3 - $1.5 trillion, again about 9%-10% of GDP. These outsized numbers are clearly a product of the aftermath of the recession, and they should diminish as the recovery builds. However, two sets of long-term budget projections highlight looming issues.

Federal government expenditures have run right at 20% of GDP for the last 15 years. During the recession, in fiscal 2009, they were 24.7% and are estimated at 24.8% for this year. According to a Congressional Budget Office analysis of the Obama Administration's current budget[1], the lowest amount projected in coming years is 23%, with an average of 24% across the span to 2020. This is without the effects of the new health care law. Revenues have run about 18% of GDP historically and this same CBO work projects a ratio of 19% through 2020. Thus, if all this comes to pass, the long-run deficit will widen from the recent 2.5% of GDP to 5%, and the trend will be increasing toward the end of the decade. The debt-to-GDP ratio by then would be about 90%.

A widely respected survey of private forecasters reports projections of GDP growth over the next ten years at 2.7% and real interest rates at about 2.5%, basically equal, thereby bringing to an end the recent favorable relationship of high growth to low real interest costs.[2]

A Commission Works To Rework the Federal Fisc
On the face of it, then, the U.S. budget situation is worrisome, and President Obama has constituted a deficit commission to study ways to resolve it. The commission met for the first time last week and will issue a report in December. Some expect them to recommend the imposition of a Value Added Tax, or VAT, a kind of national sales tax, to close or at least narrow the budget gap. Our own recommendation would concentrate more on spending, since that is the source of the issue. The rapidly expanding elderly population will put increasing pressure on a number of so-called entitlement programs, and substantive deficit reduction can't really be accomplished if those aren't somehow reshaped. That's one reason we were disappointed that the new health care law used cuts in Medicare only to make room for a brand new entitlement initiative. Containing these big, broad outreaches is the only genuine long-term answer to persisting deficits. Perhaps it indeed needs a commission to conjure how to make cost-effective changes that are still respectful and compassionate.

When All Is Said and Done, the U.S. Remains a Safe Haven
All this said, as today has progressed while we have been writing this article, stock markets in Europe and the US have fallen sharply in response to the riots and strikes in Greece. Despite the development of a bailout plan over the weekend, new numbers suggest it still may not enough to solve Greece's short-run troubles, and the negative reaction of the workers there has spooked stock investors and driven down the euro currency. Worries about other southern European countries, especially Spain and Portugal, are mounting, as are concerns over the whole euro arrangement.

As investors sell euros and sell stocks today, they're buying something. And that something is U.S. Treasury securities. So despite our careful numerical analysis and all our ratios that are flashing warning signals, there remains a special place for U.S. Treasury debt in the portfolios of the world. It's still where people turn when they get scared. The promise that the U.S. government will pay remains the closest thing to a risk-free asset that anyone can conceive. Perhaps it is not exactly the U.S. government, but the U.S. nation that people can believe in. This could certainly change as other nations emerge and mature, but right now, there's no close, visible rival. And yes, Mother Crafton, most of the time, most countries, as most families, have to live within their means – with "means" defined pretty broadly. But there are exceptions, and right now, the U.S. seems to be just that.

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[1]Congressional Budget Office. An Analysis of the President's Budgetary Proposal for Fiscal Year 2011. Washington DC: The Congress of the United States. March 2010. Page 5.

[2]Federal Reserve Bank of Philadelphia, "Survey of Professional Forecasters". February 2010, via Haver Analytics, Inc., New York.

Earth Day, Trinity Institute and the Greek Debt Crisis

2010-04-20T22:24:00.004-04:00

At Trinity Institute back in January, the theme was "Building an Ethical Economy". As we wrote to you soon afterward, the presentations highlighted people's own behavior and people's own relationships as keys toward bringing about just economic outcomes that promote the well-being of everyone. Both Archbishop of Canterbury Rowan Williams and theologian Kathryn Tanner emphasized these person-centered factors beginning in the household and extending through markets. Also featured at the Trinity event, Professor Sir Partha Dasgupta of Cambridge University spoke about a more institutional issue, the definition and the role of "wealth".

Dasgupta wasn't talking about our financial wealth, although that can be a consideration, as we'll see later in this commentary. Dasgupta's concern is much broader. He's talking about our real wealth: the Earth and how we use it. The professor is a leader in the field we might call the macroeconomics of development: What does the shape of the economy today imply for our welfare tomorrow? Quite specifically, can we describe this for various countries, such as the U.S., China, India, Africa?

Dasgupta's presentation at Trinity[1] and some of his recent writings called my attention to the concept of "sustainability": what are the characteristics of the way an economy operates that enable it to keep moving up along a sustainable path? Is our work today good for the economy tomorrow or are we hurting it? Then, coincidentally, while reading about the implications of the current debt crisis in Greece, I ran into that term again, as in "debt sustainability". How can you assess the longer- run effects of budget deficits and government borrowing today? Might we have been able to expect the current distress in Greece?

"Capital": More than Finances, Also More than Bricks & Mortar
In the case of real wealth, economists usually talk about the nonfinancial wealth of a country as the capital goods it possesses, the buildings and equipment. In the U.S. for instance, the Federal Reserve publishes balance sheets for households and businesses that show their wealth as the sum of financial assets, plus, for households, the value of houses and perhaps vehicles, and for businesses, their office buildings, manufacturing plants and all the machinery. Incidental to these accountings is the value of the real estate they occupy. But clearly a nation has much more real wealth: croplands, pasturelands, sources of water, timber, protected areas and mineral and other "subsoil" resources, which most standard economic analysis ignores. There are other types of capital as well, more subtle forms, such as educational facilities, health facilities, reliable law enforcement and an even-handed court system, honest regulators and so on, which help the economy function smoothly – or hold it back. There's the "dis-capital" of environmental degradation and pollution that need to be accounted for.

The challenge for sustainable development is to achieve a balance in the growth of consumption in a country with the use of all this real and intangible wealth. The condition for development to be sustainable is that the total welfare of the nation should never decrease. That is, suppose factories belch smoke while making their widgets. The widgets might be great, but the accompanying harm to the people and the economy could be long-lasting.

Selling Off Natural Resources . . .
This can have unexpected ramifications. An extensive analysis conducted in 2004 by a group of economists and ecologists indicates that the countries in the world losing the most capital through time are the petroleum exporters in the Middle East.[2] That's because, until 2000, the latest year covered in the analysis, those countries were selling off that natural resource without investing enough of the proceeds in other capital to make up for the loss. Sub-Saharan Africa was the next biggest capital loser, but that had a more obvious cause in poor economic management generally, where both consumption and investment were declining. We've not found later data to know if the situations in either of these locations have subsequently turned around. The biggest capital gainer in the study was China, along with the U.K. The U.S. was in a kind of mid-range, while India and its neighbors all had small but positive capital growth, indicating that their current policies would support continuing growth into the future.

. . . Is OK Only If You Reinvest in More Capital
A good example of the difference capital investment can make comes in a comparison of Namibia with Botswana, which was conducted in 2003 by Glenn-Marie Lange, a natural resource economist.[3] She explains that Namibia, despite its great diamond wealth, has sold off much of that mineral wealth without commensurate reinvestment. There has been some growth in private capital and in other resources, such as fisheries. But this was not any greater than population growth, so wealth per capita was basically stagnant from 1990 through 2000. By contrast, Botswana put much of its diamond proceeds into infrastructure, public education and foreign financial assets. Per capita wealth expanded vigorously there, giving the potential for better performance in later years, which should help cushion the effect of the eventual flattening of diamond revenues.

Government Debt: How To Know If It's Sustainable
How does all of this connect to the presently difficult financial situation in Greece? There's another kind of sustainability, debt sustainability. As we explain, the material by Dasgupta that we've seen doesn't examine financial issues specifically. But it would seem to us that such financial debacles as the U.S. has just been through and continues to struggle with the aftermath of, would have a significant effect on the U.S.'s ability to provide the capital needed to sustain growth in years to come. Dasgupta's work includes a capital productivity factor measuring the degree by which the economy's total output responds to capital, and this factor may encompass the effects of financial market functioning. But that force cannot be glossed over in dealing with these long-run national issues, any more than we can ignore the valuation of water and timber resources, for instance.

Economists at the Inter-American Development Bank, among numerous others, describe conditions for debt sustainability. If a government carries debt and additionally runs an annual budget deficit, the country's economy must be able to generate revenue to satisfy the debt service requirements, that is, to pay the interest on current debt and pay off maturing bonds and loans and also cover the new debt from the added deficit. If it instead has to roll over the old debt and borrow still more even to meet interest expense, the country faces the prospect that its debt will spiral out of control forever. A standard formula for gauging this prospect requires the long-run growth rate of the country's economy to exceed the "real" or inflation-adjusted interest rate on the debt.[4]

Greece's Problems are Multi-Faceted
We conducted some of our own calculations according to this standard formula, which we applied to Germany and to Greece. We found Germany out of bounds during 2009, but it had performed well over the preceding three years or so, and we'd surmise that a continuing economic recovery will lift it back into positive territory. Greece, on the other hand, over the course of the 10-year range of our data, never came close. Its long-term debt service coverage was well below required amounts even if its budget were currently in balance, much less in further deficit. This is an unsustainable debt situation, and we're seeing the ramifications of it play out now in the turmoil in European markets.

Notably, correcting the debt sustainability condition needs some of the same changes to the economy that promote sustainable development. Here are some examples for Greece, cataloged for us by the Organization for Economic Cooperation and Development.[OECD, 5] (a) Greece had juggled its reported budget numbers until last autumn, understating its actual financing needs. So not only did they need more money, they had misled lenders. Along the same lines, press reports last week highlighted graft among officials. This misuse of funds raises risk and also hurts the efficiency of the economy. Another inefficiency comes from the large portion that civil servants make of the Greek work force, with a salary scale generally higher than private sector employees. So an early priority is getting the basic operation of government under better control. This reduces the current budget deficit, a good place to begin. It can also lower the real interest rate by reducing the risk premium the country's debt is subjected to. (b) The Greek labor force is in general much less productive than that in other countries. That could be improved through some deregulation and more flexible work arrangements, the OECD recommends. The social security system is the most generous among the countries of the Euro currency Area, encouraging workers to retire early, just when their years of experience might mean they are the most efficient. Reforms in that arrangement would raise the long-term growth rate. (c)Enhancement of the system of child care and public education is needed. This too would raise productivity growth over the long-run by increasing "human capital".

So on Earth Day this year, Ways of the World looks at efforts that can lead to better use of resources and better environmental outcomes among the world's economies. We find – with a new awareness – that that those same actions also promote long-run financial stability. That's not necessarily what you might think, going in. But it's quite a bonus for carrying on Earth-healthy growth strategies.

[1] Partha Dasgupta. "Natural Wealth (What Is Wealth?)" 40th Trinity Institute National Theological Conference. New York. January 28, 2010. Also see "Measuring Sustainable Development: Theory and Application" Asian Development Review, Vol. 24, No. 1, 2007, pp 1-10.

[2] Kenneth Arrow, Partha Dasgupta, et. al. "Are We Consuming Too Much?" Journal of Economic Perspectives. Vol. 18, No. 3, Summer 2004. Pp. 147-172.

[3] Glenn-Marie Lange, "National Wealth, Natural Capital and Sustainable Development in Namibia". DEA Research and Discussion Paper Number 56. Windhoek, Namibia: Directorate of Environmental Affairs, Ministry of Environment and Tourism, Government of Namibia. February 2003.

[4] Carolos Diaz Alvarado, Alejandro Izquierdo and Ugo Panizza. "Fiscal Sustainability in Emerging Market Countries with an Application to Ecuador". Inter-American Development Bank Research Department Working Paper #511. August 2004.

[5] Organization for Economic Cooperation and Development. "Greece at a Glance: Policies for a Sustainable Recovery" Brochure. March 15, 2010. Accessed April 14, 2010, from www.oecd.org/greece .

The New Health Care Bill

2010-03-22T18:47:00.004-04:00

So late last night, we got the long-debated Health Care Reform from Congress. Perhaps by the time you are reading this commentary, the President will have signed the main bill into law. A second bill, the "reconciliation", includes modifications the House is making to the Senate bill it just passed; this second bill must return to the Senate for its approval in turn.

This dual structure for the legislation is only one piece of the complexity in this $940 billion, 2700-page bill. We have been scouring the Web – not just browsing – to find comprehensible descriptions of what it contains and what it might mean. We think what we can do best for you is point you to some sources for descriptions that we found to be "pretty good".

1. For a plain, vanilla summary of the bill's basic provisions and a timetable through which they will take effect, see Reuters news service "Factboxes": http://www.reuters.com/article/idUSN2115035520100321 and http://www.reuters.com/article/idUSN1914020220100319 . These were both available as of 3:20PM EDT March 22, 2010. [Note though that in the first item, there is a reference to "Medicare" that should actually read "Medicare Advantage". As we said, these are pretty good sources, not perfect. This was otherwise the clearest listing we found, especially that didn't concentrate more on politics than information.]

2. We'll now have "health insurance exchanges" and subsidies for health insurance. There will be new payroll taxes and new excise taxes. Some of the bill goes into effect very soon, some not until 2018. How to understand the sense of these issues? Try The Christian Science Monitor series "Health Care Reform Bill 101". The first one is here: http://www.csmonitor.com/USA/Politics/2010/0319/Health-care-reform-bill-101-Who-must-buy-insurance . Other of the brief articles discuss "How Long Will Reform Take?" "Who Will Pay for Reform" and so on. These, too, are very clear explanations.

3. For some actions you might seriously consider as you plan for health care in your own budget, see The Wall Street Journal "Steps You Can Take Ahead of Changes in Coverage, Taxes", http://online.wsj.com/article/SB10001424052748704454004575135942557501242.html . The most notable of these, in our view, is that you should make sure you have a relationship with a doctor. In coming years, as millions of people are added to insurance rolls, there will almost surely be a supply squeeze on the availability of doctors. If you don't have a primary care physician now, get acquainted with one. The writer here has other helpful pieces of advice and links to other online sources.

Two other comments of our own. First, when you read or hear that the bill "saves" $138 billion on the deficit, that's because it hikes taxes and fees and it cuts other spending and subsidies to counterbalance the new outlays it makes. There's nothing "cost-saving" inherent in the bill. Instead, it greatly expands the role of government in the economy, raising both spending and taxes. Some – perhaps many – will say that the size of government in the economy is beside the point, and that may be true with health care. But we also often associate "deficit reduction" with a reduced or constrained role for government, and that is not the case here at all. As an example, there are cuts in Medicare. Those most likely would be needed anyway in the next few years to balance this program, which is already strung out financially. But the purpose of these particular cuts is to pay for expansion elsewhere, not get Medicare the rationalization it will still need as Baby-Boomers age into it.

At the same time, there is one kind of help here for an otherwise dysfunctional feature of the current system. We recently had a conversation with a friend who is a senior-level nurse in a sizable hospital in this city. She is distressed over the turmoil and enormous costs that result when the uninsured become ill and need to visit a hospital. In an emergency room, the hospital must treat the people until they are stabilized and able to leave; this might involve elaborate tests, such as a cardiac catheterization, and even surgery. In the moment, the hospital has no inkling of how it will be paid, but it must pay its staff and other expenses. In a place like New York City, with substantial numbers of uninsured, this can put real financial pressure on the hospitals. Mechanisms in the new law will work on this by getting broader insurance coverage. As Joyce explains, that coverage will benefit not just the affected patients, but the facilities that treat them. We subsequently learned that the states with the greatest uninsured problem are California, Texas and Florida. In 2008, California had the largest number, 6.8 million, which is 18.6% of its population; Texas, though, has the largest proportion, 25.1%, coming to 6.1 million people. Florida's rate is 20.0% or 3.6 million people. New York is "only" fourth in the country by number, at 2.7 million, but this is actually a smaller fraction, 14.1%, than the national average 15.4%.[1]

Generally, though, cost-saving through more efficient operation gets short shrift in this legislation. As we argued in two articles here last summer[2], genuine progress on health-care costs can only come when delivery organizations and their operations are structured effectively, both as units and as a whole. Apart from some pilot projects on fee calculation through bundling treatments instead of charging on a fee-for-service basis, there seems to be little in the bill that begins to address the whole supply side of medicine. So there would seem to be a long way to go in health care "reform".

[1]U.S. Census Bureau Current Population Survey, "Annual Social and Economic Supplement", Table H.106, Health Insurance Coverage Status by State for All People, 2008.

[2] July 29, 2009 http://ways-of-the-world.blogspot.com/2009_07_01_archive.html%20, and August 24, 2009 http://ways-of-the-world.blogspot.com/2009_08_01_archive.html

The 2010 Census

2010-03-01T15:40:00.002-05:00

The 2010 Census begins today, March 1. People in remote rural locations are receiving their forms today. Next Monday, March 8, all of us will receive a letter heralding the arrival of the forms in our mailboxes on March 15. These forms will all have just 10 – count 'em, 10 – questions, which the Census Bureau believes we can answer in 10 minutes. No one will receive the old, dreaded "long form"; all the information on that one is now covered in a new, separate annual American Communities Survey.

As an economist, I can talk about how important the Census is. Hopefully, though, you already know this. You know that the 435 seats in the House of Representatives are divided among states according to the results of each Census. The Constitution orders the count expressly for this purpose. It's right up front, in Article 1 Section 2. You know that numerous kinds of federal aid to states and localities are divided according to Census results. Local government officials put the data you generate to numerous uses. You might not have thought consciously about it, but it's also the case that planners and managers in the private sector, such as real estate agents, marketing directors and locations experts, also depend on these numbers.

If you look at the form, you'll see how simple it is: how many people are staying at your residence on April 1, and for each one, what is their name, age, sex, Hispanic origin, race and birth-date. Do you own your residence, rent, or have some other living arrangement? What is your phone number, in case Census Bureau personnel need to clarify some response. Two questions cross-check: are there others staying with you who don't usually live there and are there people normally in your household who often live somewhere else. That's all of it. You can see the form for yourself, here: http://2010.census.gov/2010census/how/interactive-form.php [although you can't fill it out online. They're experimenting with that still – maybe they'll do it that way in 2020.]

Should you not mail the form back, Census workers will call on you to obtain the information. We've seen a memo from the Better Business Bureau advising you to check the credentials of anyone claiming they are a Census-taker. That would be true. At the same time, these people are working for you, so hopefully you can welcome them and help them get all the responses down right. You'll benefit and so will the rest of us. One more cautionary note. As we mentioned, this project isn't done on the internet yet. So if you get email asking you to fill out some attachment to cover your Census input, don't do it – that will be spam. The form to fill out comes by "snail mail" and takes hand-entering!

The information is kept absolutely confidential. Names and relationships will be made available in 72 years for people who might want to study ancestry or other relationships, but until then, no one will see your personal data. That's right: the latest such information that's public comes out of the 1930 Census.

We write all this with some feeling, as you might sense. At the Episcopal Church's General Convention back in July, I was startled to find the U.S. Census Bureau there with a booth in the exhibit hall. What on earth are you guys doing here at a church convention? I asked them. The Census is so important, they explained, that they were reaching out to community leaders through whatever venues they could find. We took their sentiment to heart, so we're writing to you now.

Thanks for your help! Tell your family and friends too!

New Credit Card Rules: an Update

2010-02-20T16:55:00.004-05:00

New Federal rules on credit card rates and fees take effect Monday, February 22. You've surely been hearing about these in the press or perhaps from your own credit card companies. We last talked about credit cards here in early June 2009, right after the law was enacted which mandates these rules. It's obviously time for an update.

To review briefly, the rate the bank charges on your outstanding balance can't be hiked on you overnight. Indeed, if you're current in your payments, the rate on your existing balance can't be raised at all, just the rate they charge on your new purchases. Your rate can't be hiked if you're current on this card's payments, but you default on some other credit card or loan. If you get a new card, the bank can't raise the rate at all for a year. The bank must tell you how long it will take to pay off your current balance if you make just the minimum payment each month; they must also calculate for you how much you need to pay each month to pay off your balance in three years. In other words, the law, the Credit CARD Act of 2009, seeks to protect you from seemingly capricious changes in the terms of your borrowing arrangement.

There's more to this law and certainly more we all need to know about consumer credit and credit cards. The Federal Reserve has just inaugurated a new website to help ordinary people with those issues. Find it here: http://www.federalreserve.gov/creditcard/. Check it out. Among other things, it has links to a credit report service and to the Federal Trade Commission's credit repair site. The latter includes a list of legitimate sources for low- or no-cost help in rebuilding creditworthiness.

Today's Wall Street Journal does note some cautions.* The new rules will not be a panacea; especially, they will not protect you from all interest rate increases or other charges. And like the airlines with their new baggage fees and other extra charges, there are clearly ways banks can still extract additional income: suppose, for instance, that you order online from a company in England. The Journal tells us that there can be fees not only for changing the foreign currency but for the non-U.S. payment processing. Balance transfers, often done free as a promotion to get you to change cards, may incur charges, as well. More broadly, some cards that presently have no annual fee may find that one is imposed. Finally, rates themselves may be higher across the board. Still, the new law should limit some of the more egregious, burdensome practices that have seemed to hit some borrowers' statements right out of the blue.

How are consumers doing with credit card debt? Well, they're continuing to pay it down. Really. The latest data from the Federal Reserve show that through December, "revolving consumer credit" was down $91.3 billion from December 2008; this is equivalent to just about $76 a month for every household in the country. The last monthly increase occurred in August 2008.

In the current economic environment, delinquency rates don't look very good, but through the third quarter of 2009, they've at least stopped getting worse. From an average of 4% or so during the mid-2000s, the Federal Financial Institutions Examination Council (FFIEC) reports that the amount of delinquent loans past due 30 days or more surged to 6.7% of outstanding balances in the second quarter of last year, then edged down to 6.6% in the third quarter. Clearly, at present, there's more risk in these loans than there had been, and if banks have tightened lending terms, we can hardly blame them.

What about the terms that are actually in place? The Fed gives us data on average rates, and they are higher. Finance charges ran about 12% of outstanding balances in 2008, but by late 2009, they were 13.6%. Some people, of course, pay off their balance every month and do not incur charges. If these are excluded, finance charges on accounts that do pay them amounted to 13.5% in mid-2008 and rose about a percentage point in late 2009 to 14.6%. Banks might also have been raising rates to get in front of the impending new regulations. It remains to be seen if rates might go still higher now.

How do we face these higher charges? That new Fed website has some advice for us in managing our credit, one piece of which we quote here: "pay your bills on time". This is the best way to keep our costs to a minimum, both in the short run and later on when we might want or need to borrow for some major project or event. For those of us in the Church, it might be a very significant Lenten discipline to work on our own personal finances in this way. As indicated here, we now have some new regulatory tools to support us in that work. And for everyone, this is a major way we can help the whole economy recover and move forward on a firmer foundation.

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*Robin Sidel, "Credit Card Fees: The New Traps", The Wall Street Journal, February 20-21, 2010, Page B7. http://online.wsj.com/article/SB10001424052748704804204575069374130248754.html.

The data we cite all come from USECON, an online subscription database compiled and maintained by Haver Analytics, Inc., New York. If readers would like to see the Federal Reserve's source data, email carol@geraniumfarm.org and we can direct you to the Fed's various statistical releases.

An Ethical Economy Is Based in Us

2010-01-30T18:44:00.003-05:00

This past Wednesday through Friday, January 27-29, Trinity Church Wall Street conducted its 40th Annual "Trinity Institute", this edition titled "Building an Ethical Economy: Theology & the Marketplace". Speakers were the Most Reverend Rowan Williams, Archbishop of Canterbury, Kathryn Tanner, theology professor at the University of Chicago Divinity School, and Sir Partha Dasgupta, economics professor at Cambridge University.

Each session consisted of a lecture by one of the speakers, then a panel where all the speakers and an additional "discussant" discussed the lecture, along with questions from the audience. The "audience" was seated in the nave at Trinity and in 80 networked partner sites located in all 50 States, Panama and several other countries. Each session was followed by an hour-long meeting of small Theological Reflection groups, where eight or nine people from all over this country who had mostly never met each other before, got to hash out the lessons together and try to figure out how they could fit those lessons into their lives and work. At an opening Eucharist Wednesday night, the preacher was Bernard Ntahoturi, the Archbishop of the Anglican Church of Burundi, one of the world's poorer countries, with the Archbishop of Canterbury as the Celebrant. The Blessing at the conclusion of that service was offered – in unison – by the Archbishop of Canterbury, the Presiding Bishop of the Episcopal Church and the Bishop of New York. Heady stuff.

This article and at least one more to follow will give you my take on the presentations. The quickest way for you to get a sense of it for yourself is to visit Trinity's website, where videos of the plenary sessions are now available: http://www.trinitywallstreet.org/news/articles/todays-buzz-on-wall-street-an-ethical-economy . Also, a blog by Scott Gunn, a priest, and Catherine Mann, an economist, contains some great commentary. Here: http://www.trinitywallstreet.org/news/blogs/blogging-an-ethical-economy.

I had presumed that the conference would consist mainly in a lashing out at the capitalist system and free enterprise. This was not at all the case. These institutions were perhaps critiqued, but I think there's a growing recognition that the obvious alternative, government, may not necessarily do any better job; the recent financial crisis, after all, came about in part because regulators and government sponsored lending programs were themselves also irresponsible. And corrupt governments can contribute to poverty and pollution. More significantly, there are even more foundational considerations ["fundamental" could appear here, but it's overworked, and "foundational" gets more to the heart of the matter – or to the "base" of it, if you will]: how any of it works depends on the character of the people participating, that is, all of us.

Rowan Williams, who is an extraordinarily insightful and impressive speaker, began by pointing out that "economics" is, at root, "housekeeping". He described that in a house, or a home, the inhabitants all work together in common for the good of the household: "life is lived in common". So he wants us to consider the home we build together. This is a long-term activity in which we want to nurture the well-being of all the members of the household. In this setting, "every person is both needy and needed . . . we are helpless alone and gifted in community." Theology participates in this by providing a basis and a mandate for the examination of our character and our integrity. Our well-being depends, Williams says, on our capacity for bearing self-scrutiny and maintaining a discerning self-awareness. How do we do our best? What are we invested in – in a broad sense, not just financially.

Later, Dasgupta described "an economy" as whatever the relevant "unit of account" might be: household, yes, or community or nation or, increasingly, the whole globe. Wherever our exchanges take place. Dasgupta's main discourse, on the earth as the sum and substance of our "wealth", is a fascinating notion and will absorb a whole Ways of the World essay.

As you see through these brief references, the conversation never focused on business or profit. It never centered on income inequality or greed. It mentioned these topics, but it was our role and our relationships to them that were important, not the concepts themselves. The discussion emphasized community, but spoke so often of us as individuals that I hesitate to call it "communitarian". Nonetheless, as Kathryn Tanner, the theologian, explained, even as God desires our flourishing, we require relationships with others in order for us flourish. She believes religion can help market behavior and in particular, she believes Christianity can help market participants – that's us – look out beyond the short-term to something greater.

The Archbishop's closing summary explored four over-arching themes that he observed across the conference's various sessions: (1) a sense of "language", as he put it, or perhaps "terminology" that can have more than one kind of implication: for instance, "capitalism" enables you to do good when you don't intend to. And "competition" does not necessarily portray a "war of all against all". Indeed "self-competition" is quite a desirable property that fosters our own growth. He wants us to consider "what sort of persons we need to make the system work effectively". This refers to everyone, not just to financial specialists.

(2) Education. All the speakers at some point discussed the significance of education, especially early childhood. Williams asks "What does education initiate young people into?" That is, what values and culture do we pass on to them? He wants us to teach "enterprise" to children, presumably introducing ethical ways of conducting enterprise at a very young age. We must teach – and take for ourselves – a broader humanist approach that overrides strict "rationalism". [Interestingly, recent Nobel-Prize-winning economic research has dealt with exactly these kinds of issues: what is the value of early childhood education?]

(3) How do we define "self"? As in "self-interest". There was no debate about "self-interest" per se. But instead, we realize that our "self" is a bigger being than just us individually. Our self must also encompass our neighbors and any we have exchange with, a kind of "social self". In the context of our work here, the self is automatically invested in our neighbor now and also in the future. "The self of the future already exists in the present." What "we" do today will impact our children in later years – or even, as I think about it, our neighbors and our colleagues tomorrow.

(4) Finally, every speaker and every session came to "trust". This doesn't mean just "mutual belief", but a stronger "I believe that you share in my interest." The other person understands and participates in my interest. And, notably, vice versa. In this regard, part of the problem of today is that "there are great tracts of the world who believe that the wealthy have no interest in them." In reply to a follow-up question, Williams suggested that this is part of the schismatic problem that the Anglican Communion faces presently. He asks us to consider "Whose interests do I recognize?" and "Why should I be trusted?" In the end, he reminds us "We can trust God because God made us when God didn't need to."

Haiti

2010-01-14T21:28:00.005-05:00

Friday Noon, January 15:

We received an email from the Sisters of St. Margaret telling us that they finally were able to speak to their Sisters. They are all fine, gathered on a nearby football field with some of the residents of their senior housing facility. Praise God!

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There is a significant Episcopal Church presence in Haiti. Readers of Barbara Crafton's eMos, recipients of the daily emails from the Episcopal Church news service and folks on the mailing list of Episcopal Relief and Development will already be aware of our denomination's connections there. What we have learned so far is that all of our clergy and nuns there have survived, although the good Sisters of St. Margaret have not been heard from directly by their Mother House in Boston. All of the diocesan buildings, including those Sisters' convent, have, however, been destroyed.

Many have died. The Haitian maintenance director in my roommate's office building here in Brooklyn heard that two of his young family members there were last seen in a building that collapsed and in which no survivors were found. The Archbishop of the Roman Catholic Church in Port-au-Prince was known early on to have been killed. Earthquakes are obviously no respecters of position or privilege.

Possibly you are concerned about loved ones, or you know people who are. If you are looking for American citizens, you can contact the State Department, which has some information. Call their special number, 1-888-407-4747.

Many avenues are open for giving aid. We are amazed to learn that people text-messaged donations yesterday totaling more than $3 million. At least one cell-phone vendor was figuring out how to advance the money to places where it's needed. What we know best is Episcopal Relief & Development, http://www.er-d.org/. A box appeared on the homepage of their website early Wednesday morning, giving a direct click to donations for Haiti.

Finally, we are personally acquainted with a couple of the Sisters of St. Margaret. Go to their website. Reading the updates there is like praying right along with them. http://www.ssmbos.com/ See the pictures on the homepage of their members who are there, and then click on the menu item for Haiti to read. A very dedicated Sister is sharing with all of us . . . .

Terrorism and Terrorists

2010-01-12T10:19:00.007-05:00

In the wake of the Christmas Day attempt by a terrorist to blow up Northwest Airlines Flight 253, we immediately wanted to take a look at the whole issue of terrorism. What do we know? What have we learned about it since 9/11? It seems that academic writers in psychology and economics have learned a lot and that some of these ideas are very different than we expected. In a brief summary, we'll talk here about the terrorists themselves and where they come from. The other side of it, the national security issues faced by the U.S. and other target regions, makes a separate discussion for another time.

What is terrorism?
Here's the U.S. State Department's definition: "premeditated, politically motivated violence perpetrated against noncombatant targets by sub-national groups or clandestine agents, usually intended to influence an audience."[1]

What do terrorists want?
In the main, social science researchers argue, terrorists have two objectives: (a) inflicting economic harm on rich countries and (b) getting occupying powers to back out of prized territories.

(a) Terror groups are minority organizations who attack rich countries and try to inflict economic harm on them. In a 2004 appearance on al-Jazeera television, Osama Bin Laden was quite clear that al-Qaeda wants to "bleed" the U.S. into bankruptcy. Here are four other examples, identified by the professors who conducted the research:
1. In a tally of trans-national terrorist events, Krueger & Laitin show a concentration of targets among rich democracies.
2. In a widely cited study of Basque terrorism in Spain in the 1960s, Abadie & Gardeazabal show that the main harm was the damage done to the local economy.
3. In Israel from 2000-2003, GDP per capita is estimated to have been cut 10% as a result of terror attacks, according to econometric work by Eckstein & Tsiddon.
4. Describing another variation of "harm", Berrebi & Klor tabulated the hit to the stock market valuation of companies whose operations were targets. They calculate that the companies' capitalization was decreased by $401 million per firm per attack.[2]

Much of the harm the terrorists inflict comes from the psychological blow to confidence in the target economy that follows in the aftermath of a nasty attack. In a sense, the terrorists take their action because it's profitable. This is a reverse profitability, where they can spend a relatively modest amount of money compared with the magnitude of the hit the target economy takes. Note that "success" in the specific action is not necessary to achieve at least some of the economic objective; the mere attempt or threat inflicts costs and distress – and " influences an audience".

(b) Terrorists want to "liberate" "occupied territories". The most prominent example is the goal of Hamas and neighboring organizations to "liberate" the Israeli territory. Others include an Islamist organization in Pakistan called Jaish-e-Mohammed which "advocates the liberation and subsequent integration of Jammu and Kashmir from Indian control into Pakistan." Among the Kurdish people, the Kurdistan Workers' Party (PKK) desires the liberation of Kurdistan from areas presently part of Turkey, Iraq, Syria and Iran, whose governments are deemed "foreign occupiers" by the PKK. At present, far from the least important is an old group, ETA, the Basque separatists in Spain. They are of current concern since many believe they will stage some action during the next six months when Spain holds the Presidency of the EU. This list could go on at length.

Our basic source here is a book Social Science for Counterterrorism: Putting the Pieces Together, published just a year ago by the National Defense Research Institute of the RAND Corporation, where it was prepared specifically for the Secretary of Defense. Chapter 5 on "The Economics of Terrorism and Counterterrorism" by Claude Berrebi is a broad review of recent research in this burgeoning field.[3]

Two Major Perceptions Questioned
This resource and other material bring us two important points about terrorism that make it all the harder to get a grip on. First, as the list in the above paragraph indicates, far from all of the terrorist organizations are related to religion. The Kurdish group, for instance, has collectivist political and economic reform goals. Moreover, even among those that have religious ties, the role of religion and theology is ambivalent. I have been surprised to notice this and have learned that the role of religion is one of the biggest questions among scholars at present who are trying to fathom the motivations of terrorists and thereby fashion effective counterterrorism policy recommendations.

Second, the Christmas Day terrorist from Nigeria is a wealthy man with considerable education. In the main, this is the background for most terrorists: they are not poor and not uneducated, even though many of us have believed in this stereotype. Some TV analysts have mentioned this distinction in recent weeks, but some public officials continue to argue that the terrorists' extreme actions come out of poverty and frustration and that they are recruited out of some kind of innocent ignorance.

Religion
On the religion question, although it is still open to considerable ambiguity, the distinction is probably centered on the difference between religion and theology. For instance, in a quick read of some of the social science research, we saw no evidence that proselytizing for Islam was an objective. Destroying Israel, yes, but it's hard to separate the political and territorial issues from the religious ones. Further, it's not clear that the religion itself is inspirational. Economists and sociologists point out that religious organizations can evoke the deep devotion and commitment needed to perform terrorist acts, even and especially including suicide. But it's hard to find any sense that the theology was the driving force, over and above the social "glue" of the group. For example, in one study that included interviews with Palestinians who had not succeeded in such assignments, none of the would-be perpetrators said that they had been motivated by actual religiosity or promises of rewards in the afterlife. In another study, Marc Sageman, a consultant and psychiatrist, indicates in material published in 2006 that very few terrorists he has interviewed are religiously active: "The vast majority of the al-Qaida terrorists in the sample came from families with very moderate religious beliefs or a completely secular outlook. Indeed, 84 percent were radicalized in the West, rather than in their countries of origin. Most had come to the West to study, and at the time they had no intention of ever becoming terrorists." [4]

Income
Indeed, this finding about where and when radicalization occurs goes along with some of the study on the family background and income of individual terrorists. A significant number of them are radicalized when they go from their native countries to study in, for instance, Europe. According to psychologist Todd Helmus, these people gather together in the foreign country to socialize with their own people – that's not hard to understand – and in the case of Muslims, perhaps simply because they want to keep to the Halal dietary laws. Helmus argues that, while they are obviously not poor and uneducated, they are strangers in a strange land, feeling disorientation and alienation and sometimes discrimination.[5a] However, others surely may also go to Europe for schooling and not come away with some new radical worldview. So there is much complexity here that prevents much generalization. Other writers, especially Eli Berman and David Laitin, explain that many Muslim terrorists come from regions where, even if their families are not financially deprived, the government of their country may be dysfunctional and not providing basic services or feature significant corruption. [5b] Nigeria, despite its oil resources, may currently fit these criteria.

In more quantitative analysis of the relationship between terrorists and their economic status, economists have found that among terror incidents in the last 25 years or so, there is no measurable correlation between the number of terrorists who come from a specific country and its per capita income. So a nation's wealth doesn't impact any buildup of terrorist organizations there. What is correlated with the number of native terrorists are measures of political and/or civil rights. Notably, terrorism tends to emerge in countries where there is some amount of freedom, but which freedom may be limited or unpredictable. There has been little incidence of international terrorism from fully democratic countries or from countries where political power is held in an absolute dictatorship in which all dissent is successfully suppressed. It's countries in a kind of twilight or transition away from authoritarianism that seem most susceptible to spawning those groups.[6]

The definitive study on this issue was conducted by Alan Krueger, a professor at Princeton who currently serves as the Obama Administration's Assistant Secretary of the Treasury for Economic Policy. Until his work on terrorism was first circulated in 2002, that is, not long after 9/11, the conventional wisdom had remained – with exceptions among specialists who knew better – that terrorists were poor and unlearned. On the contrary, as Krueger's and numerous other studies now explain, the people who bring off these elaborate, undercover attacks have to be smart, dedicated and intensely trained. And these individuals have to be calm and cool-headed; they can hardly be psychotic or otherwise mentally ill, as had been thought before much of the recent study of these issues took place.[7]

Does this help? Do these guys sound something like the Weather Underground and other 1960s groups? Hear me think out loud here. Do their attitudes resemble this description from Wikipedia? "Anti-Establishment became a buzzword of the tumultuous 1960s. Young people raised in comparative luxury saw many wrongs perpetuated by society and began to question 'the Establishment.'" What do you think?

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[1] From U.S. Department of State, "Patterns of Global Terrorism, 2000". April 30, 2001. http://www.state.gov/s/ct/rls/crt/2000/2419.htm Accessed January 5, 2010. Cited by Alan Krueger and David Laitin, "Kto Kogo?: A Cross-country Study of the Origins and Targets of Terrorism", p. 6. See footnote [7] below.

[2] Paul Davis and Kim Cragin, Eds. Social Science for Counterterrorism: Putting the Pieces Together. Santa Monica, CA: The RAND Corporation. 2009. Available online here: http://www.rand.org/pubs/monographs/2009/RAND_MG849.pdf. Hereafter referred to as Social Science for Counterterrorism.

[3] Claude Berrebi. "The Economics of Terrorism and Counterterrorism: What Matters and Is Rational-Choice Theory Helpful?" Chapter 5 of Social Science for Counterterrorism, pp. 151-208.

[4] Berrebi, op.cit., page 165.

[5a] Todd C. Helmus. "Why and How Some People Become Terrorists". Chapter 3 of Social Science for Counterterrorism, pp. 71-111.

[5b] Eli Berman and David Laitin. "Religion, Terrorism and Public Goods: Testing the Club Model." Cambridge, MA: National Bureau of Economic Research. Working Paper 13725, January 2008. Available at http://www.nber.org/papers/w13725.

[6] Alberto Abadie. "Poverty, Political Freedom, and the Roots of Terrorism". Harvard University, unpublished paper, October 2004.

[7] Alan Krueger and David Laitin. "Kto Kogo?: A Cross-Country Study of the Origins and Targets of Terrorism". Several versions, especially unpublished paper, January 18, 2007. Earlier from November 2003. Also published in Keefer and Loayza, eds., Terrorism, Economic Development, and Political Openness. New York, Cambridge University Press, 2008, pp. 148-173. See also Krueger's What Makes a Terrorist? Economics and the Roots of Terrorism. Princeton, NJ: Princeton University Press. 2007.

"Persons of the Year" -- and Forces of the Decade

2009-12-22T09:45:00.007-05:00

Time Magazine, as you may be aware by now, chose Federal Reserve Chairman Ben Bernanke as its "Person of the Year". Despite the fact that he was not among our own nominees (see our post of December 10, below), we do agree with their choice, and for exactly the reasons they cite. Bernanke led the Federal Reserve in its extraordinary policies and actions to "save" the U.S. and world economies. Their article is quite good in documenting this, and we hope you will take time to read it. Here:
http://www.time.com/time/specials/packages/article/0,28804,1946375_1947251_1947520,00.html.

Bernanke has been widely criticized for both the seeming recklessness of the Fed's massive explosion of the money supply and for the fact that unemployment is still as high as 10%. But the policies have achieved – at least so far – a stabilization of the economy and the beginnings of a return to growth. This outcome contrasts with the Great Depression, when the Fed did not make such generous provisions and even raised its discount rate in view of the greater credit risk in the economy. The result only added to the catastrophe. This exact topic is one of Bernanke's chief research interests as an economist. Perhaps, as Time argues, there could have been no one better heading the Fed at this point in time. Really do it, read it for yourself. And as I've written here before, I don't want to even contemplate the alternative scenario to what the Fed did. Nor are they being foolhardy about the inflation potential, as every policy meeting in recent months has commented on ways to wind down and pull back on all the easy-money actions and some of their emergency programs are already being cut back.

Among Time's "runners-up" were two on our list, Nancy Pelosi and General McChrystal. The magazine highlights someone else of interest, Chinese workers. Isn't that intriguing? More comment on that will appear here at some point. Finally, Monday's Wall Street Journal has a special section reviewing "the aughts", the decade just coming to a close. The leader to that feature mentions two others on our list, reality TV and Susan Boyle. They go much farther than we did in the meanings of these two phenomena; there is great food for thought here:

"The first decade of the 21st century offered ample reminders that even with imperfections, human beings are capable of great triumphs. The aughts will be remembered for the greatest alleviation of poverty in the history of humankind, as the middle class swelled in China, India and elsewhere. It will be remembered for a long list of technological accomplishments . . . . In the U.S., it will be celebrated as the decade in which the nation took a huge step toward breaking free of its legacy of slavery and Civil War by electing a black president.

"And the supersized dose of reality dumped on us during the decade is now informing a search for new answers, new approaches, new models, all based on a better understanding of human nature. . . .

"The hopeful embodiment of this new tone surfaced at the end of the decade, in the person of an unmistakably real woman named Susan Boyle. Never in a thousand decades would she have been cast for a leading role by Hollywood. Yet her performances . . . reminded us that you don't need fantasy to create success. Reality will do just as well."

Merry Christmas from Ways of the World!

Charity Finances: A Resource for Year-End Giving

2009-12-16T21:37:00.003-05:00

A reader of Joanna Depue's "More or Less Church" wrote to her last week about a post on MOLC from several months ago about Episcopal Relief and Development. The woman indicated that she had looked at ER-D's "990s" and was surprised at how high the staff salaries are. She was dismayed about that use of funds and was now hesitant to give to them.

Obviously, we all wanted to know what the woman, Ann, was talking about, since it's our impression that ER-D is a well-run institution. So, as the local numbers person, I said I would check it out. What follows responds to Ann's comments and also presents some general information that you might find helpful as you plan your own year-end charity donations to whatever organizations you might support.

What Is a 990?
First, "990" is the IRS form that tax-exempt organizations file every year instead of a tax return. It is very detailed. The form alone is 11 pages long. The total submission, including supporting schedules, runs much more than that. ER-D's for 2008 is 53 pages long, and the Heifer Project, which I chose for comparison, is 54 pages. The form asks about the charity's purpose and for a list of activities undertaken toward that purpose. It asks about officers, by name, and their salaries, and it asks a series of policy questions, including the general basis for establishing those salaries. The form says right at the top "Open to Public Inspection" and among those policy questions is one asking how people get access to the form. In ER-D's case, the form is available through a link right on the homepage of the website. Here, right in the middle. In the website's "About Us" section, there are links to the previous six years of these statements.

Part IX of the 990 concerns the charity's expenses by type – grants it makes, benefits it pays, purchases, employee compensation, etc. And it asks the charity to specify the division of those expenses into the actual running of programs, administration of the organization and fundraising.

For ER-D, we see that the Executive Director makes over $200,000 in salary and benefits, and several other top officers have compensation of $100,000 or more. These figures might well seem startling. At the same time, we also see that total outlays run to nearly $29,000,000, of which about 5% is administration and 10% goes for fundraising. Those numbers and ratios make it look that the organization might not be so profligate. How can we judge this?

ER-D has two designations that give us a way to get to some comparative information without having to comb through the 990s for all the charities we might be interested in.

The Better Business Bureau Seal
ER-D carries the seal of the Better Business Bureau as an "Accredited Charity". The BBB's "Wise Giving Alliance" has established 20 standards for good practice by charities. These involve governance, management of expenditures, reporting accuracy and public disclosure. Reports on conformity with these standards appear on the BBB website for more than 1,000 organizations. These reports are quite specific about ones that do not conform and what the failings are. The Wise Giving people conduct the "BBB seal program" among the institutions that meet all 20 standards and then submit material for periodic reviews of their compliance. Charities that are eligible for the seal must apply for it and pay a fee to display it, and not all of them choose to do that. Here is a link to the relevant section of the BBB website where all of this is explained.

Charity Navigator Ratings
ER-D also has a numerical rating from a group called Charity Navigator. This organization was formed in 2001 to do exactly what we want to do here, make comparisons among charities for the quality of their operations. They comb through the IRS 990s for over 5,400 organizations of all kinds: arts, colleges, health researchers, patient support organizations, animal rescue funds, libraries and – among numerous other categories – development and relief organizations. Their rating system examines ratios of program expense to total expenses (more is better), administrative expense to total expense (less is better), fundraising to total expense, revenue growth and expenditure growth, and fundraising efficiency, that is, how much the organization spends to raise $1 in donations. Financial management measures include how many years' worth of operating expenses the charity has in cash assets (more is generally better) and a negative item for running persistent operating deficits. These ratios and measures are put onto a numerical scale and added up. Charities are assigned a number of stars, from zero to 4, corresponding to the sum total of points they achieve. This assessment, because it is based on numerical measures, is almost totally objective, and the scores allow individual organizations to be compared to overall nonprofit finances as well as their own category.

For 2007, the latest rating available, Episcopal Relief and Development had 61.19 points and received 4 stars. Many charities in the category of international relief and development did receive this highest rating, 117 of 207, although some well-known ones, including the Heifer Project (55.25) and Lutheran World Relief (59.26) come in with 3 stars. The differences compared to ER-D include proportionately higher fundraising expenses for Heifer and almost no program expansion at the Lutheran charity. Heifer and ER-D have both been growing rapidly. The Lutheran group, however, has one of the highest numerical scores for management efficiency, and as you see, its total is less than 2 points lower than ER-D's. In the total scoring, the charity next above ER-D is Doctors Without Borders, at 61.23 points.

Visit Charity Navigator. Browse to your heart's content there. It's a fascinating and informative site. www.charitynavigator.org.

Do CEOs Make Too Much Money?
Now, about those officers' salaries. Charity Navigator has also done some comparisons of CEO pay. This is a matter of some concern for donors, including the woman Ann whose query to More or Less Church started this topic for us. She's not alone. On the webpages where each charity is discussed, there's a "Comments" tab. On Heifer's page these comments constitute a real debate about whether relatively large expenses, including the CEO's salary, are valuable. On the ER-D page, there are five comments, all expressing some degree of distress that officers of an anti-poverty organization make such "big bucks", and writers are in fact disappointed that ER-D's pay scale seems not any more restrained than Heifer's.

Our commentary here so far, based on the Better Business Bureau and Charity Navigator analyses, suggests these ER-D salaries are not out of line. Navigator has gone further in classifying the salaries; they have calculated averages on three bases: the category of the charity's activities, size and location of headquarters. In the 2009 CEO Compensation Study, the average among CEOs at all 5,448 institutions is $158,075. By category, salaries at international relief agencies do tend to be lower, $131,096. But size and geography more than counter-balance that. For all those organizations larger than $13.5 million in expenses, the average is $286,760. And for all those located in New York City, the average is $220,735. So by those comparisons, the ER-D President, at about $220,000, is only average for New York and well below average for the size of the operation he is responsible for managing.

And this very last phrase is an important one. The Navigator analysts explain to us that we potential donors often miss one of the main aspects of charity administration. The executives who run these operations do very much the same kind of work as executives of profit-making companies. They manage employees and – especially in the case of something like ER-D – they coordinate very complex world-wide undertakings. They need to have highly professional skill-sets and extensive experience. So we can hardly expect to pay them a substandard wage. Indeed, the Navigator people say, in underlined text, "You're better off supporting a charity that is fiscally efficient, achieving its programmatic goals and paying its CEO well, than a charity that has substandard fiscal health, fails to live up to its mission, but under-pays its CEO." Right. Just ask a family in Africa who's getting mosquito nets from ER-D.

One other notion. These statements and data all cover 2007 and 2008. The financial world and the world economy has, of course, looked very different in 2009. So we need to monitor all of this as later information becomes available. Deficits and income and outgo have likely changed a lot this year, and not for the better. In the meantime, if you are able, support the charity of your choice. They really need it.

Some Nominees for "Person of the Year"

2009-12-10T18:36:00.008-05:00

Last week, I indicated that I expected to post some discussion of the latest employment data following the Labor Department's release of November figures last Friday. In the interim, I have been on Jury Duty in Brooklyn, and that has lasted longer and been more fatiguing than I had expected. In addition, the Labor Department published even more information than usual in some follow-up reports and the President has spoken about labor market conditions. So there's considerable material, and we'll dig into it on the coming weekend and bring you our thoughts about employment, unemployment and jobs.

While my brain was absorbed with the car-truck collision that was the subject of the court case I sat through, it occurred to me -- through no particular rational connection -- that this is the time of the year when we hear about the most influential people of the year or the most important or simply, "the person of the year". I conjured some nominations for the year-end cover of Time Magazine. Now, Time has their own set of nominations [here], and they welcome you to "rate" them and "vote" for your favorite. Some of them agree with my conjurings. Some of them are very interesting. Voting, though, makes it more like a popularity contest, and I'm not sure that's the real intention. It's certainly not my intention, as you can see in my list. [This text has been modified somewhat from the original. I discovered Time's nominee list only after I put up the first version of these comments.]

Time's designation is not a prize or award for the "best". Hitler and Stalin were named in 1938 and 1939, respectively, Putin in 2007 and George W. Bush in 2000 and 2004. Also, as far as I can tell, no one has received the distinction two years in a row. So it is unlikely that Barack Obama would be named again this year. [Here's the list, so you can see, if you like: http://www.time.com/time/personoftheyear/archive/stories/.] Given these notions, here are my ideas:

Harry Reid & Nancy Pelosi

The Unemployed

Producers of "reality" TV shows: what kind of statements are they making about society? What kinds of behavior are they encouraging in people?

Fox News and its commentators

In another vein, and perhaps together,
Capt. Chesley Sullenberger
Susan Boyle
who gave, in varying amounts and no particular order, heroism, joy and goodness, at a time when we needed all of those things a lot.

People who are interesting, but whose designation this year might be premature:
General Stanley McChrystal
The Tea Party organizers

Finally, no one has been honored posthumously; otherwise, we'd obviously put forth Ted Kennedy.

What do you think of these? Whom would you nominate to be on the cover of Time Magazine? Let us know your ideas!

A Positive Spin on World AIDS Day

2009-12-01T17:18:00.003-05:00

All of a sudden it's gotten to be December. I haven't put anything here for three weeks. Did I forget? I don't think so. Actually, I have been writing, but that text is not yet ready for public consumption. It's one of the chapters of – as a friend termed it the other day – "the Great American Economics Book" that Mother Crafton and I think we're doing together. I'm excited about this project, though there is yet no real timetable to talk about. But I've written several thousand words about "Government" and this latest is the part about "Business", an apologia for profit-making pursuits, if you will. So stay tuned for hints on how it's going.

Meantime, today is World AIDS Day, and there are certainly some things I can say about that. We are heartened by a story on the Wall Street Journal website [here] about Jacob Zuma, the new president of South Africa, authorizing more advanced treatment there for both HIV and AIDS patients. Children born HIV-positive will start getting anti-retroviral drugs as soon as it's medically advisable. Mr. Zuma himself will be tested for HIV, almost certainly a symbolic act, but in Africa an important statement indeed about the importance of proper diagnosis and treatment. He must be the first Head of State in the world to be so tested.

I also think today of some of my friends who have lived for years – perhaps we can even say decades now – with HIV, reflecting the success of those very anti-retroviral drugs. Those guys take handfuls of pills every single day, but they live and move and have their being, just like the rest of us. Wow! More power to them!

Whoever thought we could say positive, constructive things about the efforts on the AIDS front? But we can, and somehow, it makes sense to have the world's commemoration of those efforts come on December 1st, right after Thanksgiving and at the beginning of Advent.

On more mundane matters, the U.S. Labor Department will issue the monthly "employment situation" report this coming Friday, so you will hear from us next week with an update on unemployment and jobs. No one thinks employment will have increased, but consensus forecasts by Wall Street economists look to the smallest monthly decline since January 2008. Let's hope they're right!

The Fall of the Berlin Wall: the Morning After

2009-11-10T11:58:00.001-05:00

In my old job, I got up each weekday morning and put on the TV to catch the early news of whatever had transpired in foreign markets and politics overnight, so I'd be "tuned in" to the latest events when I arrived at work. So the morning of November 10, 1989, I put on the TV and shook my head at what I saw. The picture was live and it showed people dancing on top of the Berlin Wall. For some days, we'd seen and been amazed by video of trainloads of people going from East to West in other parts of Central Europe. But here was the crowning touch, the Fall of the Wall; it had happened Thursday evening, and by midday Friday, when I saw it in the New York morning, many people were still there partying.

Numerous news sources this week are commemorating the 20th Anniversary of these earth-shaking events. Rather than summarize them here, we would simply point you, in particular, to the current issue of The Economist magazine (November 7-13, 2009). This UK-Europe-centered publication features the event on its cover and has several informative articles. For bibliophiles like ourselves, the collection of book review-lets are fascinating; the first recommendation is not a new book at all, but Solzhenitsyn's In the First Circle, a strong, "dark" reminder of life under Communism – "at its Stalinist peak: all-pervasive, paranoid, oppressive, incompetent, lethal" (page 76). This has just been republished in a new edition, which includes additional text originally "self-censored" by Solzhenitsyn in 1968 in an unavailing effort to get the work published inside the Soviet Union. We also suggest the Economist's website, www.economist.com, and the Wall Street Journal's site, www.wsj.com, both of which reproduce articles they published in the moment in 1989.

One of the Wall Street Journal's current stories tells about a German restaurateur who then owned a McDonald's in Hof, West Germany, in Bavaria, just across from the East German province of Sachsen. People driving out of East Germany on November 10 stopped at his establishment, one of the prime symbols of western capitalism. He ran out of food in just a few hours. Mr. Rader realized at once that he could expand into the nearly virgin East German territory, where all those people were clearly hungry for McDonald's. He is now a partner in a chain of Italian eateries in a number of cities, including London and Washington.

Prosperity Lags in Former East Germany
This is an example of a western entrepreneur invading formerly Communist territory. But what about the people of those Communist regions? The evidence on their prosperity is, well, mixed. How are they doing, free of their Communist shackles? First, in sheer numbers, the trend in population has been uneven. At the end of 1988, there were 16,675,000 East Germans. By the end of 1989, there were 16,434,000, indicating that nearly a quarter of a million left as soon as the gates were opened. The population declined every single year through 2000, reaching 15,120,000 (excluding Berlin). Not surprisingly, the population of West Germany rose, and by even more than the decline in East Germany. Obviously, there were immigrants from other post-Communist regions as well. [All these data are from the German Federal Statistical Office. All references to "East" and "West" refer, of course, to the territories before 1990's formal Reunification.]

A declining population is not a particularly good sign. Neither is the amount of unemployment, which remains elevated in the former East territory. In 1990, according to the German Federal Employment Agency, unemployment in that region was 10.2%. As poorly run, noncompetitive companies closed there, unemployment surged immediately and continued climbing, peaking at 20.6% in 2005. By contrast, the 2005 rate in the West was 11.0%. Since then rates in both sectors have come down, but that in the East, 11.8%, remains notably higher than in the West, 6.6%.

Similarly, wage comparisons in the East continue to lag as well. Reported average wages and other income measures improved sharply compared to West German wages during the first few years after the Wall fell, but have stagnated since about 1996. East German workers earned about one-half of the hourly wage of West Germans in 1990-1992. This ratio rose quickly to 70-74% over the next five years, but the comparison has changed little since then. East Germans' relative welfare increased some, but it is far from converging with that of West Germans, making a major goal of reunification elusive.

Those Who Leave the East Do Better
This picture looks discouraging, but other factors come to bear and hearten our interpretation. A number of scholars[1] help us understand that, as we might think, labor and work were organized very differently in the two Germanys. East German workers were far less productive than those in the West, justifying the initial wage differential. The transition in the economic structures, which is clearly still in process, should be expected to be uneven and lengthy. As noted, non-competitive plants and companies in the East have closed, throwing huge numbers of people out of work. And many good workers left East Germany when the wall came down and they were able to go.

This last sentence is not meant as a throw-away line or excuse. Workers "left" the East German labor force in two ways. They actually moved to West Germany or they took jobs there and have been commuting. In both cases, their earning power has increased more than workers who stayed in the East zone. Indeed, some statisticians refer to these groups as "movers" and "stayers". The movers and commuters have done much better: they earn an average of 85% as much as West German "natives", with many of the movers reaching par, particularly when their age, educational and experiential backgrounds are similar.

Desire for Government Support Greater in East
What we are left with then in explaining differences in workers' prosperity is a cultural environment that still overhangs the Eastern region. The workers who have moved are notably younger than those who have stayed; in 2005, the age difference was almost five years, 37 versus 42, and 31% of the leavers are 30 years old or less, compared to 11-1/2% of the stayers and just under 10% of the West Germans. Many people who are likely among the most adaptable and energetic have left East Germany. Those who remain are older; just because of their age, they are more accustomed to the governance style of the Communist regime. Work by Harvard economists Alesina and Fuchs-Schundeln[2] highlights two manifestations of this mindset. People in the East tend to believe government should have more responsibility for individuals' financial security and they also believe that what happens in life is caused more by social conditions and less by one's own efforts.

Alesina and Fuchs-Schundeln examine survey results from the German Socioeconomic Panel (GSOEP), which is compiled annually by the German Institute for Economic Research. The term "panel" means that many of the same people participate year after year so changes in their life situations can be documented. Every five years, the survey includes questions about policies on "financial security". Who should be responsible for citizens' financial security in the event of unemployment, illness, etc? Should it be solely the government or solely private resources or some combination? Personal information is collected about the respondents: age, where they live, where they have lived before, what their income is and what their major sources of income are, and so on. These data make it straightforward to differentiate between people who are from the former West and East Germanys.

The GSOEP questions cover the desire for government support in response to conditions of unemployment, illness, family welfare in general, old age and "needing care". On average in 1997, 42% of West Germans believed government should be mainly responsible for "financial security" in these situations; this portion edged up to 43.7% in 2002. Only support for unemployment was favored by more than half the West Germans. East Germans, on the other hand, argued for government support 58.7% of the time in 1997; all the items except "family welfare" garnered well over half yes-votes and the family welfare number was just below half, at 49.1%. By 2002, however, this pattern had changed. The overall government-leaning decreased to 55.1%, and the decline showed in all five topics. So an attitudinal change was already evident in 2002. The authors extrapolate the size of the change over the five years and conclude that it would still take well over 20 years for East German readings to converge with those in the West.

Older Easterners Perceive a Rigid Class Structure
People's motivation in the East is hampered by a basic sense of society's structure. Seventy-two percent believed in 1997 that the possibilities one has in life are defined by social standing. The frequency of this response in West Germany is lower, but hardly "low", at 60.4%. [We wish we had a comparable number for the U.S.] In accompanying regression analysis, Alesina and Fuchs-Schundeln check this response by age-group and find that older East Germans have stronger feelings about the role of social conditions in determining one's fortunes than do younger people. In the West, there is no statistically distinguishable effect of age. So these analysts conclude that there is a strong, penetrating effect on one's psyche for having been subjected to 45 years of Communism, and the longer you lived that way, the deeper the feeling goes. Younger people have had an easier time figuring out how to lift themselves up in the world rather than expecting government to maintain their welfare.

[1]Analytical articles from the German Institute of Economic Research. If you are interested, contact Carol for references.

[2]Alberto Alesina and Nicola Fuchs-Schundeln. "Good Bye Lenin (Or Not?): The Effect of Communism on People's Preferences", Cambridge, MA: National Bureau of Economic Research Working Paper 11700, October 2005. http://www.nber.org/papers/w11700. Accessed November 7, 2009.

Financial Regulation, Prudential Behavior

2009-10-26T10:51:00.002-04:00

Last week here, we expressed some concern that not much seemed to be happening with financial regulatory reform, and we thought that issue should be getting more attention. As it turned out, several developments on that front took place in subsequent days. These are important to all of us because in the last two years we've faced considerable danger in all our economic and financial dealings. Now that some of the dust has settled, we need to work at rationalizing the structure of markets and institutions to try to minimize the prospects that crashes and chaos could overtake us again. This work is done mainly through our government officials, but there's a role here for everyone, and we'll will come back to that at the conclusion.

This past week saw three initiatives: the House Financial Services Committee voted out a bill to establish a Consumer Financial Protection Agency, the Treasury and the Federal Reserve both announced rules governing the pay of senior officers of banks and financial firms that have received taxpayer assistance, and the Treasury prepared us for the introduction of new more concrete proposals for general financial regulatory reform.

The CFPA Passes the First Legislative Step
The Consumer Financial Protection Agency would have the power to write consumer protection rules for numerous credit, lending and deposit products and to ban those that it deems "unfair, deceptive or abusive". This authority would be centered on the product or service and not on the kind of institution. The bill gives CFPA authority to examine individual institutions, though, to evaluate their product offerings and practices. This examination would be in addition to any other regulatory examination, such as FDIC or state government bank examinations. A number of specifics have yet to be clearly defined, for instance, how to distinguish car dealer financing, which might be exempt, from financing provided by an auto company's financial affiliate, such as GMAC, which would be covered. The goal is to prevent predatory lending, deceptive practices especially regarding mortgages and to provide clearer information on consumer financial products in general. It has been a high priority of the Obama Administration, who believes that abusive tactics harmed consumers and contributed to the heightened risk that led to the collapse.

Treasury & Fed Come Down Hard on Executive Pay
The second development last week was the announcement of executive compensation caps for financial institutions that have received aid from the federal government and the Federal Reserve. The Treasury Department's "Special Master for TARP Executive Compensation" issued "determinations" on the amounts and forms of payment that can be paid to the five most senior executives and the next 20 most highly paid officers at the seven institutions that received "exceptional assistance" from the Treasury. These firms are AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial. The week before, the Special Master, Kenneth Feinberg, had recommended that the out-going chairman of Bank of America Kenneth Lewis receive no compensation at all for 2009; Mr. Lewis agreed to this. Lewis has already announced his resignation from BofA, effective December 31.

The caps limit cash pay for these 175 individuals to $500,000 and any kind of bonus award to restricted shares of stock that cannot be sold for three years. One of the objectives of the action is to shift the executives' viewpoints from short-term, "how can I boost business this quarter or this year", to a longer span that might encompass several cycles of activity or market conditions. Another objective is certainly to limit the liability of taxpayers to these officials whose companies are presently on the government dole.

Almost simultaneously, the Federal Reserve announced a broad initiative to examine compensation policies at two groups of banking institutions, one set of 28 "large, complex" firms and a second broad group of regional, community and other banking organizations. The sense of "examine" here is the technical, legal one applying to the regulatory process. The 28 large, complex firms will have their pay schemes examined all at once, a so-called "horizontal review", so they may be compared with each other at a given point in time. The firms will be told how to modify their pay structures, according to specific principles, and subsequent regular examinations will test for compliance. For the smaller, non-complex institutions, executive compensation will be added to the subject-matter for their regulatory examinations.

Here too, as with the Treasury's edict, a major goal is to lengthen the horizon for executive pay calculation, to shift the focus of the incentive structure over several fiscal periods instead of just "this one", however short that might be. The assumption in both the Fed and the Treasury is that this will help reduce the risk exposure of the firms, since there will be less perceived need to reach for greater risk or to hurry to cram in one more deal this week before the books close on the quarter.

"Living Wills" for Financial Institutions??
Lastly, later today, October 26, the Treasury will submit to the Congress a new plan intended to fix some of the major deficiencies of current regulation. Michael Barr, a Treasury Assistant Secretary testified before the House Judiciary Committee on October 22 to present some of the proposal. It concentrates on "large, inter-connected firms", that is, those widely thought to be "too big to fail". The plan includes new, strengthened capital requirements to undergird their business during downturns and prescriptions for holdings of truly liquid, marketable assets to cover short-term market gyrations. You might recall that during the most chaotic periods last year regular financial business dealings were disrupted when one firm's failure or weakness led to even magnified reactions in other companies and markets. One significant consequence was that government somewhat arbitrarily rescued some firms, but not others, and that only added to the chaos. Now that markets and conditions have settled out some, the Treasury, other officials and other observers – such as my professional economist colleagues who were gathered in St. Louis – want to try to set principles and enforceable rules that will govern such financial rescues. No one, Assistant Secretary Barr should ever conduct business under the presumption that they are "too big to fail". The new program even includes a mandate for specified firms to set up advance directives akin to a "living will" (his term) that set forth a way to shift management responsibilities and the firm's underlying financial structure in the event of some major failure.

Prudential Behavior for Everyone
If you are still with me, Good Reader, by this time you've read about potential fixes for messes arising from badly conceived consumer products and excessive executive pay, and you've read about predetermined ways to relieve management of their duties if their actions in the face of adverse market and business contingencies put their big firm, its associates and its customers, deep in hot water. This is indeed all very messy. We can make arguments both for and against each one of these proposals. Bankers and the Chamber of Commerce argue in one direction; consumer rights organizations in another. Democrats one way, Republicans another. However, we also want to make one more point that takes a step back and looks at these issues from outside. The need for all of them comes because people over-reached or were dishonest or behaved in bad faith or were disrespectful. Much of the trouble came not because consumers were cheated or had fees raised on their accounts, but because they borrowed too much to begin with. Further, other participants in these affairs didn't pay enough attention when there was a lot at stake, they didn't ask questions or they committed lots of their own assets to questionable enterprises or they presumed that their fancy mathematical formula would always work to produce a completely predictable outcome. Some of these people held or hold positions of public trust or quasi-public trust. We all – managers, government officials, consumers – need to be responsible.

Mr. Barr's testimony uses the word "prudential" several times; he wants the new regulations to highlight and encourage prudential behavior. Exactly. Back in February, we talked here about some scandals and we illustrated with the story from the Book of Acts about Ananias. There might be government officials, as well as private citizens, named Ananias. The best remedy for all of this is for all of us to be prudential and take care with our own affairs and treat others with respect. This sounds a bit like the Golden Rule, doesn't it? These are the kinds of issues, it occurs to me, that churches can work on, right with the people in their own pews. Long-term financial fixes can start right there, with a bunch of Christians thinking of themselves and their friends and colleagues in terms of Jesus' lessons.

The Budget Deficit: More Questions than Answers

2009-10-20T10:04:00.002-04:00

Last time we wrote here, two weeks ago, we spoke to the current state of the economy and whether it might truly be growing again or about to sink into another recessionary phase. We opted for the former, though with the usual economist's disclaimers.

Since then, we traveled to St. Louis, where we attended the annual meeting of the National Association for Business Economics "NABE", the main professional organization in our business. Can you imagine 300 economists in one room? That means, of course, that there were at least 400 opinions on the way things are going and why. Nearly all of the speakers, who included Lawrence Summers of the White House National Economic Council, two senior Federal Reserve officials and a number of private sector business economists, did seem to agree, though, that the recession has ended. But beyond that, there were plenty of notions about how quickly and strongly an outright recovery might proceed. Skeptics think we may be in for "a lost decade", such as the Japanese economy slogged through in the 1990s. Others noted that economists frequently underestimate the vigor of the rebound in business activity; they expect an early bounce and a sustained uptrend. We want to side with this second group, but there are, of course, numerous questions in this extraordinary period.

Today, we will talk about one of these questions, a big one, the size and role of the Federal Government, especially the hot-button issue of the deficit. The other mega-question from the NABE sessions concerns the structure and regulation of financial markets, and we'll go over that one with you too, hopefully next week. You're not hearing enough about that in the media or from Washington officials, but in the wake of all the mess of the last two years, it's important to get some of it untangled and straightened out if the economy is indeed to move ahead on a sustained upward track.

How Big Are Those Numbers?
This past Friday, the Treasury and the Office of Management and Budget (OMB) reported that the budget deficit for fiscal year 2009 came to $1,417,121,000,000. GDP in the fiscal year came to an estimated $14,116,000,000,000. Thus, the budget deficit represents just over 10% of the economy's output of goods and services for the year. This figure is not just the largest since 1945 (the last year of World War II), but the largest by a considerable margin; in fiscal year (FY) 1983, coming out of a steep recession, it was 6.0%; otherwise over the past 35 years, it has ranged from 2% to 5% of GDP, including surpluses from 1998 to 2001. Projections from OMB and the Congressional Budget Office through 2019 envision another 10% in FY2010 and then a gradual reduction to 3.2% through 2018. However, at that point, the deficit begins to widen anew as demographics push up outlays for retirement-age folks on Social Security, Medicare and similar programs. We'll come back to this point shortly.

How did this latest year's deficit get SO bad? The poor economy pulled down tax receipts and raised spending. Taxes fell 16% from $2.52 trillion to $2.10 trillion, with individual income taxes (what you and I pay) off 20%, corporate income taxes 36% and social security taxes 1%. Spending increased 18% from $2.98 trillion to $3.52 trillion; the biggest percentage gains were in housing finance programs, energy research and so-called "income security", which includes unemployment insurance. The biggest dollar gains included the housing and income security programs, plus social security, Medicaid and Medicare, followed by defense.

How Much Did the Stimulus Programs Add?
The stimulus programs, including the Bush Administration actions, contributed to the gaping deficit, but actually not as much as might be imagined. For instance, as we've already noted here, the American Recovery and Reinvestment Act, passed in February, is putting out funds at a moderate pace, still just above $100 billion. This should pick up quickly as projects get farther along in their bureaucratic processing. The special unemployment insurance for people who exhaust their regular allotment has so far amounted to "just" $6.5 billion. The TARP program for banks, which the Bush Administration pushed through late in its tenure, has seen capital investments of taxpayer funds into banks totaling $205 billion, but also repayments of $71 billion, for a net cost during this fiscal year of $134 billion. In July 2008, Congress also passed a housing finance assistance program, and it has laid out $96 billion. These four items that we can easily identify total $341 billion, just under one-quarter of the entire deficit. Other business cycle-related spending comes in regular unemployment insurance, added Medicaid outlays and probably even extra Social Security as some people might be encouraged to collect if they're eligible rather than hunt for a new job. Even apart from this special spending and the recession-generated weakness in receipts, the deficit would still be sizable; our quick calculations here would still leave us about $700 billion, that is, about half the actual total. And this is still big. The whole deficit in FY2008 was $455 billion, compared with an average from 1991 through 2008 of $160 billion.

The Deficit in the [Very] Short Run Is OK
Is this big deficit helping the economy or hurting it? The answer to this question is "Yes". In the short run, "deficit spending" is providing a support to the economy, but the longer run is a different question. At the NABE meeting, Lawrence Summers was quite clear in his pronouncement that "the stimulus is working". All of the above programs have indeed helped brake the recessionary forces. Others argue – and did so at the meeting – that since the economy and unemployment have been worse than the Obama Administration had forecast, the stimulus has failed. But we became convinced that these federal government initiatives prevented much worse conditions from overtaking us. And the quick actions of the Bush people last year helped stem the panic in financial markets. So these are positive developments – at least right now.

But The Deficit Stays Big and Gets Bigger
There's a problem, though, and you probably already know it. In the paragraph above, we guessed that about $700 billion of the FY2009 deficit is more fundamental than just fighting the recession. Indeed, long-term budget projections from the OMB point to $700 billion deficits out for the next eight or nine years. And then, as we noted, the deficit is likely to widen more, both in absolute size and also relative to GDP. This is tough, and out in St. Louis I heard bigger numbers than this from some economists who advise Democratic policymakers. The current health care plans only make this greater.

"We will go line-by-line through the budget and identify programs that are wasteful and could be dropped," candidate Obama promised. He's hardly the first to make such a pronouncement. This has not happened, of course, but we need to consider seriously just what we want government to be doing and the most equitable way to pay for it. Bear in mind the rubric, "if you tax something, you get less of it" so simply hiking taxes to try to close the gap will, over the long haul, bring less of whatever it the tax applies to. This could be self-defeating, then, as higher tax rates sap strength from the revenue sources. Additionally, current polls show that the elderly are opposed to the health care bills because they would cut Medicare. We may not have much choice, and as has been said for a number of years now, social security, Medicare and Medicaid all need to be rationalized in the face of the onrush of Baby Boomer retirees. How much defense can we afford? Well, we have to keep the country safe – that's the primary duty of the federal government – and this is a time when what that means is really complicated. There are no good answers at present, but we really need to ponder these questions in a comprehensive way and not be afraid to act on them.

A chapter of the book Mother Crafton and I are starting together will go over some of these issues. I have views I will lay out there. If you have views on what functions you think government should really concentrate on, please do write to us. The long-term health of the economy, our currency and our children hang in the balance.

A "W"-Shaped Economic Cycle? We Like "V" Better

2009-10-06T22:16:00.001-04:00

Weekend press reports highlighted the continuing decline in payroll jobs in September – at 263,000, more than economists had forecast – and the still higher unemployment rate, now 9.8%. Was this a sign of renewed economic contraction? Many had thought that things were getting better. Are we to be disappointed?

After this report from the Labor Department last Friday, some observers are thinking that we may be in for a "W"-shaped business cycle. That is, perhaps economic activity had started to head higher over the spring and summer, completing a "V", but now has started back down again, so that we face a "double-dip", producing a W, with the chance for even worse conditions still to come. Such fears have already prompted talk in Washington of further government "stimulus" action to support the economy.

Right at the moment, we wouldn't actually be so terribly concerned. We have three caveats to offer in this discussion which point to a more optimistic scenario. First, the employment numbers face a quirk of the calendar that may be holding them back. The Labor Department collects this information at the same time every month, during the calendar week that contains the 12th of the month. And as you remember, Labor Day was very late this year, coming on the 7th, and this was during the employment survey week. This combination hardly ever happens – the last time was in 1998. Activities that begin in the autumn, such as schools, had started in many locations, but with the late Labor Day, not everywhere. So before we panic over a renewed economic downturn, we probably should wait to see what happens with the October figures. In 1992, for instance, the economy was struggling to come up out of recession and the September 7 Labor Day coincided with a weakening of employment and an uptick in the unemployment rate. Then, in October, these reversed: employment strengthened and unemployment eased. Asking for a month's patience may not sit well at present; people want to see continuous progress toward recovery. We may in fact have that, but it just may not be showing up right now in this long-established data collection system.

Second, many people claim that the $787 billion stimulus program enacted back in the spring hasn't worked. Despite this huge amount of money, unemployment has continued to rise far beyond what the Obama Administration predicted. But in actuality, only a little of the money has been spent yet; the federal government's Recovery.gov website tells that only a little over $100 billion of the money has been paid out, just one-eighth. This is a considerable sum, but it still shows that only a fraction of the stimulus work projects have actually been started.

For the portion of the stimulus that takes the form of benefits to taxpayers, some analysts fret that these consumers are saving the money rather than boosting their spending; this was especially the case with the 2008 tax rebates and has remained with this year's version. What a complaint!! One reason we got into this mess is that people borrowed and spent too much. Paying down debt and increasing saving is a very beneficial use of any extra cash we get a hold of. These remedial actions by consumers obviously don't lift growth when they happen, but they'll support it more assuredly going forward.

Finally, the economy was restrained over the summer by a renewed increase in energy prices, especially for gasoline. In and around New York, we were paying nearly $3.00 a gallon; this isn't 2008's $4-and-change, but still takes a chunk of our income to pay for it, limiting what we can spend on other things. The encouraging news in recent weeks is a reversal of some of that price hike and the lowest gasoline prices since May, according to the US Department of Energy. The result is the freeing up of about 1-1/4% of our "take-home pay". Since the continuing cuts in employment are preventing any income growth, this cut, even though it sounds small, is really important in supporting consumer spending on non-energy "stuff". Coming just ahead of the Christmas shopping season, this is no small matter. Indeed, two weekly surveys of chain-store sales both show some improvement in September, an encouraging sign.

We don't want to overstate anything here. Nor do we want to argue against at least one stimulus-related proposal, that to further extend unemployment benefits. This would be just the wrong moment to let lapse the special extensions that are already in place. But the caveats to a bearish outlook which we have just mentioned – quirks in the measurement of the employment data, more stimulus spending already in the pipeline and lower gas prices right now – suggest that the economy may not weaken again. Indeed, after a sinking spell last week, stock markets seem to be coming around to the same notion, with a combined two-day gain yesterday and today of more than 240 points on the Dow Jones, which recoups a sizable amount of losses last week. So let's not throw in the towel yet. The "V" shape recovery may still prevail over the "W" and more definitive progress may become evident "soon".

Bigger Role for G-20 Elevates Emerging Market Nations

2009-09-28T09:22:00.004-04:00

There was a major development at last week's G-20 meeting in Pittsburgh, and it wasn't the protests or pronouncements on climate change. Perhaps the most significant development to come from the meeting was the recognition that this group, the G-20, is now the most relevant forum in the world for coordinating world economic policy. This bigger group, including major "emerging market" countries, thus supplants the more restricted G-8 that covered only the biggest industrial nations.

Specifically, the G-8 consists of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. The European Commission (EC) attends as well, but in an advisory capacity. In sharp contrast, the G-20 contains those countries, plus

Argentina
Australia
Brazil
China
India
Indonesia
Mexico
Saudi Arabia
South Africa
South Korea
Turkey

There are thus 19 countries, plus the EC. With the latter, a number of smaller European countries have representation. Now we have the most populous countries added to the discussions as well as several major resource producers. During the meeting, the group also decided to increase the role of these countries in the International Monetary Fund, the IMF, which provides financial support to needy nations. For a time during recent years, it appeared that the IMF might be fading, as it looked like fewer countries were subject to foreign exchange and other financial crises. Those conditions, of course, have changed dramatically and now the focus is on making the IMF's structure and work more responsive to the needs that are weighing on the world financial system.

It seems strange to congratulate a country. But this seems to us like a graduation of sorts, where the newly promoted countries are finally recognized for the stake they have in the world's welfare, as both recipients and providers of economic benefits. We're glad they're to be included in these deliberations.

William Safire

2009-09-28T07:52:00.003-04:00

Perhaps all of you routinely check out the New York Times website of a morning, and you have already seen this today. In memory of their renowned columnist William Safire, who died yesterday at age 79, the Times today highlights one of his memorable columns, "How to Read a Column". If you have in fact not seen it, do take it in. You'll never look at such a feature in the same way again!
http://www.nytimes.com/2005/01/24/opinion/24safire1.html?_r=1&adxnnl=1&adxnnlx=1254139490-6+7pzC9qowzI+B/HDpNLew

Mr. Safire published his "On Language" column in the Times Magazine as recently as September 13, on the issue of bending the curve and using other such symbolic phrases. [We can't begin to choose the right words to describe this succinctly, a not inconsiderable irony in speaking of Mr. Safire.] Here it is: http://www.nytimes.com/2009/09/13/magazine/13FOB-OnLanguage-t.html.

We will miss this pundit, for whom, the Times' affectionate obituary asserts this morning, the word "pun-dit" was likely coined. May Mr. Safire rest in peace, knowing what pleasure he brought to reading about serious -- and pleasurable -- affairs of the day.

The Tariff on Tires

2009-09-21T11:32:00.003-04:00

Just over a week ago, the Obama Administration announced a 35% tariff on certain car and truck tires imported from China. Apparently, the purpose of the tariff is to raise the price of imported tires so they won't be so attractive, thereby encouraging U.S. consumers who are shopping for new tires to choose some produced in the U.S. It's hard to know how savvy tire-shoppers are, but one of them, Debbie from Geranium Farm's Hodgepodge, saw an article the next day with the headline, "Tire Prices To Rise by 20-30%". Debbie thought to alert her relatives and friends who might be needing tires – as she herself does at the moment, she tells me – and she circulated the article to some 40 people, including me. They should buy their tires right away, she thought, before that huge price hike.

I responded to her note immediately, but as an economist, not a tire-buyer. The following poured out of my fingers into the computer in not more than ten minutes (the text here is a bit more elaborate than what I actually sent back to her).

Dear Debbie,

I guess you want a comment about this . . . .

I haven't read this specific piece, but I've kept up with the news in the last couple of days. It is truly disappointing. In a word, protectionism is bad. Raising tariffs in the 1930s was a major contributor to the length of the Depression. Because when we raise them, the other countries retaliate, as China has already threatened on chicken and car parts. So prices go up and jobs go down, everywhere. We've spent years and years since then trying to lower tariffs.

It is false that higher import tariffs will "protect" American jobs. Sometimes, very occasionally, you can make an argument in a very young industry that it deserves "protection" until it builds a customer base and momentum. But even there, they already have patent protection. There might also be national security reasons to discourage buying of products from certain countries.

But in the vast majority of these cases, in fact, the people get hurt who are the very people government officials think they're helping, the workers. These imported tires are cheaper, so they are bought heavily by lower income Americans, who can least afford these higher prices, especially now in the fragile, job-scarce economy.

China and India and Wal-Mart, with their ability to produce and sell at low-cost, are one of the main reasons that the Fed Chairman [last week could] say that he believes the recession now may have concluded and a recovery, however hesitant, begun.

My email ended here, but let me finish the thoughts. One of the saving graces in these dire times has been the availability of low-price options for many products. By shifting to shopping at Wal-Mart, for instance, people can make their limited dollars stretch farther. If they need new tires, they can find some they can afford. Further, the imposition of the tariff, by chopping demand from the exporters in China and India, will export our economic hurt to the people of those countries, who are just starting to enjoy the fruits of their own economic emergence. They, in turn, would buy less of the products we try to sell, hurting our exporting companies. The industries are different: the Chinese tend to make the consumer goods and the U.S. firms specialize more in capital equipment, but the mutual harm is the same.

The dollars here are not large – car tires are hardly our biggest import – but the pending action sends a very difficult message at a very sensitive time in the world economy, and it comes just days before the leaders of the G-20 nations are scheduled to meet together in Pittsburgh. The British-based magazine The Economist last week highlighted this issue on their cover: "Economic Vandalism", they called it. They have supported the President editorially on other issues, and they do tend to be on his side. But the language in their article is stronger than mine here.

It is true that trade relations with China need attention. But it would seem that joint examination and negotiation would be more appropriate ways to work on them. And we haven't even mentioned that China owns substantial assets in the U.S. and has recently become the largest creditor of the U.S. government. That position makes our unilateral tariff action problematic as well.

Thanks, Debbie – I think – for showing so clearly how important these policy decisions can be in our everyday lives.