150,202 Readings(C) Fall, 2010
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14f10s
As
Democrats and Republicans jockey to set Congress's agenda for after the midterm
elections, President Obama has already dismissed one reform that would improve
Americans' financial standing: allowing workers to save and invest some of their
Social Security taxes in personal accounts.
That's
an "ill-conceived" proposal, Mr. Obama said in August, because it means "tying
your benefits to the whims of Wall Street traders and the ups and downs of the
stock market." The financial crisis, he said, should have put this idea to rest
"once and for all."
Missing
from the president's statements is any acknowledgment that, to date, all
proposals to create personal accounts have provided workers with the option to
invest for retirement or to stay with Social Security. Any worker could choose
to reject the option. So, contrary to the president's assertion, creating
personal accounts wouldn't suddenly empower those who "would gamble your Social
Security on Wall Street."
In
addition, no proposal has required workers to invest personal account funds in
Wall Street stocks, as opposed to other investments such as corporate or
government bonds, bond mutual funds or indexes, or certificates of
deposit.
Suppose
a senior citizen—let's call him "Joe the Plumber"—who retired at the end of
2009, at age 66, had been able to set up a personal account when he entered the
work force in 1965, at the age of 21. Suppose that, paying into his personal
account what he and his employer would have paid into Social Security, Joe was
foolish enough to invest his entire portfolio in the stock market for all 45
years of his working career. How would he have fared in the recent financial
crisis?
While
working, Joe had earned the average income for full-time male workers. His wife
Mary, also age 66, had earned the average income for full-time female workers.
They invested together in an indexed portfolio of 90% large-cap stocks and 10%
small-cap stocks, which earned the returns reported each year since 1965.
By the
time of their retirement in 2009, Joe and Mary would have accumulated account
funds, after administrative costs, of $855,175. Indeed, they would have been
millionaires a few years earlier, but the financial crisis lost them 37% in
2008. They were unfortunate to retire just one year after the worst 10-year
stock market performance since 1926. Yet their account, having earned a 6.75%
return annually from 1965 to 2009, would still pay them about 75% more than
Social Security would have.
What's
more, this model assumes that in retirement Joe and Mary switch to a lower-risk,
conservative portfolio that averages a return of just 3%. Of course for young workers today,
Social Security promises even lower returns of only 1.5% or less, given the
actuarial value of all promised benefits. For many, the promised returns are
zero or negative. And if Congress raises taxes or cuts
benefits in order to close financial gaps—as everyone who rejects personal
accounts effectively advocates—the eventual returns for young workers will be
even lower.
It is a
mathematical fact that the least expensive way to provide for an almost certain
future liability is to save and invest in capital markets prior to the onset of
the liability. That's why state and local pension funds, corporate pension
plans, federal employee retirement plans and Chile's successful Social Security
personal accounts (since copied by other countries) do so. It is sound
practice.
And
it's why Mr. Obama is wrong to assert that personal Social Security accounts are
"ill-conceived," and why each of us should have the liberty to opt into
one.
Mr.
Shipman, formerly a principal at State Street Global Advisors, is co-chairman of
the Cato Project on Social Security Choice. Mr. Ferrara, director of entitlement
and budget policy at the Institute for Policy Innovation, served in the White
House Office of Policy Development under President Reagan.
Wsj
OCTOBER 26, 2010, 5:53 P.M. ET
MOSCOW—Russia
became more corrupt in the last year, placing alongside Haiti and Tajikistan in
an annual corruption index despite President Dmitry Medvedev's pledge to battle
graft, a ranking by Transparency International showed Tuesday.
Russia
became more corrupt in the last year, placing alongside Haiti and Tajikistan in
an annual corruption index despite President Dmitry Medvedev's pledge to battle
graft, a ranking by Transparency International. Eduardo Kaplan discusses the
survey's results.
Russia
fell to 154th—down from 146th last year—on Transparency International's 2010
International Corruption Perceptions Index, which ranks 178 countries from least
to most corrupt.
It was
ranked as the most corrupt economy in the Group of 20 nations, and the most
corrupt country in Europe, with Moldova, the next most corrupt European nation,
finishing in 105th place.
Russia
also placed worst among the so-called BRIC countries—Brazil, Russia, India and
China.
"It is
becoming completely obvious that the government's anti-corruption policy is at a
dead end," said Yelena Panfilova, head of Transparency International in Russia.
View
Full Image
John
MacDougall/AFP/Getty Images
Huguette
Labelle, head of Transparency International
The
world's least corrupt countries are Denmark, New Zealand and
Singapore,
according to the data showed. The most corrupt is Somalia, followed by
Afghanistan, Myanmar and Iraq.
Moscow's
slide in the rankings may provide ammunition for Mr. Medvedev's critics, who
claim that little has changed since he declared war on corruption after
replacing Vladimir Putin in 2008.
Indeed,
even Mr. Medvedev—widely seen as the less powerful half of a ruling elite made
up of himself and Mr. Putin, who is now prime minister—has seemed to have given
up. Although he launched the "Forward, Russia" anti-corruption campaign last
October, by July the president admitted that it had brought no results.
Corruption
develops "when society is closed, when there are no controls over the
government, when there is no punishment for giving or receiving bribes," said
Yevgeny Arkhipov, head of the Association of Russian Attorneys for Human Rights.
"All of these conditions exist today in Russia."
A
report by Mr. Arkhipov's organization released earlier this year found that
corruption in the country generates $650 billion annually, an amount equal to
half last year's gross domestic product.
Former
CIS state Georgia, which enacted massive reforms under President Mikheil
Saakashvili and lost a war to Russia in 2008, finished in 68th place, just below
Italy.
The
September state unemployment numbers came out last Friday, and we couldn't help
noticing that three of the four states with the highest job losses were
California (-63,500), New York (-37,600) and New Jersey (-20,200). The other was
Massachusetts (-20,900). Texas, meanwhile, gained 4,000 jobs.
This
continues a longer term trend.Over the last year, as the economy was
beginning to grow again, the Lone Star State has led the nation with the
addition of nearly 153,000 jobs, while California surrendered 43,700, New Jersey
lost 42,300 and New York dropped 14,600. This superior jobs recovery builds
on the fact that Texas also weathered the national recession better than most
states. According to a new Texas Public Policy Foundation study, Texas
experienced a decline of 2.3% from its peak employment, while California fell
nearly four times further, with 8.7% of jobs vanishing.
These
hiring statistics confirm that for business Texas is the new California—as the
likes of Austin, Dallas and San Antonio have become destinations for investment
and entrepreneurship. Texas has become a mecca for high tech, venture
capital, aeronautics, health care and even industrial manufacturing like the
building of cars and trucks.
Meanwhile,
the Golden State, New York and New Jersey have been slouching toward slow-growth
European status. New Jersey is at least working to get its spending and taxes
under control with Chris Christie as Governor, though its state and local tax
burden remains the nation's highest and its business tax climate is the worst,
according to the Tax Foundation.
The
migration of factories, capital and jobs to states like Texas is no accident.
Texas is a right to work state, meaning that workers cannot be compelled to join
a union. Texas also has no income tax, which gives its firms a roughly 10% cost
advantage over a "progressive" state like California.
There
is also a lesson here for Washington. The job-free zones of California, New
Jersey and New York each tax the rich more than nearly all other states. In
these states the top 1% wealthiest taxpayers bear roughly 40% of the state
income tax burden, but their budgets are still a mess and the job losses
continue. If the next crop of Governors and the 112th Congress want faster
growth and more job creation, they'll avoid the mistakes of California and New
York and learn from Texas.
Amazon.com Inc.
has decided to get a little more friendly.
On
Friday, the maker of the Kindle e-reader announced in a blog post that it would
allow Kindle users to lend e-books to friends.
The
capability, which will be introduced later this year, will let buyers of Kindle
e-books lend their Amazon e-book purchases just once, for a period of 14
days. (And just like an old-fashioned book, the lender cannot read their own
book while it is virtually in the hands of a friend.) Sharing will work for both
Kindle device owners and users of Kindle apps on other gadgets, like the iPad
and iPhone.
There's
a catch. Not all of the company's 720,000 e-books will be lendable. "This is
solely up to the publisher or rights holder, who determines which titles are
enabled for lending," said Amazon in its announcement.
Book
lending for the Kindle closes a notable product gap with Barnes &
Noble Inc.,
which introduced a similar feature with its Nook e-reader last
year.
There
remains another missing frontier in sharing for Amazon: libraries. Both the
Nook and Sony
Corp.'s Reader allow users to read books embedded with digital rights management
software from popular library systems, such as the one run by Overdrive Inc.
Amazon's Kindle, which uses its own e-book format, isn't
compatible.
Digital
libraries are becoming increasingly mainstream. Some two-thirds of American
public libraries offer e-book loans, according to the American Library
Association.
Amazon
continues to play coy about exactly how many Kindles it has sold, but in its
earnings announcement last week, it said that in the 12 weeks following the
introduction of its latest generation device, U.S. and U.K. customers ordered
more Kindles than any other product from the giant online
retailer.
Write
to Geoffrey
A. Fowler at geoffrey.fowler@wsj.com
October 28, 2010
A quick review of the facts reveals that
American universities often deliver easy, biased or useless content -- at great
expense to students, parents and taxpayers, says the Pope Center for Higher
Education.
University students learn less than many people
think:
Universities are expensive for students,
parents and taxpayers:
A college degree is no guarantee of future
success:
Many college professors teach one-sided
courses:
Source: Jenna Ashley Robinson, "A Closer Look
at Higher Education," Pope Center for Higher Education Policy, October 27,
2010.
For text:
http://popecenter.org/clarion_call/article.html?id=2428
October 28, 2010
Tuition is up (no surprise) and this year the percentage increases for public and private four-year colleges and universities are higher than they were last year. Generally, the percentage increases at public institutions are larger than those at privates (which are more expensive to start with). Those trends are standard for tight economic times, when states cut budgets and try to make up for shortfalls with larger tuition increases, and when many private colleges worry that sticker shock will scare away families and so tend to moderate price increases.
Across the board, the increases exceed the inflation rate of about 1.2 percent for the last year, which, while low, was higher than the slightly negative rate of the year before.
Those are the key findings from this year's annual survey on college prices (and a companion survey on student aid) being released today by the College Board. In many respects, the data extend trends that were evident last year as well. Here are the overall figures for the 2010-11 academic year:
Tuition and Fees by Sector
|
Sector |
2010-11 Tuition and
Fees |
One-Year Dollar
Increase |
One-Year % Increase
|
Previous Year's %
Increase |
|
Private, nonprofit
four-year colleges |
$27,293 |
$1,164 |
4.5% |
4.4% |
|
Public four-year
colleges, in-state residents |
$7,605 |
$555 |
7.9% |
6.5% |
|
Public four-year colleges,
out-of-state residents |
$19,595 |
$1,111 |
6.0% |
6.2% |
|
Community colleges |
$2,713 |
$155 |
6.0% |
7.3% |
|
For-profit colleges |
$13,935 |
$679 |
5.1% |
6.5% |
For room and board, public increases also outpaced the privates, and privates are also more expensive. The average public college rate is going up by 4.6 percent, to $8,535, and the average private rate is going up by 3.9 percent, to $9,700. Those figures are for four-year institutions only, as the pool of community colleges and for-profit colleges charging for room and board remains small.
As is the case every year, College Board officials stress that the data show that most colleges -- however much their prices frustrate students and families -- are not in the mid-$50,000 range that attracts so much attention. Total expenses for a private four-year institution are, on average, just under $37,000 a year. But because the most famous private institutions tend to be well above that average, many people assume tuition rates are even higher than they are. (At Harvard University, an undergraduate's total costs this year, typical for those at elite private research universities and liberal arts colleges, are estimated by the university to be between $53,950 and $56,750.)
Many of the data in the report focus on the impact of state budget shortfalls on public colleges. For instance, in comparing inflation-adjusted average tuition increases from the last three decades, the College Board finds that over that time, the rate of increase has dropped for private four-year institutions and gone up for public four-year institutions. Further, while the rate of increase at private institutions was greater than that of publics in the 1980s, it is now smaller.
Annual Average Tuition Increases (Inflation-Adjusted) by Sector
|
Sector |
1980-1 to 1990-1
|
1990-1 to 2000-1
|
2000-1 to 2010-1
|
|
Private four-year |
5.1% |
2.6% |
3.0% |
|
Public four-year |
4.2% |
3.3% |
5.6% |
|
Community colleges |
3.9% |
3.2% |
2.7% |
The College Board's report on student aid notes that the past two years -- which have seen significant increases in tuition at many public colleges and universities and growing economic pressures on many families -- have seen a rapid expansion in aid packages.
From 2008-9 to 2009-10, grant aid per full-time equivalent
undergraduate increased by about 22 percent (or $1,073) and federal loans
increased by 9 percent (about $408). Particularly notable, the College Board
report said, was the increase in the maximum Pell Grant of 16 percent in
constant dollars in 2009-10, the largest one-year increase in program history.
The total Pell budget reached $28.2 billion, divided among 7.7 million
students.
Sandy Baum, a policy analyst for the College Board and co-author of the reports being issued, said that the tuition figures "were not very surprising," given the state of the economy. "I don't think anybody thought public tuition would go up only 2 percent this year."
She urged educators and policy-makers to pay more attention to the long-term issues raised by this year's data. She noted, for example, that the impact of tuition increases on low-income students has been mitigated in part by the strong support for the growth in Pell Grants -- growth that probably will not be matched in the years ahead. "No matter what kind of Congress we get, the idea that Pell Grants will keep growing at this rate is unlikely," she said.
Baum said that in many ways she sees the tuition trends posing more of a threat ahead to public higher education than to private colleges. She said that some private institutions -- those that are being forced to give so much aid to attract students that they can't balance their books -- are in danger. But she said that the basic financial model for most privates, in which some students pay enough to subsidize others, is sound.
For public higher education, however, she said she feared that "the basic model may no longer be sustainable." While states are likely to restore some support for higher education as the economy improves, she said, it seems unlikely that enough support will be provided to maintain tuition at affordable levels. She said she anticipates public colleges having to consider more radical changes in how they provide education, ideally using means that cut costs. She noted that while technology has to date not cut costs in providing higher education, that may not be the case in the future.
If new models fail to provide more students with quality education, she said, "we could lose public higher education, and that would be a huge social failure."
Chavez Confiscates
Owens-Illinois
Warns
Polar
Over Protests, O-I
Surprised
Charging
U.S. bottle manufacturer Owens-Illinois with worker exploitation and
environmental damage, Venezuelan President Hugo Chavez has announced plans to
confiscate the local unit of the company, the 200th nationalization of a private
firm this year, the Los Angeles
Times
reports. Ownes-Illinois expressed
surprise over the move.
Meanwhile, the government accused the country's top
brewer Empresas Polar of leading workers' protests against the nationalization
and warned the beer-maker to back off, Reuters
reports.
WSJ
October 30, 2010
By
Froma
Harrop
Whenever
I visit Italy,
France or
elsewhere in dolce vita Europe, I go: "Oooh! Aren't these cheeses wonderful?
Ahh! Look how fit and well dressed everyone is. Oh! If only America would
protect its downtowns the way these Europeans preserve their ancient village
centers."
But on
the return, something interesting happens when the jet wheels touch down in the
land of strip malls and drive-through junk food. I'm really happy to be back
home. The reason is the people.
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Americans
work. They value work. They respect it.
When
Italians refer to a lucky guy, they say (my translation) "he has a big rear
end." In other words, he's not out laying bricks or waiting on tables. He gets
to lounge all day in the loggia.
An
Italian friend (a leftist, actually) once asked me, "Why do the Rockefellers
work?"
Because
they want to make their mark in society, I responded, to which he shook his
head. The
idea of working if one doesn't need the money amazed him. But it's impossible, I think, to
support the dignity of the worker and not the dignity of
work.
Observe
the demonstrations in France over government efforts to raise the retirement age
to 62 from 60. To American eyes, age 62 is on the early side of retiring.
Americans seem to accept 65 as the normal age for leaving the job. Rep. Paul
Ryan, R-Wis., goes further, proposing to hike the eligibility age for receiving
Medicare to 69 from the current 65.
You
can't imagine American workers setting bonfires in the streets or otherwise
disrupting commerce in the belief that they are owed three or more decades of
retired comfort.
Americans are famous for their inadequate vacation time and long work hours
-- they do need more time off -- but they generally don't regard 24-7 leisure as
an admirable way of life.
A few
years ago, The Wall Street Journal had a piece about golfers in their 50s who
still have jobs shunning players their age who have retired. They assumed that
those who no longer work are not very interesting.
Americans
-- with their notoriously stingy pension plans, devastated 401(k)s and skimpy
savings -- figure that they will work after retirement. If they are healthy,
there's nothing bad with that.
Those
with special expertise are being hired as part-time consultants. Some take jobs
in retail for as many or as few hours as they want. Companies such as Home Depot
value older salespeople; many shoppers prefer them, because they tend to know
more about the products. And the wealthier retirees may become "social
entrepreneurs," using their money and knowledge to help
others.
Thing
is, Americans don't feel
sorry for 70-year-olds who still work. They admire
them.
A
mandatory retirement age has been largely banned in the United
States. The
exceptions are professions requiring stamina or quick reactions. Examples: FBI
agents must retire at 57, and air traffic controllers at
56.
A good
way to delay retirement is to restructure careers so that one isn't doing the
hardest stuff in the last years of employment. For instance, an aging
firefighter could move off the strenuous weightlifting tasks and into an
administrative or other support function. Nurses could gradually cut down on
their hours. Corporate executives might start shedding responsibilities as their
career winds down.
When my
Italian friend visited this country, I took him to a busy diner where an elderly
woman was bustling about with the coffee pot. "I do respect that woman," he
said.
I think
of her and other hardworking Americans whenever I'm in one of those lands of
leisure. They make me glad to come home.
Oct
28, 2010
9:09 AM
By
David Wessel
The job
market is getting better ever so slightly, but the housing bust is discouraging
U.S. managers and executives from moving to take new jobs.
Only
6.9% of unemployed managers and executives who found new jobs in the third
quarter relocated for that position, down from 13.4% in the same quarter a year
earlier, according to a survey of about 3,000 successful job seekers conducted
by outplacement consultancy Challenger, Gray &
Christmas, Inc. The 6.9% was the lowest for the measure since
Challenger, Gray first began tracking it in 1986.
“Continued
weakness in the housing market is undoubtedly the biggest factor suppressing
relocation. Job
seekers who own a home — even if they are open to relocating for a new job — are
basically stuck where they are if they are unable or unwilling to sell their
homes without incurring a significant loss,” said John A. Challenger,
chief executive officer of the firm.
“Right
now, demand for new workers is not at a level that would force companies to
bring in talent from outside their region. However, as the local talent pool
starts to become depleted as the economy improves, companies will be compelled
to cast a wider recruiting net. Unfortunately, the immobility of the workforce
may mean that some employers will have to delay expansion plans, thus slowing
the recovery,” he said.
“At
that point,” he added, “some large companies might have the financial ability to
increase their relocation budgets and help offset the difference between the
home value and selling price. However, small- and medium-size companies, where
most of the new job growth is expected to occur, probably will be unable to
cover the costs of relocation and make up for a candidate’s lost home value,”
said Challenger.
A 2010
Atlas Van Lines survey of companies found that 51 % of companies with fewer than
500 employees offer new hires full reimbursement of relocation expenses to new
hires. Among companies with 500 to 4,999 employees, 45%, do so; among companies
with 5,000 or more employers, 47% cover all moving expenses for new
hires.
Most
companies now refuse to cover losses on the sale of a home, though. Only 28% of
employers are willing to reimburse new hires for any loss on the sale of their
home; among companies with fewer than 500 employees, it’s 14%. Some activist
shareholders have criticized big-companies for
reimbursing top executives for losses on their homes when they
move.
Oct
28, 2010
9:09 AM
The
U.S. economy expanded at a slightly faster pace in the third quarter as consumer
spending inched up, but growth remains too weak to cut unemployment any time
soon.
WSJ's
Sara Murray will offer insight into what third quarter numbers say about the
recovery at noon on Friday. Join the chat live and ask your questions
now.
Gross
domestic product, the value of all goods and services produced, rose at an
annual rate of 2.0% after climbing 1.7% in the second quarter, the Commerce
Department said Friday. Economists polled by Dow Jones Newswires were expecting
GDP to rise by 2.1% in the July to September period.
The
government report was the last significant economic indicator before midterm
elections Nov. 2 and a Federal Reserve meeting ending Nov. 3. More than a year
after the recession ended, stubbornly high unemployment could hurt Democrats in
Congress and is likely to be a key factor in getting the Fed to resume bond
purchases.
The GDP
breakdown showed that spending by Americans, accounting for about 70% of demand
in the U.S. economy, rose at a 2.6% rate. That's up from a 2.2% increase in the
April to June period and a 1.9% in the first quarter.
Though
an improvement, consumer spending remains well below levels seen following
previous U.S. recessions. Americans' wealth and incomes were badly hit by
the collapse in home prices and the extremely weak jobs market that followed the
financial crisis. In the
four quarters after the last deep U.S. recession in 1982, consumer spending
posted increases of between 4% and 8%.
What's
more, a lot of the spending by Americans continued to go into goods and services
imported from abroad. Although the rise in imports decelerated in July-September
compared to the second quarter, it remained above the increase in exports, thus
weighing on the economy.
Imports were up 17.4% in the third quarter while exports rose by
5.0%.
With
the holiday season just around the corner, the outlook for spending by Americans
doesn't look great either. A gauge of consumer confidence has been falling since
June as Americans worry about weak home prices and jobs.
The
economic recovery has been too soft to bring about a significant improvement in
unemployment. Companies haven't ramped up hiring, concerned the economy will
stay weak while taxes could increase to plug a hole in a huge budget deficit.
Unemployment was stuck
at 9.6% in September, close to the 10.1% post-recession high hit in October
2009.
Fed
Chairman Ben Bernanke believes the main reason unemployment is high is because
the economy remains too weak. That, coupled with inflation running below the
Fed's 2.0% goal, is likely to lead the central bank to announce more bond
purchases next week. In an effort to spur growth by keeping borrowing rates low,
the Fed is likely to announce plans to buy U.S. Treasury bonds worth a few
hundred billion dollars over several months.
View
Full Image
Reuters
A
craftsman works on an acoustic guitar at the PRS guitar factory in Stevensville,
Md. Despite the world economic downturn, his company has built a new
multimillion dollar factory.
The
report Friday showed inflation remains very soft. The Fed's preferred gauge, the
price index for personal consumption expenditures excluding volatile food and
energy items, rose an annualized 0.8% in the third quarter, slowing down from
the second quarter's 1.0% increase.
Other
inflation gauges were also muted. The overall price index for personal
consumption expenditures rose by 1.0% in the third quarter, after a flat reading
in the second quarter. Gross domestic purchase prices rose 0.8%, after a 0.1%
increase in the second quarter.
Friday's
report, the first GDP estimate for the third quarter that often gets revised
substantially, also showed that federal government spending and investment rose
by 8.8%, following a 9.1% increase in the second quarter.
A
second GDP estimate, based on more complete data, will be released by the
Commerce Department Nov. 23.
WSJ
Oct 25 2010
Public
anxiety over rising taxes is helping Republicans in this midterm election—with
one exception. Democrats are trying to turn the tables on the GOP over the
so-called FAIR Tax, a tax reform idea that has bounced around conservative
circles for years.
The
proposal would end all current federal taxes, junk the Internal Revenue Service
and impose in their place a 23% national sales tax. In 16 House and three Senate
races so far, Democrats have blasted GOP candidates for at one point or another
voicing an interest in the FAIR tax. In Kentucky's Senate race, Democrat
Jack Conway is running a TV spot charging that Republican "Rand Paul wants a new
23% sales tax on groceries, clothes, prescriptions,
everything."
FAIR
tax proponents are right to say these Democratic attacks are unfair and don't
mention the tax-cutting side of the proposal, but the attacks do seem to work.
Mr. Paul's lead in
Kentucky fell after the assault, and the issue has hurt GOP candidate Ken Buck
in a close Colorado Senate race.
In a
special House election earlier this year in Pennsylvania, Democrat Mark Critz
used the FAIR tax cudgel on Republican opponent Tim Burns. In a district that
John McCain carried in 2008, Mr. Critz beat the Republican by eight points and
is using the issue again in their rematch.
This is
a political reality that FAIR taxers need to face. Pushed by Texan Leo Linbeck
and his Americans for Fair Taxation, among others, the FAIR tax became a
political fad in the 1990s. It was promoted by Tom DeLay, the former House
Majority Leader who never brought it to a vote even as he soaked campaign
contributions from its supporters.
Mike
Huckabee, who raised taxes when he was Arkansas Governor, embraced the FAIR tax
in his 2008 Presidential run to try to assert some conservative economic bona
fides. Yet
none of these voices or checkbooks can be heard now that other candidates who
once flirted with the FAIR tax are under attack.
No one
supports tax reform more than we do, and in theory a consumption tax like the
FAIR tax is preferable to an income tax because it doesn't punish the savings
and investment that drive economic growth. If we were designing a tax code from
scratch, the FAIR tax would be one consumption tax option worth debating.
But we
live in a country that already has an income tax, and most states rely on sales
taxes for a major part of their revenue. Unless the Sixteenth Amendment that
allowed an income tax is repealed, voters rightly suspect that any new sales tax
scheme will merely be piled on the current code. Adding a 23% federal sales
tax on top of a 5% or more state sales tax levy would also be a huge additional
tax on all purchases. The temptation to avoid such a tax by paying cash or via
other means would be high, and collection might require the same army of
auditors that the IRS now deploys.
These
are all reasons we've long been skeptical of the FAIR tax as a practical tax
reform, and the current campaign only reinforces our doubts. No doubt we'll once
again hear from the many FAIR taxers who seem eternally vigilant to write
letters whenever tax reform is raised. But if the FAIR tax is going to get
anywhere politically, its supporters ought to show they can defend the
candidates who are under attack for having endorsed it, or even having said nice
things about it.
Our
advice to the FAIR taxers is that voters will start to take the idea seriously
once the income tax is on the road to repeal. Until then, our advice to
candidates would be to avoid the FAIR tax and focus on goals that are more
achievable and less politically self-destructive.
·
WSJ OCTOBER
28, 2010
Agence
France-Presse/Getty Images
Indian
activists of The All-India Democratic Women's Association (AIDWA) and their
supporters hold placards protest in front of the Reserve Bank of India (RBI) on
October 13, 2010.
The
microlending movement that was supposed to help lift millions of people in India
out of poverty has in recent weeks fallen into chaos.
Urged
on by local government officials and politicians, thousands of borrowers have
simply stopped paying lenders, even though they have the money. The government
has begun ratcheting up restrictions, fearing that borrowers are being buried by
usurious interest rates. In some cases, officials have even arrested lending
agents for allegedly harassing borrowers.
Local
politicians, meanwhile, have blamed dozens of suicides on microlenders and are
urging borrowers not to pay back what they owe.
Though
so far the backlash has been confined to a southern Indian state of Andhra
Pradesh, what happens there is frequently a bellwether for microlending in
India, and programs around the world. Hyderabad, the state capital, is home
to some of the world's biggest microlenders, including SKS Microfinance Ltd.,
Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts
for about 30% of the loans for all of India, one of the world's biggest
microfinance markets.
"This
is potentially going to devastate lending to rural areas for a long time," said
Vikram Akula, founder and chairman of SKS Microfinance, India's largest
microlender by loan volume, which recently listed its shares in India. "We are
confident that we will survive, but certainly this is going change how things
could and should be done."
Arlene
Chang/The Wall Street Journal
Satyama
Ayrene (in green) and her daughter-in-law Laxmi Narsamma at their home in
Sankarampet village in Andhra Pradesh, Wednesday, October 27, 2010. SKS
Microfinance Ltd., which provided Laxmi a loan of Rs. 10,000 to invest in land,
has waived off the debt.
Microcredit
is the lending of tiny amounts of money, usually less than $200, to
entrepreneurs who use the loans to start or expand small businesses such as a
vegetable stand or a bicycle repair shop.
Most microcredit firms
lend money through women's groups and reach out to borrowers who are either too
far from or too poor to borrow from a bank. The repayment rate on the loans have
tended to be better than that of richer borrowers. Interest rates, however, can
be high, from 25% to 100% a year, mostly due to the cost of administering
millions of tiny loans in remote areas.
The
crisis is in some ways reminiscent of recent debt problems in the U.S.
Microfinance is targeted at a population that is overlooked by the mainstream
banking industry, the same social niche targeted by payday and subprime lenders
in the U.S.
As the
microfinance industry has grown, it has attracted international capital that has
greatly boosted the size of the industry, much as payday lending and subprime
borrowing soared until two years ago in the U.S. In a significant move that
showed international investors' interest in the industry, SKS recently sold $350
million of its shares on the Indian stock market.
But
along with that has come concern among politicians, regulators—and indeed
some in the industry—that unfettered expansion was leading to poor lending
practices, multiple loans to the same borrowers, and fears of widespread
repayment problems.
While
they have been much in demand wherever they have been introduced as they provide
a kinder, cheaper alternative to the village loan shark, some economists are
skeptical about whether the small loans actually help lift people out of
poverty.
And in
regions where there are more than one microlender competing for clients, some
experts are concerned that the poor are being encouraged to take on more debt
than they can bear.
So
far, the repayment rate
across the microlending industry has remained extremely high.
But Andhra Pradesh's
payment strike could presage a turn—and put the capital that has flooded into
the industry at risk. Mainstream Indian and international banks
have backed the microlending industry in India with more than $4 billion of
loans this year, with private-equity funds pouring more than $250 million into
the industry in India last year alone.
The
repayment strike is a rare black mark for an industry that has long been viewed
as a social benefit. One of the industry's leaders, Mohammed Yunus of Grameen
Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the
system. The
industry has spread across emerging Asia, Africa and South America. India, with
its giant population and hundreds of millions of people living in poverty, is
one of the most important markets.
The
industry also was the first to reach out to those that make less than $1 a day.
It had been so successful that it has spawned efforts to bring everything from
insurance to cellphones to solar lights to groceries to the
poor.
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Andhra
Pradesh slapped new restrictions on the industry that effectively shut it down
last week. While
a state court order put the restrictions on hold and allowed the lenders back in
the field this week, close to half of all borrowers are continuing to avoid
payments, microlenders say.
State
officials say they are trying to protect the poor from usurious interest rates
and heavy-handed practices, which they say have triggered more than 70 suicides
in the state.
Microlending
companies say that often where they have investigated suicides attributed to
their lending, they have found that microloans were among the smallest of the
many problems of the people that have killed themselves.
In
Sankarampet village about 2˝ hours from Hyderabad, Satyama Ayrene is still in
mourning over the death of her son who hanged himself. While local police say
they have been told to investigate whether microdebt caused the death, Ms.
Ayrene says it was the $2,200 he owed loan sharks that was bothering him, not
the $220 his wife owed to a microlender.
"He did
not commit suicide because of the [microloan] companies," said Ms. Ayrene, 55
years old. "He was burdened with loans from the local moneylenders and didn't
know how to pay them back."
Microlenders
say they are being punished for the success at reaching the poor and that if the
resistance continues, many of them will go out of business. Many have been
taking steps to create good will to try to avert the situation from worsening.
The biggest lenders who account for the majority of borrowing say they will
cap their rates at around 24% and form a fund to help troubled borrowers
reschedule their loan payments.
They
say they are ready to comply with more government restrictions as long as they
are given time to meet new requirements. But in the meantime, the industry has
ground to a halt.
When
SKS agents arrived in a village called Shanti Nagar about 150 miles from
Hyderabad, the capital of Andhra Pradesh, on Wednesday morning, they could tell
right away something was wrong. The borrowing group of 20 women was milling
around the dusty village square, instead of sitting in order in a circle with
their weekly payments as SKS procedure requires.
While
the group wanted to pay its loans, they had been forbidden by a local political
leader and their husbands, the women said.
The
political leader, A. Subramanyam, arrived and told the SKS agents not to harass
his neighbors.
"I
told them if they don't have the money, they don't have to pay," said Mr.
Subramanyam. "I have seen them sell their wedding jewelry to pay the
installments, why should they do that? No one here has prospered with these
loans."
Write
to Eric
Bellman at eric.bellman@wsj.com and
Arlene Chang at arlene.chang@wsj.com
IN the campaign season now drawing to a close,
immigration and
globalization have often been described as economic threats. The truth, however,
is more complex.
Over all, it turns out that the continuing
arrival of immigrants to American shores is encouraging business activity here,
thereby producing more jobs, according to a new study. Its
authors argue that the easier it is to find cheap immigrant labor at home, the
less likely that production will relocate offshore.
The
study, “Immigration, Offshoring and American Jobs,” was written by two economics
professors — Gianmarco I. P. Ottaviano of Bocconi University in Italy and
Giovanni Peri of the University of California, Davis — along
with Greg C. Wright, a Ph.D. candidate at Davis.
The study notes that when companies move
production offshore, they pull away not only low-wage jobs but also many related
jobs, which can include high-skilled managers, tech repairmen and others. But
hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the
United States, the authors say. In fact, when immigration is rising as a share
of employment in an economic sector, offshoring tends to be falling, and vice
versa, the study found.
In
other words, immigrants may be competing more with offshored workers than with
other laborers in America.
American economic sectors with much exposure to
immigration fared better in employment growth than more insulated sectors, even
for low-skilled labor, the authors found. It’s hard to prove cause and effect in
these studies, or to measure all relevant variables precisely, but at the very
least, the evidence in this study doesn’t offer much support for the popular
bias against immigration, and globalization more generally.
We see the job-creating benefits of trade and
immigration every day, even if we don’t always recognize them. As other papers
by Professor Peri have shown, low-skilled immigrants usually fill gaps in
American labor markets and generally enhance domestic business prospects rather
than destroy jobs; this occurs because of an important phenomenon, the presence
of what are known as “complementary” workers, namely those who add value to the
work of others. An immigrant will often take a job as a construction worker, a
drywall installer or a taxi driver, for example, while a native-born worker may
end up being promoted to supervisor. And as immigrants succeed here, they help
the United States develop strong business and social networks with the rest of
the world, making it easier for us to do business with India, Brazil and most
other countries, again creating more jobs.
For all the talk of the dangers of offshoring,
there is a related trend that we might call in-shoring. Dell or Apple computers
may be assembled overseas, for example, but those products aid many American
businesses at home and allow them to expand here. A cheap call center in India
can encourage a company to open up more branches to sell its products in the
United States.
Those are further examples of how some laborers
can complement others; it’s not all about one group of people taking jobs from
another. Job creation and destruction are so intertwined that, over all, the
authors find no statistically verifiable connection between offshoring and net
creation of American jobs.
We’re all worried about unemployment, but the problem is
usually rooted in macroeconomic conditions, not in immigration or offshoring.
(According to a Pew study, the
number of illegal immigrants from the Caribbean and Latin America fell 22
percent from 2007 to 2009; their departure has not had much effect on the weak
United States job market.) Remember, too, that each immigrant consumes products
sold here, therefore also helping to create jobs.
When it comes to immigration, positive-sum
thinking is too often absent in public discourse these days. Debates on
immigration and labor markets reflect some common human cognitive failings —
namely, that we are quicker to vilify groups of different “others” than we are
to blame impersonal forces.
Consider the fears that foreign competition,
offshoring and immigration have destroyed large numbers of American jobs. In
reality, more workers have probably been displaced by machines — as happens
every time computer software eliminates a task formerly performed by a clerical
worker. Yet we know that machines and computers do the economy far more good
than harm and that they create more jobs than they destroy.
Nonetheless, we find it hard to transfer this
attitude to our dealings with immigrants, no matter how logically similar
“cost-saving machines” and “cost-saving foreign labor” may be in their economic
effects. Similarly, tariffs or other protectionist
measures aimed at foreign nations have a certain populist appeal, even though
their economic effects may be roughly the same as those caused by a natural
disaster that closes shipping lanes or chokes off a domestic harbor.
AS a nation, we spend far too much time and
energy worrying about foreigners. We also end up with more combative
international relations with our economic partners, like Mexico and China, than
reason can justify. In turn, they are more economically suspicious of us than
they ought to be, which cements a negative dynamic into place.
The current skepticism has deadlocked prospects
for immigration reform, even though no one is particularly happy with the status
quo. Against that trend, we should be looking to immigration as a creative force
in our economic favor. Allowing in more immigrants, skilled and unskilled,
wouldn’t just create jobs. It could increase tax revenue, help finance Social Security, bring new home buyers and improve the business
environment.
The world economy will most likely grow more
open, and we should be prepared to compete. That means recognizing the benefits
— including the employment benefits — that immigrants bring to this country.
Tyler Cowen is a professor of economics at
George Mason University
This
Bud's For Sale
How
the Busch clan lost control of an iconic American beer
company.
If
ever an American company represented the land of milk and honey for corporate
executives it was Anheuser-Busch, though perhaps the land of hops, rice and
barley would be more apt. For decades a palace of well-paid vice presidents in
cushy offices presided over the manufacture of Budweiser, America's beer, in
that most American of cities, St. Louis. They also oversaw the Busch Gardens
theme parks in Virginia and in Florida, where Shamu the killer whale was on the
payroll, along with a stable of 250 Clydesdale horses. It was a first-class
operation all the way. There were $1,000 dinners, hunting lodges, sky suites at
Busch Stadium and a fleet of Dassault Falcon corporate jets with a staff of 20
waiting pilots. Every kitchenette refrigerator at corporate headquarters was
well stocked with Bud, Bud Lite and Michelob.
And
why shouldn't the execs live well? The massive, 150-year-old company had an
estimated value of $40 billion to $50 billion. Budweiser was, and is, one of the
most recognized brands in the world, ahead of McDonald's, Disney and Apple. "Few
companies on earth were more evocative of America, with all of its history and
iconography, than Anheuser-Busch," writes veteran Financial Times journalist
Julie MacIntosh in her strenuously reported book, "Dethroning the King: The
Hostile Takeover of Anheuser-Busch, an American Icon." As the title suggests,
the reign of the King of Beers ended in the summer of 2008, when the company
merged with the Brazil-based brewing giant InBev, an outfit about as culturally
different from Anheuser-Busch as one could imagine. At $70 a share, or $52
billion, it was the largest all-cash acquisition in history and even more
noteworthy because it occurred during the gathering storm of a global financial
collapse.
To
help us grasp the significance of mating this corporate odd couple, Ms.
MacIntosh spends roughly the first third of "Dethroning the King" introducing
the reader to the Busch clan, a family so beechwood aged in their own history
that newborn male Busch babies are anointed with five drops of Budweiser on
their lips after delivery.
Presiding
over the company is August Busch III, or The Third, as he is called, a control
freak so frosty that he tosses his own father (metaphorically) under the
Clydesdale wagon in 1975 to gain the company reins. Ms. MacIntosh writes that
The Third made his move "not in a heart-to-heart with his dad at the dinner
table . . . but through a dramatic and painstakingly choreographed boardroom
coup."
View
Full Image
s
Dethroning
the King
By
Julie MacIntosh
(Wiley, 380 pages, $27.95)
For
the next 27 years as chief executive, The Third literally descends upon
corporate headquarters each morning piloting his own helicopter and strides the
hallways in his trademark cowboy boots. Many of his employees adore him; even
his enemies concede that he has a brilliant head for the beer business. When
executives are called on by the CEO in meetings to speak, one of Ms. MacIntosh's
sources tells her, their concern "is that he knows more than they do, even
though the topic is in their area of expertise." Another remembers: "He had only
two moods: pissed off and suspicious."
The
Third also regarded trusting other people a character flaw, including his own
son August IV, or The Fourth, to whom he grudgingly passed on the title after
The Fourth had completed an apprenticeship in many of the company's departments.
Ms. MacIntosh portrays The Fourth as a former good-time Charlie indulging in
booze, babes and fast cars before pulling himself together to claim his royal
birthright. One executive tells the author that, taken together, the father and
son were known around headquarters as "Crazy and Lazy."
There
seems little the son can do to please his father. When The Fourth excitedly
shows dad previews of the brilliant Super Bowl commercial in which three frogs
croak out Bud-wei-ser one syllable at a time, The Third asks why it
doesn't include the traditional "pour shot." "He just didn't understand why it
was funny," says one staffer. Ms. MacIntosh does a fine job of exploring the
father-son dynamic, but after a while it becomes hard to watch junior get
whacked one more time. "They didn't communicate much," recalls one executive,
"unless you call communicating on a daily basis getting your ass chewed."
When
growth-hungry InBev arrives on the scene, a company so lean and cost-conscious
that they're called the Walmart of brewers, all hell breaks loose at the
complacent Anheuser-Busch headquarters. The Brazilians make a pitch of $43
billion in what's known on Wall Street as a "bear hug"—an offer so generous that
the recipient can't refuse. But A-B's board does refuse, triggering weeks of
moves and counter-moves and endless end-gaming by the two companies. Ms.
MacIntosh relates every gambit in crisp, scene-by-scene detail.
Suffice
it to say here that the fate of Anheuser-Busch is what results when a company
coasts on its reputation and ignores global markets. Despite its reputation as
an all-American business idol, A-B proved to be a comparative mom-and-pop
operation on the world stage. "Unlike most consumer goods giants, Anheuser-Busch
didn't employ a raft of worldly, well traveled staffers," Ms. MacIntosh writes.
Adds another executive: "I bet 90 percent of the employees came from south of
Highway 40, out 270 and to the river."
The
Anheuser-Busch board of directors saw a final chance to forestall takeover by
initiating its own merger with the Mexican brewer Grupo Modelo, but in the
end—and with the machinations of The Third, who cut off his CEO son at the knees
one last time—they lost the will to fight on. After squeezing every dollar out
of the Brazilians, and while company layoffs were being planned and the NYSE
ticker symbol "BUD" flickered away, the board and its bankers, lawyers, vice
presidents and hangers-on began calculating their personal cuts of the sale. One
executive complained to the author that he couldn't help feeling the "victim of
America's cutthroat and . . . fractured business climate." Victim? The guy
walked off with $20.6 million.
Mr.
Cooke is a writer in Pelham, N.Y.
The Federal Reserve, in a dramatic effort to
rev up a "disappointingly slow" economic recovery, said it will buy $600 billion
of U.S. government bonds over the next eight months to drive down interest rates
and encourage more borrowing and growth.
Many outside the Fed, and some inside, see the
move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly
unconventional policies during the financial crisis to ward off a
financial-system collapse. But a year and a half later, he confronts an economy
hobbled by high unemployment, a gridlocked political system and the threat of a
Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more
if growth and inflation don't perk up in the months ahead. The $75 billion a
month in new purchases of Treasury debt come on top of $35 billion a month the
Fed is expected to spend to replace mortgage bonds in its portfolio that are
being retired.
The Dow Jones Industrial Average Wednesday
continued a climb that began in August, when Mr. Bernanke signaled that a
bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a
two-year high of 11215.13. Yields on 10-year notes, which have fallen from just
under 3% in early August, finished the day at 2.62%. The value of the dollar has
fallen in anticipation of a flood of new American currency hitting global
financial markets.
These market reactions are seen inside the Fed
as being stimulative to the economy. In addition to the impact of cheaper
borrowing, higher stock prices could encourage households to spend more and
businesses to invest more, and a weak dollar could make U.S. exports cheaper and
thus easier to sell abroad.
"All of these things are part of what the Fed
is trying to do, and I think it has been successful," said Laurence Kantor, head
of research at Barclays Capital in New York.
The moves announced Wednesday were broadly in
line with the expectations of economists, although some had expected total
spending to be a bit less and to come more quickly.
The Federal Reserve Wednesday unveiled a controversial
new plan to buy $600 Billion of Treasurys, hoping to spur growth in a
disappointingly slow U.S. economy. David Wessel and Neal Lipschutz discuss the
likelihood that the plan will work.
There are immense unknowns and many risks.
Rate changes since 2004 in dozens of
countries.
In essence, the Fed now will print money to buy
as much as $900 billion in U.S. government bonds through June—an amount roughly
equal to the government's total projected borrowing needs over that
period.
In normal times, a Fed spending spree on
government bonds would be highly inflationary, because it would flood the
economy with money and raise worries about too much government spending. The
mere worry of too much inflation in financial markets could drive long-term
interest rates higher and cause the Fed's program to backfire.
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Prices in commodities markets have marched
higher since late August. Crude-oil futures prices, for instance, have risen 15%
since then, to $85 per barrel.
—Misty
Lane
Michael Pence, a top Republican in the House of
Representatives, said the Fed was taking an "incalculable risk."
Thomas Hoenig, the president of the Federal
Reserve Bank of Kansas City, who described the move before the meeting as a
"bargain with the devil," was the lone dissenter in a 10-1 vote of the Fed's
policy committee. He said the risks of additional government bond purchases
outweighed the benefits.
But Fed officials are betting that inflation is
still being pushed strongly in the other direction because there is so much
spare capacity in the economy—including an unemployment rate at 9.6%, a
real-estate landscape littered with more than 14 million unoccupied homes, and
manufacturers operating with 28% of their productive capacity going unused.
The latest economic data suggest the economy is
expanding, but not at a very fast pace. Figures Wednesday from payroll firm
Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed
that companies added 43,000 private-sector jobs in October.
In a post-meeting statement, the Fed said it
was acting to "promote a stronger pace of economic recovery" and to ensure that
inflation, now running at around a 1% annual rate, moves toward the Fed's
informal objective of 2%.
This is the Fed's second experiment with a big
bond-buying program. Between January 2009 and March of this year, the central
bank purchased roughly $1.7 trillion worth of government and mortgage bonds.
That move also sparked worries about inflation, which so far hasn't
materialized. The bond-buying program is known in some corners as quantitative
easing.
"This approach eased financial conditions in
the past and, so far, looks to be effective again," Mr. Bernanke said in an
opinion piece scheduled to be published in Thursday's Washington Post.
By buying a lot of bonds and taking them off
the market, the Fed expects to push up their prices and push down their yields.
The Fed hopes that will result in lower interest rates for homeowners, consumers
and businesses, which in turn will encourage more of them to borrow, spend and
invest. The Fed figures it will also drive investors into stocks, corporate
bonds and other riskier investments offering higher returns.
The Fed normally would push down short-term
interest rates when the economy is weak. But it has already pushed those rates
to near zero, leaving it to resort to unconventional measures.
The planned bond buying, by Fed calculations,
will have an economic impact roughly equivalent to cutting short-term interest
rates by three-quarters of a percentage point.
The Fed will be buying bonds with maturities of
as long as 30 years, but will concentrate its purchases in the five-year to
six-year range. Some bond-market participants were disappointed with that
decision because they wanted the Fed to focus on buying longer-term bonds. But
doing so could leave the Fed more exposed to losses if interest rates rise.
There are other risks.
Critics say a weaker dollar isn't in U.S.
interests, and that a swift decline in the value of the currency could drive up
U.S. interest rates. Fed officials have seen the dollar's drop to date as being
orderly and supportive of growth.
Some critics also argue that by purchasing
government bonds, the Fed is taking pressure off the White House and Congress to
address long-term deficit problems, but Mr. Bernanke is trying to avoid such
political calculations.
U.S. trading partners, particularly in the
developing world, openly worry that the Fed's money pumping is creating
inflation in their own economies and a risk of asset-price bubbles. Fed
officials say a strong U.S. economy is in everyone's interest.
In recent weeks, China, India, Australia and
others have pushed their own interest rates higher to tamp down inflation
forces. Authorities in Brazil and Thailand have imposed taxes on capital
flooding into their economies to prevent an asset bubble. And Japanese
authorities have intervened in currency markets to prevent the yen from
appreciating too much against the dollar.
View Full Image
There is an alternate risk that officials
wrestled with in their latest two-day meeting, which concluded before lunch
Wednesday: They might not be doing enough.
Economists at the research firm Macroeconomic
Advisers LLC calculated that even if the Fed purchases $1.5 trillion worth of
Treasury bonds—which some economists say remains a distinct possibility—it would
only bring the unemployment rate down by 0.2 percentage points by the end of
2011.
"This instrument doesn't give them a lot of
power, especially on the scale which they're prepared to use," said Laurence
Meyer, of Macroeconomic Advisers, after the decision.
For the Fed, it was a middle ground that
emerged after months of internal debate about the costs and benefits of
restarting the program.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
Milton
Friedman vs. the Fed
The
Nobel laureate would never have endorsed increasing inflation to stimulate the
economy.
Would
the late Milton Friedman have endorsed the Federal Reserve's plan to make
large-scale purchases of long-term Treasury bonds? The idea here is to pump more
money into and thus jump-start the economy, reducing unemployment. Some people,
including this newspaper's David Wessel in a column last week, believe the great
Nobel laureate would favor this inflationary program. I am certain he would
not.
Friedman's
main message for central banks was to maintain a monetary rule that kept the
growth of the money supply constant. In his Newsweek column, "Inflation and
Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is .
. . a side effect of the cure for inflation," so that if a central bank "cured"
unemployment by inflating, it "will have unemployment later." In other words,
don't try it.
Friedman's
Newsweek column for July 28, 1980 ("Improving Monetary Policy") came with the
unemployment rate rising past 7%. His proposals for improving policy made no
mention of using monetary expansion to reduce unemployment. He proposed rules
for stable growth to achieve target "dollar levels of monetary aggregates."
Friedman
served on President Reagan's economic policy advisory board. His memos on
monetary policy repeat the themes he made familiar to Newsweek readers and
others all over the world. There is not a word suggesting that monetary policy
should try to raise the inflation rate in order to reduce the unemployment rate.
This
is unsurprising, as he had explained many times in the past that any such
reduction would be temporary and last only until people caught on to the higher
inflation. At that point, they would demand higher wages and interest
rates.
Friedman
made an exception to his rule about steady-state monetary policy in case of
deflation. When prices fell, as they had during the Great Depression or in Japan
in the 1990s, he urged the central bank to increase money growth. I served as
one of two honorary advisers to the Bank of Japan in the 1990s. With short-term
rates close to zero, I gave the same advice, urging the bank several times to
buy long-term bonds or foreign exchange to increase money growth until deflation
ended.
All
this is not relevant now, since there is no sign of deflation in the United
States. The Fed's claim that there is a risk of deflation should embarrass it.
View
Full Image
Associated
Press
Nobel
laureate Milton Friedman
In
the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch
the core deflator for personal consumption expenditure—the PCE deflator. Since
then, the Fed has used that measure as its inflation target. Recently, without
much publicity, the Fed switched to the consumer price index (CPI). The reason?
From 2003 to 2009, the two measures moved together. In 2010, they diverged—and
the CPI shows substantially less inflation than the PCE.
Even
so, the most recent PCE deflator shows inflation running at around 1.2%
annually, about where the Fed says it wants to hold the inflation rate. And it
has been between 1.5% and 1.8% for a year. There is no sign of
deflation.
The
two measures diverged because they give different weights to their components,
especially housing prices. The CPI gives almost double the weight to housing
prices, especially the rental value of owner-occupied houses. This is not a
number that government statisticians sample in the market. They make an
estimate. The new long-term bond purchase program puts a lot of weight on a weak
foundation.
Paul
Volcker and Alan Greenspan restored much of the credibility that the Fed lost in
the great inflation of the 1970s. The Fed's plan to increase inflation puts this
credibility at risk and is a large step away from the policy that Milton
Friedman favored.
Mr.
Meltzer is professor of economics at Carnegie Mellon's Tepper School of
Business, a visiting scholar at the American Enterprise Institute, and the
author of "A History of the Federal Reserve" (University of Chicago Press, 2003
and 2009).
Nov
3, 2010
10:08 AM
Secondary
Sources: QE2 Criticism, Gridlock, Protectionist Threat
WSJ
Econ Blog
By
Phil Izzo
A
roundup of economic news from around the Web.
–QE2
Criticism:
Martin Feldstein is worried about the effects of more Fed asset
purchases. “The Federal Reserve’s proposed policy of quantitative easing is a
dangerous gamble with only a small potential upside benefit and substantial
risks of creating asset bubbles that could destabilise the global economy.
Although the US economy is weak and the outlook uncertain, QE is not the right
remedy… Like all bubbles, these exaggerated increases can rapidly reverse when
interest rates return to normal levels. The greatest danger will then be to
leveraged investors, including individuals who bought these assets with borrowed
money and banks that hold long-term securities. These risks should be clear
after the recent crisis driven by the bursting of asset price bubbles. Although
the specific asset prices that are now rising are different from last time, the
possibility of damaging declines when bubbles burst is worryingly
similar.”
–Gridlock:
Mohamed A. El-Erian says the economy can’t afford political gridlock
right now. “This world speaks to a different characterization of private-sector
activity - rather than able and willing to move forward unhindered if the
government simply gets out of the way, this is a private sector that faces too
many headwinds. In these circumstances, high economic growth and job creation
require not only that the private sector moves forward but also that it attains
critical mass, or what Larry Summers, the departing head of the National
Economic Council, called “escape velocity.” While certain sectors of the economy
are in control of their destinies, the private sector as a whole is not in a
position to do this. It needs help to overcome the consequences of the “great
age” of leverage, debt and credit entitlement, and the related surge in
structural unemployment. The urgency to do so increases in the rapidly evolving
global economy, as United States sheds a bit more of its economic and political
edge to other countries daily. “
–Protectionist
Threat:
Kenneth Rogoff is worried about trade protectionism. “According to a recent joint report by
the International Monetary Fund and the International Labor Organization, fully
25% of the rise in unemployment since 2007, totaling 30 million people
worldwide, has occurred in the US. If this situation persists, as I have
long warned it might, it will lay the foundations for huge global trade
frictions. The voter anger expressed in the US mid-term elections could prove to
be only the tip of the iceberg. Protectionist trade measures, perhaps in the
form of a stiff US tariff on Chinese imports, would be profoundly
self-destructive, even absent the inevitable retaliatory measures. But make no
mistake: the ground for populist economics is becoming more fertile by the
day.”
HSA-Based
Reform Proposed as Post-ObamaCare Option
With
assistance from Devon Herrick, a senior fellow with the National Center for
Policy Analysis, physician Roger Beauchamp has developed the "180-Degree
Approach to Health Care Benefits Reform," which he says will control rising
health care costs across the nation and help save Medicare from its expected
bankruptcy, says the Heartland Institute.
Herrick
says the 180-degree approach would widen the use of health savings accounts
(HSAs) across the nation.
Beauchamp
says giving these popular accounts a primary role in a post-ObamaCare world
would empower consumers and lower bureaucratic control over personal medical
decisions.
The
180-degree approach would also save the nation from the impending fiscal
explosion of Medicare, Beauchamp says. According to U.S. Treasury
Secretary Tim Geithner, the Medicare fund is projected to become insolvent in
2017.
"By
allowing all Americans to accumulate over their lifetimes more money that is
completely tax-free to be used for their health care, we make them less
dependent on Medicare when the time comes to retire," Beauchamp
says.
The
approach will also improve the financial position of U.S. businesses and
establish fairness for the first time between people who buy health care
individually and those who get it from a company plan, says
Heartland.
Source:
Thomas Cheplick, "HSA-Based Reform Proposed as Post-ObamaCare Option," Heartland
Institute, November 3, 2010.
For
text:
Obama
Spends Billions, Only Adds to College Costs
The
Obama administration has doled out a record amount of college loans this year to
help students cope with the affordability crisis in college tuition.
Meanwhile, college tuition has become yet more unaffordable, says James A.
Bacon, author of Boomergeddon.
Higher
education has been one of the great growth industries of the 2000s. According to
the 2009 Digest of Education Statistics, published by the National Center for
Education Statistics, which lists data from the 2003-2004 to 2006-2007 school
years, operating expenditures for all
U.S. institutions of higher education increased 16 percent (in real,
inflation-adjusted dollars) over that three-year
span.
Where
did the money go? Here are the spending categories that enjoyed the
largest rates of increase:
In
other words, expanded college loans
are paying for the growth of higher-ed bureaucracies. The only way
to make higher education more affordable over the long haul is to demand greater
cost efficiency from our colleges and universities. But as long as the
federal government keeps the money spigot flowing, higher education can evade
accountability, says Bacon.
Source:
James A. Bacon, "Obama Spends Billions, Only Adds to College Costs," Washington
Times, October 29, 2010.
For
text:
http://www.washingtontimes.com/news/2010/oct/29/obama-spends-billions-only-adds-to-college-costs/
17f10
WSJ
· NOVEMBER
8, 2010
As a
reminder of unpredictability in politics, consider what happened when the
Progressive Change Campaign Committee last month announced that 95 candidates
for Congress had signed a pledge to support "net neutrality." The candidates
promised: "In Congress, I'll fight to protect Net Neutrality for the entire
Internet—wired and wireless—and make sure big corporations aren't allowed to
take control of free speech online."
Last
week all 95 candidates lost. Opponents
of net neutrality chortled, and the advocacy group retreated to the argument
that regulation of the Internet wasn't a big issue in the election.
The
broader lesson may be that people fear government regulation of what has been a
free and open Internet more than they fear what any other institution might do
to the Web. This is a good time to reset the argument about how to ensure that
the Internet remains a lively place for users and
innovators.
Over
the past decade,
lobbyists have tried to argue that more government control over the Web would
somehow result in more freedom. Many in the high-tech world
originally supported this view, perhaps because "net neutrality" sounds like the
side of the angels. But
as other industries have learned, the relationship between regulation and
freedom is inverse, not direct. There's not much wrong with the
Internet now, but there's a big risk in giving regulators more control of an
industry in which even the gurus have little idea what innovations will come
next.
Everyone
agrees that Internet providers shouldn't discriminate based on content. The
question is the role for government. If Comcast, which is in the process of
acquiring NBC, started to discriminate against CBS or ABC, its Internet
competitors would be quicker than regulators to point to an inferior consumer
experience.
To take
another example, Rick Carnes, president of the Songwriters Guild of America,
points out, "Proponents of net neutrality have long claimed that the Federal
Communications Commission needs to lay down some rules ensuring freedom of
speech on the Internet. As a songwriter, I have a hard time wrapping my mind
around the concept that the FCC is going out of the censorship business and into
the protection of free speech."
In the
name of neutrality, lobbyists want to stop Internet providers from managing
their networks by charging more to providers or users of bandwidth-hogging
services such as video and online games. This amounts to a forced subsidy of
certain users of the Web at the expense of others. As demands on the Web
escalate, speed and reliability will inevitably depend on more management of the
network, including through different prices for different levels of
service.
As
these debates simmered, the FCC lost several legal cases on whether it can even
claim jurisdiction over the Web. The commissioners now threaten to reclassify
the Internet so that it would come under the regulatory regime written in the
1930s to help the FCC micromanage a monopoly telephone service. A bipartisan
group of more than 200 members of Congress objected earlier this year to the
agency reclassifying broadband as a telecommunication service. Having
bureaucrats decide on the speeds, levels of service and prices that people and
businesses should pay for Web access is not a political
winner.
Technology
is running laps ahead of regulators. Verizon and Google have jointly proposed
that wireless networks should be excluded from the rules that apply to cable and
other hardwire providers. They also would exclude "additional, differentiated
online services," referring to the next set of consumer
services.
It
looks like the future will increasingly feature these new services.
The Internet itself is
in flux, with Wired magazine recently declaring on its cover: "The Web is Dead."
The provocative point was that many of the most successful new online products
rely on the Internet but are no longer delivered through standard Web
sites.
View
Full Image
Associated
Press
For
example, Apple offers applications designed specifically for its iPad tablet.
Amazon's Kindle has a special deal with Sprint that allows for lightning-fast
downloads of books. The closed community of Facebook regulates how people link
to one another. Do we really want regulators in the name of neutrality
determining which apps should be available on the iPad? How fair it is that
Kindle has fast book downloads? Should the FCC decide how many Facebook friends
are too many? It's not even clear what net neutrality means in the context of
these services.
Government's
most active role on the Internet is the regulation of broadband providers, which
has resulted in monopolies and duopolies. Indeed, there is little discussion of
net neutrality in Europe or Asia, where there is real competition among
broadband providers. U.S. politicians and regulators would be better off
focusing on ways to increase competition on the Internet—not looking for new
ways to regulate it.
WSJ· NOVEMBER 8, 2010
The
night before former Argentine President Néstor Kirchner died of a heart
attack—12 days ago—he is rumored to have had a heated argument with the leader
of this country's largest labor union, known by its Spanish initials CGT. Some
say it's what killed the Peronist strongman.
The
dispute is instructive because it highlights the power of Big Labor in this
country and explains why, despite the passing of this powerful politician who
acted like a mob boss, there is still little hope that Argentina's economy will
begin to modernize any time soon. It is also a cautionary tale for Americans who
have watched President Obama fuel a resurgence of union might in the United
States.
Kirchner had accumulated his remarkable political heft
since his election in 2003, in part because Argentina's Congress granted him
extraordinary powers in the wake of the peso collapse the year before. Over four
years, in matters of both the economy and politics, he continually tightened his
grip. After his wife, Cristina Kirchner, won election in 2007, he remained the
force behind the throne. It was widely expected that he again would be a
candidate for the office in the October 2011 elections.
With his death, pundits immediately began debating
whether a weakened Cristina might step aside next year. The hopeful posited that
a more moderate Peronist might restore some semblance of the rule of law, which
has been almost entirely destroyed under kirchnerismo. Markets rallied
on the news of Néstor's passing.
Yet
this calculation ignores the outsized power of organized labor here, a reality
that confronts every Argentine politician as it did the former president in the
days before his death.
The CGT, founded in the 1940s under the dictator Juan
Perón, has a long track record of paralyzing the economy to enforce its demands
and strangling any administration that dares to go against it. Its strong bond
with the Peronist Party is the reason many Argentines have become convinced that
only Peronists can govern the country.
View Full Image
Associated Press
Can
Cristina's power survive the death of her husband Néstor
(right)?
Néstor understood both the power and the peril implied
by the CGT and he rode the tiger ably, first as president and then as the
caudillo-in-chief behind his wife. CGT Secretary General Hugo Moyano performed
dutifully for the first couple, including sending out union goons to intimidate
farmers during their 2008 strike against government tax increases and blocking
the distribution of newspapers critical of Mrs. Kirchner's government in 2009.
In return, unionists were allowed to sink their teeth ever deeper into the
economy.
But
in recent weeks Néstor could see that the beast he had under him was restless.
His 2011 candidacy was looking weak and there were rumors that Mr. Moyano,
inspired by the success of Brazilian laborite Lula, had his eye on the job. The
unionist began testing the limits of his office.
Just days before Néstor's death, Mr. Moyano publicly
called for official CGT representation in the three powers of government, i.e.,
reserved seats in the courts, the congress and the cabinet. It is unlikely
Kirchner wanted to give up his power to dole out privileges. So when Mr. Moyano
called for a meeting of Peronist leaders in Buenos Aires province, Kirchner
undermined the meeting by lobbying party loyalists to boycott it. The angry
phone call that ensued from a presumably unhappy Mr. Moyano may have been too
much for the 60-year-old workaholic with a heart
condition.
Get the latest
information in Spanish from The Wall Street Journal's Americas page.
Néstor has gone to his final judgment, but the question
of who holds the reins that might both contain and channel union power lives on.
Last week, the president, whose ability to govern without her husband has been
the subject of much speculation since Oct. 27, took both carrots and sticks out
of her designer handbag. First her chief of staff reached out to Mr. Moyano,
calling the CGT the "backbone" of the Peronist Party. Days later the public
learned that a federal judge happens to be investigating corruption charges
against the union leader. If he goes to prison it would not be surprising to
find that his replacement is more pliable.
Markets are likely to help Mrs. Kirchner maintain power
in the months ahead. The U.S. Federal Reserve's latest "quantitative easing"
announcement has already boosted soybean prices here, generating a sense of
economic improvement. The pain of more inflation, added to the current
double-digit rate, will come later. For now there is applause.
She
also faces risks. Union leaders have demonstrated that they can exercise power
from jail cells. And without her husband to protect her, Mrs. Kirchner may find
herself surrounded by ambitious competitors within the party who see this as
their moment.
Yet
this uncertainty must not be confused with a debate about whether Argentina's
rule of law might be restored. The only thing up in the air is who can maneuver
most effectively within a country ruled by the ideology of 1930s economic
nationalism. It's like a battle of mafia dons. The rest of the Argentine nation
remains a spectator.
Write to O'Grady@wsj.com
WSJ
· NOVEMBER
8, 2010
I work
for a health-insurance company, and my brother is a primary-care physician. As
he tells it, my industry is responsible for the death of his. Insurance
companies, he argues, have killed primary care by grinding down reimbursement
and compelling doctors to see more and more patients just to make a
living.
I
sympathize with my brother, because I know that doctors' business with insurers
isn't always easy. I'm also aware of the market's price sensitivity—and
reimbursement paid to doctors comes from premiums paid by customers. Insurers
must keep costs down.
Remember
Marcus Welby, M.D.? He defined the family doctor on TV in the 1970s,
exemplifying the four Cs: caring, competent, confidant and counselor. In the
mid-'60s, I remember my father-in-law, a real-life Dr. Welby, telling me the
exciting news that the federal government was going to start paying him to see
seniors—patients who before he had seen for the proverbial chicken (or nothing
at all). That fabulous deal was Medicare.
View
Full Image
Associated
Press
Robert
Young (aka Marcus Welby, M.D )
Medicare
introduced a whole new dynamic in the delivery of health care. Gone were the
days when physicians were paid based on the value of their services. With
payment coming directly from Medicare and the federal government, patients who
used to pay the bill themselves no longer cared about the cost of services.
Eventually,
that disconnect (and subsequent program expansions) resulted in significant
strain on the federal budget. In 1966, the House Ways and Means Committee
estimated that by 1990 the Medicare budget would quadruple to $12 billion from
$3 billion. In fact, by 1990 it was $107 billion.
To fix
the cost problem, Medicare in 1992 began using the "resource based relative
value system" (RBRVS), a way of evaluating doctors based on factors such as
education, effort and specialized training. But the system didn't consider
factors such as outcomes, quality of service, severity or demand.
Today
most insurance companies use the Medicare RBRVS because it is perceived as
objective. As a result of RBRVS, specialists—especially those who perform a lot
of procedures—do extremely well. Primary-care doctors do not.
The
primary-care doctor has become a piece-rate worker focused on the volume of
patients seen every day. As Medicare and insurers focused on trimming the costs
of the most common procedures, the income and job satisfaction of primary-care
doctors eroded.
So
these doctors left, sold or changed their practices. New health-care service
models, such as the concierge practice and the Patient-Centered Medical Home,
drew doctors away from the standard service models that most patients rely on
for coverage.
All of
these factors have contributed to a fragmented, expensive health system with
most of the remaining doctors focused on reactive instead of preventive care.
The
solution to the problem is making primary-care physicians the captains of the
ship. They must have the time and financial resources necessary to take care of
their patients, tailoring care to patients' specific conditions and needs. And
they need the data to track their patients' results, so they can guide patient
progress. They will then be able to slow (and sometimes reverse) their patients'
illnesses, keeping them out of hospital emergency rooms and specialists'
offices. The end result: reduced costs and improved quality of
care.
So who
really killed primary care? The idea that a centrally planned system with the
right formulas and lots of data could replace the art of practicing medicine;
that the human dynamics of market demand and the patient-physician relationship
could be ignored. Politicians and mathematicians in ivory towers have placed
primary care last in line for respect, resources and prestige—and we all paid an
enormous price.
Mr.
Hannon is senior vice president of marketing and provider affairs for Blue Cross
Blue Shield of Arizona.
· NOVEMBER 8, 2010
Some recent headlines
and commentary seem to suggest that the Irish economy has all but collapsed. It
hasn't, and it doesn't have to.
Ireland has had a property bubble and crash, a
regulatory failure, a banking disaster, and a fiscal crisis. Now, Ireland is
caught up in the great macroeconomic issues of our times: how deep and how fast
to cut debt; what will promote sustainable growth; the governance of the euro
and its monetary policy; how to fix banks and who should pay; bond investors'
attitudes to sovereign risk. It's an uncomfortable place for a small
country.
Ireland's macro and
fiscal challenges are real, well known, and openly disclosed. The recurrent
government deficit has to be cut to 3% of GDP from nearly 12% in just four
budgets. A credible 4-year plan has to be published this month, and by Dec. 7
Dublin must produce a 2011 budget with €6 billion in savings. The brunt is to be
borne by spending cuts. By early next year, Ireland will have to return to debt
markets.
With all this attention
on macroeconomics, and the disaster scenarios being painted around Ireland's
latest thinly-traded 10-year government-bond price that hit over 7.5%,
prognosticators seem to have forgotten just what's involved in the one thing on
which so much depends: growth.
And in Ireland at least,
growth will be about microeconomics, not the grand macro issues.
Forget about global
imbalances. Forget about U.S. and euro-zone monetary policy. Forget about the
latest Basel capital rules. Like most countries, Ireland is a price-taker on
those decisions, as it is on global, U.S., euro-zone and U.K. economic growth.
The only growth factors Ireland can really affect for itself are its government
finances and the business environment in the country.
Observers and bond
investors are wondering, can Ireland "do it"? That would mean Dublin not
defaulting on its debts, and achieving sustainable finances and economic growth.
Aside from the government's current drive to cut spending, this is fundamentally
a question about Ireland's real economy as it now stands.
View Full Image
Getty Images
In that context, here is
the hand that Ireland now has to play: An economy consisting of about 4.5
million people that was heading to a value of €190 billion per year, but is now
settled back to €160 billion. That's not poor; it's well-off, quite diversified
and developed.
Since 1995, Irish
people's purchasing power has shot ahead of the euro-zone average, to 19% above
it in 2009 from 10% below it in 1995. During the boom years, prices in the
country got out of hand, but unit labor costs fell last year by over 6% relative
to euro-zone costs.
The median age of the
population is 35, the lowest in the EU, and despite renewed emigration, it is
still growing. Ireland has also experienced Europe's fastest increase in life
expectancy, in which it now matches the world's wealthiest countries. These
people are among the OECD's top performers in terms of tertiary education
attainment. They are also renowned for their creativity and their arts, which
can be monetized.
This economy is embedded
in a single market of 500 million people, with which it trades more than most.
Ireland's latest quarterly exports were 103% of second-quarter GDP, outstripping
imports by nearly 25%. Ireland's balance of payments is turning positive. A lot
of this is due to the presence of more than 1,000 foreign companies with
operations in Ireland, including large pharmaceutical firms,
information-technology companies, and medical-device corporations. For some
time, Ireland has been diversifying its economy, and moving away from low- and
mid-level manufacturing. The value of Irish-made medical and pharmaceutical
products increased fourfold between 2000 and 2008.
Ireland's service
exports are also rapidly growing. In 2000, they were worth €13 billion. By 2008,
they had grown to €68 billion, and had more than doubled their share of total
exports. Part of this is thanks to the back- and middle-office operations of the
international financial-services sector, which was originally based in Dublin
and is now spread around the country. This boom had nothing to do with the
property bubble, and persists after its burst.
Irish people have close ties with, and easy travel to,
the U.K. and major commercial centers around Europe. There also exists an
extensive, well-disposed Irish network in the U.S. and
globally.
Some people claim this
internationalization makes Ireland's economy vulnerable, as foreign businesses
can leave as easily as they came. But in the real global economy, change is the
only constant: Companies succeed, fail, grow, decline, move and change
operations all the time. In this environment, and for Ireland in particular, the
popular distinction between a domestic company and a mobile, international
company, is not much use. In fact Ireland's economic interest lies in seeing its
own domestic companies become global and agile, as some have already done in
food and manufacturing. If anything, Ireland has more cause for concern about
global politics than about global business, insofar as protectionist sentiment
may take hold.
Ireland also has the
national memory of its last fiscal crisis in the late 1980s. The debt spiral
they're trying to avoid now had already happened then. The debt-to-GDP ratio was
above 120%. Interest payments were 20% of total government spending and 35% of
revenue. Those levels can be avoided now, given that debt should peak at around
106% of GDP and the average cost of debt will still be lower than in the 1980s.
Ireland's net debt level is also better than it was before, and cash and
investments have been set aside in the national pension
fund.
Crucially, the people of
Ireland were different then too. Irish people now have a longer track record of
innovating, marketing, selling, manufacturing, raising capital, and making deals
in a range and depth of global markets than they ever have before.
Dublin can strengthen
this hand even further. Just as the government is intent on frontloading its
fiscal correction, it can do the same with its microeconomic prospects. Most
critical is the direction of change on Ireland's competitiveness. As well as
investing in research and allowing universities to be sustainably funded, Dublin
could take further actions to cut the costs of doing business in Ireland. Energy
costs need to fall further. Training the unemployed also helps, but so do
unambiguous policy decisions to reduce overall labor costs and improve the
incentives to take up work. If some new taxes are inevitable, Dublin can ensure
they are the ones that will be least harmful to job creation, investment and
enterprise, such as property-based taxes. Correspondingly, a cut in employers'
social-insurance rates should be part of the fiscal framework. In addition,
Ireland cannot afford to become less competitive by raising its marginal
income-tax rates. Fortunately, there is no prospect of its 12.5% corporate-tax
rate going up.
The crash did happen,
but Ireland's economy still has a pulse, at least as strong as many of its
larger partners around the world. Its debts are massive, but manageable—no one
has proven yet that they are not.
This is a playable hand.
The financial engineering required to restore the Irish budget to health is
doable, and is being done. Now, it's over to the political engineering, whose
highest achievement would be to let the Irish people do what they do best:
adjust and thrive.
Mr. O'Connor is a business consultant based in London
and a former special adviser in the Irish government.
· NOVEMBER
8, 2010
more in
Economy »
For
those with little education, it pays to live among people with college
degrees.
Workers
with less than a high school diploma were likelier to keep their jobs during the
recession if they lived in a handful of metro areas with the highest
concentrations of employees with college degrees, according to a paper released
Friday by Alan Berube, a senior fellow at the Brookings
Institution.
Mr.
Berube studied recent census data for the nation's 100 largest metro areas,
identifying the 20 with the highest share of college graduates. In those areas,
he found, the fraction of workers without high school diplomas who had
jobs—their employment rate—declined by a median of 0.6 percentage point during
the recent recession. In the other 80 areas, their employment rate fell three
percentage points, or five times as much.
"Where
you are matters," Mr. Berube said. "If you're a worker without a high school
diploma, you are better off being in a highly educated labor market like Seattle
than being in a less educated labor market like Scranton
[Pa.]."
Part of
the explanation, he said, is a trickle-down effect. Those with college degrees
were likelier to keep their jobs through the recession than less educated
workers, so they continued spending on things like restaurant meals and laundry
services. The less-educated workers found steadier work because they were in
fields that served their college-educated neighbors.
There
are other possible reasons. A less educated worker living in a city with a
surplus of such workers, for example, might not fare as well as one in a city
with a smaller supply, where it would be easier to hang on to a
job.
U.S.
employers boosted hiring in October, offering hope that the recovery may be
picking up steam. The private sector notched its largest gain since April,
adding 159,000 jobs. Still, the job market faces a long road to full recovery.
At October's pace, it would take almost 50 months just to replace the positions
lost in the downturn.
One
example of the location dynamic is Austin, Texas, where Facebook Inc. opened a
new office in late October that employs more than 60 people, many with college
degrees. Austin is also on the list of most-educated metro areas.
"If you
look at Austin, I think it makes a lot of sense" to open an office there, said
Kathleen Loughlin, a company spokeswoman. "There's a large, talented employee
base."
Those
jobs generate work for the less educated. For instance, the office has an
outside catering contractor that provides breakfast, lunch and dinner for
employees, creating food service jobs.
The
disposable income of better-educated workers is one reason Yard House USA Inc.,
a restaurant chain, is opening new locations in Denver, Boston and San Jose,
Calif., all cities on the most-educated list. The Denver restaurant is hiring
200 workers—including many positions, such as dishwashers, that tend to go to
less-educated workers.
"It
seems like Colorado is doing well," Harald Herrmann, the company's president and
chief executive, said of the area's economy. Other markets, in California,
Nevada and Arizona, remain a challenge. "Would we open another restaurant in,
say, a Riverside, Calif., today? Probably not, given the
economy."
Frankie
Wright, 43 years old, recently landed two part-time jobs in Chicago, another
city with a highly educated work force, with the help of Goodwill Industries of
Metropolitan Chicago Inc. Ms. Wright, a high school dropout, works at a local
grocer and for a community watch group in the mornings and afternoons, ensuring
that high school students enter and leave a local school without incident and
reporting any problems to police.
"I am
grateful I do have a roof over my head and food on the table,'' Ms. Wright
said.
Write
to Sara
Murray at sara.murray@wsj.com
http://blogs.wsj.com/economics/?mod=marketbeat
–Estate
Tax: Richard Thaler looks at the options for the
estate tax. “But what about the tax rate? The proposed 45 percent rate is the
lowest since 1932, but it still sounds high, almost confiscatory. Yet we must
keep that $7 million exemption in mind. The Tax Policy Center estimates that in
2009, the average effective rate (taxes paid as a proportion of the entire
estate) was 19.4 percent for all taxable estates. Even for estates above $20
million, the rate was only 22.4 percent. We could lower the rate if we also
lowered the exemption, but that would be a mistake. Dealing with the estate tax
is a major nuisance, so it should apply to as few people as possible. With the
$7 million exemption, only 3 estates in 1,000 would have to pay any tax. And
those with estates that big could certainly afford a good lawyer to help them
further increase the effective size of their exemption. “
Nov 6,
2010
11:13 AM
Number
of the Week: $10.2 Trillion in Global Borrowing
By Mark
Whitehouse
Number
of the Week
$10.2
Trillion
$10.2
trillion: The amount
of money advanced-nation governments will need to borrow in
2011
As the debts
of advanced countries rise to levels not seen since the aftermath of World War
II, it’s hard to know how much is too much. But it’s easy to see that the risk
of serious financial trouble is growing.
Next year,
fifteen major developed-country governments, including the U.S., Japan, the
U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing
bonds and finance their budget deficits, according to estimates from the
International Monetary Fund. That’s up 7% from this year, and equals 27%
of their combined annual economic output.
Aside from
Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is
the most extreme case. Next year, the U.S. government will have to find $4.2
trillion. That’s 27.8% of its annual economic output, up from 26.5% this year.
By comparison, crisis-addled Greece needs $69 billion, or 23.8% of its annual
GDP.
So far, with
the notable exception of Greece, major advanced nations haven’t had too much
trouble raising the money they need. Japan’s domestic investors have
consistently bought its government bonds despite their low yield. Foreign
investors have been snapping up U.S. Treasury bonds, which remain the world’s
premier safe-haven investment.
Still,
there’s reason to be concerned that governments’ appetite for borrowing could
ultimately push up interest rates, or worse.
For one,
government borrowers are tapping into smaller international capital flows. The
total amount of foreign portfolio investment sloshing in across advanced
countries’ borders averaged about 3.8% of global GDP in the twelve months ended
June, compared to an average 9.5% in the eight years leading up to the
recession.
Beyond that,
the U.S. and other advanced nations are putting pressure on China to allow its
currency to appreciate against the dollar. All else equal, such a move would
curb demand for dollar-denominated debt from a country that is the largest
foreign holder of U.S. Treasurys.
In the U.S.,
domestic investors could pick up the slack. The Federal Reserve has committed to
buy an added $600 billion in U.S. government debt over the next eight months.
Demand from households has been very strong as U.S. consumers boost their
savings rate. Tighter regulations could push banks to buy more safe assets such
as U.S. Treasurys.
But as the
IMF warned in a report this week, the chances that investors will balk at
lending to governments “remains high for advanced economies.” That’s a highly
undesirable outcome — picture a financial crisis in which governments can’t step
in to help, because government finances are the problem. We can’t know how close
we are to such an outcome, and the need to keep the recovery going would make
cutting back now a risky move. Ultimately, though, we’re heading in the wrong
direction.
Mixx Facebook Twitter Digg delicious reddit MySpace StumbleUpon LinkedIn
November 04, 2010|By Sara Sidner, CNN
http://articles.cnn.com/2010-11-04/world/india.bikes_1_india-market-harley-davidsons-haryana?_s=PM:WORLD
The iconic American motorcycle brand, Harley-Davidson, has announced plans to build an assembly plant in India.
Harley-Davidson, the iconic American motorcycle brand with a cult-like following, has announced it has chosen to build its second assembly plant ever outside the United States in India.
The "complete knock down" plant or CKD is expected to be up and running in the northern Indian state of Haryana in first half of 2011. Parts made in America will be put together for the Indian market in Haryana.
"What we are doing is made in USA, assembled in India, which will have a positive job effect back home which is why we are driving this investment as quickly as we are," Anoop Prakash managing director for Harley Davidson India told CNN.
18f10s
Deficit
Panel Pushes Cuts
Plan
to Save $3.8 Trillion Targets Medicare, Pentagon, Middle-Class Tax
Breaks
By
JOHN
D. MCKINNON, COREY
BOLES And MARTIN
VAUGHAN
WASHINGTON—A
White House commission laid out a sweeping proposal to cut the federal budget
deficit by hundreds of billions a year by targeting sacrosanct areas of U.S. tax
and spending policy, such as Social Security benefits, middle-class tax breaks
and defense spending.
The
co-chairs of a deficit commission established by the White House has called for
limiting federal spending on health care, gradually raising the retirement age
and lowering the corporate tax rate. Jerry Seib discusses.
The
preliminary plan in its current form would end or cap a wide range of breaks
relied on by the middle class—including the deduction for home-mortgage
interest. It would tax capital gains and dividends at the higher rates now
levied on wage income. To compensate, one version of the plan would dramatically
lower and simplify individual rates, to 9%, 15% and 24%.
For
businesses, the controversial plan would significantly lower the corporate tax
rate—from a current top rate of 35% to as low as 26%—but also eliminate a number
of deductions. It would make permanent the research and development tax credit.
More
Overall,
the plan would hold down the growth of the federal debt by roughly $3.8 trillion
by 2020, or about half of the $7.7 trillion by which the debt would have
otherwise grown by that year, according to commission staff. The current
national debt is about $13.7 trillion.
The
budget deficit, or the amount by which federal expenditures exceed revenues each
year, was about $1.3 trillion for fiscal year 2010, which ended on Sept. 30.
The
interim report stands as an opening bid in what will likely be a heated debate
over the future of spending and taxes, issues that exploded in the midterm
elections. Many of the plan's more provocative elements are intended as starting
points for negotiation, not final recommendations.
President
Barack Obama urged leaders of his own Democratic Party to hold their fire over
the recommendations of the two chairmen of his bipartisan U.S. debt commission,
and he said "tough choices" are going to be necessary to tame a deficit that has
soared to more than $1 trillion a year.
"Before
anybody starts shooting down proposals, we need to listen, gather up all the
facts, and be straight with the American people," Mr. Obama said at a press
conference Thursday in Seoul, where he attending a Group of 20 nations summit,
when presented with a statement from U.S. House Speaker Nancy Pelosi that the
commission chairmen's recommendations are "simply
unacceptable."
The
question is whether members of the commission can hone the draft into something
on which they can agree, or whether they and their supporters will splinter. The
plan's unveiling Wednesday provoked denunciations from some quarters,
particularly from organized labor and liberal lawmakers, but also from
conservative taxpayer advocates.
"We
have harpooned every whale in the ocean, and some of the minnows," said
co-chairman Alan Simpson, a retired Wyoming Republican senator. "No one has ever
done that before." The panel of 18 lawmakers, business and labor leaders and
others was formed by Mr. Obama; it was led by Mr. Simpson and co-chair Erskine
Bowles, a White House chief of staff to former President Bill Clinton.
On
Social Security, the plan would gradually raise the retirement age to 68 around
2050 and 69 by 2075. It would combine various cuts to benefits with an increase
in taxes on wealthier people's incomes. It would also seek to rein in federal
spending on health care beyond what's called for in the recently passed
health-care overhaul. This would be achieved by introducing further changes,
including reform of medical-malpractice law, and by seeking to slow the growth
of the Medicare program.
The
plan would make significant cuts on spending over which Congress has direct
control, beyond entitlements such as Medicare. It identifies $410 billion in
discretionary spending cuts by 2015. It proposes cutting the federal work force
10%, at a savings of $13.2 billion by 2015.
The
Commission released a draft of recommendations for President Barack Obama. The
panel calls for changes in the tax codes including elimination of the popular
deduction for mortgage interest. Video courtesy of Fox
News.
Congressional
earmarks—provisions inserted into legislation for lawmakers' pet projects—would
be banned permanently, saving $16 billion.
In
the bond markets, which have much riding on the outcome of the deficit debate,
investors cautioned that the ideas are preliminary and touch many political
third rails.
With
gridlock likely after the midterm elections split control of Congress between
the two parties, enacting major changes designed to significantly cut the
deficit "would take some pretty Herculean efforts I think down in Washington,
D.C.," said Kevin Flanagan, chief fixed-income strategist at Morgan
Stanley Smith Barney.
The
plan's authors hope this first draft will improve the chances of any final
version, said commission aides, by making it look milder by comparison. At a
minimum, the plan's surprise release gives President Obama a chance to appear
serious about deficit cutting should he adopt its
recommendations.
The
panel's recommendations aren't binding; its proposal needs to garner the votes
of 14 of the 18 members to trigger votes in the House and Senate. But the final
version, due Dec. 1, likely would be a starting point for any deficit-reduction
plan Congress and the White House put together.
"In
the end, the president is going to have to decide whether to incorporate some of
this into the 2012 budget," said David Walker, a former U.S. comptroller general
and an advocate for deficit reduction. "He's going to have to lead, because if
the president doesn't lead on this, it goes nowhere fast."
Mr.
Obama avoided any comment on the specifics, as did Congressional leaders. Both
said they'd wait for a final product.
Lawmaker
reaction was mixed, suggesting any final plan will be weaker than the one
released Wednesday. Sen. Judd Gregg (R., N.H.), the top Republican on the Budget
Committee and a panel member, called it "a genuine product that deserves very
serious attention."
But
liberal panel members were less enthusiastic. Sen. Richard Durbin (D., Ill.)
said he wouldn't vote for it, saying that "there are things in there that I hate
like the devil hates holy water."
Some
important interest groups were sharply critical, particularly over curbs on
entitlement spending. The plans authors "just told working Americans to 'Drop
Dead,"' said AFL-CIO president Richard Trumka. "Especially in these tough
economic times, it is unconscionable to be proposing cuts to the critical
economic lifelines for working people, Social Security and
Medicare."
The
conservative Americans for Tax Reform also blasted the plan. "It confirms what
everyone has known—this commission is merely an excuse to raise net taxes on the
American people," the group said in a written statement. Supporting the plan
would violate the group's no-new-taxes pledge, which many Republicans and some
Democrats in Congress have signed, it warned.
Sen.
Gregg said that overall, federal spending takes a bigger hit in the plan than
taxpayers do. The plan's goal is to reduce federal spending and federal revenues
to 21% of gross domestic product. Federal revenues currently are projected to be
about 19% of GDP in 2015, and outlays about 23%.
It
would seek to achieve the pullbacks through a mix of spending cuts and
increasing tax revenues—about 75% in spending reductions and about 25% from the
tax side.
If
the plan was adopted in its entirety, it would reduce the deficit to 2.2% of
gross domestic product by 2015, exceeding the target set for the panel by the
White House of lowering the deficit to 3% of GDP.
The
budget deficit equaled 8.9% of GDP in the fiscal year ended Sept. 30. Despite
the raft of spending cuts and changes to the tax code, it would still take until
2037 to balance the budget entirely.
Write
to John
D. McKinnon at john.mckinnon@wsj.com,
Corey Boles at corey.boles@dowjones.com and Martin
Vaughan at martin.vaughan@dowjones.com
WSJ
NOVEMBER 10, 2010
Google
Battles to Keep Talent
By
AMIR
EFRATI And PUI-WING
TAM
Google
Inc. is fighting off Facebook Inc. and other fast-growing Internet firms that
are poaching its staff, a reversal for a company that has long been one of
Silicon Valley's hottest job destinations.
Among
the defectors are engineers such as Cedric Beust. The 41-year-old spent six
years at Google working on projects like the mobile operating system Android.
But by this year, "I was ready for something different and more challenging," he
said.
Staff
Defections to Facebook
View
Full Image
Mr.
Beust's job target list included Facebook, micro-blogging service Twitter Inc.
and professional social-networking company LinkedIn Corp. After interviews at
several of the firms, Mr. Beust in May joined LinkedIn as a principal software
engineer.
Competition
for experienced engineers like Mr. Beust is especially strong as Web start-ups
ramp up their hiring and poach from established companies like
Google.
Facebook
and other start-ups have a recruiting tool that Google can no longer claim: They
are private companies that haven't yet gone public, and can lure workers with
pre-IPO stock. Recruiters say Facebook and others also pay competitively, with
average annual salaries for engineers typically starting at
$120,000.
"There's
a huge shortage of engineers," said Valerie Frederickson, a recruiter in Silicon
Valley. She said a recent client of hers who received a master's in engineering
this spring from Stanford University got caught in a bidding war between Google,
Facebook and others. He got hired with a $125,000 salary, and is now being
offered $175,000 by the companies that lost out initially.
Facebook
today has about 1,700 employees, up from 1,000 a year ago. Twitter now has 300
employees, up from 99 a year ago. LinkedIn said it started the year with 450
employees and expects to end the year with 900.
"It
definitely is a little easier for us right now, compared to a lot of companies''
to recruit, said Colleen McCreary, the chief people officer of online gaming
company Zynga Game Network Inc. The San Francisco company said it began the year
with 500 employees and now has 1,250, including hires from large firms like
Google and Microsoft
Corp.
Much
of the most recent hiring battles have centered on Facebook and Google.
According to data from LinkedIn, 137 Facebook employees previously worked at
Google. Among Google's recent departures to Facebook: Lars Rasmussen, co-founder
of Google Maps. Google Chrome architect Matthew Papakipos, Android senior
product manager Erick Tseng, and top Google ad executive David Fischer also
decamped to Facebook earlier this year.
To
help attract new recruits and preempt defections, Google Tuesday said it was
giving a 10% raise to its more than 23,000 employees. Google Chief Executive Eric Schmidt wrote in
an all-hands email, "We want to continue to attract the best people to Google."
Google declined to comment Wednesday.
To
be sure, Google is also on a hiring spree and increased its work force by 19%,
or 3,600 people, over the past year. To acquire some high-profile talent, Google
has ramped up acquisitions of start-ups such as social app maker Slide Inc. And
while Facebook is a huge draw now, it too has become too large for some
employees, who have left to start other projects.
Hiring
wars aren't uncommon in Silicon Valley, with mature tech companies long battling
with up-and-coming start-ups for workers. A few years ago, Google was snaring
workers from Yahoo Inc., Microsoft and others. Now, as Google's growth has
slowed, it is finding the tables have turned.
Google
is giving its 23,000 employees each a 10% raise, as competition for talent in
Silicon Valley heats up. Amir Efrati and Eric Savitz explain how the move
signals an escalating war between Google and Facebook, Inc. for top
talent.
"Google
isn't the hot place to work" and has "become the safe place to work," said
Robert Greene, who recruits engineers for start-ups such as Facebook.
Facebook's
social-networking technology and smaller size is also appealing, say some job
seekers. Software engineer Murali Vajapeyam, 29, who left Oracle
Corp. this year, said he interviewed at Google and
Facebook.
"Facebook
is more interesting," said Mr. Vajapeyam, who didn't land an offer with Facebook
and ultimately elected to join a San Francisco software start-up in
September.
Google
and Facebook's recruiting battles come as the two companies increasingly appear
to be moving onto each other's turf. Among other things, Mr. Schmidt has spoken
about adding social-networking elements to Google's
services.
In
recent days, the companies have engaged in a public war of words over
data-sharing practices. Google has complained that Facebook is engaging in "data
protectionism" by not allow its users to export their friends' email addresses
to other websites, including Google's.
—Nick
Wingfield contributed to this article.
Write
to Amir
Efrati at amir.efrati@wsj.com and
Pui-Wing Tam at pui-wing.tam@wsj.com
Read
more: http://online.wsj.com/article/SB10001424052748704804504575606871487743724.html#ixzz14yg0B38G
SEOUL—World leaders gathered for the Group of
20 summit neared an agreement that appears to paper over many of the differences
that have roiled discussions and financial markets in recent days, but one
that's unlikely to end tension over currency and trade
policies.
As the
G-20 prepared for a series of tense meetings in Seoul, President Obama urged
member states to promote global growth and guard against protectionism. Wall
Street Journal reporter Evan Ramstad sets the scene with Simon
Constable.
The agreement will likely reaffirm earlier
language hashed out by finance ministers on letting markets determine
foreign-exchange rates, without yielding specific new commitments from China to
let its currency rise. It will pledge efforts to close the gap between countries
with big trade surpluses and those with big deficits, but will likely stop short
of numeric targets pushed by the U.S.
President Barack Obama urged the G-20 nations
to stand firm against protectionism and called for a joint commitment to growth,
part of an effort by U.S. officials to soften discord as the G-20 prepared for
its meeting here beginning Thursday.
Even as the leaders meet, some emerging nations
are erecting protective berms around their economies, as a torrent of capital
pours in and threatens to derail their growth by sending their currencies
soaring and hobbling their exporters. The Federal Reserve's recent plan to
stimulate the U.S. economy by buying bonds has further frayed nerves, by
threatening to undercut the dollar.
This week, Taiwan
imposed limits on bond holdings by foreigners. In October, Brazil and Thailand
raised taxes on foreign investment in local bonds. In June, South Korea
restricted derivatives trading.
Associated
Press
Protesters shout slogans during a rally denouncing the
G-20 Seoul Summit.
Central banks from
Israel to South Africa are buying dollars to keep their currencies from rising.
China raised reserve requirements at banks this week, a move to slow foreign
investment.
Mr. Obama's letter to other leaders came amid
finger-pointing that threatened to overwhelm the summit. He reached Seoul
Wednesday night for critical meetings Thursday, including with German Chancellor
Angela Merkel, whose government has led criticism of U.S. dollar policy, and
Chinese President Hu Jintao, who has resisted the president's push on China's
currency.
U.S. officials say the depth of the discord has
been overstated in the pressure-filled days before the summit. They hope
emotions will ease if leaders endorse what their ministers previously agreed to.
"We think everyone is going to have an interest
in lowering the temperature and defusing some of the tension by agreeing on a
multilateral process for helping to resolve these pressures" on the global
financial system, said Treasury Secretary Timothy Geithner.
Likely flash points at this week's meeting in
South Korea
View Full Image
A draft communiqué prepared Wednesday
illustrated the G20 divisions. It said the nations would increasingly let
markets determine currency rates, but officials remained undecided about how to
discuss currency interventions. The draft said nations would "refrain from
competitive devaluation," but in brackets was the alternative wording
"competitive undervaluation," an apparent reference to
China.
Officials indicated G-20 leaders would fudge
the key issue of how to reduce global trade imbalances. Mr. Geithner said over
the weekend that the summit likely wouldn't agree on targets for how large trade
surpluses and trade deficits should be, a suggestion he had made earlier that
drew opposition from Germany and others.
Instead, the G-20 may leave it to the
International Monetary Fund to sort out, said Canadian Finance Minister Jim
Flaherty. The IMF would report to G-20 finance ministers at their next meeting
in February.
As originally conceived, at least by the U.S.,
this G-20 gathering was a chance to push China to allow its currency to rise
more quickly. U.S. officials want countries with large surpluses, such as China,
to consume more domestically and export less, which would help America save more
domestically and export more.
But Germany and China turned the tables, in
effect accusing the Fed of driving down the value of the dollar, particularly
through its plan to buy $600 billion of government bonds and other assets in
coming months. U.S. officials replied that stimulating U.S. growth is in
everyone's interest and that a weaker dollar is a byproduct of their efforts,
not the objective.
Although China led the criticism, it isn't
pushing to have the Seoul communiqué single out the Fed, a Chinese official
said.
Officials in emerging markets say the capital
inflows they are seeing mean they can't wait for international accords. With
economies in the U.S., Japan and Europe feeble and their interest rates low,
faster-growing nations like Brazil are attracting a frenzy of investment.
The capital inflows can create asset bubbles
and overvalued currencies or stock markets, primed to plunge the moment
investors decide to move their money elsewhere. Overvalued currencies also mean
exporters lose their edge because their goods are costlier
abroad.
Some emerging nations are embracing once-taboo
policy prescriptions to restrict inflows, the latest example of the tensions
generating by economic imbalances between rich and developing
economies.
The IMF, which once criticized capital
controls, now gives its blessing to measures like taxing foreign bond
investments, and cites the success of such measures during the Asian financial
crisis of the late '90s. The IMF and other keepers of the economic orthodoxy
still emphasize the benefits of foreign direct investments, however.
Brazil, which floated its exchange rate in
1999, is a prime example of the predicament. With 7% growth rates, Brazil was
already attracting foreign investment. Its 10.75% overnight interest rates have
made it a target of investors who borrow where interest rates are near zero,
such as the U.S. and Japan, and deposit it where rates are high. This "carry
trade" helps explain why Brazil's real has risen around 35% against the U.S.
dollar since the start of last year.
Access thousands
of business sources not available on the free web. Learn More
The easiest solution would be lower rates, but
with widening deficits, a debt load reaching 60% of gross domestic product and
perennial inflation concerns, Brazil needs high rates to attract
loans.
—Tom
Murphy, Evan Ramstad and Kanga Kong contributed to this
article.
Write to Jonathan Weisman at jonathan.weisman@wsj.com, John Lyons
at john.lyons@wsj.com and Damian Paletta
at damian.paletta@wsj.com
Stiglitz
to Obama: You’re Mistaken on Quantitative Easing
By
Alex Frangos
Nobel
Prize-winning economist Joseph Stiglitz, dismissing the Federal Reserve’s
quantitative easing as a “beggar-thy-neighbor” strategy of currency devaluation,
called on America to learn the art of stimulus from China.
President
Barack Obama has defended the Fed’s controversial program, telling the world
that a
fast-growing America is good for the world economy. But Mr. Stiglitz, in
comments at a conference in Hong Kong on Thursday, charged that quantitative
easing, by leading to a weaker U.S. dollar, in fact steals growth from other
economies.
“President
Obama has rightly said that the whole world will benefit if the U.S. grows, but
what he forgot to mention is…that competitive devaluation is a form of growth
that comes at the expense of others,” Mr. Stiglitz said at the Mipim Asia real
estate conference. “So I think it is likely to present problems for the global
economy going forward.”
Emerging-market
nations have bristled at the Fed’s move to spur the U.S. economy by increasing
the U.S. money supply. They worry it will end up instead as a tidal wave of “hot
money” that will overwhelm smaller, developing economies, creating asset bubbles
and inflation. To prevent that, many are establishing or strengthening capital
controls, banking regulations that restrict the flow of money into and out of
economies. Taiwan and Brazil are the latest to act. South Korea is also
considering measures.
That
patchwork of international capital controls is “fragmenting the global capital
market,” Mr. Stiglitz said.
Rather
than just looser monetary policy, the Columbia University economist urges more
government spending by countries whose low borrowing costs make it
affordable—notably the U.S.
“We
really should learn the lesson from China,” he said. “If you take money and
spend it on investments, then you grow the economy in the short run, but you
also grow the economy in the long run.” He says China’s massive infrastructure
investments over the past two years have “changed the economic geography” of
that country, setting it up for strong growth in the years
ahead.
The
U.S. should do the same, he said, adding that because it has funded
infrastructure so poorly over the past 20 years, projects will likely have
strong positive return on investment.
“We
have a big list of what we need to do,” he said. “We could begin with high-speed
railroads. On the list of infrastructure that was drawn up in 2000, at the top
of the priority was New Orleans levees. It was public knowledge that New Orleans
needed new levees; $5 billion invested in New Orleans levees would have saved
$200 billion. Figure out the rate of return on that.”
He
recognizes, however, that this dream of a second fiscal stimulus is unlikely to
materialize. Much more likely is an extension of the Bush administration’s tax
cuts, whose “bang for the buck is very low,” he said, and which will hurt the
federal budget deficit.
On
the issue of exchange rates, Mr. Stiglitz falls into the emerging-markets camp,
led by China, that thinks the system of free-floating rates advocated for
decades by the developed world is too volatile.
“An
ordinary business, they just want to sell products,” he said. “With the exchange
rate going up and down all over the place…you don’t know what you are going to
get in return for the sales of your products.” Financial markets haven’t created
hedging tools that are good enough and cheap enough to provide protection, he
said.
“There’s
a high social cost for the volatility in exchange rates,” he said. “So it’s very
reasonable for governments to stabilize what the markets haven’t done a very
good job at.”
So
if you accept that intervention in currency markets to reduce volatility isn’t
damaging to the world economy, where does it cross the line and become
“beggar-thy-neighbor” manipulations? That’s the crux of the problem that
policymakers at the G-20 are trying to hash out.
For
instance, China has accumulated $250 billion in reserves this year while letting
its currency appreciate only about 3%. Is that too much?
Mr.
Stiglitz says China’s currency policy is understandable. And he echoed Premier
Wen Jiabao’s contention that fast currency appreciation would send
thousands of Chinese businesses into insolvency.
Given
the failure of markets to offer adequate protection to export-dependent firms,
he said, “to make sure that the exchange-rate volatility is not such as to force
significant number of firms in bankruptcy that have macroeconomic consequences,
that is at least the minimal intervention that is appropriate on behalf of
government.”
The co-chairs of a
deficit commission established by the White House released a draft plan for
reducing the federal debt that included $200 billion in spending cuts by
2015.
The following is an
itemization provided by the committee. See
a full explanation here.
|
Reduce
Congressional & White House budgets by
15% |
0.8 |
|
Freeze
federal salaries, bonuses, and other compensation at non-Defense agencies
for three years |
15.1 |
|
Cut the
federal workforce by 10% (2-for-3 replacement
rate) |
13.2 |
|
Eliminate
250,000 non-defense service and staff
augmenteecontractors |
18.4 |
|
Reduce
unnecessary printing costs |
0.4 |
|
Create a
Cut-and-Invest Committee charged with trimming waste and targeting
investment |
11 |
|
Terminate
low-priority Corps construction projects |
1 |
|
Slow the
growth of foreign aid |
4.6 |
|
Eliminate a
number of programs administered by the Rural Utility Service
(formerlyREA) |
0.5 |
|
Eliminate
all earmarks |
16 |
|
Eliminate
funding for commercial spaceflight |
1.2 |
|
Sell excess
federal property |
1 |
|
26 other
options of $2 billion or less |
17 |
|
Apply the
overhead savings Secretary Gates has promised to deficit
reduction |
28 |
|
Freeze
federal salaries, bonuses, and other compensation at the Department of
Defense for three years |
5.3 |
|
Freeze
noncombat military pay at 2011 levels for 3
years |
9.2 |
|
Double
Secretary Gates’ cuts to defense
contracting |
5.4 |
|
Reduce
procurement by 15 percent |
20 |
|
Reduce
overseas bases by one-third |
8.5 |
|
Modernize
Tricare, Defense health |
6 |
|
Replace
military personnel performing commercial activities with
civilians |
5.4 |
|
Reduce
spending on Research, Development, Test & Evaluation by 10
percent |
7 |
|
Reduce
spending on base support |
2 |
|
Reduce
spending on facilities maintenance |
1.4 |
|
Consolidate
the Department of Defense’s retail
activities |
0.8 |
|
Integrate
children of military personnel into local schools in the United
States |
1.1 |
Economic
Issues
November
11, 2010
What
Is Fed's QE2, and What Will It Do? Experts Explain in Everyday
English.
QE2
sounds like a luxury ocean liner. But many wonder if the Federal Reserve's
second round of "quantitative easing" would be more aptly named the Titanic,
says the Dallas Morning News.
"The
book has not been written whether QE2 is a good idea or a bad idea," said Sam
Manning, general partner of the Blagden Fund in Dallas. "There are many highly
educated, brilliant minds on both sides of the argument."
But
here are some basics about quantitative easing that most agree
on:
The
Fed is worried about deflation and the psychological effect of our seeing assets
such as 401(k)s, houses and stocks devalue. It's the "wealth effect" in
reverse, says the Dallas Morning News.
But
some fear that the cure could be worse than the disease.
Bob
McTeer, distinguished fellow with the National Center for Policy Analysis,
disagrees: "Everybody's treating this as a very unusual, draconian thing
that's extremely risky, probably won't work and likely to have adverse
consequences. I think they're overdoing it."
If
successful, the action will create a manageable inflation rate that could push
the stock market and housing prices higher, entice businesses to go ahead with
projects and banks to lend to them.
If
QE2 is too successful at unleashing money, inflation could shift into
hyperdrive. Then the Fed will have to engage a completely different set of
steering mechanisms.
Source:
Cheryl Hall, "What Is Fed's QE2, and What Will It Do? Experts Explain in
Everyday English," Dallas Morning News, November 10, 2010.
For
text:
Retirement
Issues
November
11, 2010s
Raise
the Early Retirement Age
In
December, President Obama's fiscal responsibility commission will recommend ways
to fix long-term federal budget shortfalls, very likely including changes to
Social Security. At that time, Congress should consider a reform that
could increase retirement incomes while boosting the economy and federal tax
revenues: gradually raising Social Security's early retirement age of 62, says
Andrew G. Biggs, a resident scholar at the American Enterprise
Institute.
Increasing
the retirement age also would help the economy and the federal budget by
increasing the nation's annual gross domestic product by hundreds of billions of
dollars, says Biggs.
Some
people, of course, aren't physically able to work past 62 or can't find a job.
But in general, early retirees are neither less healthy nor less wealthy
than later retirees.
Source:
Andrew G. Biggs, "Raise the Early Retirement Age," Los Angeles Times, November
9, 2010.
For
text:
http://www.latimes.com/news/opinion/commentary/la-oe-biggs-social-security-20101109,0,5547603.story
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