1. Zimbabwe Inflation: The End of the Story Alex Tabarrok
2. Crisis Compels Economists To Reach for New Paradigm
3. America's Natural Gas Revolution A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market.
4. Stimulus and the Jobless Recovery Jobs 'created or saved' is meaningless. What matters is net job gain or loss, and that means the unemployment rate.
5. A fruitless clash of economic opposites By Edmund Phelps
6. The Coming Shortage of Doctors Our aging population is challenge enough. Try to get an appointment after health-care reform.
7. Carriers Eye Pay-As-You-Go Internet Amid Government Push to Open Networks, Some See Cover for Pricing Based on Usage
8. Students Rely on Federal Loans to Pay Rising Tuition Private College Financing Dried Up as Credit Crunch Hit Lenders; Costs Up 6.5% for Public Schools, 4.4% at Private Ones
9. When Bad Luck Is a Crime    *   By HOLMAN W. JENKINS, JR.
10. Efficient Market Theory and the Crisis By JEREMY J. SIEGEL
11. How Ford Is Making Its Comeback The news from Dearborn is sunny, except for the auto maker's labor relations.
12. Broader U-6 Unemployment Rate Hits 17.5%
13. Economists React: Conflicting Signals From Jobs Report
14. October Jobless Rate Tops 10%
15. The Return of the Inflation Tax The Pelosi tax surcharge applies to capital gains and dividends.
16. THE WORLD'S BEST TAX HAVEN: IN AMERICA, BUT UNAVAILABLE TO    AMERICANS
17. Twenty Years of Stimulus for East Germany Economically, reunification has been devastating for the east. It need not have been.
18. Unemployment Extension Adds Up to 99 Weeks of Benefits
19. As Women Near Work Force Majority, Businesses Respond
20. IT'S TIME TO RETHINK ELECTRICITY
21. Wal-Mart Looks to Bolster Suppliers
22. Auto Industry Has Room to Shrink Further
23. How Washington Can Create Jobs Despite their drawbacks, direct public-service employment and a tax credit for new workers would both help.
24. The Supreme Court v. Patent Absurdity No, you shouldn't be able to patent a 'method of speed dating.'
25. Diamond Miners Band Together Producers of Uncut Rocks Will Raise Output to Ease the Pinch on Polishers
26. Patterns Suggest Gold Will Keep Climbing
27. China and the American Jobs Machine China's export policy is really a social policy, designed to maintain order. By ROBERT B. REICH
28. THE POOR NEED CAPITALISM
29 The worst is yet to come: Unemployed Americans should hunker down for more job losses BY Nouriel Roubini
30. An Alternative Stimulus Plan A payroll tax cut would add three to four million jobs at a fraction of the cost of the stimulus bill. WSJ Nov 18 09 By MICHAEL J. BOSKIN
31. Health 'Reform' Gets a Failing Grade The changes proposed by Congress will require more draconian measures down the road. Just look at Massachusetts.
32. The 'stimulus' for unemployment By ALAN REYNOLDS
33. Greed, Envy, and Compensation 1/15/2009 By Matt Bogard
34. New Jobless Claims Flat at 505,000
35. The Phantom Jobs Stimulus 'Who knows, man, who really knows.'
 

1. Zimbabwe Inflation: The End of the Story Alex Tabarrok

As we went to press with Modern Principles: Macro we kept having to add zeroes to Zimbabwe's peak hyperinflation rate and move it up the table of world leaders.  In our final revision, Zimbabwe's inflation rate had hit 79,600,000,000% per month putting Zimbabwe in second place.  We wondered whether in our  second edition Zimbabwe would overtake the all time hyperinflater, Hungary (1945-1946) at 41,900,000,000,000,000% per month, but it was not to be.  As it turned out, we went to press just as the hyperinflation peaked and Zimbabwe's currency ceased to exist as a medium of exchange.  Steve Hanke at Cato has the end of the story:

    Ashes are all that is left of the Zimbabwe dollar — a remnant of paper money. During Zimbabwe’s hyperinflation, foreign currencies replaced the Zimbabwe dollar in a rapid and spontaneous manner. This “dollarization” process was legalized in late January 2009. Even though the Zimbabwe paper money remnant circulates alongside foreign currencies, its real value is tiny, its use is limited, and its value against the U.S. dollar is cut in half every two days.

    Zimbabwe failed to break Hungary’s 1946 world record for hyperinflation. That said, Zimbabwe did race past Yugoslavia in October 2008. In consequence, Zimbabwe can now lay claim to second place in the world hyperinflation record books.

Final Postscript: In 2009, Zimbabwe's central banker, Gideon Gono, was awarded the Ig Nobel prize, not, as expected, in economics but in mathematics for, in the prize committee's words, "giving people a simple, everyday way to cope with a wide range of numbers — from very small to very big — by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."
 

    * NOVEMBER 3, 2009

2. Crisis Compels Economists To Reach for New Paradigm
 

By MARK WHITEHOUSE

The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat. For that task, John Geanakoplos of Yale University takes inspiration from Shakespeare's "Merchant of Venice."

The play's focus is collateral, with the money lender Shylock demanding a particularly onerous form of recompense if his loan wasn't repaid: a pound of flesh. Mr. Geanakoplos, too, finds danger lurking in the assets that back loans. For him, the risk is that investors who can borrow too freely against those assets drive their prices far too high, setting up a bust that reverberates through the economy.

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Jesse Neider for the Wall Street Journal

Yale economist John Geanakoplos has seen his previously obscure theory about collateral's role in the credit bubble gain currency after it burst.
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For years, his effort to understand this process didn't draw much interest. Now it does -- yet another aftereffect of the brutal deflating of the credit bubble. The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles.

Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists' understanding of the world and serve as policy-making tools at the world's biggest central banks. It is a task that could require a thorough overhaul of the way those models work.

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow.

Mr. Geanakoplos is emblematic of the new thinking but not necessarily the one whose ideas will prevail. It's too early in the process to know. But he was among a group of academics whom Federal Reserve Chairman Ben Bernanke invited in to discuss the crisis at its peak in October 2008.

The past century saw two revolutions in the way economists view the world. Both required painful crises to set them in motion, but both arguably improved government's ability to manage the economy.

The first came after the Depression, when economists built some of the first mathematical models that policy makers could use to try to manage the economy. The second came after the inflationary 1970s, when economists created new models that took into account how people's expectations, such as about prices or income, can influence the economy over time.

During the second revolution, the U.S. economy entered a period of stability and low inflation that lasted from the 1980s through most of the 2000s, leading many economists to believe they had triumphed over business cycles. As Robert Lucas of the University of Chicago, one of the intellectual fathers of the models, put it in 2003: The "central problem of depression-prevention has been solved...for many decades."

The result was a new orthodoxy, known as "rational expectations," that still dominates, underpinning everything from the way pension funds invest to how financial analysts put values on securities. Among its main branches is the idea that markets are "efficient," meaning that even an uninformed investor can get a fair shake, because the price of any security tends to reflect all available information relevant to its value.
More

See a video of John Geanakoplos and Robert Shiller discussing the crisis.

Mr. Geanakoplos didn't buy it. A former U.S. junior chess champion schooled in math and economic theory at Harvard, he had spent much of his career looking for holes in the dominant theories. His skepticism was seasoned with real-world experience, as head of fixed-income research at the now-defunct brokerage house Kidder, Peabody & Co. and after 1995 as a partner at a hedge fund that specializes in mortgage-backed securities, Ellington Capital Management.

On Wall Street, Mr. Geanakoplos, now 54 years old, noticed what he saw as a serious market limitation: There weren't enough houses and other forms of collateral to back all of the large amounts of debt securities that bankers might want to create. So when investors demanded more "asset-backed" securities, bankers had to find ways to "stretch" the available supply of collateral.

One way was to make collateral do double-duty. For instance, mortgage loans the banks made became collateral themselves for complex debt securities, known as collateralized mortgage obligations.

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Jesse Neider for the Wall Street Journal

Yale professor John Geanakoplos's 'leverage cycle' theory might help fix central-bank economic models that couldn't handle the financial crisis.
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Another way of stretching collateral was to lend more against it. For example, if a bank lowered the down payment on a $100,000 house to 5% from 20%, it could have $95,000 in loans against the house instead of $80,000. In a similar way, banks could lower the down payments, or "margins," they required of investors who use borrowed money to buy bonds and other securities.

A rereading around 1997 of "The Merchant of Venice," with its talk of a pound of flesh, helped focus Mr. Geanakoplos's thinking about the importance of collateral. "I thought it was a sign from the gods that I was onto something," he says.

Another sign came on a Friday morning in October 1998, following the downfall of the hedge fund Long-Term Capital Management. A lender to the fund where Mr. Geanakoplos was a partner abruptly demanded more margin on a loan. The event, which nearly toppled the fund as the partners scrambled to raise cash by selling securities, drove home to Mr. Geanakoplos how margins could work two ways -- stimulating asset buying as they go lower, but forcing fire sales as they rise.

In a 2000 academic paper, Mr. Geanakoplos offered a theory. He said that when banks set margins very low, lending more against a given amount of collateral, they have a powerful effect on a specific group of investors. These are buyers, whether hedge funds or aspiring homeowners, who for various reasons place a higher value on a given type of collateral. He called them "natural buyers."

Using large amounts of borrowed money, or leverage, these buyers push up prices to extreme levels. Because those prices are far above what would make sense for investors using less borrowed money, they violate the idea of efficient markets. But if a jolt of bad news makes lenders uncertain about the immediate future, they raise margins, forcing the leveraged optimists to sell. That triggers a downward spiral as falling prices and rising margins reinforce one another. Banks can stifle the economy as they become wary of lending under any circumstances.

"It was evident to me that there was a cycle going on, not just in my little market, but all over the world," says Mr. Geanakoplos, who is still a partner at Ellington Capital. The "leverage cycle," he called it.

This idea had big implications for policy makers. For decades, they thought of interest rates as the most important indicator of supply and demand in credit markets, and the only variable they needed to adjust to achieve a desired economic result. Now, Mr. Geanakoplos was saying that something else -- lenders' collateral or margin demands -- could be even more important.
[Paradigm]

"I would give him a lot of credit," says Michael Woodford, an economist at Columbia University and a leader in shaping the models currently in use at central banks. "He is someone who was on this issue...very early."

Other, better-known economists -- including Mr. Bernanke, while he was at Princeton -- were also doing work highlighting how finance could affect the broader economy. But none of this work had much impact at the time. With the business cycle thought tamed, economists were more interested in applying their techniques in other areas, such as education and crime, as epitomized in the book "Freakonomics." Traditional macroeconomics, such as practiced by John Maynard Keynes and Milton Friedman, was relegated to second-class status.

By the middle of this decade, what Mr. Geanakoplos called the leverage cycle was playing out on a grand scale. Motivated by a flood of investment from abroad, U.S. bankers created myriad debt securities backed by assets ranging from credit-card receivables to student loans to corporate bonds. To stretch the available collateral even further, they created hundreds of billions of dollars in ethereal investments known as "synthetic collateralized debt obligations," whose value was tied to that of bonds and asset-backed securities.

From 2000 to mid-2006, lenders lowered average down payments on riskier home loans to less than 4% from about 14%. During this time, the average U.S. home price soared about 90%, and total U.S. credit-market debt rose 68%, to $43.3 trillion.

Central bankers expressed concern about the debt-fueled boom. But their main forecasting models sounded no alarms, because the models looked only at interest rates, not at any indicator of how much banks were willing to lend on assets. The models "were not able to draw up the red flags," says Tim Besley, a professor at the London School of Economics who served on the Bank of England's policy-making committee until recently.

In 2007, with mortgage defaults rising, banks pulled back on home lending. The average down payment they required for riskier home loans jumped to more than 10% in mid-2007, by Mr. Geanakoplos's calculation. House prices headed lower.

After Lehman Brothers Holdings failed in September 2008, lenders jacked up the margin investors had to put up to buy mortgage securities to nearly 70% from less than 10%, contributing to a wave of selling and losses. Some bankers became reluctant to lend at all.
Beyond the Bubble: America's New Economy

    * Slump Prods Firms to Seek New Compact With Workers
      10/19/09
    * The 'Democratization of Credit' Is Over -- Now It's Payback Time
      10/10/09
    * China Inc. Looks Homeward as U.S. Shoppers Turn Frugal
      09/30/2009
    * The Long Slog: Out of Work, Out of Hope
      9/25/2009
    * As Riches Fade, So Does Finance's Allure
      9/18/2009
    * America's New Economy: Income Gap Shrinks in Slump at the Expense of the Wealthy
      9/10/2009

As the financial system teetered, central bankers' main models offered little insight as to what the impact on the broader economy might be or what they should do to cushion it. It was just good luck, some economists say, that the Fed's chairman had spent much of his career studying what to do in such a situation. "Bernanke had the right model in his head," says Larry Christiano of Northwestern University.

Now that the financial crisis has exposed flaws in the models central banks use, economists have launched into a flurry of activity that is likely to reshape the field. As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work. Mr. Woodford asked Mr. Geanakoplos to present his ideas at an April conference held by the National Bureau of Economic Research.

Mr. Geanakoplos has yet to develop his theory into a comprehensive model. "His work assumes that the leverage cycle is bad, but gives little guidance [about] to what extent regulators should control it," says Markus Brunnermeier, an economist at Princeton who specializes in financial bubbles.

The goal for economists now is a model that takes account of what happens in the financial sector, yet is simple enough to apply in policy making. The quest is bringing financial economists -- long viewed by some as a curiosity mostly relevant to Wall Street -- together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.

Coming up with the right model could force economists to move away from the ideas of efficient markets and rational expectations on which much of their current work relies. "If that happens, that will be a change of enormous proportions," says Martin Eichenbaum, a professor of economics at Northwestern.

Mr. Geanakoplos is convinced such a paradigm shift is under way. He hopes it will prove beneficial in protecting people from the excesses of the financial markets. To that end, he believes central bankers should collect and publish data on the amount of leverage in the system, and intervene if it gets out of line.

Right now, that would require the Fed to step in where banks fear to go by lending against risky assets such as mortgage bonds, but it would also mean limiting investors' ability to use leverage in exuberant times.

"Our policy seems geared largely toward rescuing banks and bankers," Mr. Geanakoplos says. "If we could manage these cycles better, I think we'd all be better off."
Economist Profiles

In the wake of the worst financial crisis since the Great Depression, economists are racing to provide policy makers with the tools they need to avert a repeat -- a process that some believe could require a revolution in economic thought. In doing so, they are building on the work of colleagues who saw early on the dangers presented by an unstable financial sector. Here are some of the people who did the early work, and who are now using it to build new models of the economy.

Write to Mark Whitehouse at mark.whitehouse@wsj.com

   WSJ  * NOVEMBER 2, 2009, 11:15 P.M. ET

3. America's Natural Gas Revolution A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market.

By DANIEL YERGIN AND ROBERT INESON

The biggest energy innovation of the decade is natural gas—more specifically what is called "unconventional" natural gas. Some call it a revolution.

Yet the natural gas revolution has unfolded with no great fanfare, no grand opening ceremony, no ribbon cutting. It just crept up. In 1990, unconventional gas—from shales, coal-bed methane and so-called "tight" formations—was about 10% of total U.S. production. Today it is around 40%, and growing fast, with shale gas by far the biggest part.

The potential of this "shale gale" only really became clear around 2007. In Washington, D.C., the discovery has come later—only in the last few months. Yet it is already changing the national energy dialogue and overall energy outlook in the U.S.—and could change the global natural gas balance.

From the time of the California energy crisis at the beginning of this decade, it appeared that the U.S. was headed for an extended period of tight supplies, even shortages, of natural gas.

While gas has many favorable attributes—as a clean, relatively low-carbon fuel—abundance did not appear to be one of them. Prices had gone up, but increased drilling failed to bring forth additional supplies. The U.S., it seemed, was destined to become much more integrated into the global gas market, with increasing imports of liquefied natural gas (LNG).

But a few companies were trying to solve a perennial problem: how to liberate shale gas—the plentiful natural gas supplies locked away in the impermeable shale. The experimental lab was a sprawling area called the Barnett Shale in the environs of Fort Worth, Texas.

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yergin

The companies were experimenting with two technologies. One was horizontal drilling. Instead of merely drilling straight down into the resource, horizontal wells go sideways after a certain depth, opening up a much larger area of the resource-bearing formation.

The other technology is known as hydraulic fracturing, or "fraccing." Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.

The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill. The success freed the gas to flow in greater volumes and at a much lower unit cost than previously thought possible.

In the last few years, the revolution has spread into other shale plays, from Louisiana and Arkansas to Pennsylvania and New York State, and British Columbia as well.

The supply impact has been dramatic. In the lower 48, states thought to be in decline as a natural gas source, production surged an astonishing 15% from the beginning of 2007 to mid-2008. This increase is more than most other countries produce in total.

Equally dramatic is the effect on U.S. reserves. Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. The recent increase in estimated U.S. gas reserves by the Potential Gas Committee, representing both academic and industry experts, is in itself equivalent to more than half of the total proved reserves of Qatar, the new LNG powerhouse. With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years. At current levels of demand, the U.S. has about 90 years of proven and potential supply—a number that is bound to go up as more and more shale gas is found.

To have the resource base suddenly expand by this much is a game changer. But what is getting changed?

It transforms the debate over generating electricity. The U.S. electric power industry faces very big questions about fuel choice and what kind of new generating capacity to build. In the face of new climate regulations, the increased availability of gas will likely lead to more natural gas consumption in electric power because of gas's relatively lower CO2 emissions. Natural gas power plants can also be built more quickly than coal-fired plants.

Some areas like Pennsylvania and New York, traditionally importers of the bulk of their energy from elsewhere, will instead become energy producers. It could also mean that more buses and truck fleets will be converted to natural gas. Energy-intensive manufacturing companies, which have been moving overseas in search of cheaper energy in order to remain globally competitive, may now stay home.

But these industrial users and the utilities with their long investment horizons—both of which have been whipsawed by recurrent cycles of shortage and surplus in natural gas over several decades—are inherently skeptical and will require further confirmation of a sustained shale gale before committing.

More abundant gas will have another, not so well recognized effect—facilitating renewable development. Sources like wind and solar are "intermittent." When the wind doesn't blow and the sun doesn't shine, something has to pick up the slack, and that something is likely to be natural-gas fired electric generation. This need will become more acute as the mandates for renewable electric power grow.

So far only one serious obstacle to development of shale resources across the U.S. has appeared—water. The most visible concern is the fear in some quarters that hydrocarbons or chemicals used in fraccing might flow into aquifers that supply drinking water. However, in most instances, the gas-bearing and water-bearing layers are widely separated by thousands of vertical feet, as well as by rock, with the gas being much deeper.

Therefore, the hydraulic fracturing of gas shales is unlikely to contaminate drinking water. The risks of contamination from surface handling of wastes, common to all industrial processes, requires continued care. While fraccing uses a good deal of water, it is actually less water-intensive than many other types of energy production.

Unconventional natural gas has already had a global impact. With the U.S. market now oversupplied, and storage filled to the brim, there's been much less room for LNG. As a result more LNG is going into Europe, leading to lower spot prices and talk of modifying long-term contracts.

But is unconventional natural gas going to go global? Preliminary estimates suggest that shale gas resources around the world could be equivalent to or even greater than current proven natural gas reserves. Perhaps much greater. But here in the U.S., our independent oil and gas sector, open markets and private ownership of mineral rights facilitated development. Elsewhere development will require negotiations with governments, and potentially complex regulatory processes. Existing long-term contracts, common in much of the natural gas industry outside the U.S., could be another obstacle. Extensive new networks of pipelines and infrastructure will have to be built. And many parts of the world still have ample conventional gas to develop first.

Yet interest and activity are picking up smartly outside North America. A shale gas revolution in Europe and Asia would change the competitive dynamics of the globalized gas market, altering economic calculations and international politics.

This new innovation will take time to establish its global credentials. The U.S. is really only beginning to grapple with the significance. It may be half a decade before the strength of the unconventional gas revolution outside North America can be properly assessed. But what has begun as the shale gale in the U.S. could end up being an increasingly powerful wind that blows through the world economy.

Mr. Yergin, author of the Pulitzer Prize-winning "The Prize: The Epic Quest for Oil, Money, & Power" (Free Press, new edition, 2009) is chairman of IHS CERA. Mr. Ineson is senior director of global gas for IHS CERA.
 

 WSJ    * NOVEMBER 1, 2009, 11:22 P.M. ET

4. Stimulus and the Jobless Recovery Jobs 'created or saved' is meaningless. What matters is net job gain or loss, and that means the unemployment rate.

 
By EDWARD P. LAZEAR

With the news that GDP grew at 3.5% in the third quarter, it seems apparent that economic recovery is underway. How much of this was a result of government programs? To evaluate this, it is important to understand what constitutes a recovery. There are three developments needed to restore the economy to its prior vibrancy.

The first development, bank stabilization, began in late autumn of last year. The source of the recession was financial-sector turmoil that commenced in August 2007 and peaked in early autumn 2008. Although we did not know it at the time, by the end of 2008 the financial crisis had passed. Financial markets were far from normal, but the panics and major collapses that characterized September 2008 were behind us, and no others arose. This financial-sector stabilization created the environment that is allowing our economy to heal.

This past January, at the end of my term as chairman of the President's Council of Economic Advisers, my agency released the White House economic forecast. At that time, I said that I foresaw a couple of bad quarters but expected that the second half of 2009 would be positive, with perhaps very strong growth in 2010. These forecasts assumed no stimulus; the projected turnaround was instead based on the natural rebound of the economy that would come after the financial crisis had eased. The resumption of GDP growth, which is the second development on the road to full recovery, probably began in late spring of this year.

The third recovery factor—job growth—will be slower to develop. In a shallower recession that ended in late 2001, job growth did not become positive until 2003. Historically, recoveries have a consistent pattern: Productivity grows first, then jobs are created, and finally wages rise.

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Chad Crowe
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A crucial question at this point is, "How important were government programs in bringing about positive economic growth?" There is good evidence that a portion of third-quarter growth can be attributed specifically to the cash-for-clunkers program. The disproportionate increase in purchases of motor vehicles relative to other consumption components is evidence that the program altered expenditures.

It is less likely that the housing program, which consisted primarily of a first-time home buyer tax credit, was responsible for much of the turnaround in housing investment that occurred during the third quarter. Housing investment depends on longer-term demand shifts. The program's limited duration would be expected to reduce existing inventories more than it would be expected to stimulate additional building and investment.

Direct government expenditures also increased during the third quarter, but most of this was in defense spending, which was not a primary target of the stimulus programs.

Third-quarter growth was 4.2 percentage points higher than second-quarter growth, which was negative 0.7%. My estimate is that less than half of this growth can be attributed to government programs. Of course, cash for clunkers has ended, and the sharp decline in auto sales in September means that there will be some payback this quarter for third-quarter growth, but proponents of the program argue that the shift in timing was a decent trade-off.

After reporting GDP, the government released new numbers claiming that the stimulus programs have "created or saved" over a million jobs. These data were collected from responses by government agencies that received federal funds under the American Recovery and Reinvestment Act of 2009. Agencies were required to report "an estimate of the number of jobs created and the number of jobs retained by the project or activity." This report is required of all recipients (generally private contractors) of agency funds.

Unfortunately, these data are not reliable indicators of job creation nor of the even vaguer notion of job retention. There are two major problems. The first and most obvious is reporting bias. Recipients have strong incentives to inflate their reported numbers. In a race for federal dollars, contractors may assume that the programs that show the most job creation may be favored by the government when it allocates additional stimulus funds.

No dishonesty on the part of recipients is implied or required. But when a hire conceivably can be classified as resulting from the stimulus money, recipients have every incentive to classify the hire as such. Classification as stimulus-induced is even more likely if a respondent must only say that, except for the money, an employee would have been fired. In this case, no hiring need occur at all.

Another subtle but important point: During the cash-for-clunkers program, sales of small cars like Honda Civics went up while sales of large SUVs like the Ford Expedition went down. To discern the net effect of the program on auto sales, it is necessary to take into account not only the addition to sales of subsidized models but also the reduction in sales of discouraged models. Reporting the positives without the negatives would be misleading and would complicate attempts to objectively evaluate the success of the program.

Yet this type of gains-only reporting is precisely what the government is doing with respect to the figures on stimulus-induced new hires. When the government reports this figure, it wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. But the data do not speak to the number of workers who left their current jobs to fill government-sponsored jobs.

If the vacancies that are created as these workers move from their old firms to government-sponsored projects go unfilled, then these job-to-job transitions are negatives that must be subtracted from the positives. And in an economy that is growing on the basis of productivity improvements rather than more workers employed, firms may wait to fill vacated jobs.

Because these data do not tell us where the workers come from and what happens to the slots they leave, the numbers cannot answer the ultimate question: How many net jobs were created? A similar point holds for those who are reported as retained, only in this case the issue is that some of those retained would have moved to different jobs rather than to the pool of unemployed had they been let go. The government is reporting the gross positive figures, not the relevant net figures.

Each month, the Department of Labor reports hires and layoffs from the Job Openings and Labor Turnover Survey (Jolts). The Jolts data revealed that in August 2009 more than four million workers were hired. But, unlike the administration's new jobs-created-or-saved data, the Jolts data also tell us that in the same month about 4.3 million workers lost their jobs.

As a result, the labor market lost over a couple hundred thousand jobs. It would be misleading to examine only the hires without also looking at job losses when evaluating the conditions of the labor market, but that is exactly what the stimulus job accounting does.

Net labor market figures do exist. Administrations have always been held to the time-tested and well-understood monthly job numbers put out by the Bureau of Labor Statistics, which reports the unemployment rate and the net job gain or loss for the economy as a whole. It is important to use reliable, accurate and well-understood numbers to determine the true causes of recovery. The unemployment rate, now at 9.8%, has continued to rise, and job losses have remained at high levels throughout the stimulus period. Few will be comforted by the good-news-only claim that the stimulus "created or saved" over one million jobs.

Mr. Lazear, chairman of the President's Council of Economic Advisers from 2006-2009, is a professor at Stanford University's Graduate School of Business and a Hoover Institution fellow..
 

5. A fruitless clash of economic opposites By Edmund Phelps

http://www.ft.com/cms/s/0/f71cfc6a-c7e6-11de-8ba8-00144feab49a.html?nclick_check=1

Published: November 2 2009 20:55 | Last updated: November 2 2009 20:55

In the theory wars, which are as much wars over policy choices, two very bad kinds of theories are driving out good theories.

Keynesian economics, which had been nearly forgotten inside the macro field, has found new voices from outside. They take the position that fiscal “stimulus” of all kinds is effective against slumps of all causes. Their strategy is to defeat their only popular rivals, the neoclassicals, by deriding their view that the employment downturn involves a contraction of the labour supply.

Neoclassical equilibrium theory, which some macroeconomists had grown sceptical of, has also found new practitioners. They take the position that, aside from bad policy moves, recessions, even “great” ones, are caused by random market events and corrected by market adjustments. Demand stimulus is of no use, since there is no systematic shortage of demand.

These spokesmen show little knowledge of the several theoretical perspectives in macroeconomics over the past 100 years. The “Keynesians” seem not to have studied Keynes and the neoclassicals misread or do not read Hayek. No wonder fallacies abound.

The fallacy of the “Keynesians” is their premise that all slumps, all of the time, are entirely the result of “co-ordination problems” – mis-expectations causing a deficiency of demand. Having modelled the effects of expectations decades ago, I know they have consequences. I agree that companies appeared to underestimate the cutbacks and price cuts of competitors on the way down. That excessive optimism signalled deficient demand for goods and labour. So any stimulus then may have had a Keynesian effect. By now, though, such optimism has surely been wrung out of the system. To pump up consumer or government demand would force interest rates up and asset prices down, possibly by enough to destroy more jobs than are created.

The fallacy of the neoclassicals is their tenet that total employment, though hit by shocks, can be said always to be heading back to some normal level. In this view, employment is impervious to shifts in any particular demand. If told that consumers are broke, they say that markets will respond by lowering interest rates until investment has filled the gap. If told that business investment looks weak and will not be getting the help of another housing boom, they say that a real exchange rate depreciation will fill the gap with an increase of net exports. They do not understand that interest rates cannot fall much in an open economy and that a weaker currency has contractionary effects on output supply that could spoil the expansion coming from the effects on export and import demands.

These fallacies lull analysts into the false sense that, one way or another, a full recovery lies ahead – thanks to government spending or to self-correcting market forces. As I see it, the poor state of balance sheets in households, banks and many companies augurs a “structural slump” of long duration. Employment will recover, quickly or slowly, only as far as investment demand will carry it. It is highly uncertain whether government spending on infrastructure would help, after taking into account the employment effects of the higher tax rates to pay for it.

The most profound fallacy is the newfangled idea that misalignment of incentives in banks caused the housing bubble – a bubble that, when it burst, shook the economy to its foundations. All can agree that increased lending and building ran into the awkward fact that costs increase when production is stepped up. On that account, prices sought a higher level. But that analysis does not capture the steep four-year climb in housing prices, which rose by more than 60 per cent.

To account for so large an increase, we have to recognise that expectations played a role. Speculators appear to have expected that housing prices would go sky-high, so prices took off and then went on climbing in anticipation that those high prices were getting closer. The banks, seeing the houses offered as collateral were worth more and more, responded by supplying an increasing flow of mortgage loans.

From this viewpoint, speculation drove the crisis. Misaligned incentives were not sufficient to do it – and not necessary either. Bubbles long predate bonuses. The crisis could have happened with a 1950s financial sector. The lesson the crisis teaches, though it is not yet grasped, is that there is no magic in the market: the expectations underlying asset prices cannot be “rational” relative to some known and agreed model since there is no such model.

The gravest error of the phony debate between two non-starters is that their superficial and mechanical character – the clockwork of the neoclassical system and the hydraulics of the Keynesian one – operate to distract policymakers from asking basic questions about the dynamism of the US and UK economies. Economics has paid a terrible price for its dalliances with the Keynesian and neoclassical theories. Now policymakers are being misled by the siren call of these same, hopelessly inadequate views.

The writer, winner of the 2006 Nobel prize in economics, is director of the Center on Capitalism and Society at Columbia University and author of Structural Slumps (1994)

Copyright The Finncial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

    WSJ * NOVEMBER 4, 2009, 7:09 P.M. ET

6. The Coming Shortage of Doctors Our aging population is challenge enough. Try to get an appointment after health-care reform.

By HERBERT PARDES

None of the health-care reform proposals advancing in Congress address a fundamental problem that will soon face this country: a critical shortage of doctors. There were reform ideas put forward in Congress that would have addressed this problem. Most notably, Rep. Joseph Crowley (D., N.Y) and Sen. Bill Nelson (D., Fla.) have proposed training an additional 4,000 new physicians to add to the 25,000 entering the profession each year. But their proposals haven't made it into the bills on which congressional leaders hope to vote.

If the doctor shortage is not addressed and health-care reform is signed into law, millions of Americans will likely find themselves able to obtain insurance for the first time—but may be unable to find a doctor without a long delay. Why? Because expanding the number of insured patients but not the number of doctors will only increase the demand for services that already must meet the demands of an aging population. We must make sure there are enough health professionals to meet those new demands.

Even in the absence of health-care reform, according to the American Association of Medical Colleges, the U.S. will face a shortage of at least 125,000 physicians by 2025. We have about 700,000 active physicians today. One factor driving this shortage is that the baby-boomer generation is getting older and will require more care. By 2025 the number of people over 65 will have increased by about 75% of what it is today—to 64 million from 37 million today.

Doctors are also aging. By 2020, as many as one-third of the physicians currently practicing will likely retire. If health-care reform adds millions of people to the health-care market, the shortage of doctors will be even greater than it is projected to be now.

It is important to note that the shortage the country will soon face isn't just of primary-care physicians. It is true that there aren't enough primary-care doctors and nurse practitioners. But it is also true that we need more cardiologists, neurologists, general surgeons, pediatric subspecialists, urologists and other highly trained specialists.

Nonetheless, the few ideas to address the coming doctor shortages that were briefly considered in Washington treated the problem merely as a shortfall of primary-care doctors. One idea is to shift unused federal training funds to hospitals that need more positions, but only if those funds are used for primary care. Another is to move primary-care physician training out of hospitals and into federally qualified health centers. A third idea is to take training dollars away from doctors and instead use it to train nurses and other professionals.

None of these ideas would actually increase the number of doctors. At most the first two ideas would increase the number of primary-care doctors at the expense of the number of specialists.

But that's not likely to happen either. The fundamental reason why medical students are not entering primary care on their own is that they can't afford it. Medical-school tuition can cost a student as much as $50,000 a year. Some doctors start out owing hundreds of thousands of dollars before they are even able to open a practice. Going to medical school is a little like taking out a mortgage, only without getting a house in return.

Once doctors do start treating patients, they are squeezed between what they earn from government programs and insurance companies on one side and escalating malpractice insurance rates on the other. Meanwhile, specialists can often charge more and pay less in other costs than primary-care doctors. The reality is that many physicians cannot afford to go into primary care.

To address the shortage of doctors and the incentives that compel young doctors to eschew primary care, Congress needs to think about how to increase doctor pay, institute malpractice reform, and provide subsidies to reduce the amount of debt doctors have to take on. Residency caps should also be raised so teaching hospitals can train more doctors. Without these actions new doctors would be foolish to enter primary care, and thankfully our medical schools do not recruit foolish people.

Dr. Pardes is president and CEO of NewYork-Presbyterian Hospital.

    * OCTOBER 21, 2009

7. Carriers Eye Pay-As-You-Go Internet Amid Government Push to Open Networks, Some See Cover for Pricing Based on Usage
 

By CHRISTOPHER RHOADS And NIRAJ SHETH

( See Correction & Amplification below. )

In the early years of the Internet, the more time people spent online, the more they paid a provider like AOL for their connection. But as customers have shifted to always-on broadband services, many Web surfers have enjoyed all-you-can-eat Internet for a flat rate.

Some cable and telecommunications providers are trying to turn back the clock and return to usage-based pricing for Internet connections. Carriers including AT&T Inc. and Time Warner Cable Inc. say they may have to switch amid a surge in Internet traffic as more people go online to watch videos and download movies.

Recent efforts to introduce usage-based, or metered, broadband services have met stiff resistance from consumers. But a new push by the federal government to adopt rules that would force Internet providers to treat all Web traffic equally, no matter how much bandwidth they take up, could give ammunition to the broadband providers that want to change how they charge for Web access, Internet experts and consumer advocates say.

"This could come down to carriers saying, 'If you don't allow us to manage our networks the way we see fit, then we will just have to cap everything,' " says Phillip Dampier, a consumer advocate focusing on technology issues in Rochester, N.Y. "They'll make it an either/or thing: give them more control over their network or expect metered broadband."

Mr. Dampier was among those who forced Time Warner Cable to shelve a metered Internet pilot program in several cities last year. The company, which had argued the plan would be a fairer way to charge for access, acknowledged it was a "debacle." It won't say if it plans to revive the trials.

Some broadband providers argue that a pay-as-you-go Internet is unavoidable. "A flat-rate, infinitely expandable service is unachievable,"Dick Lynch, chief technology officer of Verizon Communications Inc., said at a recent industry conference, referring to the industry in general. "We're going to have to consider pricing structures that allow us to sell packages of bytes."

Advocates say unlimited monthly Internet service has been critical to the Internet's growth and the formation of online start-ups. Paying by the amount of Internet traffic used could damp usage and the sort of tinkering that can lead to breakthroughs, they warn.

Carriers believe it is only fair that heavy users pay more, especially since online file-sharing software, such as BitTorrent, takes up so much bandwidth.

Last year, the Federal Communications Commission sanctioned Comcast Corp. for violating so-called network neutrality principles. Comcast, which is appealing the decision, had hindered the use of file-sharing software without informing customers. It argued it needed to control such usage to keep traffic flowing properly.
[NETNUET]

In Beaumont, Texas, and Reno, Nev., AT&T has been pricing Internet access based on usage. Since last year, it has let new customers choose from one of six tiers, depending on the desired speed and how much data they think they will download in a month. Existing customers can keep their old flat-rate plan, which is capped at 150 gigabytes a month

The most basic plan, which costs $19.95, offers 20 gigabytes of downloads; the most expensive, for $65, allows 150 gigabytes a month. For every gigabyte over the limit, there is a $1 fee.

"Some type of usage-based model, for those customers who have abnormally high usage patterns, seems inevitable," an AT&T spokesman says. AT&T declined to provide more details on its trials.

Some cable companies have instituted monthly usage limits, though they are usually so high they affect only the heaviest users. A plan with 150 gigabytes, for example, would enable sending and receiving 75 million emails, or downloading more than 30,000 songs. The average Internet user consumes around 15 gigabytes a month, according to University of Minnesota professor Andrew Odlyzko.

Comcast earlier this year instituted a cap of 250 gigabytes a month. The company says the rule affects a very small minority of its high-usage customers. Some smaller and regional Internet service providers also charge on a metered basis, including Sunflower Broadband in Kansas. Frontier Communications Corp. last year briefly used metered pricing in Rochester before scrapping the policy in the face of protest.

"Unquestionably, the carriers erred in their initial selling of broadband with a flat rate," says Elroy Jopling, research director of Gartner Inc. "They assumed no one would use it as much as they do now, but then along came high-definition movies. They're now trying to get around that mistake."

Network neutrality deals primarily with ensuring that Internet providers don't favor any online traffic over any other. Still, Mr. Jopling and other analysts argue, the net neutrality debate might provide the carriers with an opening to argue for changing that pricing.

The FCC last month proposed strengthening the existing principles on network neutrality—turning them into more strictly enforceable rules—to ensure that carriers treat all Internet traffic equally.The idea is that as Internet providers themselves get more into the content business—as foreshadowed most recently by Comcast's overtures to acquire a majority stake in NBC Universal—they shouldn't be able to make it easier for users to access their own content than other companies' content

The agency also said it wants more transparency in how carriers manage their networks.

In announcing the proposals, FCC Chairman Julius Genachowski cited Comcast's approach to BitTorrent, as well as phone companies' blocking the use of online phone services on their networks.

"With network neutrality enforced, the only other option for carrriers is to charge by the byte or to raise the flat-rate pricing," says Johna Till Johnson, president of Nemertes Research. "Right now they're just deciding which one to do. Just be prepared to pay more."

When Time Warner announced last March it would expand its metered-pricing approach to other cities, including Austin and Rochester, protests erupted. Rep. Eric Massa of Corning, N.Y., who also represents parts of Rochester, introduced a bill in Congress banning tiered Internet pricing plans, arguing the plan would put his city at a disadvantage for corporate investment.

Time Warner Chief Executive Glenn Britt told a conference the following month that the company erred in communicating the rollout, not in the plan itself.

"We did not handle the public relations very well and had a bit of a debacle, to he honest," Mr. Britt said at the conference. "I still think some notion of you use less and pay less, use more and pay more, will ultimately be what happens."

Correction & Amplification

Eric Massa is a U.S. representative from Corning, N.Y., who also represents parts of Rochester. In a previous version of this article, his name was given incorrectly as Joe Messa of Rochester.

Write to Christopher Rhoads at christopher.rhoads@wsj.com and Niraj Sheth at niraj.sheth@wsj.com

  WSJ   * OCTOBER 21, 2009

8. Students Rely on Federal Loans to Pay Rising Tuition Private College Financing Dried Up as Credit Crunch Hit Lenders; Costs Up 6.5% for Public Schools, 4.4% at Private Ones
 

By ROBERT TOMSHO

More college students are relying on federal student loans instead of increasingly scarce private ones as tuition costs continue to rise, new data indicate.

According to reports issued Tuesday by the College Board, the volume of private student loans -- those not made or guaranteed by the government -- fell by 52% in the 2008-09 school year as recession-battered lenders tightened credit standards or abandoned what had been one of the fastest-growing sectors of the financial-aid market.

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Students
Associated Press

Students in a chemistry class last month at California State University East Bay in Hayward, Calif.
Students
Students

The New York-based college-admissions nonprofit said students and their families took out an estimated $11 billion in private student loans for the 2008-09 school year, down from $22.8 billion in 2007-08. All loan figures were given in constant, or inflation-adjusted, 2008-09 numbers.

The private loans, which generally have higher interest rates and more stringent terms than those made or guaranteed by the federal government, are often the last recourse for students who have maximized borrowing under federal programs.

As credit markets came to a near-halt last year, the government took steps to boost student lending in government programs, but the increase wasn't enough to offset the drop in private credit. According to the College Board, federal-loan volume rose 15% to about $84 billion in 2008-09, and overall lending fell to $95.9 billion in 2008-09 from $96.7 billion.

"I think what we are seeing here reflects the enormous credit tightening that occurred in the economy," said Terry Hartle, senior vice president of the American Council on Education, a college trade group.

Mark Kantrowitz, publisher of FinAid.org, a Web site that tracks financial-aid issues, said in an email that, amid the credit crunch, lenders have been unable to interest investors in buying securities backed by student loans, making it tough to raise lending capital.
[Hard Knocks chart]

More students and parents are pursuing federal aid, in part because as parents lose jobs, more qualify for a broader variety of such loans. The Obama administration has tried to make federal financial aid more readily available, pumping additional funds into Pell grants for low-income students and streamlining the application process.

The new reports also suggest that such efforts may be at least partially blunted by increases in tuition and fees. The College Board reported that average tuition at four-year public colleges and universities in the U.S. rose 6.5% in 2009-10, to $7,020 -- even as overall consumer prices fell. Average tuition at private, nonprofit four-year schools rose 4.4% to $26,273 for 2009-10.

Sandy Baum, a senior policy analyst at the College Board, said the tuition increases were due, in part, to declining state appropriations for higher education. They totaled $78.5 billion in 2008-09, down almost 5% from $82.2 billion the previous school year.

Ms. Baum, a former economics professor at Skidmore College, said that increases in college costs have been at least partially offset by increases in financial aid.

Patrick Callan, president of the National Center for Public Policy and Higher Education, a research group that tracks higher-education issues, called the trends highlighted in the report "disappointing," and said continued increases in college costs threaten to undermine the federal government's efforts to make college more available.

"We are kind of going on a national treadmill," he said.

Write to Robert Tomsho at rob.tomsho@wsj.com

    * OCTOBER 21, 2009

9. When Bad Luck Is a Crime    *   By HOLMAN W. JENKINS, JR.

When it comes to cheering CEOs, booing them or throwing them in jail, a consideration that ought to be nagging is whether we're reacting to luck or design.

Ken Lay, to cite a notorious example, was prosecuted not for the sins that brought down Enron, but for failing to tell investors the company was predestined to fail even as he tried to save it. Exactly the same treatment is now being meted out to two ex-Bear Stearns hedge- fund managers on trial in New York this week. Then there's Ken Lewis, the Bank of America chief, who hasn't been indicted (yet) but is being roundly booed in the media because his acquisition of Merrill Lynch is deemed in retrospect to have been a mistake.

Now we might be tempted to say journalists are especially susceptible to the hindsight fallacy. But a truer statement is that we thrive on it, are its avenging angels, forever treating every bad outcome as proof of incompetence if not malfeasance, and every good outcome as the result of far-seeing excellence.

Take a typical media indictment of BofA's Mr. Lewis, flayed because he "overpaid for an asset [Merrill] he could have had for much less had he just waited a few extra days." Good grief. If failing accurately to forecast securities prices is evidence of incompetence, why stop at Mr. Lewis? Anyone who didn't buy Google at $85 must be incompetent too (although, thanks to another kind of cognitive bias, they get a pass from the hindsight fallacy).

The Bear Stearns execs, Matthew Tannin and Ralph Cioffi, ran two subprime funds that depended heavily on leverage (i.e., borrowing) to make the rate of return expected by their high-rolling investors. Thus the funds were perfectly positioned to hit the skids at the very start of the subprime crisis, before its full dimensions were suspected.

Who, when markets turn south, doesn't worry about the worst? Lively email exchanges took place between the two men long before Lehman and the events we now think of as the global financial crisis. The prosecution's pièce de résistance is a Tannin missive that wondered aloud whether they should liquidate the funds or, alternatively, double down on the subprime market. That is, Mr. Tannin was unsure whether he was looking at the mother of all meltdowns or the mother of all buying opportunities.

How much more fun, when dealing with circumstances like these, to play the after-the-fact-know-it-all, naming heroes and villains with the confidence afforded by the rear-view mirror. Bad enough is when journalists give unreflective vent to this urge, but unhealthy for society is when prosecutors do it.

For a bracing dose of perspective, consider the flip side question. An eye-opening new paper asks: With so many public companies to choose from, how do we know the good firms from the merely lucky ones? The question is a much harder call than you might think.

The authors—Andrew D. Henderson of the University of Texas at Austin, and Deloitte Consulting's Mumtaz Ahmed and Michael E. Raynor—begin with a caveat no less applicable to the joyous media blame-laying after the subprime debacle: "If you have a large number of players in a game in which luck plays a major role, then some players will assemble seemingly impressive winning records by chance alone."

"Luck," they add, "can mislead us . . . because humans tend to mistakenly perceive patterns in random data."

By way of analogy, imagine a classroom of 70 students, each of whom is asked to flip a coin and sit down if tails comes up. According to the law of probabilities, after seven flips a single student should be standing—the one who flipped heads seven times in a row. If the student were a company, the authors say, he'd quickly become a case study of "excellence" in coin flipping.

Messrs. Henderson, Ahmed and Raynor, who presented their work at the Academy of Management's annual meeting in Chicago in August, weren't just indulging an urge to philosophize. Their goal was to design criteria for identifying excellent firms while cutting the rate of "false positives" to approximately one in 10.

It turns out the criteria are exceedingly stringent. Over a period of 10 years, a firm must score among the top 10% of performers at least nine times. Only 150 firms in a database of more than 21,000 make the grade—including Microsoft, Tambrands and Landauer Inc. (a manufacturer of radiation dosimeters).

Remember, the goal here is to create a list of "excellent" firms only 10% of which owe their ranking to luck. It still doesn't tell you which were the lucky ones. Here, journalism, and perhaps only journalism, can unpack the final puzzle—albeit a journalism that properly understands the role of luck in determining the outcomes that so excite journalists and sometimes prosecutors in the first place.

    WSJ * OCTOBER 28, 2009

10. Efficient Market Theory and the Crisis By JEREMY J. SIEGEL

Financial journalist and best-selling author Roger Lowenstein didn't mince words in a piece for the Washington Post this summer: "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis." In a similar vein, the highly respected money manager and financial analyst Jeremy Grantham wrote in his quarterly letter last January: "The incredibly inaccurate efficient market theory [caused] a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments [that] led to our current plight."

But is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.

This does not mean the EMH can be used as an excuse by the CEOs of the failed financial firms or by the regulators who did not see the risks that subprime mortgage-backed securities posed to the financial stability of the economy. Regulators wrongly believed that financial firms were offsetting their credit risks, while the banks and credit rating agencies were fooled by faulty models that underestimated the risk in real estate.

After the 1982 recession, the U.S. and world economies entered into a long period where the fluctuations in variables such as gross domestic product, industrial production, and employment were significantly lower than they had been since World War II. Economists called this period the "Great Moderation" and attributed the increased stability to better monetary policy, a larger service sector and better inventory control, among other factors.

The economic response to the Great Moderation was predictable: risk premiums shrank and individuals and firms took on more leverage. Housing prices were boosted by historically low nominal and real interest rates and the development of the securitized subprime lending market.

According to data collected by Prof. Robert Shiller of Yale University, in the 61 years from 1945 through 2006 the maximum cumulative decline in the average price of homes was 2.84% in 1991. If this low volatility of home prices persisted into the future, a mortgage security composed of a nationally diversified portfolio of loans comprising the first 80% of a home's value would have never come close to defaulting. The credit quality of home buyers was secondary because it was thought that underlying collateral—the home—could always cover the principal in the event the homeowner defaulted. These models led credit agencies to rate these subprime mortgages as "investment grade."

But this assessment was faulty. From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income. Never before have home prices jumped that far ahead of prices and incomes.

This should have sent up red flags and cast doubts on using models that looked only at historical declines to judge future risk. But these flags were ignored as Wall Street was reaping large profits bundling and selling the securities while Congress was happy that more Americans could enjoy the "American Dream" of home ownership. Indeed, through government-sponsored enterprises such as Fannie Mae and Freddie Mac, Washington helped fuel the subprime boom.

Neither the rating agencies' mistakes nor the overleveraging by the financial firms in the subprime securities is the fault of the Efficient Market Hypothesis. The fact that the yields on these mortgages were high despite their investment-grade rating indicated that the market was rightly suspicious of the quality of the securities, and this should have served as a warning to prospective buyers.

With few exceptions (Goldman Sachs being one), financial firms ignored these warnings. CEOs failed to exercise their authority to monitor overall risk of the firm and instead put their faith in technicians whose narrow models could not capture the big picture. One can only wonder if the large investment banks would have taken on such risks when they were all partnerships and the lead partner had all his wealth in the firm, as they were just a few decades ago.

The misreading of these economic trends did not just reside within the private sector. Former Fed Chairman Alan Greenspan stated before congressional committees last December that he was "shocked" that the top executives of the financial firms exposed their stockholders to such risk. But had he looked at their balance sheets, he would have realized that not only did they put their own shareholders at risk, but their leveraged positions threatened the viability of the entire financial system.

As home prices continued to climb and subprime mortgages proliferated, Mr. Greenspan and current Fed Chairman Ben Bernanke were perhaps the only ones influential enough to sound an alarm and soften the oncoming crisis. But they did not. For all the deserved kudos that the central bank received for their management of the crisis after the Lehman bankruptcy, the failure to see these problems building will stand as a permanent blot on the Fed's record.

Our crisis wasn't due to blind faith in the Efficient Market Hypothesis. The fact that risk premiums were low does not mean they were nonexistent and that market prices were right. Despite the recent recession, the Great Moderation is real and our economy is inherently more stable.

But this does not mean that risks have disappeared. To use an analogy, the fact that automobiles today are safer than they were years ago does not mean that you can drive at 120 mph. A small bump on the road, perhaps insignificant at lower speeds, will easily flip the best-engineered car. Our financial firms drove too fast, our central bank failed to stop them, and the housing deflation crashed the banks and the economy.
—Mr. Siegel, a professor of finance at the University of Pennsylvania's Wharton School, is the author of "Stocks for the Long Run," now in its 4th edition from McGraw-Hill.Printed in The Wall Street Journal, page A2
 

    *WSJ  NOVEMBER 4, 2009, 11:01 P.M. ET

11. How Ford Is Making Its Comeback The news from Dearborn is sunny, except for the auto maker's labor relations.

By PAUL INGRASSIA

A year ago, Ford Motor Co. steered clear of the auto industry's version of the "public option." You know, a government-funded bankruptcy. Maybe the decision wasn't entirely altruistic. Plan B, as in bankruptcy, would have ended more than a century of Ford family control.

Whatever the motives, Ford chose a private solution for regaining its corporate health, and today the patient is walking without a government crutch. Last week Consumer Reports gave the company quality ratings comparable to those of Honda and Toyota. On Monday, Ford reported its second consecutive quarterly profit—and more impressively, a swing from a $7.7 billion cash burn a year earlier to positive cash flow of $1.3 billion in the just-ended third quarter, helped by but not due to Washington's cash for clunkers program. The company gained a percentage of market share in the first 10 months of this year, no easy feat in an ultra-competitive market.

In fact, there's almost too much good news coming out of Ford's Dearborn, Mich., headquarters these days. In the often-bizarre world of labor relations in Detroit, good news can be bad news in dealing with the United Auto Workers union. Exhibit A is the UAW's recent rejection of contract amendments at Ford to parallel the provisions that the government imposed on GM and Chrysler. The implications aren't pretty for Ford and they're even worse for the union itself.

Before parsing those implications, though, it's worth examining Ford's recent spate of good news because there has been precious little of that from Detroit in recent years. The company's turnaround actually began three years ago with decisions that amounted to zagging every time that General Motors zigged, which was remarkable for a company whose strategy for decades was to follow GM.

When General Motors kept its CEO (the recently deposed Rick Wagoner) a few years ago, Ford brought in a new one, Alan Mulally from Boeing. While GM kept its unwieldy assortment of eight brands, Ford sold Jaguar and Land Rover, cutting its brand lineup down to a manageable size. (Another Ford brand, Volvo, appears close to being sold.)

The zig-versus-zag pattern continued when General Motors bet big on home mortgages through GMAC and then sold control of the financing unit, which now is on government welfare, just like General Motors itself. Ford avoided home mortgages and held onto its finance arm, Ford Motor Credit, choosing instead to mortgage all its assets to raise money to fund its turnaround effort.

Ford's self-help strategy carries a cost: The company now has much more debt than GM, about $27 billion to $17 billion, because the General had some three-fourths of its borrowings washed away in bankruptcy court. But controlling its source of dealer and consumer financing is a huge advantage for Ford, and the company is shoring up its balance sheet by swapping some of that debt for new equity.

What's more, shedding brands and shunning the mortgage business has helped Ford focus on quality, where it had slipped badly early in this decade. Consumer Reports said last week that 90% of Fords, Mercurys and Lincolns rate average or better in quality, right up there with Honda and Toyota. When the economy recovers and car sales increase, Ford could be in great shape. That presumably will happen by 2011, when the company says it expects "solid profitability."

It's sadly ironic, then, that the rain on this parade came the very same day that Ford reported its stellar financial results. Monday also brought the news that the UAW rejected contract amendments to freeze the pay of new hires, to forgo strikes for the next six years, and to reduce the number of job classifications in Ford factories.

The 70% vote against those changes was a stinging setback for the UAW's leadership, which had accepted similar provisions at GM and Chrysler in return for the government bailouts of those two companies. Obviously, Ford isn't desperate enough in the eyes of the union's rank-and-file, even though the company barely avoided bankruptcy, and its bond ratings remain deep in junk territory. UAW President Ron Gettelfinger tried to contain the damage by telling Automotive News that the proposed contract changes would have saved Ford "only" about $30 million a year anyway.

But that statement has more spin than Mariano Rivera's cut fastball. Forget about the wage freeze and the no-strike clause. Factory wages aren't Detroit's problem, and strikes are very rare in the auto industry nowadays. The real issue is the job classifications.

Ford's UAW contract has lots of them, governing who can and who can't perform specified tasks on the factory floor. So if a machine breaks down, an assembly line can come to a halt while everyone waits for the worker with the proper classification to arrive at the scene. If other workers nearby are perfectly capable of fixing the machine, well, that doesn't matter. The number of job classifications is less than it was a decade ago, but it's still far too many to maximize a factory's efficiency.

The classifications and attendant work rules are enforced by union bureaucracies—members of each plant's shop committee, grievance committee, health and safety committee, etc. They're all paid by the companies, as are their legions of corporate counterparts. One man's feather-bedding is another man's job.

All this begs a fundamental, and uncomfortable, question. Can a UAW-represented car company compete effectively, long term, with its nonunion competitors? At the very least, companies organized by the UAW have lots of extra costs to bear at their factories located in the U.S.

It's interesting, then, that Consumer Reports rates the quality of the four-cylinder Ford Fusion higher than the Toyota Camry and Honda Accord, and the Lincoln MKZ higher than its Acura and Lexus counterparts. The Fusion and MKZ are built in a factory without job classifications because it's in Hermosillo, Mexico, and isn't represented by the UAW. If Ford targets future expansion in Mexico, the recent contract vote will spell further decline for a union that, like Detroit's car companies, badly needs cultural change.

Ford's shares jumped more than 8% Monday on the company's earnings news. But investors should understand that in buying Ford stock they're also buying the company's relationship with the UAW, with all its implications.

Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper. His book "Crash Course," about the recent bankruptcies and bailouts of General Motors and Chrysler, will be published by Random House in January.
 

12. Broader U-6 Unemployment Rate Hits 17.5%
Posted by WSJ Staff

The U.S. jobless rate jumped up 0.4 percentage point to 10.2% in October, the highest level since April 1983. The government’s broader measure of unemployment shot up even more, rising half a point to 17.5%.

The comprehensive gauge of labor underutilization, known as the “U-6? for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Its continuing divergence from the official rate (the “U-3? unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

The U-6 rate is now the highest since the Labor Department started this particular data series in 1994. It likely isn’t as bad as it was in the 1980s, when the headline unemployment rate hit 10.8%. U-6 only goes back to 1994, but a discontinued measure has a longer history. That old U-6 measure peaked at 14.3% in 1982. Through some calculation, a comparable measure can be determined in the current report. Under the old U-6 methodology, the October rate would be 14%, the highest rate since 1982, but still below the peak.

The 10.2% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.
 
In the coming months, the U-6 measure may be an important signal for the labor market. The official jobless rate is likely to rise through at least the first half of next year as more people return to the job market. That means Americans who now fall into the U-6 category, for stopping their job searches due to discouragement, will eventually fall into the U-3 category as they restart their job hunt.

A U-6 figure that converges toward the official rate (even an official rate that’s above 10%) could indicate improving confidence in the labor market and the overall economy. But the convergence could be months away. And when it comes, it will keep unemployment above 10% for a painfully long period. –Sudeep Reddy and Phil Izzo
 

13. Economists React: Conflicting Signals From Jobs Report
Posted by Phil Izzo

Economists and others weigh in on the slowing drop in payrolls and the jump in the unemployment rate.

    * The bad news is that the jobs situation seems to have stalled out after improving dramatically through the summer. Private payroll declines actually widened slightly in September and in October. Thus, while we still strongly believe based on anecdotes, surveys, and other statistics that the labor situation is improving and that job losses will come to an end within a few months, the payroll numbers themselves do not indicate much positive momentum. In contrast to the payroll survey results, the household survey data were unambiguously negative. The unemployment rate surged to 10.2%, as the household gauge of employment plunged by almost 600,000 on top of September’s 785,000 drop. –Stephen Stanley, RBS
    * While the politics will focus on the spike in the unemployment rate to 10.2%, the economics of the move make little sense and we think it is mostly a product of the small sample that the household survey is based on (note that labor force participation fell, which acted to hold down the rate!). The payroll change, with the significant net upward revisions to August and September, provide further confirmation that economic activity is expanding at a fairly solid pace once the brisk rate of productivity growth is factored in. –RDQ Economics
    * October’s jump in the unemployment rate to 10.2% makes the national policy environment substantially more complex. The second-line numbers were even more discouraging: Accounting for marginally attached workers plus those employed part time for economic reasons, the jobless rate reached 17.5%. And the household survey showed employment dropping by 589,000, significantly higher than the 190,000 loss in the payroll survey. Coming out of a recession, the household survey should lead the payroll count. The latest data do not support arguments that the labor market will stabilize early in the 2010. –Joseph Brusuelas, Moody’s Economy.com
    * The job loss was only slightly bigger than forecast but a sizeable (net 91,000) UPWARD revision to the two previous months may be a more important sign that job conditions are indeed improving. Historically, revisions to past data have moved in the direction of changes in overall trends so up revisions to the recent past suggest stronger conditions are developing. The details reinforced the impression that the job loss pace is slowing. –Nomura Global Economics
    * The bottom line is that although labor market deterioration is clearly not occurring at the pace suffered late in 2008 and early this year, conditions remain brutal. Moreover, we continue to believe that the healing process will be a slow one, and that households will be contending with weak income growth and balance sheet issues for some time. –Joshua Shapiro, MFR Inc.
    * One of the biggest positive contributions to employment came from temporary employment, which added 34,000 extra jobs. Temporary jobs aren’t the type of positions that you want to see being created in an economy further into a recovery. But at this early stage of the cycle, that rebound in temporary jobs suggests employers will be adding extra permanent positions over the next few months…Overall, this recovery is shaping up to be a “jobless” one, just like the last two. Our concern is that, unlike the last recovery, with credit still tight households aren’t going to be able to smooth their consumption using credit until the labour market eventually strengthens. –Paul Ashworth, Capital Economics
    * Productivity gains and the hoarding of skilled labor earlier are some of the reasons for the jobless recovery. For fear of losing jobs, the current employees are working harder. During the recession, employers kept its most skilled workforce for better economic times. As production increases in some parts of the economy, the hoarded labor is utilized without adding to payrolls… Two of the hardest hit sectors of the economy, manufacturing and construction, should show some signs of stabilization in the future. –Sung Won Sohn, Smith School of Business and Economics
    * The real surprise underlying the headline data was a reversal of manufacturing industry job losses, which worsened by 16k after a string of more stable results. That, in combination with retail softness, suggests limited optimism over the holiday retail season, particularly for larger ticket items. We continue to view the average workweek as a “leading indicator” of hiring. Particularly with future uncertainty as high as it is, firms are more likely to increase the hours of underemployed workers before hiring unemployed workers. With average weekly hours holding steady at 33.0, we see little evidence of retails even considering ramping up at this stage. –Guy LeBas, Janney Montgomery Scott
    * Cyclical recovery is evident as job gains rise in temporary help and education/health and smaller job losses in retail and financial services. Turn in the labor market is very evident. Do expect job gains in 2010. –John Silvia, Wells Fargo
 
 

    * wsj NOVEMBER 6, 2009, 12:52 P.M. ET

14. October Jobless Rate Tops 10%

      * smaller Text larger

By LUCA DI LEO and JEFF BATER

WASHINGTON -- U.S. unemployment rose by more than expected in October to hit its highest level in more than 26 years and employers cut more jobs than forecast, a sign the labor market continues to struggle as the economy emerges from its deep recession.

The unemployment rate, calculated using a survey of households as opposed to companies, rose by 0.4 percentage point to 10.2%, the Labor Department said Friday. Economists surveyed by Dow Jones Newswires had forecast an increase to 9.9%.

Nonfarm payrolls fell by 190,000 last month, with the largest job losses in construction, manufacturing, and retail trade. Economists had expected a 175,000 decrease.
video
AM Report: Jobless Rate Hits New High
10:05

The New Hub panel discusses the October jobless rate data, which hit 10.2%, and whether insider trading is intrinsic to Wall Street.
More

    * Economists React: Conflicting Signals
    * Econ: 99 Weeks of Jobless Benefits
    * Econ: Broader Jobless Rate at 17.5%
    * Employers Turn to Temporary Help
    * ROI: Girding Your Finances for Long-Term Unemployment

Journal Community

    * Discuss: What does the uptick mean?

Since the start of the recession in December 2007, the number of unemployed has increased by 8.2 million and the unemployment rate has grown by 5.3 percentage points.

The unemployment figures for October strengthen the Federal Reserve's view that interest rates should remain at record lows to bolster a fragile recovery.

The U.S. central bank Wednesday cited "low rates of resource utilization" as one of the key reasons why it expects its benchmark rate to remain close to zero for an "extended period." The high jobless rate is a clear indicator of low rates of resource utilization.
Historical View

Track U.S. unemployment rate through recessions back to 1948

View Interactive

    * More interactive graphics and photos

In the past, the Fed has started to hike interest rates only several months after the jobless rate peaked.

Though still a terrible loss by historical standards, the payroll data reflects some improvement. Monthly job cuts in January 2009 totaled 741,000, for example.

More recent employment data out Thursday had shown some improvement in the labor market. New claims for unemployment benefits decreased by 20,000 to 512,000 in the week ended Oct. 31, the lowest level since Jan. 3.

The high unemployment numbers come a day after Congress approved an extension of federal jobless benefits for up to another 20 weeks, sending the bill to the White House for President Barack Obama's signature.

President Barack Obama this week warned that job losses are likely to continue in the weeks ahead.

"We are just not where we need to be yet. We've got a long way to go," Obama told a meeting of the President's Economic Recovery Advisory Board on Monday.

The U.S. economy expanded in the third quarter for the first time in more than a year, growing an annual 3.5% as the government's stimulus boosted consumer spending. The productivity of U.S. workers surged over the same period.

However, weakness in the labor market is expected to weigh on the recovery. The usual pattern in economic recoveries is that productivity rises first, then employment follows.

Friday's report showed that average hourly earnings rose by 0.3%, or $0.05, to $18.72.

Employment in the service sector -- the main source of U.S. jobs -- fell 61,000 in October. Business and professional services companies shed 18,000 jobs. Retail trade cut 40,000 jobs and leisure and hospitality employment fell by 37,000.

Employment in government was unchanged last month from September.

The average workweek was also unchanged at 33.0 hours in October.

Write to Luca Di Leo at luca.dileo@dowjones.com and Jeff Bater at jeff.bater@dowjones.com

# wsj NOVEMBER 6, 2009
15. The Return of the Inflation Tax The Pelosi tax surcharge applies to capital gains and dividends.

 
All of those twentysomethings who voted for Barack Obama last year are about to experience the change they haven't been waiting for: the return of income tax bracket creep. Buried in Nancy Pelosi's health-care bill is a provision that will partially repeal tax indexing for inflation, meaning that as their earnings rise over a lifetime these youngsters can look forward to paying higher rates even if their income gains aren't real.

In order to raise enough money to make their plan look like it won't add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan: the $500,000 threshold for the 5.4-percentage-point income tax surcharge; and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance.

This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases. The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on. The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.

View Full Image
Pelosi
Associated Press

House Speaker Nancy Pelosi
Pelosi
Pelosi

Americans of a certain age have seen this movie before. In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%, according to a Heritage Foundation analysis of tax returns.

These stealth tax increases—forcing ever more Americans to pay higher tax rates on phantom gains in income—were widely seen to be unjust. And in 1981 as part of the Reagan tax cuts, a bipartisan coalition voted to index the tax brackets for inflation.

We also know what has happened with the Alternative Minimum Tax. Passed to hit only 1% of all Americans in 1969, the AMT wasn't indexed for inflation at the time and neither was Bill Clinton's AMT rate increase in 1993. The number of families hit by this shadow tax more than tripled over the next decade. Today, families with incomes as low as $75,000 a year can be hit by the AMT unless Congress passes an annual "patch."

The Pelosi-Obama health tax surcharge will have a similar effect. The tax would begin in 2011 on income above $500,000 for singles and $1 million for joint filers. Assuming a 4% annual inflation rate over the next decade, that $500,000 for an individual tax filer would hit families with the inflation-adjusted equivalent of an income of about $335,000 by 2020. After 20 years without indexing, the surcharge threshold would be roughly $250,000.

And by the way, this surcharge has also been sneakily written to apply to modified adjusted gross income, which means it applies to both capital gains and dividends that are taxed at lower rates. So the capital gains tax rate that is now 15% would increase in 2011 to 25.4% with the surcharge and repeal of the Bush tax rates. The tax rate on dividends would rise to 45% from 15% (5.4% plus the pre-Bush rate of 39.6%).

As for the business payroll penalty, it is imposed on a sliding scale beginning at a 2% rate for firms with payrolls of $500,000 and rising to 8% on firms with payrolls above $750,000. But those amounts are also not indexed for inflation, so again assuming a 4% average inflation rate in 10 years this range would hit payrolls between $335,000 and $510,000 in today's dollars. Note that in pitching this "pay or play" tax today, Democrats claim that most small businesses would be exempt. But because it isn't indexed, this tax will whack more and more businesses every year. The sales pitch is pure deception.

As for the Senate, instead of the 5.4% surcharge, the Finance Committee bill raises taxes on "high-cost" health care plans. But this too uses the inflation ruse. The Senate bill indexes its tax proposal for the inflation rate plus one percentage point. But that is only about half as high as the rate of overall health-care inflation, i.e., the rate of increase in health-care premiums. So the Joint Tax Committee has found that a Senate tax that starts in 2013 by hitting 13.8 million Americans will hit 39.1 million by 2019.

The return of the inflation tax demonstrates once again the stealth radicalism that animates ObamaCare. In the case of inflation indexing, Democrats would repeal a 30-year bipartisan consensus that it is unfair to tax unreal gains in income, thus hitting millions of middle-class Americans over time with tax rates advertised as only hitting "the rich." Oh, and the House vote on this exercise in dishonest government will come as early as Saturday.

16. THE WORLD'S BEST TAX HAVEN: IN AMERICA, BUT UNAVAILABLE TO    AMERICANS
------------------------------------------------------------------------

Tax competition is an issue that arouses passion on both sides of the
debate.  Libertarians and other free-market advocates welcome tax
competition as a way of restraining the greed of politicians.
Governments have lowered tax rates in recent decades, for instance,
because politicians are afraid that the geese that lay the golden eggs
can fly across the border.  But collectivists despise tax
competition -- for exactly the same reason.  They want investors,
entrepreneurs and companies to passively serve as free vending
machines, dispensing never-ending piles of money for politicians.
So when a left-wing group puts together a ranking of the world's
"top secrecy jurisdictions" in hopes of undermining tax
competition, proponents of individual freedom can use that list as a
guide to world's most investor-friendly nations, says the Cato
Institute.

The good news is that an American state, Delaware, is number one on the
list.  And since being a tax haven is a magnet for investment,
this is good news for U.S. competitiveness.  The bad news is that
American taxpayers are not allowed to benefit from many of Delaware's
"tax haven" policies, says Cato.

Here's what a left-wing columnist in the United Kingdom wrote about the
issue:

   o   One of the smallest states in the United States, it offers
       the best protection for anyone who does not want to disclose
       their identity as a beneficial owner of a company.

   o   That is one very good reason why the East Coast state hosts
       50 percent of the United States' quoted firms and 650,000
       companies -- almost equivalent to one company per Delaware
       resident.

Also:

   o   Delaware offers high levels of banking secrecy and does not
       make details of trusts, company accounts and beneficial
       ownership a matter of public record.

   o   Delaware also allows companies to re-domicile within its
       borders with minimal disclosure, and allows the existence of
       privacy-enhancing "protected cell" or
       "segregated portfolio" companies, among many other
       stratagems useful for protecting the identity of those who do
       business there.

Source: Daniel J. Mitchell, "The World's Best Tax Haven: In
America, but Unavailable to Americans," Cato Institute, November
2, 2009.

For text:
http://www.cato-at-liberty.org/2009/11/02/the-worlds-best-tax-haven-in-america-but-unavailable-to-americans/
For Guardian text:
http://www.guardian.co.uk/business/2009/nov/01/delaware-leading-tax-haven
For Financial Secrecy Index:
http://www.financialsecrecyindex.com/2009results.html
For more on Taxes:
http://www.ncpa.org/sub/dpd/?Article_Category=20

WSJ # NOVEMBER 8, 2009, 4:29 P.M. ET
17. Twenty Years of Stimulus for East Germany Economically, reunification has been devastating for the east. It need not have been.
 

By WOLFGANG HUMMEL

Two decades after the fall of the Berlin Wall, West German politicians look on with satisfaction at the results of 20 years of reconstructing East Germany. East German town centers have been beautifully restored, prefabricated socialist buildings widely refurbished, highways expanded and upgraded. The social welfare network is tightly woven while unemployment benefits include paid vacation.

At first glance, East Germany seems far ahead of its neighboring countries of Poland and the Czech Republic, whose economy also underwent a transformation from a socialist planned economy to a market-driven one. But a bitter truth remains, although unspoken: While the economies of Poland and the Czech Republic, Hungary and Slovakia have managed to get on their own feet, East Germany is still fed intravenously by its western half. East Germans consume more than they produce, a gap of at least 20%. The East German economy is anything but self-supporting.

View Full Image
hummel
Getty Images
hummel
hummel

This failure is taboo to speak of. The admission is especially hard to stomach as financial aid from West Germany has been more than generous: €1.3 trillion ($1.9 trillion) since 1990.

Why have the effects of West German financial aid been so limited?

One of the most important reasons for the current plight was the monetary union. Based purely on political considerations, the West German government in 1990 valued the eastern mark at half of the West German mark, a ratio of two to one. For wages an even higher ratio of 1-to-1 was set. As it turned out, this was an overvaluation of over 500%. The black market going rate at the time of 10-to-1 was more realistic. The negative repercussions as a result of the generosity of the West German government were soon felt. Although workers' savings were only reduced by half, effective labor costs skyrocketed. East Germany priced itself out of the marketplace. The Soviet zone soon turned into a de-industrialized zone. While workers got to keep their savings accounts, they lost their jobs. Despite herculean efforts over the next 19 years, East Germany never recovered from this initial shock. Today 95% of all businesses in East Germany have less than 50 employees.

Also from purely populist motives, the path to wage equalization was rashly paved, with West German unions playing a disreputable role. Despite low productivity, wages were raised. This was not all: Regulations included a 40-hour work week, a ban on Saturday work and overtime limits. On top of this were lavish perks that ranged from sick pay and vacation allowance to weeks-long spa visits.

For East German companies that already had trouble repaying the loans taken out to buy new equipment and fixtures, their situation often became financially intolerable. Moreover, new regulations regarding workers' right to participate in decision making, particularly in terms of refurbishment and restructuring, added to the woes.

Flying the banner of equality, the disastrous strategy of the unions continues until today. Just a few weeks ago, the steel workers' union celebrated that "the 35-hour week has now reached the east." Today no more than 8,000 steel workers are the beneficiaries, when at the start of wage equalization there were 60,000.

The unavoidable loss of jobs was however not dealt with by greater flexibility but through expensive state spending programs: job creation schemes, a publicly financed employment sector and training measures. They had one thing in common: All of these programs neglected businesses' real needs. The results were therefore limited, to put it mildly. Just 4% of participants in state-financed job-creation programs found employment afterwards.

The conclusion after many years of state-financed employment assistance is apparent. No measure, no matter how good, can replace work experience in an actual firm. Wage subsidies to employers have proved to be most effective. When job-creation schemes turned out to produce little effect, cities and towns took a different approach: The public sector began to take on ever-increasing numbers of employees themselves. The consequence today is overstaffed state offices and budget deficits. At the same time, problems have intensified the tension between the employment market and the social-welfare system. There is a disincentive for people to work a 40-hour week if the wages they earn are only slightly higher than the unemployment benefits they would receive for doing little or nothing.

What's more, after reunification, with a few exceptions, West German law was extended to the eastern part. Like a net, laws, regulations and policies were cast over East German companies. Company law, business law and accountancy law were not only unfamiliar but had been tailored to West Germany's highly sophisticated economy. What might have been a handicap for a competitive West German company often became a stranglehold for East German companies.

Today, what had been achieved in 20 years of "Aufbau Ost" (building the East) is under threat. Due to their low wage costs—only 25 % of those in Germany—flexible labor regulations and weak currencies, Central European companies soon became competitors of East German firms after 1990. Most attractive for West German investment have been Poland, the Czech Republic and Slovakia. Nearly all major German firms have not only established offices there but production plants as well: Volkswagen, Beiersdorf, MAN, Siemens, to name a few. Their main market still remained West Germany.

The competitiveness of Central and East European countries continues to improve. Up to now, they have been competitors in the construction and trade sectors, but they are increasingly vying for business in the mechanical-engineering and engineering-services sectors.

The new rivals from the East, not to mention global competition, now threaten all that has been achieved in East Germany. This includes the shipbuilding industry, which has undergone arduous years of restructuring. The same goes for certain sections of the car and car supplier industries, the solar industry as well as the chip and IT industry.

The German reunification was politically a great stroke of luck. West Germany has however not taken full advantage afforded by the event to make necessary reforms to revamp its antiquated welfare system.

The German government has not been able to reform the welfare state. This is especially surprising given that the high level of social welfare benefits in Germany came about partly as a result of the propaganda war between East and West during the Cold War. Each side was determined to show its population that they were better off than the people on the other side of the wall. The two governments ignored the economic consequences of creating such unaffordable welfare systems. And after reunification, the social welfare system was neither remodeled in West Germany nor reconceived in East Germany.

Without sweeping reforms in the whole of Germany, East Germany will not only stagnate but will slide ever further behind economically. There is much to celebrate about the reunification of Germany. But economically, it has been a disaster for the East. And more than €1 trillion later, the costs of those policy errors is being paid in the west as well.

    * November 6, 2009, 12:37 PM ET

18. Unemployment Extension Adds Up to 99 Weeks of Benefits
 

By Kelly Evans

The latest extension of unemployment benefits couldn’t come at a better time, it seems; President Barack Obama signed legislation into law Friday providing an additional 14 to 20 weeks of benefits for those who have already exhausted theirs or will do so by year-end.
Job seekers search for work at a jobs fair. (Getty Images)

The extension comes on the same day the Labor Department announced the U.S. unemployment rate hit 10.2% in October, crossing into double-digits for the first time in 26 years as the nation’s jobless swelled to 15.7 million.

The bill, passed earlier this week by both the Senate and the House of Representatives, extends federal jobless benefits by 14 weeks for Americans in all 50 states who face exhaustion before year-end, and by 20 weeks for those living in states where the unemployment rate is 8.5% or higher. (See a chart of state-by-state unemployment.)

The additional 20 weeks in hard-hit states means the maximum a person in one of those states could receive is now up to 99 weeks, or nearly two years — the most in history.

More than a third of the nation’s unemployed — 35.6% — have been out of work long-term, defined by the Labor Department as a period of 27 weeks or more — the highest proportion since World War II. As illustrated in the Wall Street Journal earlier this year, that is raising much concern among policymakers.

“The probability that a laid-off worker will find a job grows smaller the longer people have been out of work, according to studies in the 1980s by economists Lawrence Katz of Harvard University and Bruce Meyer of the University of Chicago. […] Mr. Katz, Mr. Meyer and other researchers also have found that wages the laid-off can expect when they do find a new job also tend to be lower the longer they were without work.”

To pay for the additional benefits, Congress will extend a payroll tax on employers that had been set to expire at the end of the year.
 

WSJ
    * November 11, 2009, 8:41 PM ET

19. As Women Near Work Force Majority, Businesses Respond
 

By Kelly Evans

High layoffs among men in the Great Recession have left women holding a growing share of the nation’s jobs — 49.9% as of September, as the story in today’s Wall Street Journal points out — and as the breadwinners in more and more families.

The result? Businesses that traditionally catered to at-home moms are caught in the lurch.

The Desert Highlands Association, which operates a private country club of about 600 members in Scottsdale, Ariz., is trying to accommodate a growing share of working female members by extending evening dinner hours, boosting weekend golf and tennis offerings and even adding wireless Internet access to the clubhouse.

“We’re trying to offer more of an office environment now,” said Terra Waldron, the association’s vice president. “There’s a lot less of the lounging by the pool that the older generations of women did at clubs in the past.”

Ms. Waldron added that the club now keeps its restaurants open past 8pm on weeknights in an effort to accommodate women who used to come for lunch, and also has tweaked its menu offerings towards a female palette with smaller portions and wine-and-tapas pairings, for example.

“The ‘ladies who lunch’ thing is kind of over,” said Joanna Biondi, a caterer and owner of Café Primavera, a lunch-only spot at the Allied Arts Guild in Menlo Park, Calif. Ms. Biondi said the number of young and middle-aged women dining at her restaurant has dwindled, particularly during the week. “Business is definitely down, way down,” she said.

Kerrin Gaenzle, who lives in Austin, Texas and sells jewelry to women at small parties on behalf of Silpada Designs, has seen a similar shift as more women gather at nights and weekends now than when she began selling jewelry three years ago.

“The weekday brunches where women would drop off their kids and then come don’t really happen anymore,” she said. “So many of these women have gone back to work or their friends have gone back to work. It’s a different world now.”

20. IT'S TIME TO RETHINK ELECTRICITY
------------------------------------------------------------------------

Arizona's consumption of electrical power has been growing at about
three times the rate of the United States as a whole.  Even though
demand recently has slowed as a result of the economy, experts agree
eventually things will pick up.  When it does, existing supplies
of electricity won't be enough to keep up, says Nick Dranias,
constitutional policy director for the Goldwater Institute.

"Opening our electricity market to competition will increase the
amount of energy available and will stabilize rates, ultimately driving
them down," says Dranias.   The Goldwater Institute
recommends restructuring Arizona's electricity markets for competition
in three steps:

   o   The electricity monopoly must be ended; steps will be taken
       to prevent companies like APS, SRP and Tucson Electric Power
       from controlling the electricity market.
   o   Regulations that block new businesses from producing and
       selling electricity would be repealed or prevented.
   o   Consumers would be free to purchase electricity from any
       company they want or produce it themselves.
The surest way to get the ball rolling is to make sure entrepreneurs
are free to innovate in "distributed power generation," says
Dranias.
   o   Distributed generation is when a source of electricity is
       built near the place it will be used and the power is sold to
       those nearby users, bypassing the grid except for backup
       purposes.
   o   But the Arizona Corporation Commission is considering
       regulating distributed generation like a standard electricity
       company, which would significantly undermine this progress.
   o   The competitive electricity market in Texas, for example,
       increased generation capacity by 35 percent from 1998 to 2006.
   o   In Britain, a similar expansion in capacity ultimately
       lowered rates 30 percent in 10 years.

The bottom line is that more competition and more supply will keep
rates lower than what monopolies charge, says Dranias.

Source: Nick Dranians, "It's Time to Rethink Electricity,"
The Arizona Republic, November 9, 2009.
For text:
http://ow.ly/ANfb
 

WSJ N OVEMBER 14, 2009
21. Wal-Mart Looks to Bolster Suppliers

By VANESSA O'CONNELL

Wal-Mart Stores Inc. is seeking to leverage its scale and its AA credit rating to offer about 1,000 suppliers an alternative to their traditional means of financing deliveries to the retailer.

The move could give the world's largest retailer by revenue more power over its suppliers in the wake of the bankruptcy filing by lender CIT Group Inc.

Wal-Mart informed its suppliers in a Nov. 2 letter of its new "Supplier Alliance Program," in which eligible suppliers can get payment for their orders in 10 to 15 days within its receipt of goods, compared with the more typical 60 to 90 days.

Under the program, suppliers can sell their Wal-Mart invoices to the retailer's partner banks, including Wells Fargo & Co. and Citigroup Inc., according to the letter, at interest rates based partly on Wal-Mart's credit rating. In traditional factoring, lenders give manufacturers cash for their receivables and collect payments on those invoices.

Wal-Mart's move comes after CIT, a lender to nearly a million small and midsize businesses, filed for Chapter 11 bankruptcy protection. CIT's factoring unit finances nearly 2,000 manufacturers and importers. A spokesman declined to comment on the Wal-Mart program but said it continues "to do business as usual." It has said it expects to exit from Chapter 11 by year-end.

Wal-Mart, of Bentonville, Ark., said the move was aimed at improving the stability of its supply of merchandise, not replace existing relationships. "We know that many of our suppliers are dependent upon factoring and financing companies that are reportedly in financial distress," Theresa C. Mercado, Wal-Mart's senior director for product extension, said in its letter, which was sent to a group of about 1,000 of its suppliers, primarily apparel manufacturers. In all, Wal-Mart has about 60,000 suppliers.

But some lenders say they are concerned nonetheless. "It is somewhat of a threat" to traditional factors, said Michael Stanley, a managing director at factor Rosenthal & Rosenthal. "Some vendors are going to say, 'Hey, I have to sell my soul to the retailer here. I don't think I want to do that. I'd rather get my own financing,'" he said. Mr. Stanley predicted the Wal-Mart-sponsored program would probably appeal to suppliers in a weak financial condition or those that were forced to use CIT and couldn't find another factor to finance them.

A few retailers have begun experimenting with supply chain finance programs as alternatives to traditional factoring. In July, Kohl's Corp. sent its suppliers a letter promoting a "reduced" 3.5% annual percentage rate of interest through its Supply Chain Finance program. The program, developed by PrimeRevenue, lets suppliers get paid early once their invoices are approved for payment, it said. The suppliers sell their invoices to Bank of America at an interest rate based on Kohl's credit rating.

Kohl's, based in Menomonee Falls, Wisc., offered the program to 41% of its suppliers, and so far 11% have signed on, said Kohl's spokeswoman Vicki Shamion. "This is not about CIT, but rather a proactive opportunity" for Kohl's and its supplier partners, she said.

Suppliers might be more inclined to give certain retailers "preferential treatment" because of such programs, said Pratap Mukharji, a partner with consultant Bain & Company. It's possible the arrangement could influence "how a supplier would look at a Wal-Mart, especially if, in a difficult economy, this program lets a supplier stay in business or make more money," Mr. Mukharji added.

Many retailers fear that once the economy recovers, their suppliers may struggle to fulfill the increase in shopper demand for certain products because they may not have access to the increased working capital needed to boost production. "The lack of visibility that retailers have into the true economic condition of some of their smaller suppliers is a big concern," Mr. Mukharji said.

Wal-Mart says it hopes the program will result in a more stable supplier base and more predictable supply of merchandise. Wal-Mart spokesman John Simley said its AA rating should result in "more attractive" interest rates for many of its suppliers than they could otherwise get. At Fitch Ratings, for instance, Wal-Mart is currently the highest-rated retailer, with a AA rating, while Kohl's is rated BBB+, a Fitch spokeswoman said.

"This isn't about CIT," Mr. Simley said. "It's about the factoring environment generally."

Write to Vanessa O'Connell at vanessa.o'connell@wsj.com
 
 

 
# WSJ NOVEMBER 16, 2009
22. Auto Industry Has Room to Shrink Further
 

By MATTHEW DOLAN

Gothenburg, Sweden

Over the past two years, the global auto industry has endured one of the worst downturns in its century-plus history. Auto makers around the world have consolidated, restructured and slimmed down -- and yet they still have too much of just about everything, especially too many brands and too many plants.

According to CSM Worldwide, the auto industry has enough capacity to make 85.9 million cars and light trucks a year -- about 30 million more than it is on track to sell this year, the equivalent of more than 120 assembly plants.

It also means the industry is utilizing just 65% of its available production capacity. Global auto sales are expected to grow by 25 million vehicles over the next six years, but even with that increase, CSM predicts that industrywide capacity utilization will barely reach 85% by 2015.

For many industry watchers, the solution is simple but painful: More brands need to die.

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Employees at the Volvo factory in Gothenburg, Sweden, on Thursday.
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Volvo

The current downturn "should be an opportunity for rationalizing capacity and some of the brands going away," said Mark Fulthorpe, director of European vehicle forecasts for CSM Worldwide. "Instead, we're rearranging the furniture here. No real big decisions are being taken."

Other industries -- computers and consumer electronics, for example -- have experienced waves of consolidation that weed out weaker players and leave stronger companies more profitable. But for years the auto industry has struggled to correct the excess of nameplates and manufacturing capacity that keeps pressure on the industry's profit margins.

Most governments are rarely willing to let auto companies go out of business, even ones that are barely competitive. They see car companies as a strategic piece of their manufacturing base and rush in to provide aid, allowing weaker companies to live on in order to save jobs.

Another factor: Plenty of emerging auto makers with lofty ambitions are ready to take over declining brands in hopes of getting access to new technology, markets and established brand names.
[Too Much Room chart]

That very scenario is playing out in the fates of Saab and Volvo, two Swedish auto makers that are in the process of being sold, respectively, by General Motors and Ford Motor.

In an industry built on economies of scale, neither is big enough to survive on its own. Saab is on track to sell fewer than 100,000 cars world-wide this year, and Volvo about 325,000. That's less than the annual sales of a single Toyota Motor model -- the Camry -- in the U.S. alone.

Yet neither Saab nor Volvo is going away. With aid from the Swedish government, Saab was taken over by a financial firm, Koenigsegg Group, which in turn partnered with China's Beijing Automotive Industry Holdings. Ford is in talks to sell Volvo, which is based here, to another Chinese auto maker, Geely Holding Group.

Bringing in new owners, even ones with deep pockets, doesn't guarantee salvation. In the '90s, BMW spent billions and failed to save Rover, the British car maker.

In 2008, India's Tata Motors bought the Jaguar and Land Rover brands from Ford, but it has been a rocky road so far. Their sales have continued to fall, and in the quarter ended June 30 the parent company posted a loss of $67 million, compared with a profit of $147 million for the same period in 2008. Jaguar and Land Rover were the chief reason, losing a combined $100 million in that quarter.

Similar themes are playing out elsewhere. Besides handing off Saab, GM is also selling its Hummer division, to a Chinese heavy-equipment company. In one rare instance where auto nameplates will disappear, GM is turning the lights out on its Pontiac and Saturn brands.

Saab and Volvo face long odds for a comeback. Once design and safety leaders, they have lost their edge, with Volvo only recently announcing plans to manufacture a plug-in hybrid and other car makers matching Volvo's vaunted safety record.

GM has said Saab has only one profitable year in the past 12. In an interview, Saab managing director Jan Ake Jonsson contested that view, saying it is unclear whether GM was including profits from parts Saab distributed for GM. Still, he acknowledged, "it is almost impossible to state whether this brand makes money or not." Volvo's CEO, Stephen Odell, said his company doesn't need economies of scale from a company like Ford to be profitable, if the brand forms a substantial joint venture with another company or a collection of alliances with other manufacturers in key markets.

"We're not a fire sale," Mr. Odell said. "This is not really anything to do with Volvo. It's more to do with how Ford sees its portfolio."

Re-emphasizing safety and environmental friendliness using a minimalist Swedish design, Volvo has "a different way to approaching a premium sector that ultimately will recover," he said. But Mr. Odell couldn't say when he expected the brand to return to sustained profitability.

John Casesa, a veteran Wall Street auto analyst who now heads his own advisory firm, said government intervention to save auto-related jobs has forestalled the inevitable -- broad and deep restructuring that would shut down unneeded plants and close loss-making enterprises. "Not as much capacity has come out that should have," he said.

The upshot is that the auto industry is coming out of its slump leaner, but not as lean as it could or perhaps should be.

Write to Matthew Dolan at matthew.dolan@wsj.com
 
 
 
 
 
 

#WSJ  NOVEMBER 15, 2009, 8:28 P.M. ET
23. How Washington Can Create Jobs Despite their drawbacks, direct public-service employment and a tax credit for new workers would both help.
 

By ALAN S. BLINDER

These are the times that try men's and women's souls. After dropping for four consecutive quarters, GDP has at last begun to rise, signaling the end of the Great Recession. But employment continues to fall, and the unemployment rate recently hit 10%—a rate we haven't experienced in a generation. It's no wonder Americans seem to have only three things on their mind right now: jobs, jobs and jobs.

We've lived with this disjunction between rising output and falling employment for only a few months so far, but the consensus forecast sees it continuing for some time—a disturbing prospect. Hardship already abounds, and the current political atmosphere is ugly. Americans are justifiably angry to see their government committing trillions to get banks and Wall Street back on their feet while doing nothing, in their view, to create jobs. A long stretch of double-digit unemployment will deepen these sores.

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Of course, it's not true that the government has done nothing about jobs. The $787 billion stimulus has doubtless saved many jobs already, and will save many more. So have the numerous financial rescue programs that the electorate abhors.

But saying that it could have been worse doesn't inspire. And Americans take scant comfort that jobs are now disappearing at a slower pace.

All this creates a political imperative for action, and the president recently announced a "jobs forum" for next month. But what policies would be effective job creators?

I'd start with the Hippocratic oath: "First do no harm." A premature withdrawal of monetary and fiscal stimulus could pull the rug out from under the nascent recovery. Yes, the mammoth federal budget deficit is both appalling and unsustainable. But this is not the time to shrink it by raising taxes or cutting spending. Yes, the Federal Reserve must eventually "exit" from its hyper-expansionary monetary policy. But this is not the time to look for the door.

That said, "first do no harm" is not enough. What comes second?

Two big ideas for job creation are under active discussion: a tax credit for new jobs, and direct public-service employment. Were the unemployment rate at 5%, I would oppose both. The tax credit invites gaming, e.g., creating phantom jobs to grab the tax benefit; and we do not particularly want more people on the public payroll. But the unemployment rate is 10%. In deep recessions, sensible governments do things they would never do at full employment. So let's consider the merits and demerits of the two ideas.

Direct public-service employment is straightforward. As long as the new government jobs do not compete with the private sector, the net job creation should be one-for-one. So hire people to repair parks, not shopping malls. And if we restrict ourselves to low-wage jobs, the cost will not do grievous harm to the budget. For example, at an average all-in cost of $30,000 a year, one million new jobs would cost $30 billion.

What's the downside? Well, any public expenditure does add to the deficit at a time when the deficit is already huge. Furthermore, despite much rhetoric to the contrary, the U.S. remains a "small government" country, especially at the federal level. With total federal civilian employment around 1.4 million, it is inconceivable that the federal government could find sensible uses for a million new workers. So, realistically, most of the program must be funneled through the states.

What about a tax credit for new jobs? That option has two obvious advantages. Every new job would be in the private sector, where at least some would become permanent. And since it's a tax cut, it might garner some votes from Republicans, who will shriek "socialism" at public-sector employment.

How many new jobs could such a tax credit actually create? And what is the jobs bang for the taxpayer buck? The answers depend on many factors, but two stand out: the response of private-sector hiring to a lower after-tax wage (what economists call the "elasticity of labor demand"), and the degree to which businesses can successfully game the system.

Economic research gives us a pretty good handle on the former. In normal times, a 10% reduction in after-tax wage costs, which is a reasonable benchmark figure to contemplate (e.g., a $5,000 tax credit for a $50,000 job), should boost employment by roughly 4%. That would amount to about 5.5 million net new jobs, which sounds great.

But hold on. First, lots of jobs that would have been created even without the tax credit would receive the credit anyway. For those jobs, there is no bang, only bucks. Second, by increasing the demand for labor, the tax credit will drive up wages (which is nice), which will in turn kill some jobs (not nice). All things considered, reasonable estimates of the budgetary cost per job created are comparable to the cost of public service employment. (And both are much lower than the cost per job of the big stimulus package.)

Unfortunately, we know much less about gaming the system. That worries me. Apart from outright fraud, there are three major ways (and many minor ones) for firms to exaggerate the number of new jobs created in order to receive the tax credit.

One is to fire Peter and hire Paul. This problem can be fixed by awarding the tax credit only for net increases in headcount above, say, last year's base. A second gimmick is replacing one full-time worker by two half-time workers. That loophole can be plugged by applying the tax credit to total payroll costs, rather than to headcount. Both of those fixes should be made. But they will render the tax credit irrelevant to many firms that cut back their employment sharply during the recession.

And what about new firms, which have no "last-year's base"? Excluding them would make many of the economy's new jobs ineligible for the tax credit. But if we allow new firms to claim the credit, clever people will create new firms in droves—at least on paper. And that's the third big way to game the system: by turning the XYZ Company into the X Company, the Y Company, and the Z Company. Because of this concern, when Congress instituted a new jobs tax credit in 1977 it split the baby by giving new firms half the credit.

All this is a bit worrisome. Tax credits would require assiduous drafting (keep the lobbyists out of the room!) and extremely careful administration by the IRS. The more I dwell on these things, the better direct public-service employment sounds.

But as the jobless recovery drags on, two things have become clear: First, neither the tax credit nor public-service employment is a panacea. And second, with employment still declining and another massive stimulus package out of the question for budget and political reasons, we will probably have to choose one of these options soon.

Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board.
 
 
 

# wsj NOVEMBER 15, 2009, 10:28 P.M. ET
24. The Supreme Court v. Patent Absurdity No, you shouldn't be able to patent a 'method of speed dating.'

 
The Supreme Court last week became Exhibit A for the case that technological change is fast outpacing the ability of government to deal with it. The last time the justices tried to address broadly what kinds of innovations are entitled to patent protection was a generation ago. It showed.

During the oral argument in last week's case, Bilski and Warsaw v. Kappos, it became clear that the justices had strong views about what intellectual property should not get special protection. They signalled that they will invalidate a category of patents that have been granted for over a decade. But they also admitted they had little idea about what kinds of innovation should be protected in an information age.

Patents provide exclusive rights for a certain time in exchange for disclosing details of inventions so that others can then use them after the patent expires. It was easier in the industrial age to recognize the inventions and discoveries that the Constitution says would "promote the Progress of Science and the useful Arts." Today, many innovations are made using the virtual machine of the computer, which operates by changing digits, not by inventing cotton gins or improving plowshares.

Other innovations are simply better ideas. Last week's case was whether there could be a patent for a business strategy for hedging risk in buying energy. This is what patent lawyers call a "business process," which doesn't involve something tangible like a new machine or drug compound.

The justices tickled themselves offering hypotheticals that they also thought wouldn't deserve patent protection. Antonin Scalia asked if there could be a patent for "somebody who writes a book on how to win friends and influence people." Or, "Let's take training horses," he said. "Don't you think that some people, horse whisperers or others had some, you know, some insights into the best way to train horses?"

Sonia Sotomayor asked if there could be a patent for a "method of speed dating." Stephen Breyer offered his "great wonderful, really original method of teaching antitrust law" that kept 80% of the students awake. "I could probably have reduced it to a set of steps and other teachers could have followed it." Anthony Kennedy recalled how the development of calculus led to actuarial tables and risk formulas. "It's difficult for me to think Congress would have wanted to give only one person the capacity to issue insurance," he said.

The bottom line behind the judicial levity is that business-process patents deserve to be invalidated. Companies around the world are now reviewing their patent portfolios. Among the thousands of patents granted under this dubious standard is a patent on a method of applying for patents.

It wasn't supposed to be this way. In the early 1980s, Congress created the Court of Appeals for the Federal Circuit to "strengthen a weak patent system whose inability to motivate innovation threatened to perpetuate the economic malaise of the 1970s," according to Bruce Abramson, author of "The Secret Circuit." This was the court that in 1998 upheld granting of patents for business processes.

Instead of creating clear rules about what innovations make sense for patents in an information age, Mr. Abramson says ambiguity "generates uncertainty among members of the public, makes inadvertent infringement more likely, and allows a patentee to file infringement suits even when he knows full well that the accused device falls outside the scope of the invention that he patented."

One direct consequence is that "patent trolls" buy up patents so they can sue innovators. Big technology companies pool their patents to reduce lawsuits. For information technology, the costs of litigating patents may be greater than the economic benefits of patents. Real money is involved: The largest patent-case judgment is for $1.67 billion, being appealed by Abbott Labs in a case brought in the plaintiff-happy federal court in eastern Texas.

The most telling moment in the Bilski argument was when Justice Breyer asked how the balance should be struck between granting patents for methods that applied to machines as opposed to methods that apply to how information is used. "I don't know," he answered. "And I don't know whether across the board or in this area or that area patent protection would do no harm or more harm than good."

Likewise, Justice Sotomayor said she couldn't predict the result if the court tried to clarify what can be patented and what can't. "I have no idea what the limits of that ruling will impose in the computer world, in the biomedical world."

Such humility is rare at the Supreme Court, but as the justices come to a decision in this case, they should remember above all that legal uncertainty about intellectual property has real costs. For now, the most innovative parts of our economy bear the burden of uncertainty, with no one knowing for sure who owns what rights to which ideas, inventions or discoveries.

 WSJ    * NOVEMBER 17, 2009

25. Diamond Miners Band Together Producers of Uncut Rocks Will Raise Output to Ease the Pinch on Polishers
 

By JOHN W. MILLER

ANTWERP, Belgium— The world's top diamond miners plan to slowly increase output to tamp down prices of the rough gemstones. The cautious move aims to appease customers who have been squeezed by flat retail prices.

The delicate choreography comes even as the top four diamond producers fret that demographic and other changes threaten to permanently sap demand for the gems and create a long-term crisis for the industry.

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An Antwerp, Belgium diamond cutter inspected his work last month.
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Prices for rough, uncut rocks have risen more than 40% since February. Meanwhile, retail sales are falling, to $65 billion this year from $74 billion in 2008, RBC said.

"A lot of companies are going to be out" of business because of higher rough prices, said Eyal Atzmon, whose Antwerp-based company El-Ran polishes and trades diamonds.

As the financial crisis crushed the luxury-goods market, De Beers Group, Rio Tinto, BHP Billiton and Alrosa Co. slashed production this year. The four diamond miners control 90% of global production and influence prices through a Byzantine yet legal system of closed sales, secret long-term contracts and a few auctions.

De Beers, for example, slashed output by more than 90% in the first quarter.

And Alrosa sold all its production to the Russian state in the first half, rather then sell rough diamonds to its regular customers who cut and polish the stones for sale to consumers.

Global diamond-mine production is forecast to fall to $8 billion this year from $13.1 billion last year, according to Toronto-based RBC Capital Markets.

With manufacturers and polishers complaining of vanishing profit margins, the big four miners pledged Monday to ease their pain.
[ DIAMONDSB ]

"We had to avoid a large-scale and catastrophic collapse of our industry," Sergey Oulin, vice president of Alrosa, said Monday at an industry conference in this port city, the center of the world diamond trade.

While the miners are loath to see prices for uncut diamonds drop too sharply, they are also worried that they might put some of their customers out of business if prices stay high.

"There is a consensus that rough prices have gone too high," said Des Kilalea, an RBC analyst. "But what everybody craves in this business is stability."

The miners plan to increase production gradually to avoid destabilizing the market. Alrosa holds more than $1 billion of diamonds, but won't sell it all at once, Mr. Oulin said.

Production "all depends on what demand will look like in the future," said Tim Dabson, a De Beers executive director.

Any increase poses risks for the miners. Short-term retail demand was hit by the global recession. But even as economic growth resumes, the industry faces other longer-term challenges, particularly in the U.S., which accounts for 40% of retail sales.

"We know people over 55 treasure diamonds…but that's not so clear for the iPod generation," Mr. Dabson said. "We need to tap into that market."Other risks include the tendency of consumers in the growing economies of India and China to favor less-expensive gems than what sell elsewhere.

The industry also is contending with what Mr. Dabson called "ethical consumerism," the linking of diamonds to war, corruption and environmental degradation. The industry participates in the Kimberley Process, an effort to ensure that diamonds traded internationally aren't used to finance rebel groups.

The industry needs protection for "when we're hit by a crisis like the 'Blood Diamond' movie," said BHP Billiton marketing director Chris Ryder, referring to the 2006 Leonardo Di Caprio film about diamond mining in war-torn Sierre Leone.

He also said the industry needs to mount general "demand defense." De Beers, the biggest diamond producer, has said it would reduce its advertising budget, worrying executives throughout the industry. The big miners have discussed a collaborative $200 million ad campaign, but have yet to commit.

Mr. Dabson drew applause, however, by playing a De Beers TV commercial for the U.S. that features a couple ice-skating on a frozen pond.

Write to John W. Miller at john.miller@dowjones.com

    WSJ * NOVEMBER 17, 2009, 7:07 A.M. ET

26. Patterns Suggest Gold Will Keep Climbing

By FRANCIS BRAY

LONDON -- The gold cash market is in a very strong bull market, and two major continuation patterns are evident on the gold charts which highlight scope for a move ultimately up to the $1300.00 to $1325.00 area.

The first monthly close above the psychological $1000 mark in September 2009 occurred on the breakout of a seven-month bull pennant and the neckline of a 19-month head-and-shoulders continuation pattern. Even the retest of the broken neckline marking the October low at $987.00 to validate the bull trend is textbook, and gold hasn't looked back since, making record all-time highs on a regular basis.

The $1153.00 target acquired off the bull pennant is very close by, and will be reached this week. However, consolidation in these type of trends are normally very shallow and quick, and it won't be long before the next upside targets at $1200 and $1230.00 are met. The latter target is equality of the $682.00 to $1006.30 advance, projected off the orthodox termination low of the consolidation pennant at $905.30.

Yet, it is the projected target from the head-and-shoulders continuation pattern that should highlight the likely distance of this uptrend. Head-and-shoulder patterns are considered more dominant than pennants, as they are rarer as continuation patterns compared to pennants, and also the length of time it takes to form, in this case 19 months.

The measuring objective from the neckline break in September at $989.60 promotes room for a move equivalent to roughly 33.7%, to $1323.50. This ties in with a 1.272 Fibonacci projection target from the bull pennant $905.30 termination low, coming in at $1317.81. It is this type of synchronicity, or meaningful coincidence, that strengthens the idea that it is this $1317.81 to $1323.50 area that bulls will seek, rather than a peak lower down.
— Francis Bray is Dow Jones's chief technical analyst for Europe, and has worked as a technical analyst and trader for 20 years in London, Barcelona and Guernsey.
 

 
 WSJ    * NOVEMBER 16, 2009, 9:30 P.M. ET

27. China and the American Jobs Machine China's export policy is really a social policy, designed to maintain order. By ROBERT B. REICH

President Barack Obama says he wants to "rebalance" the economic relationship between China and the U.S. as part of his plan to restart the American jobs machine. "We cannot go back," he said in September, "to an era where the Chinese . . . just are selling everything to us, we're taking out a bunch of credit-card debt or home equity loans, but we're not selling anything to them." He hopes that hundreds of millions of Chinese consumers will make up for the inability of American consumers to return to debt-binge spending.

This is wishful thinking. True, the Chinese market is huge and growing fast. By 2009, China was second only to the U.S. in computer sales, with a larger proportion of first-time buyers. It already had more cell-phone users. And excluding SUVs, last year Chinese consumers bought as many cars as Americans (as recently as 2006, Americans bought twice as many).

Even as the U.S. government was bailing out General Motors and Chrysler, the two firms' sales in China were soaring; GM's sales there are almost 50% higher this year than last. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are Chinese brands. If the Chinese economy continues to grow at or near its current rate and the benefits of that growth trickle down to 1.3 billion Chinese consumers, the country would become the largest shopping bazaar in the history of the world. They'll be driving over a billion cars and will be the world's biggest purchasers of household electronics, clothing, appliances and almost everything else produced on the planet.

But in fact China is heading in the opposite direction of "rebalancing." Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35% of the Chinese economy; 10 years ago consumption was almost 50%. Capital investment, by contrast, rose to 44% from 35% over the decade.

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China's capital spending is on the way to exceeding that of the U.S., but its consumer spending is barely a sixth as large. Chinese companies are plowing their rising profits back into more productive capacity—additional factories, more equipment, new technologies. China's massive $600 billion stimulus package has been directed at further enlarging China's productive capacity rather than consumption. So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the U.S. and Europe.

Many explanations have been offered for the parsimony of Chinese consumers. Social safety-nets are still inadequate, so Chinese families have to cover the costs of health care, education and retirement. Young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to accumulate and save enough assets to compete in the marriage market. Chinese society is aging quickly because the government has kept a tight lid on population growth for three decades, with the result that households are supporting lots of elderly dependents.

But the larger explanation for Chinese frugality is that the nation is oriented to production, not consumption. China wants to become the world's pre-eminent producer nation. It also wants to take the lead in the production of advanced technologies. The U.S. would like to retain the lead, but our economy is oriented to consumption rather than production.

Deep down inside the cerebral cortex of our national consciousness we assume that the basic purpose of an economy is to provide more opportunities to consume. We grudgingly support government efforts to rebuild our infrastructure. We want our companies to invest in new equipment and technologies but also want them to pay generous dividends. We approve of government investments in basic research and development, but mainly for the purpose of making the nation more secure through advanced military technologies. (We regard spillovers to the private sector as incidental.)

China's industrial and technological policy is unapologetically direct. It especially wants America's know-how, and the best way to capture knowhow is to get it firsthand. So China continues to condition many sales by U.S. and foreign companies on production in China—often in joint ventures with Chinese companies.

American firms are now helping China build a "smart" infrastructure, tackle pollution with clean technologies, develop a new generation of photovoltaics and wind turbines, find new applications for nanotechologies, and build commercial jets and jet engines. GM recently announced it was planning to make a new subcompact in China designed and developed primarily by the Pan-Asia Technical Automotive Center, a joint venture between GM and SAIC Motor in Shanghai. General Electric is producing wind turbine components in China. Earlier this month, Massachusetts-based Evergreen Solar announced it will be moving its solar panel production to China.

The Chinese government also wants to create more jobs in China, and it will continue to rely on exports. Each year, tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work. If they don't find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China's governing elite. That elite would much rather create export jobs, even at the cost of subsidizing foreign buyers, than allow the yuan to rise and thereby risk job shortages at home.

To this extent, China's export policy is really a social policy, designed to maintain order. Despite the Obama administration's entreaties, China will continue to peg the yuan to the dollar—when the dollar drops, selling yuan in the foreign-exchange market and adding to its pile of foreign assets in order to maintain the yuan's fixed relation to the dollar. This is costly to China, of course, but for the purposes of industrial and social policy, China figures the cost is worth it.

Both America and China are capable of producing far more than their own consumers are capable of buying. In the U.S., the root of the problem is a growing share of total income going to the richest Americans, leaving the middle class with relatively less purchasing power unless they go deep into debt. Inequality is also widening in China, but the problem there is a declining share of the fruits of economic growth going to average Chinese and an increasing share going to capital investment.

Both societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the U.S., it's a prolonged jobs and earnings recession that, when combined with widening inequality, could create political backlash.

Mr. Reich, professor of public policy at the University of California, Berkeley and former secretary of labor under President Clinton, is the author of "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life" (Alfred A. Knopf, 2007).
 

28. THE POOR NEED CAPITALISM
------------------------------------------------------------------------

The Left's version of recent economic history boils down to one
terrible fact: The distribution of income has gradually become more
unequal.  Within the United States, that fact is incontrovertible.
It is not clear, however, that increased inequality has been bad, says
economist Kevin A. Hassett.

Inequality is, after all, the foundation of a capitalist society.
When individuals work hard, or innovate, they receive outsized rewards.
 When others see those rewards, they are motivated to work hard
and innovate.  As the lottery-ticket market has demonstrated, the
bigger the prize, the bigger the motivation, explains Hassett.

A landmark new study by economists Maxim Pinkovskiy and Xavier
Sala-i-Martin set out to study changes in the world distribution of
income by gathering data from many different countries.  As a
byproduct of their work, they are able to count the number of
individuals who live on $1 per day or less, a key measure of
poverty.  According to their calculations:
   o   The number of people living in poverty so defined has
       plummeted, from 967,574,000 in 1970 to 350,436,000 in 2006, a
       decrease of a whopping 64 percent.
   o   The biggest factor in the reduction was the emergence of
       middle classes in previously poverty stricken China and India.
   o   The spread of capitalism to other countries has similarly
       been followed by prosperity; the trend is even more impressive
       if one considers that the world population skyrocketed over
       that time, increasing by 3 billion.

If the trend continues for just 40 more years, poverty will have been
essentially eradicated from the globe.  And capitalism will have
done it, says Hassett.  Socialism offers itself as an alternative
to capitalism that is more just to the poor.  To test that view,
the authors reconstruct the distribution of income for the countries of
the former Soviet Union.  Back in the Communist days, poverty was
much, much higher in the Soviet Union than it is today.

There are those who have argued that the current financial crisis has
served as proof that capitalism is a failed ideology.  The work of
Pinkovskiy and Sala-i-Martin suggests that there are about a billion
people whose lives prove otherwise, says Hassett.

Source: Kevin A. Hassett, "The Poor Need Capitalism,"
National Review, November 23, 2009; based upon: Maxim Pinkovskiy and
Xavier Sala-i-Martin, "Parametric Estimations of the World
Distribution of Income," National Bureau of Economic Research,
Working Paper No. 15433, October 2009.

For text:
http://www.thefreelibrary.com/The+poor+need+capitalism.-a0211555573
For study:
http://www.nber.org/papers/w15433
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
 

29 The worst is yet to come: Unemployed Americans should hunker down for more job losses BY Nouriel Roubini

Sunday, November 15th 2009, 4:00 AM
Related News
 

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.

Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost.

This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries.

Other measures tell the same ugly story: The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession.

As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures.

The damage will be extensive and severe unless bold policy action is undertaken now.

Roubini is professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics.

Top economic prognosticator says job seekers

must face grim economic facts

RECENT COMMENTS FROM DAILY NEWS
 

30. An Alternative Stimulus Plan A payroll tax cut would add three to four million jobs at a fraction of the cost of the stimulus bill. WSJ Nov 18 09 By MICHAEL J. BOSKIN

While the economy has finally started to grow, the disturbingly high unemployment rate is increasing pressure from the left to double down on this year's poorly designed fiscal stimulus bill. Since the stimulus bill was signed, the ranks of the unemployed have grown by over three million (over four million if involuntary part-time and discouraged workers are included). The unemployment rate, which the Obama administration projected the stimulus would contain at 8%, is now 10.2%.

There is little likelihood that another round of similar fiscal stimulus would yield much more than the paltry return on the first one. The original transfer payments and tax rebates barely nudged consumer spending, and the federal spending has been painfully slow. The delayed infrastructure spending—the shovels are still in the shed—will have a bigger impact, though less than claimed. Some of the funds to state and local government did reduce layoffs. The stimulus bill surely ranks dead last compared to the natural dynamics of the business cycle, the Fed's zero interest rate policy, and the automatic stabilizers in the tax code (which have reduced taxes proportionally more than income) as far as explanations for the improvement in the economy.
[boskin]

But to evaluate the stimulus properly we should consider not just what we got for the $787 billion cost but the effects of alternative policies that might have been enacted.

My Stanford colleague Pete Klenow and Rochester economist Mark Bils estimated that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers—an amount equal to all the job losses since the stimulus was passed.

The payroll tax cut would have reduced firms' costs by roughly the same amount as from the entire decline in employment. It would have cost less than half as much as the stimulus bill, gotten far more income into paychecks quickly and, most importantly, greatly reduced incentives for firms to lay off workers. In fact, it would have created incentives to hire.

Even using the administration's claims of one million jobs "created or saved," the stimulus program passed in early February is millions of jobs short of what a cheaper payroll tax suspension would have delivered (see nearby chart).

Yet the president and Congress are preparing vast new taxes on employment in the health-care reform and other legislation. Raising the federal top tax rate to 45% (from the current 35% with a 5.4% surcharge plus the expiration of the Bush tax cuts) will hit successful small businesses especially hard. The tax hike on capital gains and dividends hidden in the fine print of the health-care legislation will also raise the cost of equity capital, further weakening businesses (including banks) desperate for private capital. Many firms will also face either an 8% additional payroll tax or be forced to pay a higher share of health insurance premiums. Such tax increases will hit employment and wages hard.

It would be far better to junk part of the remaining stimulus in favor of a one-year partial payroll tax cut. Also accelerate spending that needs to be done eventually, such as replenishing depleted military equipment used up in Iraq and Afghanistan and adding a desperately needed two Army brigades.

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Christian Hansen Photographer for The Wall Street Journal
JOBS
JOBS

There are five large interrelated headwinds to jobs and growth. First, continued deleveraging, unresolved toxic assets, and weak banks are constraining credit, especially for small business that is the source of most hiring. Second, household balance sheets depressed from declines in home values and portfolios are likely to constrain consumption growth. Third, government industrial-policy micromanagement with subsidies and mandates from pay to products is forcing noncommercial decisions on wide swaths of the economy from financial services and autos to energy and health care. Such policies have never worked before—ask the Japanese, Koreans and Europeans. Fourth, the explosion of spending, deficits and debt foreshadows even higher prospective taxes on work, saving, investment and employment. That not only will damage our economic future but is harming jobs and growth now. Fifth, the massive liquidity injections by the Fed raise the specter of future inflation.

By far the best response to these headwinds is to curtail the huge current and contemplated future government control of the economy with a clear, predictable exit strategy—before the programs become permanently entrenched, develop powerful dependent constituencies, and greatly increase the risk of rising interest rates, inflation and taxation. Doing so would more rapidly improve the outlook for permanent private-sector employment, investment and growth than any conceivable second stimulus. It would also allocate capital and labor to their highest value in providing goods and services that people actually want and need, not what government bureaucrats want them to have.

The jobs agenda must begin with a Hippocratic oath: First do no harm to employment. That means jettisoning or at least delaying job-killing energy and health-care legislation with their mandates, taxes and costs that especially hammer small businesses.

Also wind down, as soon as possible, the emergency measures which healthy businesses, households and investors fear will become permanent competitive impediments. Start with the Troubled Asset Relief Program, which the Treasury uses as a permanent revolving fund even for nonfinancial bailouts.

Financial regulation should focus on disclosure, transparency, effective clearing, capital adequacy, and new bankruptcy procedures. We also need a Plan B, modeled on the Resolution Trust Corporation cleanup of the savings and loans, in the event the losses on toxic assets are too large for time, profitability and economic recovery to manage. And the Fed must forestall future inflation by withdrawing its immense liquidity injections as soon and predictably as feasible (its initial steps are commendable).

Finally, if possible, we should complement these pro-employment policies with long-run fiscal reform: control entitlement cost growth, e.g. with price rather than wage indexing of Social Security, and real tax reform with the widest possible tax bases and lowest possible rates. America's corporate tax rate, the second highest among advanced economies, is especially damaging.

That is a far more consistent common-sense recipe for more and better jobs, far sooner than the current contradictory and ineffective policy mess emanating from Washington.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

WSJ Nov 18 09
31. Health 'Reform' Gets a Failing Grade The changes proposed by Congress will require more draconian measures down the road. Just look at Massachusetts.
 

By JEFFREY S. FLIER

As the dean of Harvard Medical School I am frequently asked to comment on the health-reform debate. I'd give it a failing grade.

Instead of forthrightly dealing with the fundamental problems, discussion is dominated by rival factions struggling to enact or defeat President Barack Obama's agenda. The rhetoric on both sides is exaggerated and often deceptive. Those of us for whom the central issue is health—not politics—have been left in the lurch. And as controversy heads toward a conclusion in Washington, it appears that the people who favor the legislation are engaged in collective denial.

Our health-care system suffers from problems of cost, access and quality, and needs major reform. Tax policy drives employment-based insurance; this begets overinsurance and drives costs upward while creating inequities for the unemployed and self-employed. A regulatory morass limits innovation. And deep flaws in Medicare and Medicaid drive spending without optimizing care.

Speeches and news reports can lead you to believe that proposed congressional legislation would tackle the problems of cost, access and quality. But that's not true. The various bills do deal with access by expanding Medicaid and mandating subsidized insurance at substantial cost—and thus addresses an important social goal. However, there are no provisions to substantively control the growth of costs or raise the quality of care. So the overall effort will fail to qualify as reform.

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Associated Press
Flier

In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it. Likewise, nearly all agree that the legislation would do little or nothing to improve quality or change health-care's dysfunctional delivery system. The system we have now promotes fragmented care and makes it more difficult than it should be to assess outcomes and patient satisfaction. The true costs of health care are disguised, competition based on price and quality are almost impossible, and patients lose their ability to be the ultimate judges of value.

Worse, currently proposed federal legislation would undermine any potential for real innovation in insurance and the provision of care. It would do so by overregulating the health-care system in the service of special interests such as insurance companies, hospitals, professional organizations and pharmaceutical companies, rather than the patients who should be our primary concern.

In effect, while the legislation would enhance access to insurance, the trade-off would be an accelerated crisis of health-care costs and perpetuation of the current dysfunctional system—now with many more participants. This will make an eventual solution even more difficult. Ultimately, our capacity to innovate and develop new therapies would suffer most of all.

There are important lessons to be learned from recent experience with reform in Massachusetts. Here, insurance mandates similar to those proposed in the federal legislation succeeded in expanding coverage but—despite initial predictions—increased total spending.

A "Special Commission on the Health Care Payment System" recently declared that the Massachusetts health-care payment system must be changed over the next five years, most likely to one involving "capitated" payments instead of the traditional fee-for-service system. Capitation means that newly created organizations of physicians and other health-care providers will be given limited dollars per patient for all of their care, allowing for shared savings if spending is below the targets. Unfortunately, the details of this massive change—necessitated by skyrocketing costs and a desire to improve quality—are completely unspecified by the commission, although a new Massachusetts state bureaucracy clearly will be required.

Yet it's entirely unclear how such unspecified changes would impact physician practices and compensation, hospital organizations and their capacity to invest, and the ability of patients to receive the kind and quality of care they desire. Similar challenges would eventually confront the entire country on a more explosive scale if the current legislation becomes law.

Selling an uncertain and potentially unwelcome outcome such as this to the public would be a challenging task. It is easier to assert, confidently but disingenuously, that decreased costs and enhanced quality would result from the current legislation.

So the majority of our representatives may congratulate themselves on reducing the number of uninsured, while quietly understanding this can only be the first step of a multiyear process to more drastically change the organization and funding of health care in America. I have met many people for whom this strategy is conscious and explicit.

We should not be making public policy in such a crucial area by keeping the electorate ignorant of the actual road ahead.

Dr. Flier is dean of the Harvard Medical School.
 

32. The 'stimulus' for unemployment By ALAN REYNOLDS

http://www.nypost.com/p/news/opinion/opedcolumnists/the_stimulus_for_unemployment_Q082yIXFBCIxk41lqXXt6H

Last Updated: 1:45 AM, November 17, 2009

Posted: 12:56 AM, November 17, 2009

Why did the unemployment rate rise so rapidly -- from 7.2 per cent in January to 10.2 percent in October? It was clearly the administration's "stimulus" bill -- which in February provided $40 billion to greatly extend jobless benefits at no cost to the states.

As Larry Summers, the president's top assistant for economic policy, noted in July, "the unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP." And the rate has moved nearly a percentage point higher since then, even though GDP increased. Countries with much deeper declines in GDP, such as Germany and Sweden, have unemployment rates far below ours.

Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: "Unemployment insurance lengthens unemployment spells."

That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that.

And the stimulus bribed states to extend benefits -- which have now been stretched to an unprecedented 79 weeks in 28 states and to 46 to 72 weeks in the rest. Before mid-2008, by contrast, only a few states paid jobless benefits for even a month beyond the standard 26 weeks.

When you subsidize something, you get more of it. Extending unemployment benefits from 26 to 79 weeks was guaranteed to leave many more people unemployed for many more months.

And longer unemployment translates to higher unemployment rates -- because the relatively small numbers of newly unemployed are added to stubbornly large numbers of those who lost their jobs more than six months ago.

Until benefits are about to run out, many of the long-term unemployed are in no rush to make serious efforts to find another job -- or to accept job offers that may involve a long commute, relocation or disappointing salary and benefits.

(Incidentally, the "mercy" of longer benefits does no long-term favors: The literature is quite clear that a prolonged period on unemployment tends to depress income for years after you finally go back to work.)

The median length of unemployment hovered around 10 weeks for six months before February's "stimulus" plan. Since half the unemployed found jobs within 10 weeks, more than half of those counted among the unemployed in one month would no longer be included three months later. In other words, more frequent turnover among the unemployed held down monthly unemployment.

But after February, with jobless benefits stretched out to 46 to 79 weeks, the median duration of unemployment nearly doubled, reaching 18.7 weeks by October.

The unemployment rate has not been rising because of growing numbers of newly jobless people. Indeed, initial claims for unemployment benefits are way down. And the number of unfilled private job openings increased by 9.3 percent from the end of April to the end of September.

The unemployment rate has been rising because unprecedented numbers of those who became unemployed six to 19 months ago are remaining "on the dole" until their benefits are nearly exhausted.

Summers isn't the only administration economist who understands this very well. Assistant Secretary of the Treasury for Economic Policy Alan Krueger co-authored a 2002 survey of the topic with Bruce Meyer of the University of Chicago. They found that "unemployment insurance and worker's compensation insurance . . . tend to increase the length of time employees spend out of work." Last August, Krueger and Andreus Miller of Princeton also found that "job search increases sharply [from 20 minutes a week to 70] in the weeks prior to benefit exhaustion."

Similarly, Meyer found "the probability of leaving unemployment rises dramatically just prior to when benefits lapse." In other words: If you extend benefits to 79 weeks, many people won't find an acceptable job offer until the 76th or 78th week.

Meyer and Lawrence Katz of Harvard estimated that "a one-week increase in potential benefit duration increases the average duration of the unemployment spells . . . by 0.16 to 0.20 weeks." Apply that formula to the 20-to-53-week extension we've seen, and you get an average of three to ten more weeks spent on unemployment. And, sure enough, the average unemployment spell has risen by seven weeks this year -- to nearly 27 weeks by October.

Katz also found that extended benefits, by making it easier for workers to wait and see whether they get their old jobs back, also makes it easier for employers to delay recalling laid-off workers. Just before unemployment benefits run out, Katz found "large positive jumps in both the recall rate and new job finding rate."

The White House recently made the mysterious claim of having "saved" 640,329 jobs, at a cost of only $531,250 per job ($340 billion).

In reality, the evidence is overwhelming that the February stimulus bill has added at least two percentage points to the unemployment rate. If Congress and the White House hadn't tried so hard to stimulate long-term unemployment, the US unemployment rate would now be about 8 percent and falling rather than more than 10 percent and -- rising.

Alan Reynolds, a Cato Institute senior fellow, is author of "Income and Wealth."
 
 

33. Greed, Envy, and Compensation 1/15/2009 By Matt Bogard

http://www.agweb.com/Blogs/BlogPost.aspx?src=EconomicSense&PID=22b63a07-ddb3-4797-8188-88f2a10220fd

To me, we have seen a lot of hypocrisy lately in the public discourse regarding the issue of compensation. The underlying premise for much of the call for capping executive compensation has been that executives are overcompensated. That compensation structures have provided too much incentive for excessive risk taking. When you combine these pay structures with greedy executives, you get all of the problems that characterize the recent financial crisis. Since they had a lot to do with our current problems, they should not be rewarded with generous compensation or bonuses.

I deem this line of thought as hypocritical in the following way. I think much of the popular support for new regulations regarding executive salaries has to do more with envy, than economics (which I will discuss more below). Often political leaders will attempt to exploit envy from below, in order to create a larger movement for social control from above. Envy is just the desire to have more, and often more of what someone else has. Lately, envy has meant begrudging others of what they have and has led to having government take it away. How is that so different from greed?

Are executives really overcompensated? Research from the Journal of Political Economy by Jenson and Murhpy indicated that for every $1000 of value created for a company, executives were only compensated by $3.25. It hardly appears that they are overcompensated. There has also been the criticism that capitalism, and greedy executives, has lead to too much concentration on short term gains without concern for long term outcomes. This too is without merit. Research from the Journal of Applied Corporate Finance indicates that near term cash flows account for only a small percentage of a firm's capitalized market value. Only 18% of share value can be attributed to short term expectations of profits within a 5 year window. Expectations looking 10 years out account for up to 35% of share value. In other words, capitalism, or markets place greater value on long term gains than short term wins.
 

A major challenge in corporate finance and compensation structures has been to actually encourage, not discourage executives to take calculated risks. A basic principle of finance is that with greater risks come greater returns. A leader that consistently abstains from taking risks will not create value for any organization. Large bonuses and golden parachutes aren't just the product of greed, but are designed to give executives the incentive to take prudent risks and create long term value for their firm and its shareholders.

Is too much risk taking really a problem? Some people claim that deregulation in addition to greed lead to excessive risk taking and our current problem. The only problem with that point is that we have not had a single act of deregulation by congress in well over a decade, and that was during the Clinton administration. But this deregulation ( the Gramm-Leach-Bliley Act) in fact helped create stability in the recent financial crisis, instead of being a source of the chaos. As quoted from the Wall Street Journal ( Oct 18,2008)

'Indeed, it allowed Bear Stearns and Merrill Lynch to be acquired by J.P. Morgan Chase and Bank of America, and allowed Goldman Sachs and Morgan Stanley to convert to bank holding companies to help shore up their positions during the mid-September bear runs on their stocks.'

But I do agree, that excessive risk taking did have a huge role to play in the current crisis. Market interest rates check excessive debt accumulation and risk taking. However, the artificially low, socially planned interest rates of the fed upset these natural checks and balances. Risky projects that did not offer a return high enough to offset risks under market interest rates, became profitable at new artificially lower interest rates. Businesses took on more risks and more debt than market fundamentals otherwise would have supported, and suddenly we have the makings of a rational bubble and the inevitable crash that followed. Implicate greed and risk taking if you will, but don't take it so far as to blame salaries and deregulation in the process.

What are the effects of our current stance on salaries? Now, of all times is when we need the best talent to lead us back to positive returns. If we really want the bailed out companies to ever be in a position to repay taxpayer dollars or regain their independence from government control, we need the top leaders to put them in that position. We won't get off cheap doing it. Already Bank of America is having trouble finding executives willing to be their CEO at the government imposed $500,000 pay cap. ( Wall Street Journal Nov 14, 2009).

Having not addressed the root causes of the financial crisis, and implementing more regulations that decrease risk taking, decrease compensation, and decrease investment incentives will only prolong the crisis and lead to stagnant long term growth.

If greed has ever been a problem, then it will be our envious regulatory response that keeps us from solving it.

References:

'Most Pundits Are Wrong About the Bubble-The repeal of Glass-Steagall has helped us weather the storm.' Wall Street Journal, Oct 18,2008. Charles Calamiris.

'BofA Hits Pay Snag in its CEO Hunt.' Dan Fitzpatrick. Wall Street Journal, Nov 14,2009.

Michale C. Jenson and Kevin J. Murphy."Performance Pay and Top Management Incentives," Journal of Political Economy, 98 No. 2 (April 1990) p. 225-264.

J.R. Woolridge, "Competitive Decline: Is a Myopic Stock Market to Blame?" Journal of Applied Corporate Finance, Spring 1988. p. 26-36

    WSJ * NOVEMBER 19, 2009, 10:16 A.M. ET

34. New Jobless Claims Flat at 505,000

By SARAH N. LYNCH

The number of U.S. workers filing new claims for jobless benefits last week remained unchanged from the prior week, the Labor Department said in its weekly report Thursday.

Total claims lasting more than one week, meanwhile, declined.

Initial claims for jobless benefits remained steady at 505,000 in the week ended Nov. 14. The previous week's level was revised to 505,000 from 502,000.

Economists surveyed by Dow Jones Newswires had expected a slight increase of 4,000 claims. Despite the fact claims were unchanged in Thursday's report, economists have said they've seen some good trends in jobless claims figures recently.

"Jobless claims have been trending steadily downward, which is a positive sign for the labor market," economists at J.P. Morgan Chase & Co. wrote in an economic analysis last week. "Payroll employment losses have been quite steady for the last three months, but the drop in claims suggests that job losses could start to moderate again soon."

The four-week moving average of new claims, which aims to smooth volatility in the data, fell by 6,500 to 514,000 from the previous week's revised average of 520,500. That is the lowest figure since November 22, 2008.

Initial claims still remain at a fairly high level and remained stagnant last week, suggesting the job market continues to face a sluggish recovery. Recent data showed that the unemployment rate in the U.S. hit 10.2% in October, which was up from 9.8% in September.

In the Labor Department's Thursday report, the number of continuing claims -- those drawn by workers for more than one week in the week ended Nov. 7 -- fell by 39,000 to 5,611,000 from the preceding week's revised level of 5,650,000.

The unemployment rate for workers with unemployment insurance for the week ended Nov. 7 was 4.3%, unchanged from the prior week's unrevised rate.

The largest increase in initial claims for the week ending Nov. 7 was in Michigan due to layoffs in the automobile, construction and service sectors. The largest decrease in initial claims occurred in Florida.
Leading Indicators Edge Up

The index of leading economic indicators rose for the seventh consecutive month in October. The index edged up 0.3% after increasing an unrevised 1% in September, the Conference Board reported Thursday.

Economists surveyed by Dow Jones Newswires had expected an increase of 0.4% in the October index.

"We can expect slow growth through the first half of 2010," said Ken Goldstein, economist at the board. "The pace of growth, however, will depend critically on how much demand picks up, and how soon."

Six of the 10 leading indicators increased in October. The most positive were the interest-rate spread, the inverted trend in jobless claims, and stock prices. The most negative contributors were consumer expectations and building permits.

The coincident index was unchanged in October after falling a revised 0.1% in September, which was originally reported as unchanged. The lagging index dropped 0.2% last month, after a revised 0.5% fall in September that was first reported as a 0.3% drop.
—Kathleen Madigan

Write to Sarah N. Lynch at sarah.lynch@dowjones.com

  WSJ   * NOVEMBER 19, 2009

35. The Phantom Jobs Stimulus 'Who knows, man, who really knows.'

At least funny bones are being stimulated by the Obama Administration's $787 billion economic stimulus bill.

To wit, how many Americans does it take to make nine pairs of work boots? According to the White House's recovery.gov site, an $890 shoe order for the Army Corps of Engineers, courtesy of the stimulus package, created nine new jobs at Moore's Shoes & Services in Campbellsville, Kentucky.

The job-for-a-boot plan may not be American productivity at its best. But such stories go a ways toward explaining how the Administration has come up with 640,329 jobs "created/saved" by the American Recovery Act as of October 30.

Jonathan Karl of ABC News deserves credit among Beltway reporters for committing journalism and actually fact-checking White House claims. Head Start in Augusta, Georgia claimed 317 jobs were created by a $790,000 grant. In reality, as Mr. Karl reported this week, the money went toward a one-off pay hike for 317 employees.

Other media outlets and government watchdog groups have also found numerous errors in the stimulus filings. Jobs have been overstated or counted multiple times. One Alabama housing authority claimed that a $540,071 grant would create 7,280 jobs. The Birmingham News reports that only 14 were created. In some cases, Recovery Act funds went to nonexistent Congressional districts, such as the 26th in Louisiana or the 12th in Virginia. Up to $6.4 billion went to imaginary places in America, according to the Franklin Center for Government and Public Integrity.

Asked by the New Orleans Times-Picayune why so many recipients would misstate their districts, Ed Pound, the director of communications for the Obama Administration's recovery.gov, said, "Who knows, man, who really knows."

The nonexistence of the jobs and places allegedly stimulated by the Recovery Act doesn't necessarily mean the money was misspent or stolen. But it does indicate that the claims made on its behalf are a political illusion. The true jobs measure of an economic recovery is the unemployment rate, which rose to 10.2% last month. No matter how hard or imaginatively the Administration spins, the reality is that the stimulus has been the economic bust that critics predicted it would be.
Printed in The Wall Street Journal, page A20