1. Does culture affect long-run growth?
2. Watching Wal-Mart at Midnight
3. A heat wave has hit Bowling Green, Ky., this summer but it has not
held back home buyers.
4. How Seniors Will Pay
for ObamaCare
5. Don't Be Afraid of
Frankenfish
6. A Scandinavian Model Sweden votes
for tax cuts, privatization and deregulation.
7.
Wal-Mart Tries to Unmask Opponents
8. Fishy
Diplomacy With Hanoi An antidumping case against Vietnamese catfish has a big
catch.
9. Wal-Mart Tries to Unmask
Opponents
10. Income: A meaningless, misleading,
and pernicious concept
11. How College Health
Plans Are Failing Students
12. The Genius of the
Tinkerer The secret to innovation is combining odds and ends, writes Steven
Johnson.
13. How to Grow Out of the
Deficit
14. The Post Office Hustle
15. EU Ends Apple Antitrust Probe
16. Banks Keep Failing, No End in Sight
17. A Game of Trade Chicken
18. Federal
Pay Still Inflated After Accounting for Skills
19. Authors Feel Pinch in Age of E-Books
20. House Democrats shelve net neutrality proposal
21. Rising Welfare Costs
22. More Proof We Can't Stop Poverty by Making It More
Comfortable
23. Tolling by Time Reduces
Congestion and Improves Air Quality
24. Only
Trade-Fuelled Growth Can Help the World's Poor
25. China's Next Leap Forward
26. 40
Years of Energy Panic
27. Bangladesh, 'Basket
Case' No More
28. Why Is College So
Expensive?
http://www.ncpa.org/pub/ba726
150,202 Readings(C) Fall, 2010
_________________________________________________________________________________s
14f10s
As
Democrats and Republicans jockey to set Congress's agenda for after the midterm
elections, President Obama has already dismissed one reform that would improve
Americans' financial standing: allowing workers to save and invest some of their
Social Security taxes in personal accounts.
That's
an "ill-conceived" proposal, Mr. Obama said in August, because it means "tying
your benefits to the whims of Wall Street traders and the ups and downs of the
stock market." The financial crisis, he said, should have put this idea to rest
"once and for all."
Missing
from the president's statements is any acknowledgment that, to date, all
proposals to create personal accounts have provided workers with the option to
invest for retirement or to stay with Social Security. Any worker could choose
to reject the option. So, contrary to the president's assertion, creating
personal accounts wouldn't suddenly empower those who "would gamble your Social
Security on Wall Street."
In
addition, no proposal has required workers to invest personal account funds in
Wall Street stocks, as opposed to other investments such as corporate or
government bonds, bond mutual funds or indexes, or certificates of
deposit.
Suppose
a senior citizen—let's call him "Joe the Plumber"—who retired at the end of
2009, at age 66, had been able to set up a personal account when he entered the
work force in 1965, at the age of 21. Suppose that, paying into his personal
account what he and his employer would have paid into Social Security, Joe was
foolish enough to invest his entire portfolio in the stock market for all 45
years of his working career. How would he have fared in the recent financial
crisis?
While
working, Joe had earned the average income for full-time male workers. His wife
Mary, also age 66, had earned the average income for full-time female workers.
They invested together in an indexed portfolio of 90% large-cap stocks and 10%
small-cap stocks, which earned the returns reported each year since 1965.
By the
time of their retirement in 2009, Joe and Mary would have accumulated account
funds, after administrative costs, of $855,175. Indeed, they would have been
millionaires a few years earlier, but the financial crisis lost them 37% in
2008. They were unfortunate to retire just one year after the worst 10-year
stock market performance since 1926. Yet their account, having earned a 6.75%
return annually from 1965 to 2009, would still pay them about 75% more than
Social Security would have.
What's
more, this model assumes that in retirement Joe and Mary switch to a lower-risk,
conservative portfolio that averages a return of just 3%. Of course for young workers today,
Social Security promises even lower returns of only 1.5% or less, given the
actuarial value of all promised benefits. For many, the promised returns are
zero or negative. And if Congress raises taxes or cuts
benefits in order to close financial gaps—as everyone who rejects personal
accounts effectively advocates—the eventual returns for young workers will be
even lower.
It is a
mathematical fact that the least expensive way to provide for an almost certain
future liability is to save and invest in capital markets prior to the onset of
the liability. That's why state and local pension funds, corporate pension
plans, federal employee retirement plans and Chile's successful Social Security
personal accounts (since copied by other countries) do so. It is sound
practice.
And
it's why Mr. Obama is wrong to assert that personal Social Security accounts are
"ill-conceived," and why each of us should have the liberty to opt into
one.
Mr.
Shipman, formerly a principal at State Street Global Advisors, is co-chairman of
the Cato Project on Social Security Choice. Mr. Ferrara, director of entitlement
and budget policy at the Institute for Policy Innovation, served in the White
House Office of Policy Development under President Reagan.
Wsj
OCTOBER 26, 2010, 5:53 P.M. ET
MOSCOW—Russia
became more corrupt in the last year, placing alongside Haiti and Tajikistan in
an annual corruption index despite President Dmitry Medvedev's pledge to battle
graft, a ranking by Transparency International showed Tuesday.
Russia
became more corrupt in the last year, placing alongside Haiti and Tajikistan in
an annual corruption index despite President Dmitry Medvedev's pledge to battle
graft, a ranking by Transparency International. Eduardo Kaplan discusses the
survey's results.
Russia
fell to 154th—down from 146th last year—on Transparency International's 2010
International Corruption Perceptions Index, which ranks 178 countries from least
to most corrupt.
It was
ranked as the most corrupt economy in the Group of 20 nations, and the most
corrupt country in Europe, with Moldova, the next most corrupt European nation,
finishing in 105th place.
Russia
also placed worst among the so-called BRIC countries—Brazil, Russia, India and
China.
"It is
becoming completely obvious that the government's anti-corruption policy is at a
dead end," said Yelena Panfilova, head of Transparency International in Russia.
View
Full Image
John
MacDougall/AFP/Getty Images
Huguette
Labelle, head of Transparency International
The
world's least corrupt countries are Denmark, New Zealand and
Singapore,
according to the data showed. The most corrupt is Somalia, followed by
Afghanistan, Myanmar and Iraq.
Moscow's
slide in the rankings may provide ammunition for Mr. Medvedev's critics, who
claim that little has changed since he declared war on corruption after
replacing Vladimir Putin in 2008.
Indeed,
even Mr. Medvedev—widely seen as the less powerful half of a ruling elite made
up of himself and Mr. Putin, who is now prime minister—has seemed to have given
up. Although he launched the "Forward, Russia" anti-corruption campaign last
October, by July the president admitted that it had brought no results.
Corruption
develops "when society is closed, when there are no controls over the
government, when there is no punishment for giving or receiving bribes," said
Yevgeny Arkhipov, head of the Association of Russian Attorneys for Human Rights.
"All of these conditions exist today in Russia."
A
report by Mr. Arkhipov's organization released earlier this year found that
corruption in the country generates $650 billion annually, an amount equal to
half last year's gross domestic product.
Former
CIS state Georgia, which enacted massive reforms under President Mikheil
Saakashvili and lost a war to Russia in 2008, finished in 68th place, just below
Italy.
The
September state unemployment numbers came out last Friday, and we couldn't help
noticing that three of the four states with the highest job losses were
California (-63,500), New York (-37,600) and New Jersey (-20,200). The other was
Massachusetts (-20,900). Texas, meanwhile, gained 4,000 jobs.
This
continues a longer term trend.Over the last year, as the economy was
beginning to grow again, the Lone Star State has led the nation with the
addition of nearly 153,000 jobs, while California surrendered 43,700, New Jersey
lost 42,300 and New York dropped 14,600. This superior jobs recovery builds
on the fact that Texas also weathered the national recession better than most
states. According to a new Texas Public Policy Foundation study, Texas
experienced a decline of 2.3% from its peak employment, while California fell
nearly four times further, with 8.7% of jobs vanishing.
These
hiring statistics confirm that for business Texas is the new California—as the
likes of Austin, Dallas and San Antonio have become destinations for investment
and entrepreneurship. Texas has become a mecca for high tech, venture
capital, aeronautics, health care and even industrial manufacturing like the
building of cars and trucks.
Meanwhile,
the Golden State, New York and New Jersey have been slouching toward slow-growth
European status. New Jersey is at least working to get its spending and taxes
under control with Chris Christie as Governor, though its state and local tax
burden remains the nation's highest and its business tax climate is the worst,
according to the Tax Foundation.
The
migration of factories, capital and jobs to states like Texas is no accident.
Texas is a right to work state, meaning that workers cannot be compelled to join
a union. Texas also has no income tax, which gives its firms a roughly 10% cost
advantage over a "progressive" state like California.
There
is also a lesson here for Washington. The job-free zones of California, New
Jersey and New York each tax the rich more than nearly all other states. In
these states the top 1% wealthiest taxpayers bear roughly 40% of the state
income tax burden, but their budgets are still a mess and the job losses
continue. If the next crop of Governors and the 112th Congress want faster
growth and more job creation, they'll avoid the mistakes of California and New
York and learn from Texas.
Amazon.com Inc.
has decided to get a little more friendly.
On
Friday, the maker of the Kindle e-reader announced in a blog post that it would
allow Kindle users to lend e-books to friends.
The
capability, which will be introduced later this year, will let buyers of Kindle
e-books lend their Amazon e-book purchases just once, for a period of 14
days. (And just like an old-fashioned book, the lender cannot read their own
book while it is virtually in the hands of a friend.) Sharing will work for both
Kindle device owners and users of Kindle apps on other gadgets, like the iPad
and iPhone.
There's
a catch. Not all of the company's 720,000 e-books will be lendable. "This is
solely up to the publisher or rights holder, who determines which titles are
enabled for lending," said Amazon in its announcement.
Book
lending for the Kindle closes a notable product gap with Barnes &
Noble Inc.,
which introduced a similar feature with its Nook e-reader last
year.
There
remains another missing frontier in sharing for Amazon: libraries. Both the
Nook and Sony
Corp.'s Reader allow users to read books embedded with digital rights management
software from popular library systems, such as the one run by Overdrive Inc.
Amazon's Kindle, which uses its own e-book format, isn't
compatible.
Digital
libraries are becoming increasingly mainstream. Some two-thirds of American
public libraries offer e-book loans, according to the American Library
Association.
Amazon
continues to play coy about exactly how many Kindles it has sold, but in its
earnings announcement last week, it said that in the 12 weeks following the
introduction of its latest generation device, U.S. and U.K. customers ordered
more Kindles than any other product from the giant online
retailer.
Write
to Geoffrey
A. Fowler at geoffrey.fowler@wsj.com
October 28, 2010
A quick review of the facts reveals that
American universities often deliver easy, biased or useless content -- at great
expense to students, parents and taxpayers, says the Pope Center for Higher
Education.
University students learn less than many people
think:
Universities are expensive for students,
parents and taxpayers:
A college degree is no guarantee of future
success:
Many college professors teach one-sided
courses:
Source: Jenna Ashley Robinson, "A Closer Look
at Higher Education," Pope Center for Higher Education Policy, October 27,
2010.
For text:
http://popecenter.org/clarion_call/article.html?id=2428
October 28, 2010
Tuition is up (no surprise) and this year the percentage increases for public and private four-year colleges and universities are higher than they were last year. Generally, the percentage increases at public institutions are larger than those at privates (which are more expensive to start with). Those trends are standard for tight economic times, when states cut budgets and try to make up for shortfalls with larger tuition increases, and when many private colleges worry that sticker shock will scare away families and so tend to moderate price increases.
Across the board, the increases exceed the inflation rate of about 1.2 percent for the last year, which, while low, was higher than the slightly negative rate of the year before.
Those are the key findings from this year's annual survey on college prices (and a companion survey on student aid) being released today by the College Board. In many respects, the data extend trends that were evident last year as well. Here are the overall figures for the 2010-11 academic year:
Tuition and Fees by Sector
|
Sector |
2010-11 Tuition and
Fees |
One-Year Dollar
Increase |
One-Year % Increase
|
Previous Year's %
Increase |
|
Private, nonprofit
four-year colleges |
$27,293 |
$1,164 |
4.5% |
4.4% |
|
Public four-year
colleges, in-state residents |
$7,605 |
$555 |
7.9% |
6.5% |
|
Public four-year colleges,
out-of-state residents |
$19,595 |
$1,111 |
6.0% |
6.2% |
|
Community colleges |
$2,713 |
$155 |
6.0% |
7.3% |
|
For-profit colleges |
$13,935 |
$679 |
5.1% |
6.5% |
For room and board, public increases also outpaced the privates, and privates are also more expensive. The average public college rate is going up by 4.6 percent, to $8,535, and the average private rate is going up by 3.9 percent, to $9,700. Those figures are for four-year institutions only, as the pool of community colleges and for-profit colleges charging for room and board remains small.
As is the case every year, College Board officials stress that the data show that most colleges -- however much their prices frustrate students and families -- are not in the mid-$50,000 range that attracts so much attention. Total expenses for a private four-year institution are, on average, just under $37,000 a year. But because the most famous private institutions tend to be well above that average, many people assume tuition rates are even higher than they are. (At Harvard University, an undergraduate's total costs this year, typical for those at elite private research universities and liberal arts colleges, are estimated by the university to be between $53,950 and $56,750.)
Many of the data in the report focus on the impact of state budget shortfalls on public colleges. For instance, in comparing inflation-adjusted average tuition increases from the last three decades, the College Board finds that over that time, the rate of increase has dropped for private four-year institutions and gone up for public four-year institutions. Further, while the rate of increase at private institutions was greater than that of publics in the 1980s, it is now smaller.
Annual Average Tuition Increases (Inflation-Adjusted) by Sector
|
Sector |
1980-1 to 1990-1
|
1990-1 to 2000-1
|
2000-1 to 2010-1
|
|
Private four-year |
5.1% |
2.6% |
3.0% |
|
Public four-year |
4.2% |
3.3% |
5.6% |
|
Community colleges |
3.9% |
3.2% |
2.7% |
The College Board's report on student aid notes that the past two years -- which have seen significant increases in tuition at many public colleges and universities and growing economic pressures on many families -- have seen a rapid expansion in aid packages.
From 2008-9 to 2009-10, grant aid per full-time equivalent
undergraduate increased by about 22 percent (or $1,073) and federal loans
increased by 9 percent (about $408). Particularly notable, the College Board
report said, was the increase in the maximum Pell Grant of 16 percent in
constant dollars in 2009-10, the largest one-year increase in program history.
The total Pell budget reached $28.2 billion, divided among 7.7 million
students.
Sandy Baum, a policy analyst for the College Board and co-author of the reports being issued, said that the tuition figures "were not very surprising," given the state of the economy. "I don't think anybody thought public tuition would go up only 2 percent this year."
She urged educators and policy-makers to pay more attention to the long-term issues raised by this year's data. She noted, for example, that the impact of tuition increases on low-income students has been mitigated in part by the strong support for the growth in Pell Grants -- growth that probably will not be matched in the years ahead. "No matter what kind of Congress we get, the idea that Pell Grants will keep growing at this rate is unlikely," she said.
Baum said that in many ways she sees the tuition trends posing more of a threat ahead to public higher education than to private colleges. She said that some private institutions -- those that are being forced to give so much aid to attract students that they can't balance their books -- are in danger. But she said that the basic financial model for most privates, in which some students pay enough to subsidize others, is sound.
For public higher education, however, she said she feared that "the basic model may no longer be sustainable." While states are likely to restore some support for higher education as the economy improves, she said, it seems unlikely that enough support will be provided to maintain tuition at affordable levels. She said she anticipates public colleges having to consider more radical changes in how they provide education, ideally using means that cut costs. She noted that while technology has to date not cut costs in providing higher education, that may not be the case in the future.
If new models fail to provide more students with quality education, she said, "we could lose public higher education, and that would be a huge social failure."
Chavez Confiscates
Owens-Illinois
Warns
Polar
Over Protests, O-I
Surprised
Charging
U.S. bottle manufacturer Owens-Illinois with worker exploitation and
environmental damage, Venezuelan President Hugo Chavez has announced plans to
confiscate the local unit of the company, the 200th nationalization of a private
firm this year, the Los Angeles
Times
reports. Ownes-Illinois expressed
surprise over the move.
Meanwhile, the government accused the country's top
brewer Empresas Polar of leading workers' protests against the nationalization
and warned the beer-maker to back off, Reuters
reports.
WSJ
October 30, 2010
By
Froma
Harrop
Whenever
I visit Italy,
France or
elsewhere in dolce vita Europe, I go: "Oooh! Aren't these cheeses wonderful?
Ahh! Look how fit and well dressed everyone is. Oh! If only America would
protect its downtowns the way these Europeans preserve their ancient village
centers."
But on
the return, something interesting happens when the jet wheels touch down in the
land of strip malls and drive-through junk food. I'm really happy to be back
home. The reason is the people.
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Americans
work. They value work. They respect it.
When
Italians refer to a lucky guy, they say (my translation) "he has a big rear
end." In other words, he's not out laying bricks or waiting on tables. He gets
to lounge all day in the loggia.
An
Italian friend (a leftist, actually) once asked me, "Why do the Rockefellers
work?"
Because
they want to make their mark in society, I responded, to which he shook his
head. The
idea of working if one doesn't need the money amazed him. But it's impossible, I think, to
support the dignity of the worker and not the dignity of
work.
Observe
the demonstrations in France over government efforts to raise the retirement age
to 62 from 60. To American eyes, age 62 is on the early side of retiring.
Americans seem to accept 65 as the normal age for leaving the job. Rep. Paul
Ryan, R-Wis., goes further, proposing to hike the eligibility age for receiving
Medicare to 69 from the current 65.
You
can't imagine American workers setting bonfires in the streets or otherwise
disrupting commerce in the belief that they are owed three or more decades of
retired comfort.
Americans are famous for their inadequate vacation time and long work hours
-- they do need more time off -- but they generally don't regard 24-7 leisure as
an admirable way of life.
A few
years ago, The Wall Street Journal had a piece about golfers in their 50s who
still have jobs shunning players their age who have retired. They assumed that
those who no longer work are not very interesting.
Americans
-- with their notoriously stingy pension plans, devastated 401(k)s and skimpy
savings -- figure that they will work after retirement. If they are healthy,
there's nothing bad with that.
Those
with special expertise are being hired as part-time consultants. Some take jobs
in retail for as many or as few hours as they want. Companies such as Home Depot
value older salespeople; many shoppers prefer them, because they tend to know
more about the products. And the wealthier retirees may become "social
entrepreneurs," using their money and knowledge to help
others.
Thing
is, Americans don't feel
sorry for 70-year-olds who still work. They admire
them.
A
mandatory retirement age has been largely banned in the United
States. The
exceptions are professions requiring stamina or quick reactions. Examples: FBI
agents must retire at 57, and air traffic controllers at
56.
A good
way to delay retirement is to restructure careers so that one isn't doing the
hardest stuff in the last years of employment. For instance, an aging
firefighter could move off the strenuous weightlifting tasks and into an
administrative or other support function. Nurses could gradually cut down on
their hours. Corporate executives might start shedding responsibilities as their
career winds down.
When my
Italian friend visited this country, I took him to a busy diner where an elderly
woman was bustling about with the coffee pot. "I do respect that woman," he
said.
I think
of her and other hardworking Americans whenever I'm in one of those lands of
leisure. They make me glad to come home.
Oct
28, 2010
9:09 AM
By
David Wessel
The job
market is getting better ever so slightly, but the housing bust is discouraging
U.S. managers and executives from moving to take new jobs.
Only
6.9% of unemployed managers and executives who found new jobs in the third
quarter relocated for that position, down from 13.4% in the same quarter a year
earlier, according to a survey of about 3,000 successful job seekers conducted
by outplacement consultancy Challenger, Gray &
Christmas, Inc. The 6.9% was the lowest for the measure since
Challenger, Gray first began tracking it in 1986.
“Continued
weakness in the housing market is undoubtedly the biggest factor suppressing
relocation. Job
seekers who own a home — even if they are open to relocating for a new job — are
basically stuck where they are if they are unable or unwilling to sell their
homes without incurring a significant loss,” said John A. Challenger,
chief executive officer of the firm.
“Right
now, demand for new workers is not at a level that would force companies to
bring in talent from outside their region. However, as the local talent pool
starts to become depleted as the economy improves, companies will be compelled
to cast a wider recruiting net. Unfortunately, the immobility of the workforce
may mean that some employers will have to delay expansion plans, thus slowing
the recovery,” he said.
“At
that point,” he added, “some large companies might have the financial ability to
increase their relocation budgets and help offset the difference between the
home value and selling price. However, small- and medium-size companies, where
most of the new job growth is expected to occur, probably will be unable to
cover the costs of relocation and make up for a candidate’s lost home value,”
said Challenger.
A 2010
Atlas Van Lines survey of companies found that 51 % of companies with fewer than
500 employees offer new hires full reimbursement of relocation expenses to new
hires. Among companies with 500 to 4,999 employees, 45%, do so; among companies
with 5,000 or more employers, 47% cover all moving expenses for new
hires.
Most
companies now refuse to cover losses on the sale of a home, though. Only 28% of
employers are willing to reimburse new hires for any loss on the sale of their
home; among companies with fewer than 500 employees, it’s 14%. Some activist
shareholders have criticized big-companies for
reimbursing top executives for losses on their homes when they
move.
Oct
28, 2010
9:09 AM
The
U.S. economy expanded at a slightly faster pace in the third quarter as consumer
spending inched up, but growth remains too weak to cut unemployment any time
soon.
WSJ's
Sara Murray will offer insight into what third quarter numbers say about the
recovery at noon on Friday. Join the chat live and ask your questions
now.
Gross
domestic product, the value of all goods and services produced, rose at an
annual rate of 2.0% after climbing 1.7% in the second quarter, the Commerce
Department said Friday. Economists polled by Dow Jones Newswires were expecting
GDP to rise by 2.1% in the July to September period.
The
government report was the last significant economic indicator before midterm
elections Nov. 2 and a Federal Reserve meeting ending Nov. 3. More than a year
after the recession ended, stubbornly high unemployment could hurt Democrats in
Congress and is likely to be a key factor in getting the Fed to resume bond
purchases.
The GDP
breakdown showed that spending by Americans, accounting for about 70% of demand
in the U.S. economy, rose at a 2.6% rate. That's up from a 2.2% increase in the
April to June period and a 1.9% in the first quarter.
Though
an improvement, consumer spending remains well below levels seen following
previous U.S. recessions. Americans' wealth and incomes were badly hit by
the collapse in home prices and the extremely weak jobs market that followed the
financial crisis. In the
four quarters after the last deep U.S. recession in 1982, consumer spending
posted increases of between 4% and 8%.
What's
more, a lot of the spending by Americans continued to go into goods and services
imported from abroad. Although the rise in imports decelerated in July-September
compared to the second quarter, it remained above the increase in exports, thus
weighing on the economy.
Imports were up 17.4% in the third quarter while exports rose by
5.0%.
With
the holiday season just around the corner, the outlook for spending by Americans
doesn't look great either. A gauge of consumer confidence has been falling since
June as Americans worry about weak home prices and jobs.
The
economic recovery has been too soft to bring about a significant improvement in
unemployment. Companies haven't ramped up hiring, concerned the economy will
stay weak while taxes could increase to plug a hole in a huge budget deficit.
Unemployment was stuck
at 9.6% in September, close to the 10.1% post-recession high hit in October
2009.
Fed
Chairman Ben Bernanke believes the main reason unemployment is high is because
the economy remains too weak. That, coupled with inflation running below the
Fed's 2.0% goal, is likely to lead the central bank to announce more bond
purchases next week. In an effort to spur growth by keeping borrowing rates low,
the Fed is likely to announce plans to buy U.S. Treasury bonds worth a few
hundred billion dollars over several months.
View
Full Image
Reuters
A
craftsman works on an acoustic guitar at the PRS guitar factory in Stevensville,
Md. Despite the world economic downturn, his company has built a new
multimillion dollar factory.
The
report Friday showed inflation remains very soft. The Fed's preferred gauge, the
price index for personal consumption expenditures excluding volatile food and
energy items, rose an annualized 0.8% in the third quarter, slowing down from
the second quarter's 1.0% increase.
Other
inflation gauges were also muted. The overall price index for personal
consumption expenditures rose by 1.0% in the third quarter, after a flat reading
in the second quarter. Gross domestic purchase prices rose 0.8%, after a 0.1%
increase in the second quarter.
Friday's
report, the first GDP estimate for the third quarter that often gets revised
substantially, also showed that federal government spending and investment rose
by 8.8%, following a 9.1% increase in the second quarter.
A
second GDP estimate, based on more complete data, will be released by the
Commerce Department Nov. 23.
WSJ
Oct 25 2010
Public
anxiety over rising taxes is helping Republicans in this midterm election—with
one exception. Democrats are trying to turn the tables on the GOP over the
so-called FAIR Tax, a tax reform idea that has bounced around conservative
circles for years.
The
proposal would end all current federal taxes, junk the Internal Revenue Service
and impose in their place a 23% national sales tax. In 16 House and three Senate
races so far, Democrats have blasted GOP candidates for at one point or another
voicing an interest in the FAIR tax. In Kentucky's Senate race, Democrat
Jack Conway is running a TV spot charging that Republican "Rand Paul wants a new
23% sales tax on groceries, clothes, prescriptions,
everything."
FAIR
tax proponents are right to say these Democratic attacks are unfair and don't
mention the tax-cutting side of the proposal, but the attacks do seem to work.
Mr. Paul's lead in
Kentucky fell after the assault, and the issue has hurt GOP candidate Ken Buck
in a close Colorado Senate race.
In a
special House election earlier this year in Pennsylvania, Democrat Mark Critz
used the FAIR tax cudgel on Republican opponent Tim Burns. In a district that
John McCain carried in 2008, Mr. Critz beat the Republican by eight points and
is using the issue again in their rematch.
This is
a political reality that FAIR taxers need to face. Pushed by Texan Leo Linbeck
and his Americans for Fair Taxation, among others, the FAIR tax became a
political fad in the 1990s. It was promoted by Tom DeLay, the former House
Majority Leader who never brought it to a vote even as he soaked campaign
contributions from its supporters.
Mike
Huckabee, who raised taxes when he was Arkansas Governor, embraced the FAIR tax
in his 2008 Presidential run to try to assert some conservative economic bona
fides. Yet
none of these voices or checkbooks can be heard now that other candidates who
once flirted with the FAIR tax are under attack.
No one
supports tax reform more than we do, and in theory a consumption tax like the
FAIR tax is preferable to an income tax because it doesn't punish the savings
and investment that drive economic growth. If we were designing a tax code from
scratch, the FAIR tax would be one consumption tax option worth debating.
But we
live in a country that already has an income tax, and most states rely on sales
taxes for a major part of their revenue. Unless the Sixteenth Amendment that
allowed an income tax is repealed, voters rightly suspect that any new sales tax
scheme will merely be piled on the current code. Adding a 23% federal sales
tax on top of a 5% or more state sales tax levy would also be a huge additional
tax on all purchases. The temptation to avoid such a tax by paying cash or via
other means would be high, and collection might require the same army of
auditors that the IRS now deploys.
These
are all reasons we've long been skeptical of the FAIR tax as a practical tax
reform, and the current campaign only reinforces our doubts. No doubt we'll once
again hear from the many FAIR taxers who seem eternally vigilant to write
letters whenever tax reform is raised. But if the FAIR tax is going to get
anywhere politically, its supporters ought to show they can defend the
candidates who are under attack for having endorsed it, or even having said nice
things about it.
Our
advice to the FAIR taxers is that voters will start to take the idea seriously
once the income tax is on the road to repeal. Until then, our advice to
candidates would be to avoid the FAIR tax and focus on goals that are more
achievable and less politically self-destructive.
·
WSJ OCTOBER
28, 2010
Agence
France-Presse/Getty Images
Indian
activists of The All-India Democratic Women's Association (AIDWA) and their
supporters hold placards protest in front of the Reserve Bank of India (RBI) on
October 13, 2010.
The
microlending movement that was supposed to help lift millions of people in India
out of poverty has in recent weeks fallen into chaos.
Urged
on by local government officials and politicians, thousands of borrowers have
simply stopped paying lenders, even though they have the money. The government
has begun ratcheting up restrictions, fearing that borrowers are being buried by
usurious interest rates. In some cases, officials have even arrested lending
agents for allegedly harassing borrowers.
Local
politicians, meanwhile, have blamed dozens of suicides on microlenders and are
urging borrowers not to pay back what they owe.
Though
so far the backlash has been confined to a southern Indian state of Andhra
Pradesh, what happens there is frequently a bellwether for microlending in
India, and programs around the world. Hyderabad, the state capital, is home
to some of the world's biggest microlenders, including SKS Microfinance Ltd.,
Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts
for about 30% of the loans for all of India, one of the world's biggest
microfinance markets.
"This
is potentially going to devastate lending to rural areas for a long time," said
Vikram Akula, founder and chairman of SKS Microfinance, India's largest
microlender by loan volume, which recently listed its shares in India. "We are
confident that we will survive, but certainly this is going change how things
could and should be done."
Arlene
Chang/The Wall Street Journal
Satyama
Ayrene (in green) and her daughter-in-law Laxmi Narsamma at their home in
Sankarampet village in Andhra Pradesh, Wednesday, October 27, 2010. SKS
Microfinance Ltd., which provided Laxmi a loan of Rs. 10,000 to invest in land,
has waived off the debt.
Microcredit
is the lending of tiny amounts of money, usually less than $200, to
entrepreneurs who use the loans to start or expand small businesses such as a
vegetable stand or a bicycle repair shop.
Most microcredit firms
lend money through women's groups and reach out to borrowers who are either too
far from or too poor to borrow from a bank. The repayment rate on the loans have
tended to be better than that of richer borrowers. Interest rates, however, can
be high, from 25% to 100% a year, mostly due to the cost of administering
millions of tiny loans in remote areas.
The
crisis is in some ways reminiscent of recent debt problems in the U.S.
Microfinance is targeted at a population that is overlooked by the mainstream
banking industry, the same social niche targeted by payday and subprime lenders
in the U.S.
As the
microfinance industry has grown, it has attracted international capital that has
greatly boosted the size of the industry, much as payday lending and subprime
borrowing soared until two years ago in the U.S. In a significant move that
showed international investors' interest in the industry, SKS recently sold $350
million of its shares on the Indian stock market.
But
along with that has come concern among politicians, regulators—and indeed
some in the industry—that unfettered expansion was leading to poor lending
practices, multiple loans to the same borrowers, and fears of widespread
repayment problems.
While
they have been much in demand wherever they have been introduced as they provide
a kinder, cheaper alternative to the village loan shark, some economists are
skeptical about whether the small loans actually help lift people out of
poverty.
And in
regions where there are more than one microlender competing for clients, some
experts are concerned that the poor are being encouraged to take on more debt
than they can bear.
So
far, the repayment rate
across the microlending industry has remained extremely high.
But Andhra Pradesh's
payment strike could presage a turn—and put the capital that has flooded into
the industry at risk. Mainstream Indian and international banks
have backed the microlending industry in India with more than $4 billion of
loans this year, with private-equity funds pouring more than $250 million into
the industry in India last year alone.
The
repayment strike is a rare black mark for an industry that has long been viewed
as a social benefit. One of the industry's leaders, Mohammed Yunus of Grameen
Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the
system. The
industry has spread across emerging Asia, Africa and South America. India, with
its giant population and hundreds of millions of people living in poverty, is
one of the most important markets.
The
industry also was the first to reach out to those that make less than $1 a day.
It had been so successful that it has spawned efforts to bring everything from
insurance to cellphones to solar lights to groceries to the
poor.
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Andhra
Pradesh slapped new restrictions on the industry that effectively shut it down
last week. While
a state court order put the restrictions on hold and allowed the lenders back in
the field this week, close to half of all borrowers are continuing to avoid
payments, microlenders say.
State
officials say they are trying to protect the poor from usurious interest rates
and heavy-handed practices, which they say have triggered more than 70 suicides
in the state.
Microlending
companies say that often where they have investigated suicides attributed to
their lending, they have found that microloans were among the smallest of the
many problems of the people that have killed themselves.
In
Sankarampet village about 2½ hours from Hyderabad, Satyama Ayrene is still in
mourning over the death of her son who hanged himself. While local police say
they have been told to investigate whether microdebt caused the death, Ms.
Ayrene says it was the $2,200 he owed loan sharks that was bothering him, not
the $220 his wife owed to a microlender.
"He did
not commit suicide because of the [microloan] companies," said Ms. Ayrene, 55
years old. "He was burdened with loans from the local moneylenders and didn't
know how to pay them back."
Microlenders
say they are being punished for the success at reaching the poor and that if the
resistance continues, many of them will go out of business. Many have been
taking steps to create good will to try to avert the situation from worsening.
The biggest lenders who account for the majority of borrowing say they will
cap their rates at around 24% and form a fund to help troubled borrowers
reschedule their loan payments.
They
say they are ready to comply with more government restrictions as long as they
are given time to meet new requirements. But in the meantime, the industry has
ground to a halt.
When
SKS agents arrived in a village called Shanti Nagar about 150 miles from
Hyderabad, the capital of Andhra Pradesh, on Wednesday morning, they could tell
right away something was wrong. The borrowing group of 20 women was milling
around the dusty village square, instead of sitting in order in a circle with
their weekly payments as SKS procedure requires.
While
the group wanted to pay its loans, they had been forbidden by a local political
leader and their husbands, the women said.
The
political leader, A. Subramanyam, arrived and told the SKS agents not to harass
his neighbors.
"I
told them if they don't have the money, they don't have to pay," said Mr.
Subramanyam. "I have seen them sell their wedding jewelry to pay the
installments, why should they do that? No one here has prospered with these
loans."
Write
to Eric
Bellman at eric.bellman@wsj.com and
Arlene Chang at arlene.chang@wsj.com
IN the campaign season now drawing to a close,
immigration and
globalization have often been described as economic threats. The truth, however,
is more complex.
Over all, it turns out that the continuing
arrival of immigrants to American shores is encouraging business activity here,
thereby producing more jobs, according to a new study. Its
authors argue that the easier it is to find cheap immigrant labor at home, the
less likely that production will relocate offshore.
The
study, “Immigration, Offshoring and American Jobs,” was written by two economics
professors — Gianmarco I. P. Ottaviano of Bocconi University in Italy and
Giovanni Peri of the University of California, Davis — along
with Greg C. Wright, a Ph.D. candidate at Davis.
The study notes that when companies move
production offshore, they pull away not only low-wage jobs but also many related
jobs, which can include high-skilled managers, tech repairmen and others. But
hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the
United States, the authors say. In fact, when immigration is rising as a share
of employment in an economic sector, offshoring tends to be falling, and vice
versa, the study found.
In
other words, immigrants may be competing more with offshored workers than with
other laborers in America.
American economic sectors with much exposure to
immigration fared better in employment growth than more insulated sectors, even
for low-skilled labor, the authors found. It’s hard to prove cause and effect in
these studies, or to measure all relevant variables precisely, but at the very
least, the evidence in this study doesn’t offer much support for the popular
bias against immigration, and globalization more generally.
We see the job-creating benefits of trade and
immigration every day, even if we don’t always recognize them. As other papers
by Professor Peri have shown, low-skilled immigrants usually fill gaps in
American labor markets and generally enhance domestic business prospects rather
than destroy jobs; this occurs because of an important phenomenon, the presence
of what are known as “complementary” workers, namely those who add value to the
work of others. An immigrant will often take a job as a construction worker, a
drywall installer or a taxi driver, for example, while a native-born worker may
end up being promoted to supervisor. And as immigrants succeed here, they help
the United States develop strong business and social networks with the rest of
the world, making it easier for us to do business with India, Brazil and most
other countries, again creating more jobs.
For all the talk of the dangers of offshoring,
there is a related trend that we might call in-shoring. Dell or Apple computers
may be assembled overseas, for example, but those products aid many American
businesses at home and allow them to expand here. A cheap call center in India
can encourage a company to open up more branches to sell its products in the
United States.
Those are further examples of how some laborers
can complement others; it’s not all about one group of people taking jobs from
another. Job creation and destruction are so intertwined that, over all, the
authors find no statistically verifiable connection between offshoring and net
creation of American jobs.
We’re all worried about unemployment, but the problem is
usually rooted in macroeconomic conditions, not in immigration or offshoring.
(According to a Pew study, the
number of illegal immigrants from the Caribbean and Latin America fell 22
percent from 2007 to 2009; their departure has not had much effect on the weak
United States job market.) Remember, too, that each immigrant consumes products
sold here, therefore also helping to create jobs.
When it comes to immigration, positive-sum
thinking is too often absent in public discourse these days. Debates on
immigration and labor markets reflect some common human cognitive failings —
namely, that we are quicker to vilify groups of different “others” than we are
to blame impersonal forces.
Consider the fears that foreign competition,
offshoring and immigration have destroyed large numbers of American jobs. In
reality, more workers have probably been displaced by machines — as happens
every time computer software eliminates a task formerly performed by a clerical
worker. Yet we know that machines and computers do the economy far more good
than harm and that they create more jobs than they destroy.
Nonetheless, we find it hard to transfer this
attitude to our dealings with immigrants, no matter how logically similar
“cost-saving machines” and “cost-saving foreign labor” may be in their economic
effects. Similarly, tariffs or other protectionist
measures aimed at foreign nations have a certain populist appeal, even though
their economic effects may be roughly the same as those caused by a natural
disaster that closes shipping lanes or chokes off a domestic harbor.
AS a nation, we spend far too much time and
energy worrying about foreigners. We also end up with more combative
international relations with our economic partners, like Mexico and China, than
reason can justify. In turn, they are more economically suspicious of us than
they ought to be, which cements a negative dynamic into place.
The current skepticism has deadlocked prospects
for immigration reform, even though no one is particularly happy with the status
quo. Against that trend, we should be looking to immigration as a creative force
in our economic favor. Allowing in more immigrants, skilled and unskilled,
wouldn’t just create jobs. It could increase tax revenue, help finance Social Security, bring new home buyers and improve the business
environment.
The world economy will most likely grow more
open, and we should be prepared to compete. That means recognizing the benefits
— including the employment benefits — that immigrants bring to this country.
Tyler Cowen is a professor of economics at
George Mason University
This
Bud's For Sale
How
the Busch clan lost control of an iconic American beer
company.
If
ever an American company represented the land of milk and honey for corporate
executives it was Anheuser-Busch, though perhaps the land of hops, rice and
barley would be more apt. For decades a palace of well-paid vice presidents in
cushy offices presided over the manufacture of Budweiser, America's beer, in
that most American of cities, St. Louis. They also oversaw the Busch Gardens
theme parks in Virginia and in Florida, where Shamu the killer whale was on the
payroll, along with a stable of 250 Clydesdale horses. It was a first-class
operation all the way. There were $1,000 dinners, hunting lodges, sky suites at
Busch Stadium and a fleet of Dassault Falcon corporate jets with a staff of 20
waiting pilots. Every kitchenette refrigerator at corporate headquarters was
well stocked with Bud, Bud Lite and Michelob.
And
why shouldn't the execs live well? The massive, 150-year-old company had an
estimated value of $40 billion to $50 billion. Budweiser was, and is, one of the
most recognized brands in the world, ahead of McDonald's, Disney and Apple. "Few
companies on earth were more evocative of America, with all of its history and
iconography, than Anheuser-Busch," writes veteran Financial Times journalist
Julie MacIntosh in her strenuously reported book, "Dethroning the King: The
Hostile Takeover of Anheuser-Busch, an American Icon." As the title suggests,
the reign of the King of Beers ended in the summer of 2008, when the company
merged with the Brazil-based brewing giant InBev, an outfit about as culturally
different from Anheuser-Busch as one could imagine. At $70 a share, or $52
billion, it was the largest all-cash acquisition in history and even more
noteworthy because it occurred during the gathering storm of a global financial
collapse.
To
help us grasp the significance of mating this corporate odd couple, Ms.
MacIntosh spends roughly the first third of "Dethroning the King" introducing
the reader to the Busch clan, a family so beechwood aged in their own history
that newborn male Busch babies are anointed with five drops of Budweiser on
their lips after delivery.
Presiding
over the company is August Busch III, or The Third, as he is called, a control
freak so frosty that he tosses his own father (metaphorically) under the
Clydesdale wagon in 1975 to gain the company reins. Ms. MacIntosh writes that
The Third made his move "not in a heart-to-heart with his dad at the dinner
table . . . but through a dramatic and painstakingly choreographed boardroom
coup."
View
Full Image
s
Dethroning
the King
By
Julie MacIntosh
(Wiley, 380 pages, $27.95)
For
the next 27 years as chief executive, The Third literally descends upon
corporate headquarters each morning piloting his own helicopter and strides the
hallways in his trademark cowboy boots. Many of his employees adore him; even
his enemies concede that he has a brilliant head for the beer business. When
executives are called on by the CEO in meetings to speak, one of Ms. MacIntosh's
sources tells her, their concern "is that he knows more than they do, even
though the topic is in their area of expertise." Another remembers: "He had only
two moods: pissed off and suspicious."
The
Third also regarded trusting other people a character flaw, including his own
son August IV, or The Fourth, to whom he grudgingly passed on the title after
The Fourth had completed an apprenticeship in many of the company's departments.
Ms. MacIntosh portrays The Fourth as a former good-time Charlie indulging in
booze, babes and fast cars before pulling himself together to claim his royal
birthright. One executive tells the author that, taken together, the father and
son were known around headquarters as "Crazy and Lazy."
There
seems little the son can do to please his father. When The Fourth excitedly
shows dad previews of the brilliant Super Bowl commercial in which three frogs
croak out Bud-wei-ser one syllable at a time, The Third asks why it
doesn't include the traditional "pour shot." "He just didn't understand why it
was funny," says one staffer. Ms. MacIntosh does a fine job of exploring the
father-son dynamic, but after a while it becomes hard to watch junior get
whacked one more time. "They didn't communicate much," recalls one executive,
"unless you call communicating on a daily basis getting your ass chewed."
When
growth-hungry InBev arrives on the scene, a company so lean and cost-conscious
that they're called the Walmart of brewers, all hell breaks loose at the
complacent Anheuser-Busch headquarters. The Brazilians make a pitch of $43
billion in what's known on Wall Street as a "bear hug"—an offer so generous that
the recipient can't refuse. But A-B's board does refuse, triggering weeks of
moves and counter-moves and endless end-gaming by the two companies. Ms.
MacIntosh relates every gambit in crisp, scene-by-scene detail.
Suffice
it to say here that the fate of Anheuser-Busch is what results when a company
coasts on its reputation and ignores global markets. Despite its reputation as
an all-American business idol, A-B proved to be a comparative mom-and-pop
operation on the world stage. "Unlike most consumer goods giants, Anheuser-Busch
didn't employ a raft of worldly, well traveled staffers," Ms. MacIntosh writes.
Adds another executive: "I bet 90 percent of the employees came from south of
Highway 40, out 270 and to the river."
The
Anheuser-Busch board of directors saw a final chance to forestall takeover by
initiating its own merger with the Mexican brewer Grupo Modelo, but in the
end—and with the machinations of The Third, who cut off his CEO son at the knees
one last time—they lost the will to fight on. After squeezing every dollar out
of the Brazilians, and while company layoffs were being planned and the NYSE
ticker symbol "BUD" flickered away, the board and its bankers, lawyers, vice
presidents and hangers-on began calculating their personal cuts of the sale. One
executive complained to the author that he couldn't help feeling the "victim of
America's cutthroat and . . . fractured business climate." Victim? The guy
walked off with $20.6 million.
Mr.
Cooke is a writer in Pelham, N.Y.
The Federal Reserve, in a dramatic effort to
rev up a "disappointingly slow" economic recovery, said it will buy $600 billion
of U.S. government bonds over the next eight months to drive down interest rates
and encourage more borrowing and growth.
Many outside the Fed, and some inside, see the
move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly
unconventional policies during the financial crisis to ward off a
financial-system collapse. But a year and a half later, he confronts an economy
hobbled by high unemployment, a gridlocked political system and the threat of a
Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more
if growth and inflation don't perk up in the months ahead. The $75 billion a
month in new purchases of Treasury debt come on top of $35 billion a month the
Fed is expected to spend to replace mortgage bonds in its portfolio that are
being retired.
The Dow Jones Industrial Average Wednesday
continued a climb that began in August, when Mr. Bernanke signaled that a
bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a
two-year high of 11215.13. Yields on 10-year notes, which have fallen from just
under 3% in early August, finished the day at 2.62%. The value of the dollar has
fallen in anticipation of a flood of new American currency hitting global
financial markets.
These market reactions are seen inside the Fed
as being stimulative to the economy. In addition to the impact of cheaper
borrowing, higher stock prices could encourage households to spend more and
businesses to invest more, and a weak dollar could make U.S. exports cheaper and
thus easier to sell abroad.
"All of these things are part of what the Fed
is trying to do, and I think it has been successful," said Laurence Kantor, head
of research at Barclays Capital in New York.
The moves announced Wednesday were broadly in
line with the expectations of economists, although some had expected total
spending to be a bit less and to come more quickly.
The Federal Reserve Wednesday unveiled a controversial
new plan to buy $600 Billion of Treasurys, hoping to spur growth in a
disappointingly slow U.S. economy. David Wessel and Neal Lipschutz discuss the
likelihood that the plan will work.
There are immense unknowns and many risks.
Rate changes since 2004 in dozens of
countries.
In essence, the Fed now will print money to buy
as much as $900 billion in U.S. government bonds through June—an amount roughly
equal to the government's total projected borrowing needs over that
period.
In normal times, a Fed spending spree on
government bonds would be highly inflationary, because it would flood the
economy with money and raise worries about too much government spending. The
mere worry of too much inflation in financial markets could drive long-term
interest rates higher and cause the Fed's program to backfire.
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Prices in commodities markets have marched
higher since late August. Crude-oil futures prices, for instance, have risen 15%
since then, to $85 per barrel.
—Misty
Lane
Michael Pence, a top Republican in the House of
Representatives, said the Fed was taking an "incalculable risk."
Thomas Hoenig, the president of the Federal
Reserve Bank of Kansas City, who described the move before the meeting as a
"bargain with the devil," was the lone dissenter in a 10-1 vote of the Fed's
policy committee. He said the risks of additional government bond purchases
outweighed the benefits.
But Fed officials are betting that inflation is
still being pushed strongly in the other direction because there is so much
spare capacity in the economy—including an unemployment rate at 9.6%, a
real-estate landscape littered with more than 14 million unoccupied homes, and
manufacturers operating with 28% of their productive capacity going unused.
The latest economic data suggest the economy is
expanding, but not at a very fast pace. Figures Wednesday from payroll firm
Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed
that companies added 43,000 private-sector jobs in October.
In a post-meeting statement, the Fed said it
was acting to "promote a stronger pace of economic recovery" and to ensure that
inflation, now running at around a 1% annual rate, moves toward the Fed's
informal objective of 2%.
This is the Fed's second experiment with a big
bond-buying program. Between January 2009 and March of this year, the central
bank purchased roughly $1.7 trillion worth of government and mortgage bonds.
That move also sparked worries about inflation, which so far hasn't
materialized. The bond-buying program is known in some corners as quantitative
easing.
"This approach eased financial conditions in
the past and, so far, looks to be effective again," Mr. Bernanke said in an
opinion piece scheduled to be published in Thursday's Washington Post.
By buying a lot of bonds and taking them off
the market, the Fed expects to push up their prices and push down their yields.
The Fed hopes that will result in lower interest rates for homeowners, consumers
and businesses, which in turn will encourage more of them to borrow, spend and
invest. The Fed figures it will also drive investors into stocks, corporate
bonds and other riskier investments offering higher returns.
The Fed normally would push down short-term
interest rates when the economy is weak. But it has already pushed those rates
to near zero, leaving it to resort to unconventional measures.
The planned bond buying, by Fed calculations,
will have an economic impact roughly equivalent to cutting short-term interest
rates by three-quarters of a percentage point.
The Fed will be buying bonds with maturities of
as long as 30 years, but will concentrate its purchases in the five-year to
six-year range. Some bond-market participants were disappointed with that
decision because they wanted the Fed to focus on buying longer-term bonds. But
doing so could leave the Fed more exposed to losses if interest rates rise.
There are other risks.
Critics say a weaker dollar isn't in U.S.
interests, and that a swift decline in the value of the currency could drive up
U.S. interest rates. Fed officials have seen the dollar's drop to date as being
orderly and supportive of growth.
Some critics also argue that by purchasing
government bonds, the Fed is taking pressure off the White House and Congress to
address long-term deficit problems, but Mr. Bernanke is trying to avoid such
political calculations.
U.S. trading partners, particularly in the
developing world, openly worry that the Fed's money pumping is creating
inflation in their own economies and a risk of asset-price bubbles. Fed
officials say a strong U.S. economy is in everyone's interest.
In recent weeks, China, India, Australia and
others have pushed their own interest rates higher to tamp down inflation
forces. Authorities in Brazil and Thailand have imposed taxes on capital
flooding into their economies to prevent an asset bubble. And Japanese
authorities have intervened in currency markets to prevent the yen from
appreciating too much against the dollar.
View Full Image
There is an alternate risk that officials
wrestled with in their latest two-day meeting, which concluded before lunch
Wednesday: They might not be doing enough.
Economists at the research firm Macroeconomic
Advisers LLC calculated that even if the Fed purchases $1.5 trillion worth of
Treasury bonds—which some economists say remains a distinct possibility—it would
only bring the unemployment rate down by 0.2 percentage points by the end of
2011.
"This instrument doesn't give them a lot of
power, especially on the scale which they're prepared to use," said Laurence
Meyer, of Macroeconomic Advisers, after the decision.
For the Fed, it was a middle ground that
emerged after months of internal debate about the costs and benefits of
restarting the program.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
Milton
Friedman vs. the Fed
The
Nobel laureate would never have endorsed increasing inflation to stimulate the
economy.
Would
the late Milton Friedman have endorsed the Federal Reserve's plan to make
large-scale purchases of long-term Treasury bonds? The idea here is to pump more
money into and thus jump-start the economy, reducing unemployment. Some people,
including this newspaper's David Wessel in a column last week, believe the great
Nobel laureate would favor this inflationary program. I am certain he would
not.
Friedman's
main message for central banks was to maintain a monetary rule that kept the
growth of the money supply constant. In his Newsweek column, "Inflation and
Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is .
. . a side effect of the cure for inflation," so that if a central bank "cured"
unemployment by inflating, it "will have unemployment later." In other words,
don't try it.
Friedman's
Newsweek column for July 28, 1980 ("Improving Monetary Policy") came with the
unemployment rate rising past 7%. His proposals for improving policy made no
mention of using monetary expansion to reduce unemployment. He proposed rules
for stable growth to achieve target "dollar levels of monetary aggregates."
Friedman
served on President Reagan's economic policy advisory board. His memos on
monetary policy repeat the themes he made familiar to Newsweek readers and
others all over the world. There is not a word suggesting that monetary policy
should try to raise the inflation rate in order to reduce the unemployment rate.
This
is unsurprising, as he had explained many times in the past that any such
reduction would be temporary and last only until people caught on to the higher
inflation. At that point, they would demand higher wages and interest
rates.
Friedman
made an exception to his rule about steady-state monetary policy in case of
deflation. When prices fell, as they had during the Great Depression or in Japan
in the 1990s, he urged the central bank to increase money growth. I served as
one of two honorary advisers to the Bank of Japan in the 1990s. With short-term
rates close to zero, I gave the same advice, urging the bank several times to
buy long-term bonds or foreign exchange to increase money growth until deflation
ended.
All
this is not relevant now, since there is no sign of deflation in the United
States. The Fed's claim that there is a risk of deflation should embarrass it.
View
Full Image
Associated
Press
Nobel
laureate Milton Friedman
In
the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch
the core deflator for personal consumption expenditure—the PCE deflator. Since
then, the Fed has used that measure as its inflation target. Recently, without
much publicity, the Fed switched to the consumer price index (CPI). The reason?
From 2003 to 2009, the two measures moved together. In 2010, they diverged—and
the CPI shows substantially less inflation than the PCE.
Even
so, the most recent PCE deflator shows inflation running at around 1.2%
annually, about where the Fed says it wants to hold the inflation rate. And it
has been between 1.5% and 1.8% for a year. There is no sign of
deflation.
The
two measures diverged because they give different weights to their components,
especially housing prices. The CPI gives almost double the weight to housing
prices, especially the rental value of owner-occupied houses. This is not a
number that government statisticians sample in the market. They make an
estimate. The new long-term bond purchase program puts a lot of weight on a weak
foundation.
Paul
Volcker and Alan Greenspan restored much of the credibility that the Fed lost in
the great inflation of the 1970s. The Fed's plan to increase inflation puts this
credibility at risk and is a large step away from the policy that Milton
Friedman favored.
Mr.
Meltzer is professor of economics at Carnegie Mellon's Tepper School of
Business, a visiting scholar at the American Enterprise Institute, and the
author of "A History of the Federal Reserve" (University of Chicago Press, 2003
and 2009).
Nov
3, 2010
10:08 AM
Secondary
Sources: QE2 Criticism, Gridlock, Protectionist Threat
WSJ
Econ Blog
By
Phil Izzo
A
roundup of economic news from around the Web.
–QE2
Criticism:
Martin Feldstein is worried about the effects of more Fed asset
purchases. “The Federal Reserve’s proposed policy of quantitative easing is a
dangerous gamble with only a small potential upside benefit and substantial
risks of creating asset bubbles that could destabilise the global economy.
Although the US economy is weak and the outlook uncertain, QE is not the right
remedy… Like all bubbles, these exaggerated increases can rapidly reverse when
interest rates return to normal levels. The greatest danger will then be to
leveraged investors, including individuals who bought these assets with borrowed
money and banks that hold long-term securities. These risks should be clear
after the recent crisis driven by the bursting of asset price bubbles. Although
the specific asset prices that are now rising are different from last time, the
possibility of damaging declines when bubbles burst is worryingly
similar.”
–Gridlock:
Mohamed A. El-Erian says the economy can’t afford political gridlock
right now. “This world speaks to a different characterization of private-sector
activity - rather than able and willing to move forward unhindered if the
government simply gets out of the way, this is a private sector that faces too
many headwinds. In these circumstances, high economic growth and job creation
require not only that the private sector moves forward but also that it attains
critical mass, or what Larry Summers, the departing head of the National
Economic Council, called “escape velocity.” While certain sectors of the economy
are in control of their destinies, the private sector as a whole is not in a
position to do this. It needs help to overcome the consequences of the “great
age” of leverage, debt and credit entitlement, and the related surge in
structural unemployment. The urgency to do so increases in the rapidly evolving
global economy, as United States sheds a bit more of its economic and political
edge to other countries daily. “
–Protectionist
Threat:
Kenneth Rogoff is worried about trade protectionism. “According to a recent joint report by
the International Monetary Fund and the International Labor Organization, fully
25% of the rise in unemployment since 2007, totaling 30 million people
worldwide, has occurred in the US. If this situation persists, as I have
long warned it might, it will lay the foundations for huge global trade
frictions. The voter anger expressed in the US mid-term elections could prove to
be only the tip of the iceberg. Protectionist trade measures, perhaps in the
form of a stiff US tariff on Chinese imports, would be profoundly
self-destructive, even absent the inevitable retaliatory measures. But make no
mistake: the ground for populist economics is becoming more fertile by the
day.”
HSA-Based
Reform Proposed as Post-ObamaCare Option
With
assistance from Devon Herrick, a senior fellow with the National Center for
Policy Analysis, physician Roger Beauchamp has developed the "180-Degree
Approach to Health Care Benefits Reform," which he says will control rising
health care costs across the nation and help save Medicare from its expected
bankruptcy, says the Heartland Institute.
Herrick
says the 180-degree approach would widen the use of health savings accounts
(HSAs) across the nation.
Beauchamp
says giving these popular accounts a primary role in a post-ObamaCare world
would empower consumers and lower bureaucratic control over personal medical
decisions.
The
180-degree approach would also save the nation from the impending fiscal
explosion of Medicare, Beauchamp says. According to U.S. Treasury
Secretary Tim Geithner, the Medicare fund is projected to become insolvent in
2017.
"By
allowing all Americans to accumulate over their lifetimes more money that is
completely tax-free to be used for their health care, we make them less
dependent on Medicare when the time comes to retire," Beauchamp
says.
The
approach will also improve the financial position of U.S. businesses and
establish fairness for the first time between people who buy health care
individually and those who get it from a company plan, says
Heartland.
Source:
Thomas Cheplick, "HSA-Based Reform Proposed as Post-ObamaCare Option," Heartland
Institute, November 3, 2010.
For
text:
Obama
Spends Billions, Only Adds to College Costs
The
Obama administration has doled out a record amount of college loans this year to
help students cope with the affordability crisis in college tuition.
Meanwhile, college tuition has become yet more unaffordable, says James A.
Bacon, author of Boomergeddon.
Higher
education has been one of the great growth industries of the 2000s. According to
the 2009 Digest of Education Statistics, published by the National Center for
Education Statistics, which lists data from the 2003-2004 to 2006-2007 school
years, operating expenditures for all
U.S. institutions of higher education increased 16 percent (in real,
inflation-adjusted dollars) over that three-year
span.
Where
did the money go? Here are the spending categories that enjoyed the
largest rates of increase:
In
other words, expanded college loans
are paying for the growth of higher-ed bureaucracies. The only way
to make higher education more affordable over the long haul is to demand greater
cost efficiency from our colleges and universities. But as long as the
federal government keeps the money spigot flowing, higher education can evade
accountability, says Bacon.
Source:
James A. Bacon, "Obama Spends Billions, Only Adds to College Costs," Washington
Times, October 29, 2010.
For
text:
http://www.washingtontimes.com/news/2010/oct/29/obama-spends-billions-only-adds-to-college-costs/
17f10
WSJ
· NOVEMBER
8, 2010
As a
reminder of unpredictability in politics, consider what happened when the
Progressive Change Campaign Committee last month announced that 95 candidates
for Congress had signed a pledge to support "net neutrality." The candidates
promised: "In Congress, I'll fight to protect Net Neutrality for the entire
Internet—wired and wireless—and make sure big corporations aren't allowed to
take control of free speech online."
Last
week all 95 candidates lost. Opponents
of net neutrality chortled, and the advocacy group retreated to the argument
that regulation of the Internet wasn't a big issue in the election.
The
broader lesson may be that people fear government regulation of what has been a
free and open Internet more than they fear what any other institution might do
to the Web. This is a good time to reset the argument about how to ensure that
the Internet remains a lively place for users and
innovators.
Over
the past decade,
lobbyists have tried to argue that more government control over the Web would
somehow result in more freedom. Many in the high-tech world
originally supported this view, perhaps because "net neutrality" sounds like the
side of the angels. But
as other industries have learned, the relationship between regulation and
freedom is inverse, not direct. There's not much wrong with the
Internet now, but there's a big risk in giving regulators more control of an
industry in which even the gurus have little idea what innovations will come
next.
Everyone
agrees that Internet providers shouldn't discriminate based on content. The
question is the role for government. If Comcast, which is in the process of
acquiring NBC, started to discriminate against CBS or ABC, its Internet
competitors would be quicker than regulators to point to an inferior consumer
experience.
To take
another example, Rick Carnes, president of the Songwriters Guild of America,
points out, "Proponents of net neutrality have long claimed that the Federal
Communications Commission needs to lay down some rules ensuring freedom of
speech on the Internet. As a songwriter, I have a hard time wrapping my mind
around the concept that the FCC is going out of the censorship business and into
the protection of free speech."
In the
name of neutrality, lobbyists want to stop Internet providers from managing
their networks by charging more to providers or users of bandwidth-hogging
services such as video and online games. This amounts to a forced subsidy of
certain users of the Web at the expense of others. As demands on the Web
escalate, speed and reliability will inevitably depend on more management of the
network, including through different prices for different levels of
service.
As
these debates simmered, the FCC lost several legal cases on whether it can even
claim jurisdiction over the Web. The commissioners now threaten to reclassify
the Internet so that it would come under the regulatory regime written in the
1930s to help the FCC micromanage a monopoly telephone service. A bipartisan
group of more than 200 members of Congress objected earlier this year to the
agency reclassifying broadband as a telecommunication service. Having
bureaucrats decide on the speeds, levels of service and prices that people and
businesses should pay for Web access is not a political
winner.
Technology
is running laps ahead of regulators. Verizon and Google have jointly proposed
that wireless networks should be excluded from the rules that apply to cable and
other hardwire providers. They also would exclude "additional, differentiated
online services," referring to the next set of consumer
services.
It
looks like the future will increasingly feature these new services.
The Internet itself is
in flux, with Wired magazine recently declaring on its cover: "The Web is Dead."
The provocative point was that many of the most successful new online products
rely on the Internet but are no longer delivered through standard Web
sites.
View
Full Image
Associated
Press
For
example, Apple offers applications designed specifically for its iPad tablet.
Amazon's Kindle has a special deal with Sprint that allows for lightning-fast
downloads of books. The closed community of Facebook regulates how people link
to one another. Do we really want regulators in the name of neutrality
determining which apps should be available on the iPad? How fair it is that
Kindle has fast book downloads? Should the FCC decide how many Facebook friends
are too many? It's not even clear what net neutrality means in the context of
these services.
Government's
most active role on the Internet is the regulation of broadband providers, which
has resulted in monopolies and duopolies. Indeed, there is little discussion of
net neutrality in Europe or Asia, where there is real competition among
broadband providers. U.S. politicians and regulators would be better off
focusing on ways to increase competition on the Internet—not looking for new
ways to regulate it.
WSJ· NOVEMBER 8, 2010
The
night before former Argentine President Néstor Kirchner died of a heart
attack—12 days ago—he is rumored to have had a heated argument with the leader
of this country's largest labor union, known by its Spanish initials CGT. Some
say it's what killed the Peronist strongman.
The
dispute is instructive because it highlights the power of Big Labor in this
country and explains why, despite the passing of this powerful politician who
acted like a mob boss, there is still little hope that Argentina's economy will
begin to modernize any time soon. It is also a cautionary tale for Americans who
have watched President Obama fuel a resurgence of union might in the United
States.
Kirchner had accumulated his remarkable political heft
since his election in 2003, in part because Argentina's Congress granted him
extraordinary powers in the wake of the peso collapse the year before. Over four
years, in matters of both the economy and politics, he continually tightened his
grip. After his wife, Cristina Kirchner, won election in 2007, he remained the
force behind the throne. It was widely expected that he again would be a
candidate for the office in the October 2011 elections.
With his death, pundits immediately began debating
whether a weakened Cristina might step aside next year. The hopeful posited that
a more moderate Peronist might restore some semblance of the rule of law, which
has been almost entirely destroyed under kirchnerismo. Markets rallied
on the news of Néstor's passing.
Yet
this calculation ignores the outsized power of organized labor here, a reality
that confronts every Argentine politician as it did the former president in the
days before his death.
The CGT, founded in the 1940s under the dictator Juan
Perón, has a long track record of paralyzing the economy to enforce its demands
and strangling any administration that dares to go against it. Its strong bond
with the Peronist Party is the reason many Argentines have become convinced that
only Peronists can govern the country.
View Full Image
Associated Press
Can
Cristina's power survive the death of her husband Néstor
(right)?
Néstor understood both the power and the peril implied
by the CGT and he rode the tiger ably, first as president and then as the
caudillo-in-chief behind his wife. CGT Secretary General Hugo Moyano performed
dutifully for the first couple, including sending out union goons to intimidate
farmers during their 2008 strike against government tax increases and blocking
the distribution of newspapers critical of Mrs. Kirchner's government in 2009.
In return, unionists were allowed to sink their teeth ever deeper into the
economy.
But
in recent weeks Néstor could see that the beast he had under him was restless.
His 2011 candidacy was looking weak and there were rumors that Mr. Moyano,
inspired by the success of Brazilian laborite Lula, had his eye on the job. The
unionist began testing the limits of his office.
Just days before Néstor's death, Mr. Moyano publicly
called for official CGT representation in the three powers of government, i.e.,
reserved seats in the courts, the congress and the cabinet. It is unlikely
Kirchner wanted to give up his power to dole out privileges. So when Mr. Moyano
called for a meeting of Peronist leaders in Buenos Aires province, Kirchner
undermined the meeting by lobbying party loyalists to boycott it. The angry
phone call that ensued from a presumably unhappy Mr. Moyano may have been too
much for the 60-year-old workaholic with a heart
condition.
Get the latest
information in Spanish from The Wall Street Journal's Americas page.
Néstor has gone to his final judgment, but the question
of who holds the reins that might both contain and channel union power lives on.
Last week, the president, whose ability to govern without her husband has been
the subject of much speculation since Oct. 27, took both carrots and sticks out
of her designer handbag. First her chief of staff reached out to Mr. Moyano,
calling the CGT the "backbone" of the Peronist Party. Days later the public
learned that a federal judge happens to be investigating corruption charges
against the union leader. If he goes to prison it would not be surprising to
find that his replacement is more pliable.
Markets are likely to help Mrs. Kirchner maintain power
in the months ahead. The U.S. Federal Reserve's latest "quantitative easing"
announcement has already boosted soybean prices here, generating a sense of
economic improvement. The pain of more inflation, added to the current
double-digit rate, will come later. For now there is applause.
She
also faces risks. Union leaders have demonstrated that they can exercise power
from jail cells. And without her husband to protect her, Mrs. Kirchner may find
herself surrounded by ambitious competitors within the party who see this as
their moment.
Yet
this uncertainty must not be confused with a debate about whether Argentina's
rule of law might be restored. The only thing up in the air is who can maneuver
most effectively within a country ruled by the ideology of 1930s economic
nationalism. It's like a battle of mafia dons. The rest of the Argentine nation
remains a spectator.
Write to O'Grady@wsj.com
WSJ
· NOVEMBER
8, 2010
I work
for a health-insurance company, and my brother is a primary-care physician. As
he tells it, my industry is responsible for the death of his. Insurance
companies, he argues, have killed primary care by grinding down reimbursement
and compelling doctors to see more and more patients just to make a
living.
I
sympathize with my brother, because I know that doctors' business with insurers
isn't always easy. I'm also aware of the market's price sensitivity—and
reimbursement paid to doctors comes from premiums paid by customers. Insurers
must keep costs down.
Remember
Marcus Welby, M.D.? He defined the family doctor on TV in the 1970s,
exemplifying the four Cs: caring, competent, confidant and counselor. In the
mid-'60s, I remember my father-in-law, a real-life Dr. Welby, telling me the
exciting news that the federal government was going to start paying him to see
seniors—patients who before he had seen for the proverbial chicken (or nothing
at all). That fabulous deal was Medicare.
View
Full Image
Associated
Press
Robert
Young (aka Marcus Welby, M.D )
Medicare
introduced a whole new dynamic in the delivery of health care. Gone were the
days when physicians were paid based on the value of their services. With
payment coming directly from Medicare and the federal government, patients who
used to pay the bill themselves no longer cared about the cost of services.
Eventually,
that disconnect (and subsequent program expansions) resulted in significant
strain on the federal budget. In 1966, the House Ways and Means Committee
estimated that by 1990 the Medicare budget would quadruple to $12 billion from
$3 billion. In fact, by 1990 it was $107 billion.
To fix
the cost problem, Medicare in 1992 began using the "resource based relative
value system" (RBRVS), a way of evaluating doctors based on factors such as
education, effort and specialized training. But the system didn't consider
factors such as outcomes, quality of service, severity or demand.
Today
most insurance companies use the Medicare RBRVS because it is perceived as
objective. As a result of RBRVS, specialists—especially those who perform a lot
of procedures—do extremely well. Primary-care doctors do not.
The
primary-care doctor has become a piece-rate worker focused on the volume of
patients seen every day. As Medicare and insurers focused on trimming the costs
of the most common procedures, the income and job satisfaction of primary-care
doctors eroded.
So
these doctors left, sold or changed their practices. New health-care service
models, such as the concierge practice and the Patient-Centered Medical Home,
drew doctors away from the standard service models that most patients rely on
for coverage.
All of
these factors have contributed to a fragmented, expensive health system with
most of the remaining doctors focused on reactive instead of preventive care.
The
solution to the problem is making primary-care physicians the captains of the
ship. They must have the time and financial resources necessary to take care of
their patients, tailoring care to patients' specific conditions and needs. And
they need the data to track their patients' results, so they can guide patient
progress. They will then be able to slow (and sometimes reverse) their patients'
illnesses, keeping them out of hospital emergency rooms and specialists'
offices. The end result: reduced costs and improved quality of
care.
So who
really killed primary care? The idea that a centrally planned system with the
right formulas and lots of data could replace the art of practicing medicine;
that the human dynamics of market demand and the patient-physician relationship
could be ignored. Politicians and mathematicians in ivory towers have placed
primary care last in line for respect, resources and prestige—and we all paid an
enormous price.
Mr.
Hannon is senior vice president of marketing and provider affairs for Blue Cross
Blue Shield of Arizona.
· NOVEMBER 8, 2010
Some recent headlines
and commentary seem to suggest that the Irish economy has all but collapsed. It
hasn't, and it doesn't have to.
Ireland has had a property bubble and crash, a
regulatory failure, a banking disaster, and a fiscal crisis. Now, Ireland is
caught up in the great macroeconomic issues of our times: how deep and how fast
to cut debt; what will promote sustainable growth; the governance of the euro
and its monetary policy; how to fix banks and who should pay; bond investors'
attitudes to sovereign risk. It's an uncomfortable place for a small
country.
Ireland's macro and
fiscal challenges are real, well known, and openly disclosed. The recurrent
government deficit has to be cut to 3% of GDP from nearly 12% in just four
budgets. A credible 4-year plan has to be published this month, and by Dec. 7
Dublin must produce a 2011 budget with €6 billion in savings. The brunt is to be
borne by spending cuts. By early next year, Ireland will have to return to debt
markets.
With all this attention
on macroeconomics, and the disaster scenarios being painted around Ireland's
latest thinly-traded 10-year government-bond price that hit over 7.5%,
prognosticators seem to have forgotten just what's involved in the one thing on
which so much depends: growth.
And in Ireland at least,
growth will be about microeconomics, not the grand macro issues.
Forget about global
imbalances. Forget about U.S. and euro-zone monetary policy. Forget about the
latest Basel capital rules. Like most countries, Ireland is a price-taker on
those decisions, as it is on global, U.S., euro-zone and U.K. economic growth.
The only growth factors Ireland can really affect for itself are its government
finances and the business environment in the country.
Observers and bond
investors are wondering, can Ireland "do it"? That would mean Dublin not
defaulting on its debts, and achieving sustainable finances and economic growth.
Aside from the government's current drive to cut spending, this is fundamentally
a question about Ireland's real economy as it now stands.
View Full Image
Getty Images
In that context, here is
the hand that Ireland now has to play: An economy consisting of about 4.5
million people that was heading to a value of €190 billion per year, but is now
settled back to €160 billion. That's not poor; it's well-off, quite diversified
and developed.
Since 1995, Irish
people's purchasing power has shot ahead of the euro-zone average, to 19% above
it in 2009 from 10% below it in 1995. During the boom years, prices in the
country got out of hand, but unit labor costs fell last year by over 6% relative
to euro-zone costs.
The median age of the
population is 35, the lowest in the EU, and despite renewed emigration, it is
still growing. Ireland has also experienced Europe's fastest increase in life
expectancy, in which it now matches the world's wealthiest countries. These
people are among the OECD's top performers in terms of tertiary education
attainment. They are also renowned for their creativity and their arts, which
can be monetized.
This economy is embedded
in a single market of 500 million people, with which it trades more than most.
Ireland's latest quarterly exports were 103% of second-quarter GDP, outstripping
imports by nearly 25%. Ireland's balance of payments is turning positive. A lot
of this is due to the presence of more than 1,000 foreign companies with
operations in Ireland, including large pharmaceutical firms,
information-technology companies, and medical-device corporations. For some
time, Ireland has been diversifying its economy, and moving away from low- and
mid-level manufacturing. The value of Irish-made medical and pharmaceutical
products increased fourfold between 2000 and 2008.
Ireland's service
exports are also rapidly growing. In 2000, they were worth €13 billion. By 2008,
they had grown to €68 billion, and had more than doubled their share of total
exports. Part of this is thanks to the back- and middle-office operations of the
international financial-services sector, which was originally based in Dublin
and is now spread around the country. This boom had nothing to do with the
property bubble, and persists after its burst.
Irish people have close ties with, and easy travel to,
the U.K. and major commercial centers around Europe. There also exists an
extensive, well-disposed Irish network in the U.S. and
globally.
Some people claim this
internationalization makes Ireland's economy vulnerable, as foreign businesses
can leave as easily as they came. But in the real global economy, change is the
only constant: Companies succeed, fail, grow, decline, move and change
operations all the time. In this environment, and for Ireland in particular, the
popular distinction between a domestic company and a mobile, international
company, is not much use. In fact Ireland's economic interest lies in seeing its
own domestic companies become global and agile, as some have already done in
food and manufacturing. If anything, Ireland has more cause for concern about
global politics than about global business, insofar as protectionist sentiment
may take hold.
Ireland also has the
national memory of its last fiscal crisis in the late 1980s. The debt spiral
they're trying to avoid now had already happened then. The debt-to-GDP ratio was
above 120%. Interest payments were 20% of total government spending and 35% of
revenue. Those levels can be avoided now, given that debt should peak at around
106% of GDP and the average cost of debt will still be lower than in the 1980s.
Ireland's net debt level is also better than it was before, and cash and
investments have been set aside in the national pension
fund.
Crucially, the people of
Ireland were different then too. Irish people now have a longer track record of
innovating, marketing, selling, manufacturing, raising capital, and making deals
in a range and depth of global markets than they ever have before.
Dublin can strengthen
this hand even further. Just as the government is intent on frontloading its
fiscal correction, it can do the same with its microeconomic prospects. Most
critical is the direction of change on Ireland's competitiveness. As well as
investing in research and allowing universities to be sustainably funded, Dublin
could take further actions to cut the costs of doing business in Ireland. Energy
costs need to fall further. Training the unemployed also helps, but so do
unambiguous policy decisions to reduce overall labor costs and improve the
incentives to take up work. If some new taxes are inevitable, Dublin can ensure
they are the ones that will be least harmful to job creation, investment and
enterprise, such as property-based taxes. Correspondingly, a cut in employers'
social-insurance rates should be part of the fiscal framework. In addition,
Ireland cannot afford to become less competitive by raising its marginal
income-tax rates. Fortunately, there is no prospect of its 12.5% corporate-tax
rate going up.
The crash did happen,
but Ireland's economy still has a pulse, at least as strong as many of its
larger partners around the world. Its debts are massive, but manageable—no one
has proven yet that they are not.
This is a playable hand.
The financial engineering required to restore the Irish budget to health is
doable, and is being done. Now, it's over to the political engineering, whose
highest achievement would be to let the Irish people do what they do best:
adjust and thrive.
Mr. O'Connor is a business consultant based in London
and a former special adviser in the Irish government.
· NOVEMBER
8, 2010
more in
Economy »
For
those with little education, it pays to live among people with college
degrees.
Workers
with less than a high school diploma were likelier to keep their jobs during the
recession if they lived in a handful of metro areas with the highest
concentrations of employees with college degrees, according to a paper released
Friday by Alan Berube, a senior fellow at the Brookings
Institution.
Mr.
Berube studied recent census data for the nation's 100 largest metro areas,
identifying the 20 with the highest share of college graduates. In those areas,
he found, the fraction of workers without high school diplomas who had
jobs—their employment rate—declined by a median of 0.6 percentage point during
the recent recession. In the other 80 areas, their employment rate fell three
percentage points, or five times as much.
"Where
you are matters," Mr. Berube said. "If you're a worker without a high school
diploma, you are better off being in a highly educated labor market like Seattle
than being in a less educated labor market like Scranton
[Pa.]."
Part of
the explanation, he said, is a trickle-down effect. Those with college degrees
were likelier to keep their jobs through the recession than less educated
workers, so they continued spending on things like restaurant meals and laundry
services. The less-educated workers found steadier work because they were in
fields that served their college-educated neighbors.
There
are other possible reasons. A less educated worker living in a city with a
surplus of such workers, for example, might not fare as well as one in a city
with a smaller supply, where it would be easier to hang on to a
job.
U.S.
employers boosted hiring in October, offering hope that the recovery may be
picking up steam. The private sector notched its largest gain since April,
adding 159,000 jobs. Still, the job market faces a long road to full recovery.
At October's pace, it would take almost 50 months just to replace the positions
lost in the downturn.
One
example of the location dynamic is Austin, Texas, where Facebook Inc. opened a
new office in late October that employs more than 60 people, many with college
degrees. Austin is also on the list of most-educated metro areas.
"If you
look at Austin, I think it makes a lot of sense" to open an office there, said
Kathleen Loughlin, a company spokeswoman. "There's a large, talented employee
base."
Those
jobs generate work for the less educated. For instance, the office has an
outside catering contractor that provides breakfast, lunch and dinner for
employees, creating food service jobs.
The
disposable income of better-educated workers is one reason Yard House USA Inc.,
a restaurant chain, is opening new locations in Denver, Boston and San Jose,
Calif., all cities on the most-educated list. The Denver restaurant is hiring
200 workers—including many positions, such as dishwashers, that tend to go to
less-educated workers.
"It
seems like Colorado is doing well," Harald Herrmann, the company's president and
chief executive, said of the area's economy. Other markets, in California,
Nevada and Arizona, remain a challenge. "Would we open another restaurant in,
say, a Riverside, Calif., today? Probably not, given the
economy."
Frankie
Wright, 43 years old, recently landed two part-time jobs in Chicago, another
city with a highly educated work force, with the help of Goodwill Industries of
Metropolitan Chicago Inc. Ms. Wright, a high school dropout, works at a local
grocer and for a community watch group in the mornings and afternoons, ensuring
that high school students enter and leave a local school without incident and
reporting any problems to police.
"I am
grateful I do have a roof over my head and food on the table,'' Ms. Wright
said.
Write
to Sara
Murray at sara.murray@wsj.com
http://blogs.wsj.com/economics/?mod=marketbeat
–Estate
Tax: Richard Thaler looks at the options for the
estate tax. “But what about the tax rate? The proposed 45 percent rate is the
lowest since 1932, but it still sounds high, almost confiscatory. Yet we must
keep that $7 million exemption in mind. The Tax Policy Center estimates that in
2009, the average effective rate (taxes paid as a proportion of the entire
estate) was 19.4 percent for all taxable estates. Even for estates above $20
million, the rate was only 22.4 percent. We could lower the rate if we also
lowered the exemption, but that would be a mistake. Dealing with the estate tax
is a major nuisance, so it should apply to as few people as possible. With the
$7 million exemption, only 3 estates in 1,000 would have to pay any tax. And
those with estates that big could certainly afford a good lawyer to help them
further increase the effective size of their exemption. “
Nov 6,
2010
11:13 AM
Number
of the Week: $10.2 Trillion in Global Borrowing
By Mark
Whitehouse
Number
of the Week
$10.2
Trillion
$10.2
trillion: The amount
of money advanced-nation governments will need to borrow in
2011
As the debts
of advanced countries rise to levels not seen since the aftermath of World War
II, it’s hard to know how much is too much. But it’s easy to see that the risk
of serious financial trouble is growing.
Next year,
fifteen major developed-country governments, including the U.S., Japan, the
U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing
bonds and finance their budget deficits, according to estimates from the
International Monetary Fund. That’s up 7% from this year, and equals 27%
of their combined annual economic output.
Aside from
Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is
the most extreme case. Next year, the U.S. government will have to find $4.2
trillion. That’s 27.8% of its annual economic output, up from 26.5% this year.
By comparison, crisis-addled Greece needs $69 billion, or 23.8% of its annual
GDP.
So far, with
the notable exception of Greece, major advanced nations haven’t had too much
trouble raising the money they need. Japan’s domestic investors have
consistently bought its government bonds despite their low yield. Foreign
investors have been snapping up U.S. Treasury bonds, which remain the world’s
premier safe-haven investment.
Still,
there’s reason to be concerned that governments’ appetite for borrowing could
ultimately push up interest rates, or worse.
For one,
government borrowers are tapping into smaller international capital flows. The
total amount of foreign portfolio investment sloshing in across advanced
countries’ borders averaged about 3.8% of global GDP in the twelve months ended
June, compared to an average 9.5% in the eight years leading up to the
recession.
Beyond that,
the U.S. and other advanced nations are putting pressure on China to allow its
currency to appreciate against the dollar. All else equal, such a move would
curb demand for dollar-denominated debt from a country that is the largest
foreign holder of U.S. Treasurys.
In the U.S.,
domestic investors could pick up the slack. The Federal Reserve has committed to
buy an added $600 billion in U.S. government debt over the next eight months.
Demand from households has been very strong as U.S. consumers boost their
savings rate. Tighter regulations could push banks to buy more safe assets such
as U.S. Treasurys.
But as the
IMF warned in a report this week, the chances that investors will balk at
lending to governments “remains high for advanced economies.” That’s a highly
undesirable outcome — picture a financial crisis in which governments can’t step
in to help, because government finances are the problem. We can’t know how close
we are to such an outcome, and the need to keep the recovery going would make
cutting back now a risky move. Ultimately, though, we’re heading in the wrong
direction.
18f10s
Deficit
Panel Pushes Cuts
Plan
to Save $3.8 Trillion Targets Medicare, Pentagon, Middle-Class Tax
Breaks
By
JOHN
D. MCKINNON, COREY
BOLES And MARTIN
VAUGHAN
WASHINGTON—A
White House commission laid out a sweeping proposal to cut the federal budget
deficit by hundreds of billions a year by targeting sacrosanct areas of U.S. tax
and spending policy, such as Social Security benefits, middle-class tax breaks
and defense spending.
The
co-chairs of a deficit commission established by the White House has called for
limiting federal spending on health care, gradually raising the retirement age
and lowering the corporate tax rate. Jerry Seib discusses.
The
preliminary plan in its current form would end or cap a wide range of breaks
relied on by the middle class—including the deduction for home-mortgage
interest. It would tax capital gains and dividends at the higher rates now
levied on wage income. To compensate, one version of the plan would dramatically
lower and simplify individual rates, to 9%, 15% and 24%.
For
businesses, the controversial plan would significantly lower the corporate tax
rate—from a current top rate of 35% to as low as 26%—but also eliminate a number
of deductions. It would make permanent the research and development tax credit.
More
Overall,
the plan would hold down the growth of the federal debt by roughly $3.8 trillion
by 2020, or about half of the $7.7 trillion by which the debt would have
otherwise grown by that year, according to commission staff. The current
national debt is about $13.7 trillion.
The
budget deficit, or the amount by which federal expenditures exceed revenues each
year, was about $1.3 trillion for fiscal year 2010, which ended on Sept. 30.
The
interim report stands as an opening bid in what will likely be a heated debate
over the future of spending and taxes, issues that exploded in the midterm
elections. Many of the plan's more provocative elements are intended as starting
points for negotiation, not final recommendations.
President
Barack Obama urged leaders of his own Democratic Party to hold their fire over
the recommendations of the two chairmen of his bipartisan U.S. debt commission,
and he said "tough choices" are going to be necessary to tame a deficit that has
soared to more than $1 trillion a year.
"Before
anybody starts shooting down proposals, we need to listen, gather up all the
facts, and be straight with the American people," Mr. Obama said at a press
conference Thursday in Seoul, where he attending a Group of 20 nations summit,
when presented with a statement from U.S. House Speaker Nancy Pelosi that the
commission chairmen's recommendations are "simply
unacceptable."
The
question is whether members of the commission can hone the draft into something
on which they can agree, or whether they and their supporters will splinter. The
plan's unveiling Wednesday provoked denunciations from some quarters,
particularly from organized labor and liberal lawmakers, but also from
conservative taxpayer advocates.
"We
have harpooned every whale in the ocean, and some of the minnows," said
co-chairman Alan Simpson, a retired Wyoming Republican senator. "No one has ever
done that before." The panel of 18 lawmakers, business and labor leaders and
others was formed by Mr. Obama; it was led by Mr. Simpson and co-chair Erskine
Bowles, a White House chief of staff to former President Bill Clinton.
On
Social Security, the plan would gradually raise the retirement age to 68 around
2050 and 69 by 2075. It would combine various cuts to benefits with an increase
in taxes on wealthier people's incomes. It would also seek to rein in federal
spending on health care beyond what's called for in the recently passed
health-care overhaul. This would be achieved by introducing further changes,
including reform of medical-malpractice law, and by seeking to slow the growth
of the Medicare program.
The
plan would make significant cuts on spending over which Congress has direct
control, beyond entitlements such as Medicare. It identifies $410 billion in
discretionary spending cuts by 2015. It proposes cutting the federal work force
10%, at a savings of $13.2 billion by 2015.
The
Commission released a draft of recommendations for President Barack Obama. The
panel calls for changes in the tax codes including elimination of the popular
deduction for mortgage interest. Video courtesy of Fox
News.
Congressional
earmarks—provisions inserted into legislation for lawmakers' pet projects—would
be banned permanently, saving $16 billion.
In
the bond markets, which have much riding on the outcome of the deficit debate,
investors cautioned that the ideas are preliminary and touch many political
third rails.
With
gridlock likely after the midterm elections split control of Congress between
the two parties, enacting major changes designed to significantly cut the
deficit "would take some pretty Herculean efforts I think down in Washington,
D.C.," said Kevin Flanagan, chief fixed-income strategist at Morgan
Stanley Smith Barney.
The
plan's authors hope this first draft will improve the chances of any final
version, said commission aides, by making it look milder by comparison. At a
minimum, the plan's surprise release gives President Obama a chance to appear
serious about deficit cutting should he adopt its
recommendations.
The
panel's recommendations aren't binding; its proposal needs to garner the votes
of 14 of the 18 members to trigger votes in the House and Senate. But the final
version, due Dec. 1, likely would be a starting point for any deficit-reduction
plan Congress and the White House put together.
"In
the end, the president is going to have to decide whether to incorporate some of
this into the 2012 budget," said David Walker, a former U.S. comptroller general
and an advocate for deficit reduction. "He's going to have to lead, because if
the president doesn't lead on this, it goes nowhere fast."
Mr.
Obama avoided any comment on the specifics, as did Congressional leaders. Both
said they'd wait for a final product.
Lawmaker
reaction was mixed, suggesting any final plan will be weaker than the one
released Wednesday. Sen. Judd Gregg (R., N.H.), the top Republican on the Budget
Committee and a panel member, called it "a genuine product that deserves very
serious attention."
But
liberal panel members were less enthusiastic. Sen. Richard Durbin (D., Ill.)
said he wouldn't vote for it, saying that "there are things in there that I hate
like the devil hates holy water."
Some
important interest groups were sharply critical, particularly over curbs on
entitlement spending. The plans authors "just told working Americans to 'Drop
Dead,"' said AFL-CIO president Richard Trumka. "Especially in these tough
economic times, it is unconscionable to be proposing cuts to the critical
economic lifelines for working people, Social Security and
Medicare."
The
conservative Americans for Tax Reform also blasted the plan. "It confirms what
everyone has known—this commission is merely an excuse to raise net taxes on the
American people," the group said in a written statement. Supporting the plan
would violate the group's no-new-taxes pledge, which many Republicans and some
Democrats in Congress have signed, it warned.
Sen.
Gregg said that overall, federal spending takes a bigger hit in the plan than
taxpayers do. The plan's goal is to reduce federal spending and federal revenues
to 21% of gross domestic product. Federal revenues currently are projected to be
about 19% of GDP in 2015, and outlays about 23%.
It
would seek to achieve the pullbacks through a mix of spending cuts and
increasing tax revenues—about 75% in spending reductions and about 25% from the
tax side.
If
the plan was adopted in its entirety, it would reduce the deficit to 2.2% of
gross domestic product by 2015, exceeding the target set for the panel by the
White House of lowering the deficit to 3% of GDP.
The
budget deficit equaled 8.9% of GDP in the fiscal year ended Sept. 30. Despite
the raft of spending cuts and changes to the tax code, it would still take until
2037 to balance the budget entirely.
Write
to John
D. McKinnon at john.mckinnon@wsj.com,
Corey Boles at corey.boles@dowjones.com and Martin
Vaughan at martin.vaughan@dowjones.com
WSJ
NOVEMBER 10, 2010
Google
Battles to Keep Talent
By
AMIR
EFRATI And PUI-WING
TAM
Google
Inc. is fighting off Facebook Inc. and other fast-growing Internet firms that
are poaching its staff, a reversal for a company that has long been one of
Silicon Valley's hottest job destinations.
Among
the defectors are engineers such as Cedric Beust. The 41-year-old spent six
years at Google working on projects like the mobile operating system Android.
But by this year, "I was ready for something different and more challenging," he
said.
Staff
Defections to Facebook
View
Full Image
Mr.
Beust's job target list included Facebook, micro-blogging service Twitter Inc.
and professional social-networking company LinkedIn Corp. After interviews at
several of the firms, Mr. Beust in May joined LinkedIn as a principal software
engineer.
Competition
for experienced engineers like Mr. Beust is especially strong as Web start-ups
ramp up their hiring and poach from established companies like
Google.
Facebook
and other start-ups have a recruiting tool that Google can no longer claim: They
are private companies that haven't yet gone public, and can lure workers with
pre-IPO stock. Recruiters say Facebook and others also pay competitively, with
average annual salaries for engineers typically starting at
$120,000.
"There's
a huge shortage of engineers," said Valerie Frederickson, a recruiter in Silicon
Valley. She said a recent client of hers who received a master's in engineering
this spring from Stanford University got caught in a bidding war between Google,
Facebook and others. He got hired with a $125,000 salary, and is now being
offered $175,000 by the companies that lost out initially.
Facebook
today has about 1,700 employees, up from 1,000 a year ago. Twitter now has 300
employees, up from 99 a year ago. LinkedIn said it started the year with 450
employees and expects to end the year with 900.
"It
definitely is a little easier for us right now, compared to a lot of companies''
to recruit, said Colleen McCreary, the chief people officer of online gaming
company Zynga Game Network Inc. The San Francisco company said it began the year
with 500 employees and now has 1,250, including hires from large firms like
Google and Microsoft
Corp.
Much
of the most recent hiring battles have centered on Facebook and Google.
According to data from LinkedIn, 137 Facebook employees previously worked at
Google. Among Google's recent departures to Facebook: Lars Rasmussen, co-founder
of Google Maps. Google Chrome architect Matthew Papakipos, Android senior
product manager Erick Tseng, and top Google ad executive David Fischer also
decamped to Facebook earlier this year.
To
help attract new recruits and preempt defections, Google Tuesday said it was
giving a 10% raise to its more than 23,000 employees. Google Chief Executive Eric Schmidt wrote in
an all-hands email, "We want to continue to attract the best people to Google."
Google declined to comment Wednesday.
To
be sure, Google is also on a hiring spree and increased its work force by 19%,
or 3,600 people, over the past year. To acquire some high-profile talent, Google
has ramped up acquisitions of start-ups such as social app maker Slide Inc. And
while Facebook is a huge draw now, it too has become too large for some
employees, who have left to start other projects.
Hiring
wars aren't uncommon in Silicon Valley, with mature tech companies long battling
with up-and-coming start-ups for workers. A few years ago, Google was snaring
workers from Yahoo Inc., Microsoft and others. Now, as Google's growth has
slowed, it is finding the tables have turned.
Google
is giving its 23,000 employees each a 10% raise, as competition for talent in
Silicon Valley heats up. Amir Efrati and Eric Savitz explain how the move
signals an escalating war between Google and Facebook, Inc. for top
talent.
"Google
isn't the hot place to work" and has "become the safe place to work," said
Robert Greene, who recruits engineers for start-ups such as Facebook.
Facebook's
social-networking technology and smaller size is also appealing, say some job
seekers. Software engineer Murali Vajapeyam, 29, who left Oracle
Corp. this year, said he interviewed at Google and
Facebook.
"Facebook
is more interesting," said Mr. Vajapeyam, who didn't land an offer with Facebook
and ultimately elected to join a San Francisco software start-up in
September.
Google
and Facebook's recruiting battles come as the two companies increasingly appear
to be moving onto each other's turf. Among other things, Mr. Schmidt has spoken
about adding social-networking elements to Google's
services.
In
recent days, the companies have engaged in a public war of words over
data-sharing practices. Google has complained that Facebook is engaging in "data
protectionism" by not allow its users to export their friends' email addresses
to other websites, including Google's.
—Nick
Wingfield contributed to this article.
Write
to Amir
Efrati at amir.efrati@wsj.com and
Pui-Wing Tam at pui-wing.tam@wsj.com
Read
more: http://online.wsj.com/article/SB10001424052748704804504575606871487743724.html#ixzz14yg0B38G
SEOUL—World leaders gathered for the Group of
20 summit neared an agreement that appears to paper over many of the differences
that have roiled discussions and financial markets in recent days, but one
that's unlikely to end tension over currency and trade
policies.
As the
G-20 prepared for a series of tense meetings in Seoul, President Obama urged
member states to promote global growth and guard against protectionism. Wall
Street Journal reporter Evan Ramstad sets the scene with Simon
Constable.
The agreement will likely reaffirm earlier
language hashed out by finance ministers on letting markets determine
foreign-exchange rates, without yielding specific new commitments from China to
let its currency rise. It will pledge efforts to close the gap between countries
with big trade surpluses and those with big deficits, but will likely stop short
of numeric targets pushed by the U.S.
President Barack Obama urged the G-20 nations
to stand firm against protectionism and called for a joint commitment to growth,
part of an effort by U.S. officials to soften discord as the G-20 prepared for
its meeting here beginning Thursday.
Even as the leaders meet, some emerging nations
are erecting protective berms around their economies, as a torrent of capital
pours in and threatens to derail their growth by sending their currencies
soaring and hobbling their exporters. The Federal Reserve's recent plan to
stimulate the U.S. economy by buying bonds has further frayed nerves, by
threatening to undercut the dollar.
This week, Taiwan
imposed limits on bond holdings by foreigners. In October, Brazil and Thailand
raised taxes on foreign investment in local bonds. In June, South Korea
restricted derivatives trading.
Associated
Press
Protesters shout slogans during a rally denouncing the
G-20 Seoul Summit.
Central banks from
Israel to South Africa are buying dollars to keep their currencies from rising.
China raised reserve requirements at banks this week, a move to slow foreign
investment.
Mr. Obama's letter to other leaders came amid
finger-pointing that threatened to overwhelm the summit. He reached Seoul
Wednesday night for critical meetings Thursday, including with German Chancellor
Angela Merkel, whose government has led criticism of U.S. dollar policy, and
Chinese President Hu Jintao, who has resisted the president's push on China's
currency.
U.S. officials say the depth of the discord has
been overstated in the pressure-filled days before the summit. They hope
emotions will ease if leaders endorse what their ministers previously agreed to.
"We think everyone is going to have an interest
in lowering the temperature and defusing some of the tension by agreeing on a
multilateral process for helping to resolve these pressures" on the global
financial system, said Treasury Secretary Timothy Geithner.
Likely flash points at this week's meeting in
South Korea
View Full Image
A draft communiqué prepared Wednesday
illustrated the G20 divisions. It said the nations would increasingly let
markets determine currency rates, but officials remained undecided about how to
discuss currency interventions. The draft said nations would "refrain from
competitive devaluation," but in brackets was the alternative wording
"competitive undervaluation," an apparent reference to
China.
Officials indicated G-20 leaders would fudge
the key issue of how to reduce global trade imbalances. Mr. Geithner said over
the weekend that the summit likely wouldn't agree on targets for how large trade
surpluses and trade deficits should be, a suggestion he had made earlier that
drew opposition from Germany and others.
Instead, the G-20 may leave it to the
International Monetary Fund to sort out, said Canadian Finance Minister Jim
Flaherty. The IMF would report to G-20 finance ministers at their next meeting
in February.
As originally conceived, at least by the U.S.,
this G-20 gathering was a chance to push China to allow its currency to rise
more quickly. U.S. officials want countries with large surpluses, such as China,
to consume more domestically and export less, which would help America save more
domestically and export more.
But Germany and China turned the tables, in
effect accusing the Fed of driving down the value of the dollar, particularly
through its plan to buy $600 billion of government bonds and other assets in
coming months. U.S. officials replied that stimulating U.S. growth is in
everyone's interest and that a weaker dollar is a byproduct of their efforts,
not the objective.
Although China led the criticism, it isn't
pushing to have the Seoul communiqué single out the Fed, a Chinese official
said.
Officials in emerging markets say the capital
inflows they are seeing mean they can't wait for international accords. With
economies in the U.S., Japan and Europe feeble and their interest rates low,
faster-growing nations like Brazil are attracting a frenzy of investment.
The capital inflows can create asset bubbles
and overvalued currencies or stock markets, primed to plunge the moment
investors decide to move their money elsewhere. Overvalued currencies also mean
exporters lose their edge because their goods are costlier
abroad.
Some emerging nations are embracing once-taboo
policy prescriptions to restrict inflows, the latest example of the tensions
generating by economic imbalances between rich and developing
economies.
The IMF, which once criticized capital
controls, now gives its blessing to measures like taxing foreign bond
investments, and cites the success of such measures during the Asian financial
crisis of the late '90s. The IMF and other keepers of the economic orthodoxy
still emphasize the benefits of foreign direct investments, however.
Brazil, which floated its exchange rate in
1999, is a prime example of the predicament. With 7% growth rates, Brazil was
already attracting foreign investment. Its 10.75% overnight interest rates have
made it a target of investors who borrow where interest rates are near zero,
such as the U.S. and Japan, and deposit it where rates are high. This "carry
trade" helps explain why Brazil's real has risen around 35% against the U.S.
dollar since the start of last year.
Access thousands
of business sources not available on the free web. Learn More
The easiest solution would be lower rates, but
with widening deficits, a debt load reaching 60% of gross domestic product and
perennial inflation concerns, Brazil needs high rates to attract
loans.
—Tom
Murphy, Evan Ramstad and Kanga Kong contributed to this
article.
Write to Jonathan Weisman at jonathan.weisman@wsj.com, John Lyons
at john.lyons@wsj.com and Damian Paletta
at damian.paletta@wsj.com
Stiglitz
to Obama: You’re Mistaken on Quantitative Easing
By
Alex Frangos
Nobel
Prize-winning economist Joseph Stiglitz, dismissing the Federal Reserve’s
quantitative easing as a “beggar-thy-neighbor” strategy of currency devaluation,
called on America to learn the art of stimulus from China.
President
Barack Obama has defended the Fed’s controversial program, telling the world
that a
fast-growing America is good for the world economy. But Mr. Stiglitz, in
comments at a conference in Hong Kong on Thursday, charged that quantitative
easing, by leading to a weaker U.S. dollar, in fact steals growth from other
economies.
“President
Obama has rightly said that the whole world will benefit if the U.S. grows, but
what he forgot to mention is…that competitive devaluation is a form of growth
that comes at the expense of others,” Mr. Stiglitz said at the Mipim Asia real
estate conference. “So I think it is likely to present problems for the global
economy going forward.”
Emerging-market
nations have bristled at the Fed’s move to spur the U.S. economy by increasing
the U.S. money supply. They worry it will end up instead as a tidal wave of “hot
money” that will overwhelm smaller, developing economies, creating asset bubbles
and inflation. To prevent that, many are establishing or strengthening capital
controls, banking regulations that restrict the flow of money into and out of
economies. Taiwan and Brazil are the latest to act. South Korea is also
considering measures.
That
patchwork of international capital controls is “fragmenting the global capital
market,” Mr. Stiglitz said.
Rather
than just looser monetary policy, the Columbia University economist urges more
government spending by countries whose low borrowing costs make it
affordable—notably the U.S.
“We
really should learn the lesson from China,” he said. “If you take money and
spend it on investments, then you grow the economy in the short run, but you
also grow the economy in the long run.” He says China’s massive infrastructure
investments over the past two years have “changed the economic geography” of
that country, setting it up for strong growth in the years
ahead.
The
U.S. should do the same, he said, adding that because it has funded
infrastructure so poorly over the past 20 years, projects will likely have
strong positive return on investment.
“We
have a big list of what we need to do,” he said. “We could begin with high-speed
railroads. On the list of infrastructure that was drawn up in 2000, at the top
of the priority was New Orleans levees. It was public knowledge that New Orleans
needed new levees; $5 billion invested in New Orleans levees would have saved
$200 billion. Figure out the rate of return on that.”
He
recognizes, however, that this dream of a second fiscal stimulus is unlikely to
materialize. Much more likely is an extension of the Bush administration’s tax
cuts, whose “bang for the buck is very low,” he said, and which will hurt the
federal budget deficit.
On
the issue of exchange rates, Mr. Stiglitz falls into the emerging-markets camp,
led by China, that thinks the system of free-floating rates advocated for
decades by the developed world is too volatile.
“An
ordinary business, they just want to sell products,” he said. “With the exchange
rate going up and down all over the place…you don’t know what you are going to
get in return for the sales of your products.” Financial markets haven’t created
hedging tools that are good enough and cheap enough to provide protection, he
said.
“There’s
a high social cost for the volatility in exchange rates,” he said. “So it’s very
reasonable for governments to stabilize what the markets haven’t done a very
good job at.”
So
if you accept that intervention in currency markets to reduce volatility isn’t
damaging to the world economy, where does it cross the line and become
“beggar-thy-neighbor” manipulations? That’s the crux of the problem that
policymakers at the G-20 are trying to hash out.
For
instance, China has accumulated $250 billion in reserves this year while letting
its currency appreciate only about 3%. Is that too much?
Mr.
Stiglitz says China’s currency policy is understandable. And he echoed Premier
Wen Jiabao’s contention that fast currency appreciation would send
thousands of Chinese businesses into insolvency.
Given
the failure of markets to offer adequate protection to export-dependent firms,
he said, “to make sure that the exchange-rate volatility is not such as to force
significant number of firms in bankruptcy that have macroeconomic consequences,
that is at least the minimal intervention that is appropriate on behalf of
government.”
The co-chairs of a
deficit commission established by the White House released a draft plan for
reducing the federal debt that included $200 billion in spending cuts by
2015.
The following is an
itemization provided by the committee. See
a full explanation here.
|
Reduce
Congressional & White House budgets by
15% |
0.8 |
|
Freeze
federal salaries, bonuses, and other compensation at non-Defense agencies
for three years |
15.1 |
|
Cut the
federal workforce by 10% (2-for-3 replacement
rate) |
13.2 |
|
Eliminate
250,000 non-defense service and staff
augmenteecontractors |
18.4 |
|
Reduce
unnecessary printing costs |
0.4 |
|
Create a
Cut-and-Invest Committee charged with trimming waste and targeting
investment |
11 |
|
Terminate
low-priority Corps construction projects |
1 |
|
Slow the
growth of foreign aid |
4.6 |
|
Eliminate a
number of programs administered by the Rural Utility Service
(formerlyREA) |
0.5 |
|
Eliminate
all earmarks |
16 |
|
Eliminate
funding for commercial spaceflight |
1.2 |
|
Sell excess
federal property |
1 |
|
26 other
options of $2 billion or less |
17 |
|
Apply the
overhead savings Secretary Gates has promised to deficit
reduction |
28 |
|
Freeze
federal salaries, bonuses, and other compensation at the Department of
Defense for three years |
5.3 |
|
Freeze
noncombat military pay at 2011 levels for 3
years |
9.2 |
|
Double
Secretary Gates’ cuts to defense
contracting |
5.4 |
|
Reduce
procurement by 15 percent |
20 |
|
Reduce
overseas bases by one-third |
8.5 |
|
Modernize
Tricare, Defense health |
6 |
|
Replace
military personnel performing commercial activities with
civilians |
5.4 |
|
Reduce
spending on Research, Development, Test & Evaluation by 10
percent |
7 |
|
Reduce
spending on base support |
2 |
|
Reduce
spending on facilities maintenance |
1.4 |
|
Consolidate
the Department of Defense’s retail
activities |
0.8 |
|
Integrate
children of military personnel into local schools in the United
States |
1.1 |
Economic
Issues
November
11, 2010
What
Is Fed's QE2, and What Will It Do? Experts Explain in Everyday
English.
QE2
sounds like a luxury ocean liner. But many wonder if the Federal Reserve's
second round of "quantitative easing" would be more aptly named the Titanic,
says the Dallas Morning News.
"The
book has not been written whether QE2 is a good idea or a bad idea," said Sam
Manning, general partner of the Blagden Fund in Dallas. "There are many highly
educated, brilliant minds on both sides of the argument."
But
here are some basics about quantitative easing that most agree
on:
The
Fed is worried about deflation and the psychological effect of our seeing assets
such as 401(k)s, houses and stocks devalue. It's the "wealth effect" in
reverse, says the Dallas Morning News.
But
some fear that the cure could be worse than the disease.
Bob
McTeer, distinguished fellow with the National Center for Policy Analysis,
disagrees: "Everybody's treating this as a very unusual, draconian thing
that's extremely risky, probably won't work and likely to have adverse
consequences. I think they're overdoing it."
If
successful, the action will create a manageable inflation rate that could push
the stock market and housing prices higher, entice businesses to go ahead with
projects and banks to lend to them.
If
QE2 is too successful at unleashing money, inflation could shift into
hyperdrive. Then the Fed will have to engage a completely different set of
steering mechanisms.
Source:
Cheryl Hall, "What Is Fed's QE2, and What Will It Do? Experts Explain in
Everyday English," Dallas Morning News, November 10, 2010.
For
text:
Retirement
Issues
November
11, 2010s
Raise
the Early Retirement Age
In
December, President Obama's fiscal responsibility commission will recommend ways
to fix long-term federal budget shortfalls, very likely including changes to
Social Security. At that time, Congress should consider a reform that
could increase retirement incomes while boosting the economy and federal tax
revenues: gradually raising Social Security's early retirement age of 62, says
Andrew G. Biggs, a resident scholar at the American Enterprise
Institute.
Increasing
the retirement age also would help the economy and the federal budget by
increasing the nation's annual gross domestic product by hundreds of billions of
dollars, says Biggs.
Some
people, of course, aren't physically able to work past 62 or can't find a job.
But in general, early retirees are neither less healthy nor less wealthy
than later retirees.
Source:
Andrew G. Biggs, "Raise the Early Retirement Age," Los Angeles Times, November
9, 2010.
For
text:
http://www.latimes.com/news/opinion/commentary/la-oe-biggs-social-security-20101109,0,5547603.story
1
http://www.voxeu.org/index.php?q=node/5540
1. Does culture affect long-run growth?
Yuriy Gorodnichenko Gérard Roland
21 September 2010
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Does culture affect long-run growth? This column argues that countries with a more individualist culture have enjoyed higher long-run growth than countries with a more collectivist culture. Individualist culture attaches social status rewards to personal achievements and thus provides not only monetary incentives for innovation but also social status rewards.
The idea that culture is a central ingredient of economic development goes back to at least Max Weber who, in his classical work “The Protestant Ethic and the Spirit of Capitalism” (Weber 1905), argued that the protestant ethic of Calvinism was a very powerful force behind the development of capitalism in its early phases. In our new research (Gorodnichenko and Roland, 2010), we provide both a theoretical model and empirical evidence showing that countries with a more individualist culture have more innovation, a higher level of total factor productivity and higher long-run growth than countries with a more collectivist culture.
Here are the main tenets of our theoretical formulation of the idea:
* Individualism emphasises personal freedom
and achievement and therefore individualist culture awards social status to
personal accomplishments such as important discoveries, innovations, or great
artistic achievements. Collectivism encourages conformity and discourages
individuals from standing out.
*
Individualism makes collective action more difficult than collectivism as
individuals pursue their own interest without internalising collective
interests
In short, individualism better encourages innovation while collectivism has the advantage in coordinating production processes and in various forms of collective action.
To formalise the argument, we put these ingredients in an endogenous growth model to study the dynamic versus static elements of the trade-off. In the model, collectivism increases the overall efficiency in the economy, but these are static. Individualism meanwhile, spurs innovation and thus faster growth. Intuitively, people in an individualist culture have not only a monetary reward from innovation but also a social status reward. They are therefore willing, all other things being equal, to allocate more effort to innovative activities. The impact of this depends upon the overall setting.
* In a Malthusian economy, however, where
all resources were devoted to survival consumption, the collectivist economy
exhibits a higher level of output per capita.
* In a modern growth setting, the individualist
culture has lower coordination capacities than a collectivist culture but its
higher innovation rate leads to higher long-run growth.
This contrast can explain how countries with individualistic
cultures were relatively backward before the Industrial Revolution, but overtook
collectivist cultures afterwards. The model also yields an interesting
relationship between culture and institutions. Under bad institutions, a
predatory government can expropriate the monetary returns from innovation.
However, social status and prestige cannot be expropriated. Therefore, even in
societies where institutions are relatively predatory, there will be more
innovation in an individualist culture because of the social status reward to
innovation.
How do we bring these predictions to the
data?
We use the individualism scores developed by Dutch sociologist Hofstede (2001).
* Initially, Hofstede surveyed IBM employees
in about 30 countries in order to understand differences in corporate culture
across the world. Further surveys included other professions and expanded the
coverage to 80 countries.
* To avoid
cultural biases in the way questions are framed, the translation of the survey
into local languages was done by a team of English and local language
speakers.
* The individualism score
measures the extent to which it is believed that individuals are supposed to
take care of themselves as opposed to being strongly integrated and loyal to a
cohesive group.
Individuals in countries with a high level of the index value personal freedom and status, while individuals in countries with a low level of the index value harmony and conformity.
A broad array of survey questions is used to establish cultural values in different countries. Factor analysis is used to summarise the data and construct the individualism score. The latter is the first component in a principal component analysis and loads positively on valuing individual freedom, opportunity, achievement, advancement, recognition and negatively on valuing harmony, cooperation, relations with superiors. Hofstede’s measure of individualism has been validated in a number of studies. For example, across various studies and measures of individualism the UK, the US and the Netherlands are consistently among the most individualistic countries, while Pakistan, Nigeria and Peru are among the most collectivist.
We regress the log of GDP per worker on Hosftede’s individualism score and find a strong and significant positive effect of individualism (see Figure 1). The same is true if we use as dependent variables different measures of total factor productivity or measures of innovation (see Figure 2). According to our estimates, a one standard deviation increase in individualism score (say from the score of Venezuela to Greece, or from that of Brazil to Luxemburg) leads to an increase in the level of income of between 60% and 87% – a large effect. Figures 1 and 2 illustrate these relationships.
Figure 1. Individualism vs GDP per worker
Figure 2. Individualism vs patents per million
Ruling out other causes
The strong positive correlation between individualism on one hand and measures of long-run growth and innovation on the other hand can be due to a causal effect of culture on innovation and growth. One can also argue, however, that there might be a reverse causality at work; as countries get richer, their culture becomes more individualistic. In order to rule out reverse causality, we perform instrumental variable regression of growth and innovation on culture.
The instrumental variable we use is a measure of genetic distance between countries. In particular we employ a measure of the Euclidian distance between the frequency of blood types in a given country and the frequency of blood types in the US, which is the most individualistic country in our sample. These genetic data originate from Cavalli-Sforza et al. (1994), providing measures of genetic markers for roughly 2,000 groups of population across the globe.
Why can blood distance be a good instrumental variable?
* First, genetic data indirectly measure
cultural transmission since parents pass on both culture and genes to their
children.
* Second, blood types are
a neutral genetic marker not related to fitness. It would thus be hard to argue
that blood types may have a direct effect on why some countries are richer than
others. Furthermore, genetic variation was by and large determined thousands of
years ago.
* Third, our genetic
distance measure correlates strongly with our individualism score and thus the
instrument is powerful.
The instrumental variable estimates of culture’s effect on long-run growth indicate a strong causal effect which is similar in magnitude to the effect implied by ordinary least squares regressions. These results are very robust to using other measures of genetic distance, blood distance to other countries, and other instrumental variables such as linguistic variables (e.g. languages that prohibit pronoun drops are more individualistic, see Kashima and Kashima 1998).
If we can exclude reverse causality, it might still be the case that blood distance affects long-run growth via other channels than individualism and collectivism. We rule out colonisation effects by showing that the effect of individualism on long-run growth still works when we exclude continents as the Americas and Oceania strongly affected by settler colonisation. The effect of individualism holds at the level of individual continents and even if we look only at European or OECD countries.
Other possible channels might be institutions, human capital,
other measures of culture, and geographical distance. Indeed one can argue that
these variables may be correlated with our measure of genetic distance. Even
when we control for all these variables, we find that culture continues to have
an important effect on income per capita and innovation. Other control variables
we also use are measures of ethno-linguistic fractionalisation, legal origins,
geographical controls such as distance from the equator or being landlocked. We
find that generalised trust, a measure used in other research on culture, has no
significant effect on long-run growth. In summary, we find that none of popular
alternatives can undermine the strong causal effect of culture on economic
outcomes.
Confirmation from cross-cultural
psychology
The final confirmation for a causal effect of individualism on long run growth comes from recent advances in cross-cultural psychology which provide some direct evidence of genes’ effects on culture. We bring in three separate research strands.
* First of all, it has been found that
collectivism is stronger in countries where a higher percentage of people have a
short (S) allele in the polymorphism 5-HTTLPR of the serotonin transporter gene
SLC6A4, putting them at greater risk for depression when exposed to life
stressors.
* Second, collectivism is
also stronger in countries with a higher frequency of the G allele in
polymorphism A118G in the mu-opoid receptor gene, leading to higher stress in
case of social rejection.
* Third,
collectivism is also stronger in countries with a historically higher pathogen
prevalence, i.e. in countries more prone to a number of important
diseases.
Studies establishing these links emphasise that collectivism provides strong psychological support networks to deal with depression and stronger protection from social rejection. Similarly, more collectivist values emphasising tradition and putting stronger limits on individual behaviour, and showing less openness towards foreigners provide protection against disease spread. Using these three variables in turn as instruments, we find robust and significant effects of individualism on log output per worker with magnitudes similar to our baseline estimates.
We also find that institutions, measured by average protection
against expropriation risk (the variable used in the famous work by Acemoglu et
al. 2001 on the effect of institutions on long-run growth) can be explained by
our individualism score but institutions also appear to affect culture. Culture
and institutions, together with human capital, play a key role in explaining
long-run growth.
What are the policy
implications?
Understanding the effects of culture on economic development
and economic performance is a fascinating task that the economics profession is
only beginning to understand. Yet we advise caution when drawing policy
conclusions from such analyses. Countries inherit their culture over a long
historical period. It would be vain, and probably destructive, to try to impose
cultural change on countries. On the contrary, countries need to embrace their
cultural heritage and find institutions appropriate to this heritage. Cultural
exchange is an integral part of the globalisation process and will no doubt
benefit all as countries learn from the strengths and weaknesses of other
countries’ culture in a spirit of tolerance, respect, and peace.
References
Acemoglu, D, S. Johnson, and J Robinson (2001), “The Colonial Origins of Comparative Development: An Empirical Investigation”, American Economic Review, 91:1369-1401.
Gorodnichenko, Y and G Roland (2010), “Culture, Institutions and the Wealth of Nations”, CEPR Discussion Paper 8013
Kashima, E and Y Kashima (1998), “Culture and language: The case of cultural dimensions and personal pronoun use”, Journal of Cross-Cultural Psychology, 29: 461-486.
Weber, Max (1905) The Protestant Ethic and the Spirit of Capitalism.
* September 20, 2010, 6:45 PM ET
2. Watching Wal-Mart at Midnight
This comment from Wal-Mart Stores Inc. has been making the rounds on blogs and newswires the past few days. It says it all about the state of the tepid U.S. recovery. The Journal’s Al Lewis wrote about it yesterday.
Bill Simon, CEO of Wal-Mart’s U.S. business, at a Goldman Sachs conference last week, on behavior at a Walmart store around midnight at the end of a month:
“The paycheck cycle we’ve talked about before remains extreme. It is our responsibility to figure out how to sell in that environment, adjusting pack sizes, large pack at sizes the beginning of the month, small pack sizes at the end of the month. And to figure out how to deal with what is an ever-increasing amount of transactions being paid for with government assistance.
“And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs,and continue to shop and mill about the store until midnight, when electronic — government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.
“And if you really think about it, the only reason somebody
gets out in the middle of the night and buys baby formula is that they need it,
and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5
a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are
there for a reason.”
Is the Recession Killing Economic Freedom?
September 21st, 2010 at 12:15 pm Tim Mak | 12 Comments |
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http://www.frumforum.com/is-the-recession-killing-economic-freedom
The 2010 Economic Freedom of the World report, released annually by the Fraser Institute, shows that world economic freedom declined between 2007 and 2008, the most recent year for which data is available. The United States also lagged, showing a decline in economic freedom driven by an increase in the size of government.
In 2008, economic freedom dropped to a score of 6.67 – this being the first year where global average economic freedom has dropped since the beginning of the study in 1980. Indeed, economic freedom in the world had increased steadily between 1980 (5.53) and 2007 (6.74).
“It’s pretty clearly the great recession, and governments intervening more deeply in the economy than they did before,” said McMahon, explaining the global decrease in economic freedom. “Our data is the most recent available, which is 2008. We anticipate that as we get more recent data, we’ll see a further decline [in economic freedom].”
economic freedom ranking Is the Recession Killing Economic Freedom?
On the other hand, McMahon argued that the global economic response has been rather sensible, considering all the options:
Market oriented countries have resisted the siren call of protectionism, and with some exception, resisted really back-breaking stimulus. In fact, what you see in the United Kingdom is very significant cutbacks even while the recession is still going on. From a policy point of view, we have well resisted huge setbacks in economic freedom.
In the United States, world freedom declined from a score of 8.08 in 2007, to 7.93 in 2008, ranking the country 6th in the world. “[The U.S.] was hitting rocky waters before the last quarter of 2008, and you’ve got to remember that when you look at the figures you see only an extremely small decline,” said McMahon. “We will see a larger dip when we get the 2009 data… it’s possible the U.S. could drop out of the top ten.”
The United States’ drop in economic freedom from 2007 to 2008 had largely come from an increase in governmental consumption, as well as transfers and subsidies.
Although some of the worst of the economic crisis was to come in 2009, McMahon points out that, even in 2008, governments were spending more because of ‘automatic stabilizers’ – expenses that increase during times of economic distress, even as government policy remains the same. Automatic stabilizers include government expenditures like welfare and unemployment insurance. TARP funding, which began in late 2008, can also be considered a factor.
The Heritage Foundation received a significant amount of press when it earlier released its own 2010 Index of Economic Freedom, which dropped the United States from ‘Free’ to ‘Mostly Free’. McMahon said that the data is simply not there to support that assertion, arguing that much of the information required to make calculations on economic freedom in 2010 isn’t yet available.
“There’s no data to support it either way,” McMahon said. “They
use some hard data… but I don’t know where they get that [the United States is
only ‘mostly free’]… at the end of the day, their ranking is subjective, not
based on hard calculations on hard data.”
Home sales have been bustling in Bowling Green, Ky.
Updated 8/16/2010 9:15 PM | Comment | Recommend
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this
This is the Bowling Green market's most expensive
home, priced at $2.3 million. (More details below.)
Enlarge image Enlarge Realtor.com
This is
the Bowling Green market's most expensive home, priced at $2.3 million. (More
details below.)
By Christine Dugas, USA TODAY
3. A heat wave has hit Bowling Green, Ky., this summer but
it has not held back home buyers.
Summer is usually the slowest time of the year for the local housing market. But even though this has been one of the hottest summers in years, it also has been the busiest part of the year so far for home sales, says Ruth Ann Bowen, president of the Realtor Association of Southern Kentucky.
CLOSE TO HOME: Real estate markets across the USA
HOUSING MARKET: Track the rise, fall and ...
rebound?
Bowling Green is not like other areas of the country that saw a surge in sales while the home buyer tax credit was in effect and a drop after it ended in April. The tax credit "did not make a big difference" either way, Bowen says.
•Sales status. In June, home sales in the Bowling Green area were 10.9% higher than in June 2009. With businesses expanding in the Bowling Green area, that's bolstered buyers' confidence in the economy and encouraged them to buy now when interest rates are low.
•Price points. Even though sales are rising, Bowling Green has a larger-than-normal inventory of homes for sale. As homes stay on the market longer, some sellers are cutting their prices.
"We are seeing more of that in the last month or so," Bowen says.
The median sales price was $123,500 in June, 4% lower than a year earlier.
•Local economy. Manufacturing is a major part of the economy in Bowling Green. It is the headquarters of Fruit of the Loom, which recently added about 600 jobs. And it has a General Motors Corvette assembly plant. GM canceled its traditional summer shutdown this year to meet demand.
"Overall, Bowling Green is more resilient than the state of Kentucky," says Uric Dufrene, a regional economist at Indiana University Southeast.
•Hot 'hoods. Bowling Green's downtown, which has an historic area, has gone through many changes in recent years. Circus Square Park, opened in 2008, hosts picnics and concerts. And there's a new downtown ballpark for the local minor league baseball team, the Bowling Green Hot Rods, a farm team for the Tampa Bay Rays.
Historic homes downtown are priced at about $175,000 to $200,000, Bowen says.
Most expensive home
Jo and Connie Daniel are selling a Victorian-style home built in 1868 that has a 2-acre stocked fishing lake on about 40 acres (see photo above).
•Price: $2.3 million.
•Bedrooms: 5.
•Bathrooms: 6 full, 3 half.
•Size: 4,319 square feet.
•Features: Five gas fireplaces, three original walnut mantles, family room, laundry room, two walkout balconies, covered porch, guest house, barn.
Median price home
Realtor.com
This ranch-style home on
1.2 acres is on the market.
This ranch-style home on 1.2 acres is on the market.
•Price: $124,900.
•Bedrooms: 3.
•Bathrooms: 2 full.
•Size: 1,425 square feet.
•Features: Great room, laundry room, deck, storage shed,
detached garage.
WSJ * SEPTEMBER 23, 2010
4. How Seniors Will Pay for ObamaCare
In many areas, Medicare Advantage enrollees will lose about one-third of
their health insurance benefits. The cuts will finance new subsidies for younger
people.
By JOHN C. GOODMAN
Today marks the six-month anniversary of the enactment of the Patient Protection and Affordable Care Act, widely known as ObamaCare. It is a day when the first significant round of benefits kicks in, and the Obama administration is taking every opportunity to tout them to the American public.
Insurers, we are being told, will no longer be able to impose annual limits or lifetime caps on benefits, and they will face a higher standard before than can drop anyone's coverage. Children will be guaranteed access to insurance, regardless of health condition. And there is more to come in the future.
Yet the administration is strangely silent about who will bear
the cost of these benefits. Search the government's own health-reform website
and you'll get the idea that the whole thing is one big free lunch.
The reality is that the cost of ObamaCare will be quite high for some people. By 2017, thousands of people in Dallas, Houston and San Antonio will be paying more than $5,000 a year in lost health-care benefits to make ObamaCare possible, according to a study published this month by Robert Book at the Heritage Foundation and James Capretta at the Ethics and Public Policy Center. For some New York City dwellers, the figure will exceed $6,000 a year. Unfortunate residents of Ascension, La., will pay more than $9,000 in lost benefits.
Who are these people? Are they the rich and the comfortable—the folks presidential candidate Barack Obama told us could afford to pay for health reform? Are they people who have excessively profited during a recession that's caused hardships for so many? Are they the ones who gained the most from the Bush tax cuts?
None of the above. According to the Book/Capretta study, the people getting hit with these very expensive tabs live in predominately low-income households. They are disproportionately minorities. They have trouble paying their own medical bills.
These are the enrollees in Medicare Advantage plans, health plans operated by private insurers (Cigna, Aetna, United Health, etc.) that provide extra benefits to the elderly and the disabled on top of standard Medicare coverage. The price they will pay for health reform will be a double whammy: less spending on Medicare coupled with reduced subsidies for their Medicare Advantage plans. In many areas, Medicare Advantage enrollees will lose about one-third or more of their health-insurance benefits.
Despite its popularity, conventional Medicare is actually a lousy health-insurance plan. It doesn't cover most drugs and it leaves beneficiaries exposed to thousands of dollars in potential out-of-pocket expenses. To protect themselves, most seniors purchase additional coverage known as "Medigap" insurance (either from an employer or purchased directly) and buy drug coverage (Medicare Part D) as well.
Many low-income seniors, however, have trouble paying three premiums to three plans, and all too often they find a decent Medigap plan unaffordable. For these retirees (about one in every four Medicare beneficiaries) Medicare Advantage plans have been a godsend. They have been able to enroll in comprehensive health plans that resemble the coverage many nonseniors have—often with no extra premium.
The hostility of the White House and many congressional Democrats toward these health plans is hard to explain. Ostensibly, they do everything President Obama says he wants to accomplish with health reform. They provide subsidized coverage to low- and moderate-income people who could otherwise not afford it. They have no pre-existing condition limitations, and some plans actually specialize in attracting and caring for patients with multiple illnesses. They provide an annual choice of plans.
On measures of quality and efficiency, they also score well. According to a study published in June by America's Health Insurance Plans (a trade group that represents Medicare Advantage insurers):
• Medicare Advantage enrollees had 33% more doctor visits (presumably representing more primary care), yet experienced 18% fewer hospital days and 10% fewer hospital admissions than conventional Medicare patients.
• They had 27% fewer emergency-room visits, 13% fewer avoidable admissions, and 42% fewer readmissions.
Other studies report similarly impressive results.
This is not to say that the Medicare Advantage programs could not be improved. Right now, almost all the enrollees are in HMOs. Very few have a health savings account plan. And there is no practical way for the chronically ill to manage their own budgets. By contrast, the Medicaid disabled—as part of pilot programs that have been in force for a decade—can hire and fire the people who provide them with services, and use any money they save to purchase other medical care.
Some complain that the government has been paying Medicare Advantage plans about 13% more than what would have been spent under conventional Medicare. This is partly explained by the influence of members of Congress who represent rural areas that would not otherwise be able to support these plans. In any event, these "overpayments" allow members to get about $825 in extra benefits each year, including lower out-of-pocket payments and better coverage for drugs, preventive care, and chronic disease care.
According to a report published in April by the administration's own Medicare Office of the Actuary, about 7.4 million people who would have been enrolled in Medicare Advantage plans in 2017 will lose their coverage completely. Those who are able to retain their coverage will lose significant benefits. These cuts are financing lavish subsidies for health insurance for young people at about the same income level as the seniors who are being penalized.
To those economic libertarians who view this as an entitlement wash, don't be misled. Many of the seniors losing their health plans will enroll in taxpayer-funded Medicaid, in addition to Medicare. The rest will be on the steps of Capitol Hill in the near future asking to have their benefits reinstated.
Mr. Goodman is president, CEO and a fellow at the National
Center for Policy Analysis.
* WSJ SEPTEMBER 23, 2010
5. Don't Be Afraid of Frankenfish
Genetically engineered salmon will meet growing demand for protein-rich
food without depleting wild fish stocks.
By JAMES C. GREENWOOD
Right now, the government is deciding whether it's safe for us to eat genetically engineered salmon. The fish, called AquAdvantage, is being developed by a Massachusetts biotech firm and is in every measurable way identical to Atlantic salmon—except it grows to normal size twice as fast. If officials at the Food and Drug Administration (FDA) give it the green light, it would be the first time that a genetically engineered animal is approved for food use.
Genetic engineering usually conjures up images of Frankenstein. But modern day biotech researchers are anything but mad scientists. Their ground-breaking work has the potential to address world hunger and protect the environment. The AquAdvantage salmon in particular could ease pressure on wild fish stocks, reduce the environmental impact of traditional fish farming, and help feed the growing world population.
Overfishing and pollution are quickly wiping out the native global fish supply. Already 80% of fish stocks world-wide are fully exploited or overexploited, according to a May 2010 U.N. report. If current trends continue, virtually all fisheries risk running out of commercially viable catches by 2050.
Fish farming has helped address this problem: About half of seafood consumed world-wide is now farm-raised. But it's expensive. Shipping farm-raised salmon to the United States from Chile, where most of our fish originates, costs as much as 75 cents per pound.
Faster-growing genetically engineered salmon could help restore America's domestic fish farming industry, trimming costs and reducing energy consumption. If the FDA approves the fish it would also spur investment in other food products. This could help meet the world's growing demand for protein-rich food.
Through biotechnology, scientists at a firm in South Dakota have developed cattle that are resistant to mad cow disease. Canadian researchers have asked the FDA to approve their "Enviropig," a pig genetically engineered to produce manure that is less polluting. Biotech researchers are also exploring ways to fortify food plants with enhanced nutritional content, which could help alleviate malnutrition and certain diseases in the developing world. And researchers are engineering animals that can better utilize nutrients in feed.
Critics contend that genetically engineered fish haven't been sufficiently researched and could harm our health. But the truth is that these faster-growing salmon are the result of more than two decades of research. Plus, the FDA's system to ensure the safety of such animals has been in development for over a decade.
There's nothing peculiar about this fish's genetic makeup. To create the faster-growing salmon, scientists took a gene from the Chinook salmon, which matures rapidly, along with a gene from a salmon relative called ocean pout, which produces growth hormones all year. Aside from these two tweaks, the AquAdvantage salmon is chemically and biologically identical to the salmon we purchase at the local grocer.
Critics also fear that these salmon could crossbreed with wild fish and pollute their gene pool. This is highly unlikely given the protections put in place and the realities of the science. By treating the genetically engineered eggs, all AquAdvantage salmon will develop as sterile females. And these fish will be grown in contained, land-based tanks, away from any interaction with wild fish and the ocean.
When genetically engineered crops were introduced 14 years ago, critics worried that "frankenfood" would hurt human health and the environment. Since then, farmers have grown corn, soybeans, cotton and other products that are resistant to disease and pests, and tolerant of herbicides. These innovations have reduced production costs, increased agricultural productivity and reduced agriculture's footprint on the environment. To date, not a single adverse health effect has been caused by a food derived from genetically engineered crops.
Genetically engineered animals are the next intelligent step in food innovation. As Josh Ozersky, a James Beard Award-winning food writer, has observed, "There are no Black Angus cows grazing in the wild; they're the product of breeding for size, marbling and fast growth, not unlike the genetically-modified salmon."
Public dialogue on any new technology is important. But the discourse must be based on sound science. And regarding faster-growing salmon—and other genetically engineered foods of the future—science shows clearly that they can provide us with the safe and sustainable food source we need.
Mr. Greenwood is president and CEO of the Biotechnology
Industry Organization.
# WSJ SEPTEMBER 22, 2010
6. A
Scandinavian Model Sweden votes for tax cuts, privatization and
deregulation.
We've been waiting to write this for about, oh, 70 years, but here goes: It's time the world started imitating the Scandinavian—or at least the Swedish—economic model.
On Sunday, Swedish Prime Minister Fredrik Reinfeldt of the Moderate Party secured a second term in office, while the formerly dominant Social Democrats suffered their worst result in almost a century. Mr. Reinfeldt devoted his first term to cutting taxes (or, in the case of the wealth tax on personal assets, abolishing it altogether); privatizing state-owned companies, such as Absolut vodka maker Vin & Sprit; deregulating previously closed sectors, such as pharmacies, which used to be a government monopoly, and trimming welfare benefits. Today, there are 50,000 fewer Swedes on the country's much-abused sick leave and early retirement schemes than there were when Mr. Reinfeldt came to office.
Still, this is Sweden, so Mr. Reinfeldt has had to take care not to cast his program as a smashing of the welfare state itself. Instead, he has branded his free-market reforms as the only way to secure the finances for an inevitably leaner welfare state. Voters liked the results, including an expected growth rate this year of more than 4% this year and an expected budget deficit of just 2.1% of GDP, the smallest in the European Union.
Even though support for Mr. Reinfeldt's four-party coalition rose one percentage point to 49.3%, he's now three seats short of a majority because the anti-immigration Sweden Democrats managed to clear the 4% threshold for parliamentary representation. But headlines suggesting political disarray are misplaced. The final vote count expected for later today might still give Mr. Reinfeldt a majority. If not, he will continue to govern, either with the Greens's help or at the helm of a minority government, something the country has ample experience with.
Mr. Reinfeldt has won particular praise for how his government
handled the financial crisis. When the Obama Administration bailed out the U.S.
car industry, Mr. Reinfeldt rejected calls to do the same for Volvo and Saab,
which their American owners, Ford and GM, respectively, were able to sell this
year. "It's not the role of the state to build cars that nobody wants to buy,"
he said at the time. He stood by his principles and, as opinion polls showed,
captured the popular mood.
Printed in The Wall Street
Journal, page 13
# WSJ SEPTEMBER 20, 2010
8. Fishy
Diplomacy With Hanoi An antidumping case against Vietnamese catfish has a big
catch.
Washington has been busy building
bridges with Hanoi as part of a strategy to counter Beijing's growing
assertiveness in the South China Sea, and that's all to the good. What isn't so
productive is the Obama Administration's simultaneous spearing of one of
Vietnam's most important export industries.
At issue is a seven-year-old antidumping case alleging that Vietnamese producers sell frozen pangasius fillets in the U.S. at a price less than their cost of production. The Commerce Department last week filed notice that it wants to change how it calculates the difference between Vietnam's production cost and the selling price. The result of this esoteric adjustment could be dramatically higher duties.
For that, Vietnamese exporters—and the U.S. consumers who would have to pay higher fish prices—can thank America's domestic catfish lobby. Since Commerce designates Vietnam a nonmarket economy, it uses the price level of another country to estimate how much it costs to make a fish fillet in Vietnam. Until now, Bangladesh was used as that proxy. At the Catfish Farmers of America's request, trade bureaucrats now propose switching to the Philippines. Plugging those numbers into the Commerce Department's calculators yields dumping margins of around 130%, up from zero last year.
Prime Minister Nguyen Tan Dung expressed his dissatisfaction with Commerce's proposal Monday in a meeting with Washington state Governor Christine Gregoire, according to state media, and little wonder: The U.S. is Vietnam's second-largest market for the fish behind the European Union. Total exports are set to hit $1.5 billion year—about 2% of total projected exports—of which nearly 10% goes to America.
Zapping these exports is just what the Catfish Farmers of America want. Vietnamese pangasius has a taste and texture similar to an American catfish, although it's a different species. It's also cheaper. So domestic producers and their congressional friends, mostly in the Mississippi River delta region, have been trying to keep the imports out for years.
If they succeed, the pangasius will become the latest example of how a relatively small domestic lobby can exploit a technical provision of U.S. trade law to goad Commerce into making a decision that will hurt a significant industry of a country with which America has bigger fish to fry. Consider the antidumping and countervailing duties Commerce has slapped on billions of dollars of imports from China, including ribbons and steel pipes.
Some political leadership here might help. Nearly two years after taking office. Mr. Obama still hasn't filled the two politically appointed jobs at the head of the office within Commerce that makes these calls. Other measures, such as his recently announced 14-point plan to stiffen antidumping and countervailing-duty enforcement against countries like China and Vietnam, signal to bureaucrats that they can't go wrong by being too strict.
Part of this problem is structural: Trade laws that give domestic interest groups plenty of opportunities to drive an Administration's trade policies. Indeed, had Commerce not sided with the catfish farmers in this instance the law would have allowed them to sue to see if they could convince a judge instead. It would be far better to give Presidents greater discretion to pursue—or not—trade cases like this one as part of a broader economic and foreign policy.
Until Congress gets around to fixing the trade laws, however,
Presidential trade rhetoric matters. Mr. Obama has hurt his cause with two
years' worth of "enforcement" talk to the exclusion of a real trade policy. As
the Vietnam example shows, both trading partners and American consumers will pay
the price.
WSJ * SEPTEMBER 22, 2010
9. Wal-Mart Tries to Unmask Opponents
* Article
By ANN ZIMMERMAN And TIMOTHY W. MARTIN
Wal-Mart Stores Inc. is fighting back against a longtime corporate-sabotage campaign undertaken by grocery competitors to slow its growth.
The Bentonville, Ark.-based retailer recently asked judges to require its opponents to disclose who is footing the legal bills in four out of the dozens of California lawsuits against Wal-Mart that have helped delay the company's expansion.
Lawyers for Wal-Mart want to know if the protracted environmental suits have been funded not by grass-roots activists, as the company long thought, but rather by competitors. "We believe the court and the community have a right to know who is funding the suits," said Wal-Mart spokesman David Tovar.
Wal-Mart filed the discovery motions after a June article in The Wall Street Journal said grocery competitors Safeway Inc., Supervalu Inc. and Ahold NV secretly funded hundreds of lengthy battles across the country opposing Wal-Mart's efforts to open supercenters, which sell groceries and general merchandise. In some instances, the grocery chains' efforts were aided by grocery-worker unions, which fear that Wal-Mart will suppress industry wages and benefits.
The grocers hired Saint Consulting Group, a land-use firm based
in Massachusetts, to carry out antidevelopment campaigns against Wal-Mart using
political tactics and suits to delay or derail the opening of Wal-Mart stores,
the Journal said.
In two of the four California cases involving Wal-Mart, the Journal reviewed internal Saint documents that showed the consulting firm was hired by Safeway to thwart Wal-Mart's expansion.
In all, Safeway hired Saint to organize more than 30 campaigns against Wal-Mart projects in the state in the past eight years.
One of them resulted in a court decision that made it more difficult to build big-box stores in California, according to Saint internal documents that list the company's projects, clients and billing numbers.
Safeway, based in Pleasanton, Calif., didn't return calls
seeking comment.
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Pat Fox, president of Saint, acknowledged his firm was hired to organize opposition to hundreds of Wal-Mart projects, but he declined to name his clients.
"The work we do helps to level the playing field as regular citizens try to fight back against the world's largest retailer and the impact of big-box development in their communities," Mr. Fox said.
Saint maintains that the Journal's account came from disgruntled company employees who want to harm the firm.
Wal-Mart lawyers estimate that about a third of the company's stores in California were challenged by local groups prior to 2002, but once it began trying to open supercenters selling groceries, almost every store faced opposition.
Wal-Mart recently combed through dozens of legal cases brought against it. It zeroed in on suits involving the California towns of Merced, Realto, Elk Grove and Galt, all of which claimed that Wal-Mart-based developments violated the California Environmental Quality Act, which requires cities to subject building projects to stringent environmental-impact studies before approving them.
Wal-Mart says it chose these cases because they were at a procedural stage that permitted the filing of discovery motions.
The Journal's review of Saint documents indicates that Safeway hired Saint to organize opposition in Merced and Elk Grove, though the documents don't specify whether Saint paid the plaintiffs' legal fees. The judge handling the Merced case has granted Wal-Mart's request for discovery.
Wal-Mart has been trying to open a distribution center in Merced for four years. The city has an unemployment rate of about 20%, and the company projects the center would provide about 1,200 jobs with average pay of $17.50 an hour for fulltime workers.
But a group calling itself the Merced Alliance for Responsible Growth is vehemently opposed. In advance of a summer 2009 city council vote on the project, it published a 12-page newspaper with such headlines as "Wal-Mart Jobs Threaten Lives."
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walmart
Getty Images
walmart
walmart
One article, citing a trucking magazine story about Federal Bureau of Investigation prostitution stings at public truck stops, suggested that the distribution center could be a magnet for prostitution, drugs and crime, possibly involving the local high school.
The anti-Wal-Mart newspaper was paid for by Saint using Safeway and union funds, according to two former Saint employees who were interviewed by the Journal.
The Merced Alliance didn't return calls seeking comment.
Saint's Mr. Fox declined to comment on specific allegations or events.
In 2008, the United Food and Commercial Workers union in California spent $58,000 on the Warn Merced Project, described as a Wal-Mart project in an annual report filed by the union with the U.S. Labor Department.
"Hiring Saint and other organizations...is within our First Amendment rights," said Jill Cashen, a union spokeswoman.
Merced's city council approved the distribution center in September 2009. The Merced Alliance for Responsible Growth filed suit 30 days later, claiming that Wal-Mart's environmental review was flawed. A judge heard oral arguments on the case earlier this month, but hasn't yet ruled.
The Merced case follows a battle against Wal-Mart in Bakersfield, Calif., earlier in the decade.
A group called Bakersfield Citizens for Local Control consisted of a Saint employee who used an alias and posed as a resident volunteer, several union workers, and a Bakersfield resident who was paid by the plaintiffs' lawyers who brought the case, according to former Saint employees.
To dissuade the Bakersfield city council from approving one of two shopping centers that were to include Wal-Marts, the group tried to prove that the site was a habitat for the endangered San Joaquin kit fox.
Then, when the city council nonetheless approved the project, Bakersfield Citizens sued, arguing that the two Wal-Marts might force other stores to close.
In 2005, a California appellate court agreed that the potential for blight should be taken into account, overturning the city's approval of the two shopping-center sites.
But a more extensive environmental impact report concluded that the area could accommodate the Wal-Mart stores. One opened in fall 2009 and the other in March 2010.
Write to Ann Zimmerman at ann.zimmerman@wsj.com and Timothy W.
Martin at timothy.martin@wsj.com
A slightly off-center perspective on monetary
problems.
10. Income: A meaningless, misleading, and
pernicious concept
http://www.themoneyillusion.com/?p=7091
And now, finally, my post on the optimal tax regime. It will be nice to finally get this off my chest, as you can’t imagine how enraged I get reading progressives talk about the “principle” that all forms of income should be taxed equally (which is like a “principle” that all fruit should sell at the same unit price.) Or when they discuss Gini coefficients of inequality based on meaningless income data (not to mention ignoring the fact that the economic incidence of a tax is totally different from its legal incidence.)
Bear with me as I start from first principles; this is an important post. I will try to convince my progressive readers that they should favor complete abolition of all personal and corporate income taxes, as well as all inheritance taxes.
Suppose 2 brothers both make $100,000 a year. One spends his income on watermelon, and the other spends it on blueberries. Would it make sense to decry the inequality of this society, merely because the blueberry eater got to consume a larger number of “fruits” (because their unit price was lower?) Clearly not, and for two very good reasons.
1. They are each free to buy either type of fruit.
2. The higher unit price of watermelon indicates they are more highly valued (per individual fruit.)
Now assume it’s possible to invest income at a real rate of interest that allow one to quintuple one’s wealth between age 25 and 65. (Say a 40 year zero coupon real bond yielding around 4%.) In this example let both brothers consume nothing but blueberries. One brother chooses not to save at all, the other saves 40% of his income. One eats $100,000 worth of blueberries today; the other eats $60,000 today and saves $40,000. After 40 years the thrifty brother gets to eat $200,000 worth of blueberries. Both also get some social security at 65. Here’s my question: In this society is there any economic inequality?
I don’t see how anyone could say there is. Both have exactly the same wage income at age 25. Yes, they do different things with it, but that’s their choice. At age 65 one has zero income outside social security, and the other has $160,000 in capital gains, which is generally considered “income.” But nonetheless there is complete equality for two reasons:
1. Both are free to choose whether to save or not, so we have no evidence that one brother had more utility than the other.
2. In present value terms their total lifetime consumption of blueberries is identical.
The mistake is assuming that blueberries in 40 year are the same thing as blueberries today. Future blueberries only cost 1/5th as much, as they are much less valued than current blueberries. They are different goods just as much as watermelon and blueberries are different goods. That $160,000 gain is not “income” in the way most people think of the term, i.e. as some sort of goodie available for spending. Rather it reflects deferred consumption. The $200,000 received at 65 is exactly equal in present value to the $40,000 saved today. Indeed it is the very same wealth, simply measured at a different point in time. It is nonsensical to say the thrifty brother has income of $100,000 today plus another $160,000 at age 65, you’d be counting the same income twice.
Studies of economic inequality should completely ignore all capital income, and measure only labor income, or consumption. Indeed the present value of labor income should equal the present value of consumption. And as we will see, a labor tax (like the 2.9% Medicare tax) is identical to a consumption tax (like a VAT.)
Consider how a 50% payroll tax would affect the previous example. Every figure would be cut in half. The spendthrift would consume $50,000 today, and the thrifty guy would consume $30,000 today and $100,000 at age 65. An equal-sized VAT would have an identical effect, cutting consumption for each person in half, at each point in time.
But now consider a 50% income tax. The spendthrift would be affected in exactly the same way as with the other two taxes. But the thrifty guy would pay a much higher tax. He’d save $20,000, and that would produce $100,000 in 40 years. The government would then take $40,000 of the so-called capital “income” in taxes, leaving him with only $60,000 for consumption. If he wants to prepay his future tax liability, he must save $8,000 today in order to pay a $40,000 tax bill at 65. That means $8,000 of his current saving goes to pay future taxes, and only $12,000 goes toward future consumption. His total tax is then (in current dollars) $50,000 plus $8,000, or $58,000. His tax rate is 58%, against 50% for his spendthrift brother. And all because they have different preferences, not because one brother is in any meaningful sense “better off” than the other brother. It’s no different from putting a higher income tax rate on a brother who eats blueberries, as compared to one who eats watermelon, merely because he has more blueberries in numerical terms.
At this point you might be thinking “Yes, but wouldn’t eliminating all income and consumption taxes be a giveaway to the rich?” No, it would be restoring fairness by taxing the thrifty and spendthrift at equal rates. If we think the rich should pay more tax, then let’s put a progressive consumption tax into effect. This is easy to do, just turn the regressive FICA into a progressive payroll tax, with much higher rates for those with high wages and salaries. This sort of tax can achieve any desired degree of progressivity. Unlike most libertarians, I think a progressive payroll tax is desirable for simple utilitarian reasons. I don’t buy the “I worked hard for it, it’s my money” argument, for two reasons:
1. Most of your income comes from luck. If you’d been born in a poor peasant household in Asia or Africa, your income would be low no matter how hard you worked. You hit the jackpot just being born in a developed country.
2. Our wealth comes from living in a highly functional society, thus part of your wealth is due to the fact that your neighbors don’t go around raping and pillaging as in the old days, but rather peaceably go to polling stations to vote. Am I saying; “It Takes a Village?” Sort of, more precisely “it takes a civic-minded culture.”
At this point my progressive readers might be willing to go for the progressive consumption tax for those who worked hard and saved their money. But surely not for that deadbeat trust fund kid, who is living off daddy’s wealth? Surely there should be an inheritance tax so that those with inherited wealth don’t go through their entire life without paying any tax?
If this is what you are thinking, you are still confused. I will show that, if anything, we should be subsidizing those trust fund deadbeats.
First recall that if we have an optimal payroll tax then the money they inherit is all after-tax money. And if we had a VAT, then the heirs would have to pay taxes on their consumption. Now let’s go back and look at the case of the two brothers. Suppose both have arrived at age 65 with $10,000,000 in wealth. Also assume that we have a steeply progressive payroll tax, so they are considered morally justified in spending the wealth they have accumulated after paying those taxes. The only issue being considered is whether we should have an inheritance tax on top of the payroll tax. So let’s assume a 50% inheritance tax is introduced. Compare the follow two scenarios:
1. Brother A spends the entire $10,000,000 on fancy sports cars, yachts, champagne, glamorous parties, etc. Brother B spends $5,000,000 and gives $5,000,000 to his only child. Who should pay more tax? We’ve already agreed that the guy who consumes all his wealth has already paid his dues through the progressive payroll tax. If not, then make it more progressive. The other guy would have to pay $2,5000,000 in inheritance taxes, leaving his kid with $2,500,000. It seems to me that on both efficiency and moral grounds the more generous dad should not pay more, but rather should actually pay less taxes than the other guy:
1. He is less selfish, so virtue ethics favors the one who makes bequests.
2. Because of diminishing marginal utility, it’s better to share your wealth with one other person. He wins on utilitarian grounds.
3. The inheritance tax discourages saving, and thus reduces the capital stock. This lowers the real wage of workers who work with physical capital.
Brace yourself. The optimal policy is a negative inheritance tax. At age 65 both rich guys should be forced to put some amount (let’s say $100,000) into a government fund. When they die, the $200,000 should go to the kid who also inherited the rich guy’s money. I know what you are thinking—why not give the $200,000 to the poor? Because we already assumed the existence of a progressive payroll (or consumption) tax, which is redistributing the optimal amount of money to the poor. This extra tax is just trying to make things a bit more equal among two old rich guys, and one worthless trust fund baby.
[Yes, I'm sort of joking here---just trying to rigorously apply the logic of egalitarianism. (For my trust-fund kid readers--I have nothing against you, I am just parroting society's prejudices.) But I am serious about favoring a progressive consumption tax. Indeed I favor it so much that I would prefer it even if it meant I paid more in taxes than I do right now. You will never find me complaining that I can't get by on a family income of over $250,000.]
I think people have a huge mental block about these ideas, because they grossly misunderstand the actual incidence of taxes. For instance, most people think consumption is much more equal than income, and hence that consumption taxes are regressive. Actually, consumption taxes are proportional to consumption, which is the only meaningful benchmark. Income is meaningless gobbledygook. And most people think wealth is much less equal than income. But how can both of these perceptions be correct, when wealth is nothing more than the present value of all future consumption for you and your heirs! Actually, inequality of wealth and consumption are exactly equal, when properly measured in present value terms. OK, to make this true I have to treat gifts from the rich is part of their consumption. But even in a society where the wealthy made no gifts, most people would be shocked to find out that wealth and consumption inequality are equal. And the reason is that our minds are being twisted and distorted by a meaningless concept—income. People find it hard to shake the notion that income is actually measuring something meaningful. So we use it as a sort of benchmark for everything from tax progressivity to Gini coefficients.
The beauty of the progressive consumption tax is:
1. No tax forms for 90% of Americans, it’s automatically collected like FICA.
2. It’s fair to high savers, treating them equally to spendthrifts.
3. It encourages more saving and less consumption, which America desperately needs. This raises economic growth.
The ideal tax system would be:
1. Externality taxes such as a carbon tax.
2. A land tax
3. A progressive consumption tax, preferably on wages and salaries (as the VAT is harder to make progressive.)
4. If we opt for the high-tax Nordic model, you might also need a VAT.
But why go for the high-tax model, when the lowest-taxed developed country entity in the world has the best infrastructure? And the second lowest-taxed rich country also has enviable infrastructure plus universal health care combined with a Japanese-level life expectancy?
It would only take four things to make me become a card-carrying Democrat:
1. If they dumped Keynesianism and favored using monetary policy to target NGDP
2. If they favored replacing our current tax system with a progressive consumption tax
3. If they favored replacing the public school monopoly with universal vouchers.
4. HSAs through forced saving plus subsidies for the lower incomes
Progressive blogger Matt Yglesias already agrees with me on the first two, and Sweden adopted the third. Singapore combines the 4th with universal health care. So how can any progressive call me a reactionary Chicago-school economist?
I suppose what’s holding back vouchers in America is liberal sensitivity regarding our troubled racial history, and also a fear of religious schools. But that’s for another post.
So why the inflammatory title of the post? I hope I showed that “income” is meaningless if it includes capital income. It is misleading because it leads people to talk about the share of “income” earned by the top 1% as if it is all actual labor income, whereas it is often mostly capital income, aka deferred consumption and not income at all. And it’s harmful because it leads to the establishment of an extremely annoying, inefficient, and sometimes even repressive system called the income tax. And it punishes thrift and rewards spendthrifts.
PS. Of course there are real world problems with estimating wage income. How should we deal with the self-employed? One option might be to tax income from proprietorships, allowing the expensing of investments. I hope commenter Mark can help me out here, as it’s been 30 years since I read any public finance and am relying on my feeble memory.
Update: A commenter pointed out that Steve Landsburg did a similar post just a few days ago.
September 23, 2010
Value of College
Degree Is Growing, Study Says
Despite rising tuition and student loan debt levels, the long-term payoff from earning a college degree is growing, according to a report by the College Board.
Workers with a college degree earned much more and were much less likely to be unemployed than those with only a high school diploma, according to the report, "Education Pays: the Benefits of Higher Education for Individuals and Society."
* According to the report, the median
earnings of full-time workers with bachelor's degrees were $55,700 in 2008 --
$21,900 more than those of workers who finished only high school.
* Among those ages 25 to 34, women with
college degrees earned 79 percent more than those with high school diplomas, and
men, 74 percent more.
* A decade
ago, women with college degrees had a 60 percent pay premium and men 54
percent.
* The report found that
after about 11 years of work, college graduates' higher earnings compensated for
four years out of the labor force and for student loans, at 6.8 percent
interest, to cover the average tuition and fees at a public four-year
university.
Even during the recession, a degree offered protection from unemployment. The 2009 unemployment rate of college graduates 25 and older was 4.6 percent, compared with 9.7 percent for high school graduates.
The debate over whether college is worthwhile has grown more spirited as tuition spirals higher, faster than inflation. Among economists, though, even those who emphasize alternative approaches to skill development agree that for most people, a college degree pays off, says the New York Times.
Source: Tamar Lewin, "Value of College Degree Is Growing, Study Says," New York Times, September 21, 2010.
For text:
http://www.nytimes.com/2010/09/21/education/21college.html
For study:
http://trends.collegeboard.org/files/Education_Pays_2010.pdf
WSJ SEPTEMBER 25, 2010
11.
How College Health Plans Are Failing Students
How
Colleges Are Failing Students on Health Care— And What You Can Do About
It
By JESSICA SILVER-GREENBERG And MARY
PILON
On Thursday, the first big pieces of the new health-care overhaul took effect. Among other things, the rules mandate that insurance companies offer coverage to adult children until the age of 26 and devote at least 80% of their revenue to health-care costs.
But one major player was notably absent from these new rule changes: colleges. They have managed to sidestep, at least for now, the regulatory clampdown that has sent hospitals, insurers and corporations scrambling.
How'd they pull it off? Since student plans for the 2010-11
school year were negotiated before Sept. 23, they aren't subject to the
regulations this year.
Bad Medicine
How colleges are failing students on health care:
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CAMPUS3
Eli Meir Kaplan for The Wall Street Journal
Nia Heard-Garris, Howard University Medical School: School plan
didn't cover an emergency-room visit and CT scan for neck pain. Her cost:
$1,600
CAMPUS3
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CAMPUS4
AJ Mast for the Wall Street Journal
Katie Todd, Franklin University: Suffers from depression, but
school plan limits benefits to $50 per visit—up to $250 a year—for mental-health
counseling. Her cost: Anything over $250 a year
CAMPUS4
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CAMPUS5
Peter McCollough for The Wall Street Journal
Paula Villescaz, University of California at Berkeley: School
plan didn't cover her final round of chemotherapy for treating her bone cancer,
among other expenses, leaving her with a huge bill. Her cost: $80,000
CAMPUS5
And if industry and university groups succeed, the plans will be exempted permanently from many elements of the new law. At a June American College Health Association conference, James Turner, executive director of student health at the University of Virginia and former president of the ACHA, told audience members that Nancy-Ann DeParle, director of the White House Office of Health Reform, had told him during an earlier meeting to "tell me what you want written into the regulations and we'll make it happen."
"The White House denies that Ms. DeParle ever said that," says White House spokesman Nick Papas. "The administration is still working on this issue and is eager to hear from all parties."
The health-care overhaul has major implications for young adults and their parents. For the first time, parents will have the choice of keeping their graduate-student children on their corporate insurance plans or opting for cheaper college plans.
They should think carefully.
There is broad consensus that, as a group, college health-insurance plans rank among the worst in the nation for consumers. Many college plans come with remarkably low benefit ceilings—in some cases as little as $2,500. Others limit areas of coverage, such as preventative services and chemotherapy.
The upshot: Students are often much less insured than they think they are. In extreme cases high-school seniors with health issues might be advised to consider a college's health plan before attending.
"These plans have not been thoroughly scrutinized," says Bryan A. Liang, executive director of the Institute of Health Law Studies at California Western School of Law in San Diego. "In some instances they offer very paltry care."
The college health-care system is a hodgepodge of school plans and private insurance. According to the Government Accountability Office, more than half of the nation's colleges offer school-sponsored plans. All told, about 80% of college students, nearly 7 million people, are covered by private or public health insurance.
Most schools aim to provide the best care for the lowest cost. Students tend to be healthier than the general population, so school plans don't need the safety nets found in adult plans.
Yet these low-cost plans are a big business for insurance companies. All of the major players are active in the college market, with Aetna Inc. and United Healthcare leading the pack. According to a November 2009 study from the Massachusetts Division of Health Care Finance and Policy, profit margins for student health programs in the state were 10%, compared with 2% for other insurance plans.
When colleges fall short, say health-care experts, it is often because their administrators lack the savvy to negotiate with insurers and arrange the best terms for their students.
"Not every podunk university is going to have a health plan official who will look into these plans," says Elizabeth Ritzman, director of Dominican University's student health center in River Forest, Ill.
The health-care overhaul deals with individual and group insurance plans. In an Aug. 12 letter to the White House, the ACHA and other groups argued that school plans shouldn't be considered group or individual plans but rather "short-term limited-duration" insurance policies. Such a designation would likely exempt them from many of the new regulations, experts say.
The letter also warned that certain reforms "could make it impossible for colleges and universities to continue to offer student health plans."
The ACHA "is supporting regulatory clarification that would allow student plans to preserve the grouplike status that is vital to providing lower cost coverage to students," says Jake Baggott, ACHA's advocacy coalition chair. Dr. Turner, ACHA's president until June, says the spirit of his conversation with the White House was that "they would be happy to include in the regulations the necessary language to assure preservation of the plans."
Insurers seem to be confident they will get their way. According to three people familiar with the matter, Aetna has told colleges that they have nothing to worry about because their plans will be exempted.
Aetna says it never conveyed that message to its members. "We expect that all student plans that wish to be credible will comply with minimum coverage requirements as soon as possible," says Ethan Slavin, a spokesman for the insurer.
Good insurance plans are marked by a few elements, among them benefit ceilings of at least $250,000, generous prescription drug plans and emergency room coverage. According to the GAO, more than half of all school plans have ceilings of less than $30,000.
Some schools boast excellent health plans, says Dr. Liang. Take Boston University's program, offered through Aetna. Students pay $1,676 for coverage that includes a $500,000 benefit ceiling and pays 80% of any ambulance expenses.
Another indicator of a good plan is its "medical loss ratio," or the percentage of the premium that the insurance provider pays out in claims. The health-care overhaul limits loss ratios to 80%; a lower ratio means students aren't getting as much for the cost. Brigham Young University, which offers insurance through Deseret Mutual Benefit Administrators, had a loss ratio of 93% last year, meaning that for every $100 in premiums, students received $93 of care.
Other plans, however, are less generous.
Paula Villescaz, a senior at the University of California at Berkeley, says she never looked closely at the Anthem Blue Cross insurance policy she got through her college. The plan has a $400,000 ceiling, but also has some important limitations, as Ms. Villescaz found out recently.
The political-science major had always been healthy—until March, when doctors discovered she had Ewing's Sarcoma, a rare form of cancer. Berkeley's plan didn't cover her first MRI, her PET scan or many blood tests her doctors required, she says.
In between chemotherapy treatments, Ms. Villescaz says she had to battle the insurance company, which refused to cover her last round of chemotherapy, declaring it medically unnecessary. Her chemotherapy has since concluded, but she is now undergoing radiation treatment.
Ms. Villescaz says she owes about $80,000 all told. Before she got sick, she worked two jobs to support herself and help out her single mother. "I'm going to be paying off these bills for the rest of my life," she says.
Both Berkeley and Anthem declined to comment.
Students who don't study the details of a plan before signing up can end up with nasty surprises, as Nia Heard-Garris, a 24-year-old medical student at Howard University Medical School, learned firsthand.
Ms. Heard-Garris in 2007 signed up for Howard's standard health plan, administered by Summit America Corp. The plan, which now costs $476 a year and is mandatory for all students, came with a $5,000 limit per injury and sickness, and didn't cover radiation and chemotherapy—though the plan now offers more coverage. (Howard also offers an enhanced plan that costs $699 a year and has a limit of $200,000 per injury or sickness.)
Last year, Ms. Heard-Garris went to the emergency room complaining of neck pain. She got a CT scan—then found out that her insurance wouldn't cover the $1,600 bill. "I have absolutely no idea how I can pay this," she says. "I think it's kind of ironic that here I am learning how to help people, and I can't even get care covered." She says she is negotiating with Summit to cover her bill.
Howard doesn't comment on specific cases. A spokeswoman says students receive a booklet detailing medical-care protocols, and "the student health center staff will take the appropriate steps to provide [students] with appropriate care." A Summit spokeswoman says, "We're always willing to work with any student to provide clarity."
Some school plans limit their coverage of certain categories, such as mental health. Franklin College in Indiana offers a plan through Markel Insurance Corp. that covers $50 for every mental-health counseling visit—up to $250 per year.
"There's admittedly very little coverage for mental health," says Terri Nigh, coordinator of student health services at Franklin. While negotiating benefits and evaluating the plan each year, school administrators try to meet the needs of the majority of students, she says. "It's a difficult process."
That's been a problem for Katie Todd, a sophomore at Franklin. A pre-med major, Ms. Todd says she has battled depression since she was 12. She says most private insurers considered her depression a pre-existing condition, and that the best quote she has gotten would cost a steep $310 a month.
With no alternative, she signed up for the Franklin plan, but is frustrated by its limitations. "It's really vital for me to get this coverage, and the plan just mostly ignores it," she says.
"The plan's design is based on the specifications of the college, not the insurer," says Mark Nichols, a managing director at Markel.
Parents and students can get the most for their money by carefully examining school plans before signing up. Health-care planning should come long before enrollment, says James A. Boyle, president of the College Parents of America, a Virginia-based nonprofit.
Anyone considering a school plan should ask a number of questions, say experts:
• What is the maximum benefit for the policy?
• Are prescriptions and mental health services included?
• What happens to coverage if you leave school, go abroad or graduate?
• What is the loss ratio?
• Do any on-campus services, such as checkups or flu shots, overlap with existing coverage?
Parents who are considering keeping their child on their personal insurance should ask their benefits representative or insurer about how coverage will be carried over on campus and off—especially at schools far from home. (This also applies to graduate students and to adult children under age 26.) They should also be ready to sign a waiver with the school so they're not charged for automatic enrollment in a campus policy.
If, after getting all these answers, both the employer and school insurance options seem unappealing, parents should consider using a site like eHealthInsurance.com, which allows for comparison browsing among 10,000 plans from 180 carriers. The prices and coverage can vary widely depending on the state, but the site offers free access to licensed agents who don't work on a commission basis and can answer specific questions about plans, says Carrie McLean, a consumer specialist at the company.
The key is to do the legwork now to avoid surprises later.
Otherwise, says Aaron Smith, a founder of Young Invincibles, a nonprofit student
group that seeks better care for college students, you could wind up "in a
dangerous place, with insurance plans that don't cover any real health-care
costs."
[CAMPUSCARE]
# WSJ SEPTEMBER 25, 2010
12. The
Genius of the Tinkerer The secret to innovation is combining odds and ends,
writes Steven Johnson.
By STEVEN JOHNSON
In the year following the 2004 tsunami, the Indonesian city of Meulaboh received eight neonatal incubators from international relief organizations. Several years later, when an MIT fellow named Timothy Prestero visited the local hospital, all eight were out of order, the victim of power surges and tropical humidity, along with the hospital staff's inability to read the English repair manual.
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Robot2
nerdbots.com
Nerdbots are assembled from found objects. Like ideas, they're
random pieces connected to create something new.
Robot2
Mr. Prestero and the organization he cofounded, Design That Matters, had been working for several years on a more reliable, and less expensive, incubator for the developing world. In 2008, they introduced a prototype called the NeoNurture. It looked like a streamlined modern incubator, but its guts were automotive. Sealed-beam headlights supplied the crucial warmth; dashboard fans provided filtered air circulation; door chimes sounded alarms. You could power the device with an adapted cigarette lighter or a standard-issue motorcycle battery. Building the NeoNurture out of car parts was doubly efficient, because it tapped both the local supply of parts and the local knowledge of automobile repair. You didn't have to be a trained medical technician to fix the NeoNurture; you just needed to know how to replace a broken headlight.
The NeoNurture incubator is a fitting metaphor for the way that good ideas usually come into the world. They are, inevitably, constrained by the parts and skills that surround them. We have a natural tendency to romanticize breakthrough innovations, imagining momentous ideas transcending their surroundings, a gifted mind somehow seeing over the detritus of old ideas and ossified tradition.
But ideas are works of bricolage. They are, almost inevitably,
networks of other ideas. We take the ideas we've inherited or stumbled across,
and we jigger them together into some new shape. We like to think of our ideas
as a $40,000 incubator, shipped direct from the factory, but in reality they've
been cobbled together with spare parts that happened to be sitting in the
garage.
The Genius of the Tinkerer
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Graver
As a tribute to human ingenuity, the evolutionary biologist Stephen Jay Gould maintained an odd collection of sandals made from recycled automobile tires, purchased during his travels through the developing world. But he also saw them as a metaphor for the patterns of innovation in the biological world. Nature's innovations, too, rely on spare parts.
Evolution advances by taking available resources and cobbling them together to create new uses. The evolutionary theorist Francois Jacob captured this in his concept of evolution as a "tinkerer," not an engineer; our bodies are also works of bricolage, old parts strung together to form something radically new. "The tires-to-sandals principle works at all scales and times," Mr. Gould wrote, "permitting odd and unpredictable initiatives at any moment—to make nature as inventive as the cleverest person who ever pondered the potential of a junkyard in Nairobi."
You can see this process at work in the primordial innovation of life itself. Before life emerged on Earth, the planet was dominated by a handful of basic molecules: ammonia, methane, water, carbon dioxide, a smattering of amino acids and other simple organic compounds. Each of these molecules was capable of a finite series of transformations and exchanges with other molecules in the primordial soup: methane and oxygen recombining to form formaldehyde and water, for instance.
Think of all those initial molecules, and then imagine all the
potential new combinations that they could form spontaneously, simply by
colliding with each other (or perhaps prodded along by the extra energy of a
propitious lightning strike). If you could play God and trigger all those
combinations, you would end up with most of the building blocks of life: the
proteins that form the boundaries of cells; sugar molecules crucial to the
nucleic acids of our DNA. But you would not be able to trigger chemical
reactions that would build a mosquito, or a sunflower, or a human brain.
Formaldehyde is a first-order combination: You can create it directly from the
molecules in the primordial soup. Creating a sunflower, however, relies on a
whole series of subsequent innovations: chloroplasts to capture the sun's
energy, vascular tissues to circulate resources through the plant, DNA molecules
to pass on instructions to the next generation.
INSPIRATION POINT
Big new ideas more often result from recycling and combining
old ideas than from eureka moments. Consider the origins of some familiar
innovations.
Double-entry accounting
One of the essential instruments of modern capitalism appears
to have been developed collectively in Renaissance Italy. Now the cornerstone of
bookkeeping, double-entry's innovation of recording every financial event in two
ledgers (one for debit, one for credit) allowed merchants to accurately track
the health of their businesses. It was first codified by the Franciscan friar
Luca Pacioli in 1494, but it had been used for at least two centuries by Italian
bankers and merchants.
Gutenberg press
The printing press is a classic combinatorial innovation. Each
of its key elements—the movable type, the ink, the paper and the press
itself—had been developed separately well before Johannes Gutenberg printed his
first Bible in the 15th century. Movable type, for instance, had been
independently conceived by a Chinese blacksmith named Pi Sheng four centuries
earlier. The press itself was adapted from a screw press that was being used in
Germany for the mass production of wine.
Air
conditioning
AC counts as a rare instance of innovation through sheer individual insight. After summer heat waves in 1900 and 1901, the owners of a printing company asked the heating-systems specialist Buffalo Forge Co. for a way to make the air in its press rooms less humid. The project fell to a 25-year-old electrical engineer named Willis Carrier, who built a system that cooled the air to a temperature that would produce 55% humidity. His idea ultimately rearranged the social and political map of America.
The scientist Stuart Kauffman has a suggestive name for the set of all those first-order combinations: "the adjacent possible." The phrase captures both the limits and the creative potential of change and innovation. In the case of prebiotic chemistry, the adjacent possible defines all those molecular reactions that were directly achievable in the primordial soup. Sunflowers and mosquitoes and brains exist outside that circle of possibility. The adjacent possible is a kind of shadow future, hovering on the edges of the present state of things, a map of all the ways in which the present can reinvent itself.
The strange and beautiful truth about the adjacent possible is that its boundaries grow as you explore them. Each new combination opens up the possibility of other new combinations. Think of it as a house that magically expands with each door you open. You begin in a room with four doors, each leading to a new room that you haven't visited yet. Once you open one of those doors and stroll into that room, three new doors appear, each leading to a brand-new room that you couldn't have reached from your original starting point. Keep opening new doors and eventually you'll have built a palace.
Basic fatty acids will naturally self-organize into spheres lined with a dual layer of molecules, very similar to the membranes that define the boundaries of modern cells. Once the fatty acids combine to form those bounded spheres, a new wing of the adjacent possible opens up, because those molecules implicitly create a fundamental division between the inside and outside of the sphere. This division is the very essence of a cell. Once you have an "inside," you can put things there: food, organelles, genetic code.
The march of cultural innovation follows the same combinatorial pattern: Johannes Gutenberg, for instance, took the older technology of the screw press, designed originally for making wine, and reconfigured it with metal type to invent the printing press.
More recently, a graduate student named Brent Constantz, working on a Ph.D. that explored the techniques that coral polyps use to build amazingly durable reefs, realized that those same techniques could be harnessed to heal human bones. Several IPOs later, the cements that Mr. Constantz created are employed in most orthopedic operating rooms throughout the U.S. and Europe.
Mr. Constantz's cements point to something particularly inspiring in Mr. Kauffman's notion of the adjacent possible: the continuum between natural and man-made systems. Four billion years ago, if you were a carbon atom, there were a few hundred molecular configurations you could stumble into. Today that same carbon atom can help build a sperm whale or a giant redwood or an H1N1 virus, along with every single object on the planet made of plastic.
The premise that innovation prospers when ideas can
serendipitously connect and recombine with other ideas may seem logical enough,
but the strange fact is that a great deal of the past two centuries of legal and
folk wisdom about innovation has pursued the exact opposite argument, building
walls between ideas. Ironically, those walls have been erected with the explicit
aim of encouraging innovation. They go by many names: intellectual property,
trade secrets, proprietary technology, top-secret R&D labs. But they share a
founding assumption: that in the long run, innovation will increase if you put
restrictions on the spread of new ideas, because those restrictions will allow
the creators to collect large financial rewards from their inventions. And those
rewards will then attract other innovators to follow in their path.
[0923inn01] Getty Images
Circa 1450, Johannes Gutenberg (1400 - 1468) inventor of printing examines a page from his first printing press. (Photo by Rischgitz/Getty Images)
The problem with these closed environments is that they make it more difficult to explore the adjacent possible, because they reduce the overall network of minds that can potentially engage with a problem, and they reduce the unplanned collisions between ideas originating in different fields. This is why a growing number of large organizations—businesses, nonprofits, schools, government agencies—have begun experimenting with more open models of idea exchange.
Organizations like IBM and Procter & Gamble, who have a long history of profiting from patented, closed-door innovations, have embraced open innovation platforms over the past decade, sharing their leading-edge research with universities, partners, suppliers and customers. Modeled on the success of services like Twitter and Flickr, new Web startups now routinely make their software accessible to programmers who are not on their payroll, allowing these outsiders to expand on and remix the core product in surprising new ways.
Earlier this year, Nike announced a new Web-based marketplace it calls the GreenXchange, where it has publicly released more than 400 of its patents that involve environmentally friendly materials or technologies. The marketplace is a kind of hybrid of commercial self-interest and civic good. This makes it possible for outside firms to improve on those innovations, creating new value that Nike might ultimately be able to put to use itself in its own products.
In a sense, Nike is widening the network of minds who are actively thinking about how to make its ideas more useful, without adding any more employees. But some of its innovations might well turn out to be advantageous to industries or markets in which it has no competitive involvement whatsoever. By keeping its eco-friendly ideas behind a veil of secrecy, Nike was holding back ideas that might, in another context, contribute to a sustainable future—without any real commercial justification.
A hypothetical scenario invoked by the company at the launch of the GreenXchange would have warmed the heart of Stephen Jay Gould: perhaps an environmentally-sound rubber originally invented for use in running shoes could be adapted by a mountain bike company to create more sustainable tires. Apparently, Gould's tires-to-sandals principle works both ways. Sometimes you make footwear by putting tires to new use, and sometimes you make tires by putting footwear to new use.
There is a famous moment in the story of the near-catastrophic Apollo 13 mission—wonderfully captured in the Ron Howard film—in which the mission control engineers realize they need to create an improvised carbon dioxide filter, or the astronauts will poison the lunar module atmosphere with their own exhalations before they return to Earth. The astronauts have plenty of carbon "scrubbers" onboard, but these filters were designed for the original, damaged spacecraft and don't fit the ventilation system of the lunar module they are using as a lifeboat to return home. Mission control quickly assembles a "tiger team" of engineers to hack their way through the problem.
In the movie, Deke Slayton, head of flight crew operations, tosses a jumbled pile of gear on a conference table: hoses, canisters, stowage bags, duct tape and other assorted gadgets. He holds up the carbon scrubbers. "We gotta find a way to make this fit into a hole for this," he says, and then points to the spare parts on the table, "using nothing but that."
The space gear on the table defines the adjacent possible for
the problem of building a working carbon scrubber on a lunar module. (The device
they eventually concocted, dubbed the "mailbox," performed beautifully.) The
canisters and nozzles are like the ammonia and methane molecules of the early
Earth, or those Toyota parts heating an incubator: They are the building blocks
that create—and limit—the space of possibility for a specific problem. The trick
to having good ideas is not to sit around in glorious isolation and try to think
big thoughts. The trick is to get more parts on the table.
—Steven Johnson is the author of seven books, including "The Invention
of Air." This essay is adapted from "Where Good Ideas Come From: The Natural
History of Innovation" by Steven Johnson, to be published by Riverhead Hardcover
on Oct. 5. Copyright © by Steven Johnson.Printed in The Wall Street Journal,
page C1
# WSJ SEPTEMBER 27, 2010
13. How to
Grow Out of the Deficit
Limiting spending increases
to inflation minus 1% would balance the budget in less than a decade.
By EDWARD P. LAZEAR
As Washington debates the fate of the 2001 and 2003 tax cuts, many lawmakers have fallen into a logical trap of their own making. Although they recognize that tax increases hurt the economy, they argue that our huge deficit requires Congress to raise revenue through a tax hike.
This argument rests on the flawed premise that we can reduce the deficit only by increasing taxes, as if high levels of spending are a given. Not so.
To reduce spending and reignite growth, this Congress or its
successor should take two actions. First, immediately cut the level of spending
that has been increased so dramatically since 2008. Second, institute an
"inflation-minus-one" rule to constrain future spending increases.
[lazear] Associated Press
Much public discussion focuses on the deficit, which is indeed at critical levels of around 10% of GDP. But even if President Obama succeeds at lowering the deficit to 4% of GDP by 2013, our public-debt-to-GDP ratio will still be dangerously high, at over 70%, or nearly twice what it was during the Bush years. As the economists Carmen Reinhart and Kenneth Rogoff have shown in the journal American Economic Review, such high debt-to-GDP ratios are associated with low growth.
Tax increases—which some suggest in order to reduce the deficit—also impede growth. But Americans don't have to choose between an enormous deficit or high taxes. If we returned to the relative fiscal restraint that prevailed during the Clinton and Bush years, when spending was 19.7% and 19.6% of GDP, respectively, we could avoid the entire mess.
Spending, not the deficit, is the most important measure of fiscal restraint. A fiscally irresponsible president could balance an out-of-control budget by taxing too much. That approach would hardly be conducive to economic growth.
To return to the healthier spending ratios of the past two decades, Congress should begin by enacting a budget that brings spending for fiscal year 2012 at least half way back to where it was in 2008. Republicans campaigning to take control of Congress should make such spending reduction a priority.
Second, Congress should begin limiting future spending according to an inflation-minus-one rule. That rule would hold that in any year when the ratio of government expenditures to GDP exceeds 18% (the 30-year average of tax revenues), Congress could increase spending only by the last three years' inflation rate, minus one percentage point.
This would reduce the ratio of spending to GDP, because GDP growth would almost always exceed budget growth. There would be wrangling over what gets funded, but the amount of budget growth would be constrained. Further, because growth is tied to a historic number (the prior year's budget) rather than a forecast, the rule would be tough to circumvent.
Coupled with the initial cut in spending, such a rule would get us back to 2008 ratios by fiscal year 2014. It would take three or four more years to get to a balanced budget. And if an aggressive Congress cuts spending even faster than the limit imposed, those additional cuts would be baked into future budgets.
In emergencies, Congress could pass a one-year suspension of the rule with a 60% vote of both houses. The base, then, would return to the budget levels of the year before the suspension. The ability to suspend the rule temporarily would help prevent the more draconian measure of repealing it as soon as the first emergency presents itself.
In addition, we should limit budget growth in any year that is under the target ratio to no more than twice the prior year's increase. And once the spending-to-GDP ratio again exceeds 18%, the rule would kick in and bring the ratio back down. Thus spending would stay constrained within a narrow band around historic revenue-to-GDP ratios.
The inflation-minus-one rule would allow us to grow our way out of our fiscal problems without taxing a higher proportion of GDP. Eventually the deficit would vanish—and with taxes remaining at historic levels, there would be no impediment to economic growth.
Calling for a rigid rule may seem wishful, but the alternative is a dangerous false choice between high deficits and high taxes. Failing to take a stand now will condemn subsequent generations to lower living standards and fewer opportunities.
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.
# WSJ SEPTEMBER 27, 2010
14. The
Post Office Hustle
Another rate increase and more
wage hikes.
With the economy still hobbling along, few industries have pricing power. But neither rain, nor sleet nor recession can stop the United States Postal Service, which wants to raise the price to deliver a first class letter to 46 cents from 44 cents. Congress should refuse and finally force this public monopoly to adapt to the 21st century.
Next to the public schools, the postal service may be the most inefficient monopoly in America. The post office lost $3.5 billion last quarter, and losses are expected to be a cumulative $238 billion over the next decade, by its own admission. Postal rate increases are supposed to rise under the law only at the rate of inflation, but this latest request is four times the increase in the consumer price index. The federal Postal Rate Commission will decide on the request in early October.
Meanwhile, mail service to captive customers keeps deteriorating. The snail-mail system now often delivers not to the doorstep but to cluster boxes. It long ago ended twice daily delivery to most business and residential addresses, and it now wants to eliminate Saturday delivery—which, alas, probably makes sense given its declining revenues.
Mail volume has fallen by 20% since 2007 as tens of billions of letters, birthday wishes and bill payments are now emailed. This trend has long been foreseeable, but the postal bureaucracy hasn't adapted. The same economic forces have buffeted Federal Express, UPS and thousands of private local couriers, but somehow they still manage to turn a profit.
The difference is that private companies know how to control costs. In 2009, postal service costs grew by 6% even as its revenues predictably fell. Labor costs suck up about 80 cents of every postal service dollar, so any hope of getting to break-even will require cutting the 600,000 postal work force and union benefits.
Postmaster General John Potter has done an admirable job cutting 36,000 jobs and closing some facilities. But these are band-aids. Congress is no help. Last year it let the postal service skip a $4 billion payment it was legally required to make to its pension and health-care fund, and this year it wants to forgive another $4 billion. This digs a deeper long-term fiscal hole and makes a federal bailout more likely, with unfunded retirement liabilities estimated at $90 billion, according to the Government Accountability Office. For years Congress has caved in to union demands for higher wages while impeding closure of obsolete local post offices.
This only makes the unions more militant. In an interview recently with Government Executive magazine, APWU president William Burrus laid out his negotiating strategy: "More. More control over activities at work, more money, better benefits—we want more."
More? Today the average postal worker makes $83,000 a year in wages and benefits, roughly 50% above the average compensation for private workers, according to federal wage data. Those benefits are already so generous the post office could save $560 million a year if the mailman paid the same 28% share of employee health premiums that other federal employees pay, which is still below the norm in the private economy. Normally when a company is losing $16 billion a year in revenues, unions see the need for concessions.
Rubber stamping one more postal rate hike without at least a plan to cut labor costs only rewards union intransigence and postal service inefficiency. The time has come to free the mail by amending the private express statutes—which confer a legal monopoly on first-class mail—and allow expanded choices for letter delivery. Yes, we know the ritual claim is that this will end universal delivery, but even people living in remote areas would benefit from an injection of competition into the antiquated mail system.
If someone can deliver a letter for less than 46 cents or a
postcard for less than 30 cents, by all means let them. Contract with Wal-Mart
and grocery stores to sell stamps and collect packages. The postal service won't
avoid its coming financial catastrophe by continuing to raise prices, but it
might if it has to compete for customers.
Printed in
The Wall Street Journal, page A18
WSJ * SEPTEMBER 27, 2010, 11:34 A.M. ET
15. EU Ends Apple Antitrust Probe
By PEPPI KIVINIEMI
BRUSSELS—The European Commission over the weekend dropped its preliminary antitrust probe into Apple Inc.'s App Store and iPhone restrictions, following the company's change to some policies.
The commission said it was able to abandon its probe following
recent announcements by Apple that the company will relax its restrictions on
the development tools for iPhone and iPad applications, as well as introduce
cross European warranty repair services for the devices.
Real Time Brussels
* Why So Quiet on Apple Decision?
"Apple's response to our preliminary investigations shows that the commission can use the competition rules to achieve swift results on the market with clear benefits for consumers, without the need to open formal proceedings," Competition Commissioner Joaquin Almunia said.
The commission, Europe's highest antitrust body, began probing Apple for anticompetitive business practises in spring 2010. It was concerned the limitation's of the warranty repair services to the country where the iPhone was bought amounted to illegal territorial restrictions within the European Union.
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Luke MacGregor/Reuters
A customer tested the new iPad tablet computer in an Apple
store in London.
apple0927
apple0927
The commission was also investigating Apple over its decision to restrict App Store application developers to use only Apple's native programming tools, restricting developers from easily running their applications on other devices.
Apple's App Store allows iPhone and iPad users to download games, financial tools and other applications for their devices.
The laxer developer requirements followed a spat between Apple and Adobe Systems Inc. over whether developers can use Adobe's Flash development tools for creating their applications. As a result of the new guidelines developers can now run their apps on competing platforms such as Google Inc.'s Android, as well as the Nokia Corp. backed Symbian.
For example, videogames written in the Flash technology language can be translated into Apple-acceptable language for use on iPhones and iPads; while simultaneously be displayed for Nokia and Google smartphone users without too much extra work.
Write to Peppi Kiviniemi at peppi.kiviniemi@dowjones.com
Read more:
http://online.wsj.com/article/SB10001424052748704654004575517823325624614.html?mod=WSJ_hps_sections_tech#ixzz10pHNPVSz
WSJ * SEPTEMBER 27, 2010
16. Banks Keep Failing, No End in Sight
Since WaMu Fell, 279 Lenders Have Collapsed; Lost Jobs, Curtailed
Lending and the Big Get Bigger
By RANDALL SMITH And ROBIN SIDEL
The largest number of bank failures in nearly 20 years has
eliminated jobs, accelerated a drought in lending and left the industry's
survivors with more power to squeeze customers.
Bank
Failures
* After a Collapse, End of a Dream
* For Ms. Hodgson, A New, Poorer,
Start
Some 279 banks have collapsed since Sept. 25, 2008, when Washington Mutual Inc. became the biggest bank failure on record. That dwarfed the 1984 demise of Continental Illinois, which had only one-seventh of WaMu's assets. The failures of the past two years shattered the pace of the prior six-year period, when only three dozen banks died.
Two more banks went down last Friday, and failures are expected
to "persist for some time," according to a report issued Tuesday by Standard
& Poor's. In the second quarter of this year, the Federal Deposit Insurance
Corp. increased its number of problem banks by 6% to 829.
Banks That Went Bust
Track U.S. bank failures since January 2008.
[bankfail]
* More interactive graphics and photost
Between failures and consolidation, the number of U.S. banks could fall to 5,000 over the next decade from the current 7,932, according to the top executive of investment-banking firm Keefe, Bruyette & Woods Inc.
The upside of failures is that they can represent a healthy
cleansing of a sector that grew too fast, with bank assets more than doubling to
$13.8 trillion in the decade that ended in 2008. Many banks that failed were
opportunistic latecomers. Of the failed banks since February 2007, 75 were
formed after 1999, according to SNL Financial.
Experience WSJ professional
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Still, economists say, the contraction represents an enduring threat to capital, lending and the economy.
"When we step back and look at this financial disaster 10 years from now, the destruction of capital in our economy as a result of what we've endured will be the single greatest lasting impact on recovery and how the economy performs in the future," says Howard Headlee, president of the Utah Bankers Association.
The pain is less severe than in the Japanese banking crisis, in which banks languished for a decade despite $440 billion the government spent to assist the industry.
But, in the past two years, the whole U.S. banking system recoiled. Large banks like Countrywide Financial Corp. and Wachovia Corp. were acquired to avert failure while powerful banks including Citigroup Inc. and Bank of America Corp. were propped up by the government.
Between the failures and government assistance, Gerard Cassidy of RBC Capital Markets says, the impact to the system has been "far more severe" than the savings-and-loan crisis. Not only were government rescue measures more sweeping and more global this time, the weakness in real estate continues to constrain economic growth.
Since 2008, the industry's assets have shrunk by 4.5%.
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BANKFAILmap
BANKFAILmap
BANKFAILmap
"If you reduce the amount of assets at a bank, it means they make fewer loans, and that has a negative impact on the economy," says Richard Bove, a bank analyst at Rochdale Securities in Lutz, Fla.
From small towns like Rockford, Ill., to Miami, the banks' disappearance means not only cutbacks in lending but fewer banking choices, lower interest rates on savings accounts, and lost jobs.
The recession and collapse of the housing bubble have cut bank-industry employment by 188,000 jobs, or 8.5%, since 2007, according to FDIC data. Failures alone have cost 11,210 jobs, or 32% of the employees at failed banks, according to FIG Partners, an Atlanta investment firm that specializes in the banking industry.
For more than a year, Martin Quantz and his co-workers at the Woodstock, Ill. branch of Amcore Bank checked the FDIC's website each Friday afternoon to see if their flailing bank had gone under. Regulators seized the bank in April and turned over its 58 branches to Harris National Association.
By August, Mr. Quantz was unemployed. He now hopes reconnecting with an old contact will lead to a new bank job.
"There's a lot of pain out there, and there are a lot of people in the industry who won't go back," says Mr. Quantz, 41 years old.
The city of Clinton, Utah, may never be refunded $83,000, a portion of their cemetery-maintenance funds that wasn't insured when nearby Centennial Bank failed without a buyer.
In nearby Ogden, Utah, Weber State University lost $100,000 in scholarship money that had been pledged by Barnes Banking Co., a 119-year-old local institution that failed in January. The scholarships, to be distributed in $1,000 increments, represented one quarter of in-state tuition, says a Weber State administrator. Earlier this month, the college restored the Barnes Banking Lecture Hall to its original name: "Room 110."
Failed bank assets are now strewn across the banking system.
The FDIC is burdened with $38 billion of remnants it is trying to sell. They range from virtually worthless mortgaged-backed securities to office decorations such as plastic Christmas trees.
The tough times follow cresting prosperity in which banks with few loan losses chased customers into hot real-estate markets. When the subprime mortgage bubble burst, failures were concentrated among mortgage lenders such as IndyMac Bank, which left $1 billion of depositors' money uninsured when it failed in 2008.
Various autopsies of expired banks all point to real estate as
the primary cause. A tally by SNL Financial LC found that 94% of bank failures
since 2008 had either residential or commercial real-estate as their largest
category of delinquent loans. KBW says their riskier construction loans were 23%
of their total portfolio, compared with 7.2% for the industry as a whole. The
delinquency rate of commercial real estate was 13.5%, far above the current
national average of 1.7%, SNL said.
[bankfail2] Getty
Images
Federal and state bank regulators arrive to close Midwest Bank on May 14 in Melrose Park, Illinois. Midwest, with assets totalling $3.17 billion, was seized by regulators after failing to raise the necessary capital needed to stay independent, and taken over by Ohio-based Firstmerit Bank.
The Imperial Capital Bank unit of Imperial Capital Bancorp in La Jolla, Calif., specialized in real estate. Like many other small banks, it extended beyond its home turf and made loans nationwide. The bank more than doubled its assets to $4.1 billion in the five years ended in 2008, according to an FDIC report. Then, the nine-branch bank purchased $826 million of mortgage-backed securities.
Real estate accounted for more than 95% of its loans, compared to 35% or less for its peers. The bank failed in 2009.
Some economists argue that, for all the damage, the failures' impact on the economy was muted because the largest banks that failed or came close were quickly absorbed by other institutions or helped by the government.
"I don't think enough banks have failed, or have been failing fast enough, to have a macro-economic impact," says economist Edward Yardeni.
Surviving banks have raised more than $500 billion in new capital, reducing the risks of new failures by boosting rainy-day funds.
Failure can occasionally jumpstart lending. To conserve capital, regulators often block sickly banks from making new loans. When a bank buys the assets of the failed institution, that buyer often resumes lending.
Since acquiring operations of the failed Frontier Bank in Everett, Wash., last April, Union Bank N.A. has started originating loans in Frontier's region in western Washington and Oregon. Though Union lowered interest rates on certificates of deposit, "We desire to grow our loan portfolio and are eager to find ways to make loans that make sense," says Tim Wennes, chief retail banking officer for Union Bank, a unit of San Francisco-based UnionBanCal Corp.
Such consolidation also means the biggest are getting bigger: Bank of America, J.P. Morgan Chase & Co. and Wells Fargo hold 33% of all U.S. deposits, up from 21% in 2006, according to SNL Financial. That gives them more market power to squeeze out smaller competitors.
John Squires, who was chief executive officer of Old Southern Bank when it failed in March, protests that his larger competitors in his Orlando, Fla., neighborhood all survived thanks to heavy doses of government support, which allowed them to raise capital more easily.
"Absolutely unfair—the big boys have the clout," says Mr.
Squires. "Community banks are in jeopardy all over the country."
—Dan Fitzpatrick contributed to this article.
Write to Randall Smith at randall.smith@wsj.com and Robin Sidel at robin.sidel@wsj.com
WSJ * SEPTEMBER 28, 2010
17. A Game of Trade Chicken
Poultry protectionism shows where the U.S. and China are
heading.
The U.S. and China are slouching
toward a trade war, with the House of Representatives aiming to vote this week
on a bill to impose duties on Chinese goods if Beijing doesn't revalue its
currency against the dollar. Two can play at that game, however, as China is
proving as it responds to earlier U.S. protectionism.
China's Commerce Ministry Sunday unveiled its final order in an antidumping investigation against U.S. poultry. Effective yesterday, Beijing is levying duties ranging from 50% to 104%, depending on the producer, on imports of products such as chicken feet. The Chinese government claims U.S. companies sell in the Chinese market at a price less than their cost of production. In a separate case in August, Beijing slapped countervailing duties of between 4% and 31% on the imports, claiming U.S. agricultural policies unfairly subsidize chicken production in America.
These moves must be about politics because the economics of the cases make no sense. Far from dumping, U.S. poultry producers can sell chicken products in China at a premium over the American market because Chinese consumers prefer parts of the bird that Americans don't like—especially the feet, a delicacy known as "phoenix claw." And while it's hard to dispute that subsidies distort the U.S. agricultural marketplace far beyond anything Adam Smith would recognize, to the extent China feels the effects they amount to a U.S. subsidy for Chinese consumers.
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3chickentariffs
AFP/Getty Images
3chickentariffs
3chickentariffs
What's really going on here is that Beijing is trying to send President Obama and Congress a message about trade policy. The Administration is discovering the flaw of its "exports for me, but not for thee" trade strategy: Other countries won't keep their borders open to American products if Washington is simultaneously closing America's own ports to foreign products.
This antidumping case was filed within days of Mr. Obama's imposition last September of a discretionary 35% tariff on Chinese tire imports and amid American antidumping and antisubsidy duties on Chinese exports worth billions of dollars. This case also came after years of Chinese frustration with an unrelated move on Capitol Hill to block imports of cooked Chinese chicken over misguided safety concerns. Chinese chicken producers had complained about U.S. practices for a long time. In the face of mounting American protectionism, Beijing simply couldn't say no to its own domestic lobby anymore.
This trade revenge might taste sweet for now, but the danger for Beijing is that it will sour pretty quickly. Most immediately, Chinese consumers will see the effects of these duties in the form of higher prices at the supermarket—which ought to be of concern in Beijing, where officials live in terror of food-price inflation. There's also the increasing political concern that the U.S. Congress will retaliate against China's retaliation.
As for American lawmakers—and Mr. Obama—the chicken case is a warning. Merely because retaliation hurts China's own economy doesn't mean Beijing won't give in to political pressures to respond to American protectionism.
We're blithely told that a full-scale trade war a la the 1930s
can't break out again because everyone knows better. But that's what we were
told about the other lessons of Depression economics, and our leaders have
already remade nearly every one of those mistakes. In a game of trade chicken,
everybody will lose.
Printed in The Wall Street
Journal, page A20
WSJ * SEPTEMBER 15, 2010
18. Federal Pay Still Inflated After Accounting for
Skills
Federal employees are paid substantially
more than comparably skilled private sector workers.
By JAMES SHERK AND JASON RICHWINE
From the Heritage Foundation
The Heritage Foundation has conducted two separate studies that both reach the same conclusion: Federal employees are paid substantially more than comparably skilled private sector workers. Defenders of the federal pay system, including the U.S. Office of Personnel Management (OPM), have mischaracterized The Heritage Foundation's analyses by suggesting they ignore skill differences between the public and private sectors, resulting in an "apples to oranges" comparison. On the contrary, Heritage has carefully accounted for skill differences, always comparing apples to apples.
While federal employees do earn more partially because they are more skilled than the average private sector worker, controlling for skills does not eliminate the federal pay premium. Depending on the methodology employed, the average federal employee receives as much as 22 percent more in wages than an equally skilled private sector worker. Including both wages and benefits, overpaying federal workers costs taxpayers approximately $40–50 billion per year.
The Heritage Studies
Heritage analyst James Sherk recently published a detailed comparison of federal and private pay in a report from The Heritage Foundation's Center for Data Analysis.[1] Separately, Heritage analyst Jason Richwine worked with Andrew Biggs of the American Enterprise Institute on a similar study, the results of which were published in The Wall Street Journal.[2] The studies employ different datasets and methodologies,[3] but they draw similar conclusions: Federal workers are overpaid in both wages and benefits at substantial cost to taxpayers.
Federal Pay Debate
Defenders of the federal pay system have responded by arguing that these studies ignore differences in skills and occupations. OPM Director John Berry summarized this view in a recent statement:
The Cato Institute and USA Today stories quoting Cato staff (and similar statements from the Heritage Foundation) look only at gross averages, including retail and restaurant service workers and other entry-level positions that reduce private sector average pay in comparison to the Federal average, which does not include many of these categories in its workforce. The Federal workforce today is highly specialized.[4]
This critique mischaracterizes The Heritage Foundation's research on federal pay, which expressly controlled for education, experience, and other observable characteristics to make an apples-to-apples comparison between federal employees and private sector workers.
Controlling for Skills and Occupation
Regression analysis allows researchers to break pay differences between groups down into two portions. One is explained by differences in observed characteristics (such as education and experience), while the other contains differences these characteristics do not explain. The unexplained difference in pay estimates how much private sector workers would earn with their measured skills if they worked for the federal government.[5]
Both the Sherk study and the Richwine–Biggs study used regression techniques to compare the wages of federal employees and private sector workers, controlling for variables such as age, education, marital status, race, gender, size of the metropolitan area, and several others.[6]
Federal Employees Earn More Than Comparable Private Workers
Table 1 below shows the results from the Sherk study.[7] A portion of federal workers' higher cash pay comes from their higher skills, but the government pays the average federal employee 22 percent more per hour than accounted for by observable skills.[8] Restricting the analysis to workers in identical occupations in both sectors still shows a federal hourly wage premium of 19 percent in the Sherk study. In their own analysis, Richwine and Biggs found a premium of 12 percent.
Including the value of non-cash benefits such as health care and pension benefits adds to the federal advantage in total compensation. An apples-to-apples comparison shows that the federal pay system gives many federal workers significantly more compensation than they would get in the private sector. The total premium costs taxpayers $40 billion (according to Richwine and Biggs) or $47 billion (Sherk) per year above market rates.
Not an Isolated Finding
This is not an isolated finding. Academic research consistently shows that the federal government pays more than the private sector.[9] Liberal and conservative economists alike find the same thing. Alan Krueger, the current Assistant Secretary of the Treasury for Economic Policy in the Obama Administration, wrote one of the seminal research papers on federal pay. He compared wages of similar private sector and federal workers and also examined how the wages of workers who joined the federal government changed. In both cases, federal employees earned higher pay.[10]
Not All Federal Workers Are Overpaid
Not all federal employees are overpaid, of course. The government's seniority-based pay scale divorces compensation from individual performance. Many highly skilled federal workers earn no more (and perhaps even less) than they would in the private sector. Consequently, Congress should not uniformly reduce the pay of all federal employees. Instead, Congress should expand outsourcing to the private sector and replace the General Schedule with a performance-based pay system tied to market compensation. Congress should also bring federal benefits in line with market standards.
Reform the Federal Pay System
Defenders of the federal pay system, including the OPM, argue that federal employees earn higher wages because they perform more skilled work. This is only partially correct. Skill differences explain only a portion of the federal government's disparate level of pay. After controlling for skills and occupation, the federal government still pays its employees substantially more than they would earn in the private sector. According to two separate Heritage studies, the current federal pay system:
Pays hourly wages as much as 22 percent above that of comparably skilled private workers; and
Will overcharge taxpayers approximately $40–50 billion in 2011 when both wages and benefits are considered.
Clearly, reform is needed.
Overtaxing All to Benefit a Few
Congress should not overtax all Americans to overpay workers in the federal civil service. Congress should bring equity to federal pay by replacing the General Schedule with performance-based pay, requiring federal agencies to compete with the private sector, and bringing benefits to market levels.
Mr. Sherk is Senior Policy Analyst in Labor Economics, and Mr. Richwine is Senior Policy Analyst in Empirical Studies, in the Center for Data Analysis at The Heritage Foundation.
* WSJ SEPTEMBER 26, 2010
19. Authors Feel Pinch in Age of E-Books
By JEFFREY A. TRACHTENBERG
[authors]
Credit: Matt Wright-Steel for the Wall Street Journal
Author John Pipkin worries about the e-book business model: 'I've had to rethink my plans in terms of supporting my family full time as a writer.'
When literary agent Sarah Yake shopped around Kirsten Kaschock's debut novel "Sleight" this year, she thought it would be a shoo-in with New York's top publishers.
"Her project was one of the most exemplary in the last decade or so," said Jed Rasula, who has taught in the English department at the University of Georgia since 2001. "I certainly thought she'd find a New York publisher."
But the major New York publishers passed on "Sleight," a novel about two sisters trained in a fictional art form. Coffee House Press in Minneapolis, a small independent publisher, now plans to publish the book, offering Ms. Kaschock an advance of about $3,500—a small fraction of the typical advances once paid by the major publishing houses.
It has always been tough for literary fiction writers to get
their work published by the top publishing houses. But the digital revolution
that is disrupting the economic model of the book industry is having an outsize
impact on the careers of literary writers.
[AUTHORS_p1]
Priced much lower than hardcovers, many e-books generate less income for publishers. And big retailers are buying fewer titles. As a result, the publishers who nurtured generations of America's top literary-fiction writers are approving fewer book deals and signing fewer new writers. Most of those getting published are receiving smaller advances.
"Advances are down, and there aren't as many debuts as before," says Ira Silverberg, a well-known literary agent. "We're all trying to figure out what the business is as it goes through this digital disruption."
Much as cheap digital-music downloads have meant that fewer bands can earn a living from record-company deals, fewer literary authors will be able to support themselves as e-books win acceptance, publishers and agents say. "In terms of making a living as a writer, you better have another source of income," says Nan Talese, whose Nan A. Talese/Doubleday imprint publishes Ian McEwan, Margaret Atwood and John Pipkin.
In some cases, independent publishers are picking up the slack
by signing promising literary-fiction writers. But they offer, on average,
$1,000 to $5,000 for advances, a fraction of the $50,000 to $100,000 advances
that established publishers typically paid in the past for debut literary
fiction.
The Future of the Book
The Journal explores how digital technology is remaking the
book industry. See more at WSJ Topics: E-Books.
More on
E-Books
* The ABCs of E-Reading
08/25/2010
* 'Vanity' Press Shakes Up Book Industry
06/03/2010
* E-Books Rewrite Bookselling
05/21/2010
* E-Book Pricing Put Into Turmoil
02/02/2010
* WSJ Topics: E-Books
The new economics of the e-book make the author's quandary painfully clear: A new $28 hardcover book returns half, or $14, to the publisher, and 15%, or $4.20, to the author. Under many e-book deals currently, a digital book sells for $12.99, returning 70%, or $9.09, to the publisher and typically 25% of that, or $2.27, to the author.
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FutureOFBookLog
FutureOFBookLog
FutureOFBookLog
The upshot: From an e-book sale, an author makes a little more than half what he or she makes from a hardcover sale.
The lower revenue from e-books comes amidst a decline in book sales that was already under way. The seemingly endless entertainment choices created by the Web have eaten into the time people spend reading books. The weak economy also is contributing to the slide.
"We aren't seeing a generation of readers coming along that supports writers today the way that young people supported J. D. Salinger and Philip Roth when they were starting out," says Ms. Talese, who is married to the author Gay Talese.
Sales of consumer books peaked in 2008 at 1.63 billion units and are expected to decline to 1.47 billion this year and to 1.43 billion by 2012, says Albert Greco, a book-industry market researcher.
E-books sales are exploding. Currently, e-books account for an estimated 8% of total book revenue, up from 3% to 5% a year ago. Mike Shatzkin, a publishing consultant, estimates e-books could be 20% to 25% of total unit sales by the end of 2012. "Eventually, digital books will overtake physical books," Mr. Greco predicts.
Some book-industry experts say that lower e-book prices could increase overall unit sales eventually. Whether they will make up for the loss of hardcover income remains to be seen.
Although e-books are still in their infancy, publishers say that average advances on literary fiction are already shrinking. To secure the rights to publish and distribute a book, publishers pay authors advances against future book sales. After the book is published, the author earns a royalty that is initially applied to the advance. Once the author recoups the advance, he earns a percentage of every book sale.
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authors2
Credit: Matt Wright-Steel for the Wall Street
Journal
Mr. Pipkin teaches creative writing
authors2
authors2
There will always be the lucky new author whose first novel ignites a hot auction. But more often today, many debut novels that would have won lucrative advances five years ago today are getting $15,000 or less, says Adam Chromy, a New York literary agent. Mr. Chromy was recently disappointed with the immediate response from editors for a debut novel he thought was exceptionally good.
"The bar is higher," says Jamie Raab, publisher of Lagardere SCA's Grand Central Publishing, which is buying less debut fiction than in prior years. Although launching debut titles is one of the most rewarding aspects of publishing, Ms. Raab says, "publishers are buying more selectively, agents are being more selective with choosing clients, and retailers are taking fewer titles."
The e-book is good news for some. Big-name authors and novels
that are considered commercial are increasingly in demand as e-book readers
gravitate toward best sellers with big plots. Unlike traditional bookstores,
where a browsing customer might discover an unknown book set out on a table,
e-bookstores generally aren't set up to allow readers to discover unknown
authors, agents say. Brand-name authors with big marketing budgets behind them
are having the greatest success thus far in the digital marketplace.
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In July, Amazon.com Inc. said the late Swedish writer Stieg Larsson, whose novel "The Girl with the Dragon Tattoo" is part of a trilogy of top-selling crime books, was the first writer to sell more than 1 million Kindle books.
Celebrated author Jonathan Franzen, who has already built his reputation as one of America's premier literary-fiction writers, is seeing significant e-book sales of his new novel, "Freedom," having sold well over 35,000 in the first two weeks after going on sale Aug. 31.
"Monster best sellers are still the major drivers of profits for publishers and their authors—and these are precisely the books that are being snapped up by e-book buyers," says Laurence Kirshbaum, a New York literary agent.
It's a different story for debut fiction writers and those with
less commercial potential, who might have print runs of 10,000 copies or less.
Mr. Kirshbaum says he's found it difficult to sell a debut novel about
small-town life because many editors are no longer committing to new writers
with the expectation that their story-telling skills will evolve with the
second, third and fourth books. In the past, many literary authors were able to
build careers because of such patience, Mr. Kirshbaum says.
[AUTHORS_jmp]
"Writers like Anne Tyler and Elmore Leonard have to simmer quite a bit before they are going to boil. Publishers no longer have the patience to work through multiple modest successes," Mr. Kirshbaum says. "There is a real danger that these people could be lost today."
John Pipkin's 2009's debut novel, "Woodsburner," won several literary prizes, including the 2009 Center for Fiction First Novel Prize. Despite the acclaim and print sales of more than 10,000, "Woodsburner" has only sold 359 digital copies.
Mr. Pipkin says the business model of e-books worries him. "I embrace anything that makes it possible for people to read what I've written, especially if it's somebody who might not have read the physical book," Mr. Pipkin says. "But the sales price of e-books is lower than the price of physical books, so writers stand to earn less. It's a concern moving forward, especially as e-books make up a larger percentage of sales."
Mr. Pipkin, who has Ph.D in English literature, says he cobbles together an income based in part on grants, fellowships and a partial advance he has received for his second book. "I've had to rethink my plans in terms of supporting my family full time as a writer," he says.
His wife, a tenured professor, provides health benefits for his family. Mr. Pipkin, who teaches an undergraduate creative-writing class at Southwestern University in Georgetown, Texas, receives no benefits. Although he has an IRA, he doesn't receive employer contributions. Mr. Pipkin, 43, says his goal is to find a full-time teaching position with benefits.
"Unless you're a best-selling author, I don't see how it's possible for an author to get together enough income to pay for health insurance, retirement and other things," he says.
Only a few years back, previously unknown writer Diane Setterfield scored a seven-figure advance for her debut novel, "The Thirteenth Tale," while Jed Rubenfeld was paid $800,000 for his debut, "The Interpretation of Murder."
The Authors Guild and some literary agents are urging publishers to raise the author's share of e-books to as high as 50%, arguing that there is less overhead for a digital book. Thus far, publishers are resisting.
Long before there were iPads and Kindles changing communication as we know it, there were other disruptive technologies and breakout information delivery systems. Like the printing press. And the Guttenberg Bible. WSJ's Marshall Crook offers a brief history of the book.
Not everyone believes that the shift to digital publishing is necessarily bad for writers. Novelist E.L. Doctorow, who has taught creative writing for 23 years at the NYU Creative Writing Program, says the industry may be transforming away from big corporate-owned publishers back to a cottage industry like it was many years ago. The shakeout could help prune an overcrowded market.
"Writers come up from nowhere, from the ground up, and nobody is looking for them or asking for them, but there they are," says Mr. Doctorow. "If there is a weeding out that's going to occur because of such difficulties, it may be all to the good."
As e-book sales accelerate, their impact on physical book sales will grow. Publishers worry that $12.99 digital books that typically go on sale the same date as physical books will cut into their hardcover sales and their $14.99 paperback sales down the line, a key revenue producer for literary titles.
Amazon, which controls the majority of digital-book sales with its Kindle reading device, says its Kindle e-book sales already are outpacing hardcover sales. Kindle e-books could outsell paperbacks in nine to 12 months, Amazon has said.
Also under pressure are big chains such as Barnes & Noble and Borders Group Inc., which continue to close stores because of the digital shift and the woeful economy. The stores have played a critical role in focusing attention on new voices through meet-and-greet readings and other promotions.
Meanwhile, small independent publishers are becoming more popular options for new writers. Leslie Daniels, a literary agent for the past 20 years, was thrilled to sell Creston Lea's recently published debut short-story collection, "Wild Punch," to Turtle Point Press.
But the author received only a $1,000 advance, typical of the advances paid by small independents. "I can't make a living as a writer, but it feels great to have these stories out in the world," says Mr. Lea. The author, who lives in Vermont, builds electric guitars and writes on the side. Jonathan Rabinowitz, publisher of Turtle Point Press, says "Wild Punch" has sold about 1,500 copies, including 150 e-books. He described the performance as "encouraging."
The smaller advance has a ripple effect. Ms. Daniels, who earns a 15% commission, used to make $11,250 on a big publisher advance of $75,000 or so. Her cut on Mr. Lea's $1,000: $150.
Write to Jeffrey A. Trachtenberg at
jeffrey.trachtenberg@wsj.com
Read more: http://online.wsj.com/article/SB10001424052748703369704575461542987870022.html?mod=WSJ_business_LeadStoryCollection#ixzz10pKpIHuV
20. House Democrats shelve net neutrality
proposal
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Sep 29, 9:58 PM (ET)
By JOELLE TESSLER
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WASHINGTON (AP) - House Democrats have shelved a last-ditch effort to broker a compromise between phone, cable and Internet companies on rules that would prohibit broadband providers from blocking or degrading online traffic flowing over their networks.
House Commerce Committee Chairman Henry Waxman, D-Calif., abandoned the effort late Wednesday in the face of Republican opposition to his proposed "network neutrality" rules. Those rules were intended to prevent broadband providers from becoming online gatekeepers by playing favorites with traffic.
The battle over net neutrality has pitted public interest groups and Internet companies such as Google Inc. and Skype against the nation's big phone and cable companies, including AT&T Inc., Verizon Communications Inc. and Comcast Corp.
Public interest groups and Internet companies say regulations are needed to prevent phone and cable operators from slowing or blocking Internet phone calls, online video and other Web services that compete with their core businesses. They also want rules to ensure that broadband companies cannot favor their own online traffic or the traffic of business partners that can pay for priority access.
But the phone and cable companies insist they need flexibility to manage network traffic so that high-bandwidth applications don't hog capacity and slow down their systems. They say this is particularly true for wireless networks, which have more bandwidth constraints than wired systems. The communications companies also argue that after spending billions to upgrade their networks for broadband, they need to be able earn a healthy return by offering premium services. Burdensome net neutrality rules, they say, would discourage future investments.
Waxman's proposal, the product of weeks of negotiations, attempted to carve out a middle ground by prohibiting Internet traffic discrimination over wireline networks while giving broadband providers more leeway when it comes to managing traffic on wireless networks. The plan would have given the Federal Communications Commission authority to impose fines of up to $2 million for net-neutrality violations.
For the broadband companies, Waxman's retreat is a setback. They fear the issue could now go back to the FCC, which deadlocked over the matter in August. The commission could impose more restrictive rules on the industry than a House compromise would have.
"If Congress can't act, the FCC must," Waxman said in a statement. He added that "this development is a loss for consumers."
Net neutrality was the Obama administration's top campaign pledge to the technology industry and a major priority of the current FCC chairman, Julius Genachowski, a key architect of Obama's technology platform. But frustration is growing - particularly among public interest groups - as the debate has dragged on over the past year without resolution either at the FCC or in Congress.
Waxman's proposal, in part, fell victim to today's political climate, with Republicans hoping to rack up gains in the upcoming midterm elections apparently unwilling to help Democrats make progress on such a contentious issue. With an anti-government, anti-regulation sentiment sweeping the nation - and boosting Tea Party candidates - Republicans also were reluctant to support a proposal that opponents equate to regulating the Internet.
Yet in what would have been a big victory for the phone and cable companies, Waxman's proposal would have headed off an effort by Genachowski to redefine broadband as a telecommunications service subject to "common carrier" obligations to treat all traffic equally.
The FCC has been trying to craft a new framework for regulating broadband since a federal appeals court in April threw out its current approach, which treats broadband as a lightly regulated "information service." The agency had argued that this approach gave it ample jurisdiction to mandate net neutrality.
But the U.S. Court of Appeals for the District of Columbia rejected that argument. It ruled that the agency had overstepped its authority when it ordered Comcast to stop blocking subscribers from using an online file-sharing service called BitTorrent to swap movies and other big files.
With Congress making no progress to resolve this issue, several public interest groups on Wednesday called on Genachowski to move ahead with his proposal to reclassify broadband as a telecom service.
"The FCC must act now to protect consumers by reinstating its authority over broadband," Gigi Sohn, president of the public interest group Public Knowledge, said in a statement. "We expect the FCC to do so to carry out one of the fundamental promises of the Obama administration."
But Joe Barton of Texas, the top Republican on the House
Commerce Committee, said Genachowski's proposal would "stifle investment and
create regulatory overhang in one of the most dynamic sectors of our
economy."
Welfare Issues
September 28, 2010
21. Rising
Welfare Costs
The Government Accountability Office (GAO) released Congressional testimony last week looking at Temporary Assistance for Needy Families (TANF). TANF, which replaced unrestricted welfare in 1996, has reduced welfare rolls and encouraged recipients to obtain work. Unfortunately, TANF's goals have been undermined, says Tad DeHaven, a budget analyst with the Cato Institute.
The GAO notes that "work participation rates...do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adults in work activities."
* States are required to have at least 50
percent of eligible TANF recipients from single parent families participating in
work activities.
* However, states
are given various credits and exemptions that significantly reduce the number of
recipients required to work.
* As a
result, only about 30 percent of TANF recipients engage in "work activities,"
which is often liberally defined.
Moreover, while TANF has successfully reduced the budgetary cost of cash welfare, overall federal spending on antipoverty programs has increased dramatically -- 89 percent over the present decade, after adjusting for inflation.
With so many Americans currently in need of assistance, now is actually a good time to discuss the role of government in taking care of the less fortunate, says DeHaven.
Source: Tad DeHaven, "Rising Welfare Costs," Cato-at-Liberty.org, September 22, 2010.
For text:
http://www.cato-at-liberty.org/rising-welfare-costs/#utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Cato-at-liberty+%28Cato+at+Liberty%29&utm_content=Google+Reader
For testimony:
http://www.gao.gov/new.items/d10815t.pdf
Welfare Issues
September 27, 2010
22. More Proof
We Can't Stop Poverty by Making It More Comfortable
On Jan. 8, 1964, President Lyndon Johnson delivered a State of the Union address to Congress in which he declared an "unconditional war on poverty in America." Then, the poverty rate in America was around 19 percent and falling rapidly. Last week, it was reported that the poverty rate this year is expected to be roughly 15 percent, and is climbing, says Michael D. Tanner, a senior fellow with the Cato Institute.
* Between then and now, the federal
government spent more than $13 trillion fighting poverty, and state and local
governments added another couple of trillion.
* Yet the poverty rate never fell below 10.5
percent.
The federal government now has 122 separate antipoverty programs ranging from Medicaid, the largest and most expensive antipoverty program, to the tiny Even Start Program for Indian Tribes and Tribal Organizations.
* Combined, these 122 programs spent more
than $591 billion in 2009, and are projected to cost even more this year.
* That amounts to $14,849 for every man,
woman and child in America.
* Given
that the poverty line is $10,830, it would have been cheaper just to mail every
poor person a check for $11,000.
During his first year in office, Obama's administration increased spending on welfare programs by more than $120 billion, says Tanner.
Some of the increase, of course, is due to the recession. But the administration has also made conscious policy choices to ease eligibility and expand caseloads. The end result is that one out of every six Americans is now receiving some form of government assistance.
The real work of fighting poverty must come not from the government, but from the engines of civil society, says Tanner.
Source: Michael D. Tanner, "More Proof We Can't Stop Poverty by Making It More Comfortable," Investor's Business Daily, September 17, 2010.
For text:
http://www.investors.com/NewsAndAnalysis/Article/547746/201009171932/More-Proof-We-Canand8217t-Stop-Poverty-By-Making-It-More-Comfortable-.aspx
September 24, 2010
23. Tolling by
Time Reduces Congestion and Improves Air Quality
Current solutions for traffic congestion on U.S. highways, including the construction of old-style toll roads, are ineffective and do little to address ancillary problems such as road maintenance. A better, more efficient solution is to implement congestion pricing, say John Merrifield, a professor of economics at the University of Texas at San Antonio and a senior fellow with the National Center for Policy Analysis, and H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis.
Traffic congestion in the nation's 439 urban areas cost U.S. taxpayers $87.2 billion dollars in 2007, according to the Texas Transportation Institute. Consider:
* Approximately 2.8 billion gallons of fuel
were wasted in 2007.
* The average
travel time delay during peak periods was 35 hours per driver.
* The average cost per driver due to wasted time and
fuel was $757.
Traditional toll roads and toll lanes are most often not operated in a way that helps reduce congestion, say Merrifield and Burnett. A better solution is congestion pricing, which charges fees that vary by time for use of the roadway -- higher fees during peak hours and lower or no fees during off-peak hours.
Experience shows congestion pricing works:
* A congestion fee on bridges and tunnels
between New York and New Jersey resulted in a 7 percent decline in traffic
during the peak morning period and a 4 percent decline in the peak evening
period.
* Traffic declined 15
percent in both London and Stockholm under congestion pricing schemes.
* In Singapore, congestion pricing resulted
in a 45 percent reduction in traffic.
Source: John Merrifield and H. Sterling Burnett, "Tolling by Time Reduces Congestion and Improves Air Quality," National Center for Policy Analysis, September 24, 2010.
For text:
http://www.ncpa.org/pub/ba725
September 28, 2010
24. Only
Trade-Fuelled Growth Can Help the World's Poor
Current experience and history both speak loudly that the only real engine of growth out of poverty is private business, and there is no evidence that aid fuels such growth, says William Easterly, professor of economics at New York University and codirector of its Development Research Institute.
Of the eight Millennium Development Goals (MDGs), only the eighth faintly recognizes private investment, through its call for a "nondiscriminatory trading system." Yet the trade-related MDG received virtually no attention from the wider campaign, has seen no action and even its failure has received virtually no attention.
This is all the more misguided because trade-fuelled growth not only decreases poverty, but also indirectly helps all the other MDGs. Yet in the United States alone, the violations of the trade goal are legion, says Easterly.
* U.S. consumers have long paid about twice
the world price for sugar because of import quotas protecting about 9,000
domestic sugar producers; the European Union is similarly guilty.
* Equally egregious subsidies are handed
out to U.S. cotton producers, which flood the world market, depressing export
prices.
* According to an Oxfam
study, eliminating U.S. cotton subsidies would "improve the welfare of over one
million West African households -- 10 million people -- by increasing their
incomes from cotton by 8 to 20 percent."
The U.S. government, for its part, announced recently its "strategy to meet the millennium development goals." The proportion of this report devoted to the U.S. government's own subsidies, quotas and tariffs affecting the poor: zero.
It is already clear that the goals will not be met by their target date of 2015. One can already predict that the ruckus accompanying this failure will be loud about aid, but mostly silent about trade. It will also be loud about the failure of state actions to promote development, but mostly silent about the lost opportunities to allow poor countries' efficient private business people to lift themselves out of poverty, says Easterly.
Source: William Easterly, "Only Trade-Fuelled Growth Can Help the World's Poor," Financial Times, September 21, 2010.
For text:
http://blogs.ft.com/beyond-brics/2010/09/21/guest-post-only-trade-fuelled-growth-can-help-the-worlds-poor/
September 29, 2010
Kansas K-12
Spending and Achievement Comparison
Kansas has been following the same theory for a long time in hope of improving public education: pumping more money into the same approach to achieve proficiency. Over the last 10 years corresponding to the state's participation in the National Assessment of Educational Progress (NAEP), Kansans have increased per pupil spending by 79 percent, but the results have been dismal: modest improvements in mathematics, little improvement in reading ability and the majority of students still failing to perform at proficient levels. That is a failing grade by any measurement, says John R. LaPlante, an education policy fellow with the Kansas Policy Institute.
It's also important to examine how mathematics and reading scores have changed since 2005 -- the year before the state began pumping hundreds of millions more into schools as a result of the last school lawsuit.
* Total aid to schools jumped $1.4 billion
between the 2005 and the 2009 school years ($925 million of which came from the
state) but test scores are essentially flat.
* The education lobby contends that higher spending
causes achievement to rise, but a 30 percent per pupil spending hike over a four
year period clearly made little difference in proficiency scores.
Continuing to follow the "more money = greater proficiency" theory would only validate Albert Einstein's definition of insanity: doing the same thing over and over and expecting a different result. "Just spend more" is not the answer but there are many options that have proved successful, including charter schools and tax credits for private schools, says LaPlante.
Source: John R. LaPlante, "Kansas K-12 Spending and Achievement Comparison," Kansas Policy Institute, September 2010.
For text:
http://www.kansaspolicy.org/researchcenters/education/studies/d66804.aspx?type=view
WSJ * SEPTEMBER 29, 2010, 10:45 A.M. ET
25. China's Next Leap Forward
The jump from middle-income to rich status is much harder to achieve
than the ascent from poverty. But there are plenty of reasons to believe China's
growth prospects remain strong.
By GARY S. BECKER
I just spent two weeks lecturing in China and Hong Kong, and
discussing China's economic development with many economists, businessmen and
government officials. China's progress since my first trip there in 1981 has
been truly remarkable, and I expect considerable growth during the next decade.
Nevertheless, China still faces many challenges if it is to move beyond
middle-level income status into the exclusive club of high per capita income
countries.
Related Video
* News Hub: China's Output Tops Japan's
(08/16/10)
* Long-Term Prospects for
the World's Economies (08/11/10)
*
The Big Interview: Morgan Stanley's Stephen Roach (07/09/10)
No country in the modern world has managed persistent economic growth without considerable reliance on private enterprise and decentralized private markets. All centrally planned economies failed to achieve sustained development, including the Soviet Union before its collapse, China before market reforms began in the late 1970s, and Cuba since Castro's revolution in the late 1950s.
China's private sector has led its dominance in textiles, electronics, and other consumer and producer goods. It's followed the model of the "Asian Tigers"—Hong Kong, Singapore, South Korea and Taiwan—and relied heavily on exports produced with cheap labor. In the process, China has accumulated enormous reserves, as Taiwan, Japan and other rapidly growing Asian economies did in past decades.
Poorer countries like China need not get everything "right" to grow rapidly through exports to richer countries. They need only have some strong sectors that use world markets to fuel overall growth. Japan's rapid growth from the 1960s-1980s was led by a highly efficient manufacturing sector. Yet at the same time Japan also had a large and inefficient service sector, and an agricultural sector that was riddled with subsidies and inefficient incentives.
Similarly, China's economy still has a glut of state-owned enterprises (SOEs) with excessive employment and low productivity. Their importance has fallen over time, but Chinese economists estimate that they still control about half of nonagricultural GDP. One crucial example is the state-controlled financial sector that makes cheap loans to other large, inefficient and unprofitable state enterprises. China's economy also suffers from extensive price controls, restrictions on migration, and many other structural barriers to efficient growth.
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David Gothard
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Some democracies, like postwar Japan, have made the economic reforms needed for sustained economic progress. India, for example, experienced rapid growth after it began in 1991 to shed a socialist orientation and encourage private investment and private initiative. But economic progress has been swift under autocratic rule as well, including in Chile under Augusto Pinochet, Singapore under Lee Kuan Yew, and Taiwan under Chang Kai-shek. Usually, however, personal freedom has grown along with rapid economic progress in autocratic governments. Chile, Taiwan and South Korea, for example, all became vibrant democracies after they'd grown rapidly for a number of years.
Something related has happened in China. The degree of personal freedom in China today is enormously greater than in 1981, when the vast majority of the population had essentially no personal freedoms. The Internet, in particular, has given hundreds of millions of Chinese access to all kinds of information, including what happens in democracies, and various criticisms of their government's policies. The government actively tries to censor the Internet, but these censors are easily bypassed. Students and others say they readily "climb the wall" by using cheap software (appropriately, made in America) that gives them direct access to the Internet in Hong Kong and hence avoids the censors.
I do not know how soon China will evolve into a political system with competing parties, or whether China will continue to have effective leadership under its single-party structure. But as the economy continues to develop it will be impossible to prevent personal freedoms from expanding, including the freedom to criticize economic and social policies.
Global markets allow poor countries to grow rapidly for a while, but it is far more difficult to grow beyond middle-income levels. Much has been made of the fact that a month ago China's aggregate GDP surpassed that of Japan. But all that means is China's per capita income is about 10% of Japan's, since China's population is about 10 times that of Japan. Despite its great economic advances, China still has a long way to go to become a rich country.
China's locally owned government enterprises have been more efficient than national enterprises. This is mainly because local government enterprises have to compete against each other, whereas national enterprises often receive monopoly positions. But competition among government enterprises is a partial substitute for competition among privately owned enterprises. If China wants to continue to grow rapidly it will have to reduce the scope of the SOEs, especially the national ones, and greatly expand the private sector in finance, telecommunications and many other fields.
Developing countries improve their technological base by importing technologies and knowledge developed in advanced countries. China has encouraged direct foreign investment in part to get access to the technologies of Japan, the U.S., Germany and other nations. Using technologies developed by others is still important after countries advance to middle-income levels, but these countries must then also develop more of their own technologies to advance much further.
To accomplish this transition, China has been promoting university enrollments and a growing R&D sector. University attendance in China has grown greatly since the late 1990s, propelled by rapid increases in the earnings of individuals with higher education. China is innovating more, but it is still a long way behind the U.S., Japan and other rich countries.
As for China's currency, it's true that the yuan is considerably undervalued due to Beijing's continued intervention in foreign-exchange markets. But the undervalued yuan is a gift to American and other consumers outside China because it makes goods produced in China much cheaper.
In effect, China sells goods cheaply to the rest of the world and receives in return U.S. and other paper assets that pay almost no interest, and will depreciate in value when inflation rates increase in the U.S. These are the main reasons why China should move toward floating the yuan.
Many Chinese officials believe that substantial yuan appreciation will make the SOEs even less competitive, thereby increasing unemployment and social unrest as these enterprises contract. Yet an undervalued currency not only leads to a further accumulation of paper assets but also weakens the incentives of Chinese companies to cater to domestic consumption—which is remarkably weak—and to upgrade their exports to higher quality products.
There is tremendous pride and enthusiasm among Chinese regarding their economic achievements, and a growing confidence that China is returning to its great-country status of centuries ago. This is reflected in the enormous energy of its professionals, entrepreneurs and workers. It is also reflected less attractively in the more aggressive stance of China toward Japan and other neighbors.
Yet with some enlightened leadership, along with greater faith in competition and private markets, China's prospects for continued growth—and for rapid improvements in the circumstances of the children and grandchildren of the present generation—are strong.
Mr. Becker, the 1992 Nobel economics laureate, is professor of
economics at the University of Chicago and senior fellow at the Hoover
Institution.
WSJ * SEPTEMBER 29, 2010
26. 40 Years of Energy Panic
We
seem to get all the oil we want at a price we're willing to pay.
*
By HOLMAN W. JENKINS, JR.
The scene was a Senate hearing last November, before the Gulf oil spill. To his credit (and unlike a BP exec seated nearby), Shell's Marvin Odum went on about the risk of spills, the history of spills, the response to spills.
Then he launched into a section that began: "The U.S. imports approximately 60% of its petroleum needs. This is not necessary. . . . We should not be satisfied with having other nations produce their energy for our use."
No, our point isn't that fear of foreigners is being used by
Big Oil to con us into taking unacceptable environmental risks. If anything,
BP's success in recapping the Macondo well suggests that, had a reliable blowout
preventer been installed in the first place, BP's numerous errors needn't have
resulted in any spill at all. Rather, our point is that the endless invocation
of an alleged energy crisis is used to sell deep-water drilling because it's
used to sell everything.
Related Videos
* News Hub: Gulf Oil Plume Size of Manhattan
- Study
* Raw Video: BP Recovers
Failed Blowout Preventer
* A Look at
the Oil Drilling Process
Turn on the TV: ethanol, hybrid vehicles, electric vehicles, coal, offshore drilling, onshore drilling, wind, natural gas. Inflicted on us relentlessly since the 1970s, the most mischievous and misleading trope in American politics is the idea that our energy supplies are in danger, that foreigners are out to get us, that a crisis is upon us.
What exactly has been the record of poor, pitiful us during this time?
We seem to get all the oil we want at a price we're willing to pay. For three decades, our economy enjoyed one of its greatest boom periods ever—a boom that ended, ironically, not because of oil shortages, but because of overspending on giant houses far from town by people happily conditioned by the ubiquity and affordability of their energy supplies.
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bw0929
Associated Press
Never mind that Washington's price controls were to
blame.
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bw0929
And look at countries even more dependent on oil imports than ours. China and India have inaugurated two of the greatest growth stories in history. Hong Kong, Singapore, Japan, Taiwan, much of Western Europe—states notorious for a paucity of natural resources—have built among the highest sustained living standards on the globe.
Some confused persons still think we invaded Iraq to get its oil, which would have been like spending a dollar to get a penny. Saddam would have sold us all the oil we wanted (and Kuwait's too) if we had just left him alone.
Now whole careers in the public eye are being built on the idea of peak oil—a geological conceit that produces scenarios of global catastrophe only because it omits the price mechanism, which has worked well for a century to adapt the world economy to whatever amount of oil is geologically available at a given time.
This isn't to say that oil isn't a political problem maker. Villains like Saddam want to steal it. As a fount of domestic patronage, it spoils, corrupts and degrades societies where control is handed to politicians. But for the rest of us, that corruption is mainly visited via policies peddled domestically with a heavy dose of energy panic.
Take the two scandals dogging BP lately. Britain's craven behavior toward a terrorism-sponsoring Libya partly arose from an exaggerated notion of Britain's stake in Libyan oil. The British, like us, have had no trouble buying all the oil they want on world markets.
And, in retrospect, the obvious question raised by the Macondo blowout is why anyone would bet their company by drilling in ultra-deep water where the consequences of a blowout can't quickly and economically be contained.
It turns out that one reason is the now-famous Oil Pollution Act of 1990, which capped oil-spill liability partly out of fears of jeopardizing the nation's energy. Even so, when the bill was debated, shipowners warned that any substantial liability at all might kill the global oil trade.
Well, if not in law then in practice, the cap has been repealed. We'll soon see on what terms shareholders and insurance markets are willing to back the search for oil in deep waters. Guess what? By properly pricing the risks of a deep-water blowout, we're likely to get much safer drilling.
Would that all our energy choices were allowed to work the same way, undistorted by rampant intervention premised on the false notion that the global oil market has proved to be anything other than what it is: robust, reliable, unfailing, if frequently volatile.
Even the greenies might be better off—Americans might be more amenable to modest energy taxes to fight global warming (if that's your cup of tea) if not preached into constant fear of energy shortages. Someday it will behoove a professor to write a book about the greatest failed political marriage of all time—the marriage of the global warming crowd with the energy panic crowd.
Look how little it has achieved despite commanding the
airwaves, the media and nearly universal assent from the great and good. Why the
marriage failed so abysmally is a question for another day. For now, it suffices
simply to notice that it has.
WSJ * SEPTEMBER 29, 2010
27. Bangladesh, 'Basket Case' No More
Pakistan could learn about economic growth and confronting terrorism
from its former eastern province.
By SADANAND DHUME
Not long ago, when you thought of a South Asian country ravaged by floods, governed by bumblers and apparently teetering on the brink of chaos, it wasn't Pakistan that came to mind. That distinction belonged to Bangladesh.
Henry Kissinger famously dubbed it a "basket case" at its birth in 1971, and Bangladesh appeared to work hard to live up to the appellation. For the outside world, much of the country's history can be summed up as a blur of political protests and natural disasters punctuated by outbursts of jihadist violence and the occasional military coup.
No longer. At a reception Friday for world leaders attending the United Nations General Assembly in New York, President Barack Obama congratulated Bangladeshi Prime Minister Sheikh Hasina Wazed for receiving a prestigious U.N. award earlier in the week. Bangladesh was one of six countries in Asia and Africa feted for its progress toward achieving its Millennium Development Goals, a set of targets that seek to eradicate extreme poverty and boost health, education and the status of women world-wide by 2015.
Bangladesh has much to be proud of. Its economy has grown at nearly 6% a year over the past three years. The country exported $12.3 billion worth of garments last year, making it fourth in the world behind China, the EU and Turkey. Against the odds, Bangladesh has curbed population growth. Today the average Bangladeshi woman bears fewer than three children in her lifetime, down from more than six in the 1970s.
The country's leading NGOs—most famously the microcredit pioneer Grameen Bank—have earned a global reputation. Relations with India are on a high. In August, Indian Finance Minister Pranab Mukherjee signed off on a $1 billion soft loan for Bangladeshi infrastructure development, the largest such loan in India's history.
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Associated Press
Sheikh Hasina, Prime Minister of Bangladesh, addresses a summit
on the Millennium Development Goals at United Nations headquarters in New
York.
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Perhaps most strikingly, Bangladesh—the world's third most populous Muslim-majority country after Indonesia and Pakistan—has shown a willingness to confront both terrorism and the radical Islamic ideology that underpins it. Since taking office in 2009, the Awami League-led government has arrested local members of the Pakistani terrorist group Lashkar-e-Taiba, the al Qaeda affiliate Harkat-ul-Jihad-al-Islami-Bangladesh, and Jamaat-ul-Mujahideen, a domestic outfit responsible for a wave of bombings in 2005.
In July, the Supreme Court struck down a 31-year-old constitutional amendment and restored Bangladesh to its founding status as a secular republic. The government has banned the writings of the radical Islamic ideologue Abul Ala Maududi (1903-79), founder of Jamaat-e-Islami, the subcontinent's most influential Islamist organization. Maududi regarded warfare for the faith as an exalted form of piety and encouraged the subjugation of women and non-Muslims. A long-awaited war crimes tribunal will try senior Jamaat-e-Islami figures implicated in mass murder during Bangladesh's bloody secession from Pakistan.
Of course, it will take more than a burst of entrepreneurial energy and political purpose before Bangladesh turns the corner for good. The long-running feud between Prime Minister Wazed and her main rival, Bangladesh Nationalist Party leader Khaleda Zia, makes that of the Hatfields and McCoys look benign by comparison. The war of ideas against the country's plethora of Islamist groups requires the kind of sustained pressure that Dhaka has been unable to apply in the past. And garment exports notwithstanding, the economy remains shallow.
Deputy Editorial Page Editor Bret Stephens analyzes the latest strikes.
Despite these caveats, Bangladesh ought to be held up as a role model, especially for the subcontinent's other Muslim-majority state. Arguably no two countries in the region share as much in common as Pakistan and Bangladesh, two wings of the same country between 1947 and 1971. With 171 million people and 164 million people, respectively, they are the world's sixth and seventh most populous countries. Both have alternated between civilian and military rule. In terms of culture, both layer Islam over an older Indic base.
Yet when it comes to government policies and national identity, the two countries diverge sharply. As a percentage of gross domestic product, Islamabad spends more on its soldiers than on its school teachers; Dhaka does the opposite. In foreign policy, Pakistan seeks to subdue Afghanistan and wrest control of Indian Kashmir. Bangladesh, especially under the current dispensation, prefers cooperation to confrontation with its neighbors.
Perhaps most importantly, Bangladesh appears comfortable in its own skin: politically secular, religiously Muslim and culturally Bengali. Bangladeshis celebrate the poetry, film and literature of Hindus and Muslims equally. With Pakistanis it's more complicated. The man on the street displays the same cultural openness as his Bangladeshi counterpart, but Pakistan also houses a vast religious and military establishment that seeks to hold the country together by using triple-distilled Islam and hatred toward India as glue.
In a way their best known national heroes sum up the two country's personalities. For Bangladesh, it's Grameen Bank's Nobel laureate Muhammad Yunus, synonymous with small loans to village women. For Pakistan: Abdul Qadeer Khan, the rogue nuclear scientist who peddled contraband technology to Libya, Iran and North Korea.
Nearly 40 years ago, only the most reckless optimist would have bet on flood-prone, war-ravaged Bangladesh over relatively stable and prosperous Pakistan. But with a higher growth rate, a lower birth rate, and a more internationally competitive economy, yesterday's basket case may have the last laugh.
Mr. Dhume, a columnist for WSJ.com, is writing a book about the
new Indian middle class.
28. Why Is College So Expensive? http://www.ncpa.org/pub/ba726
Brief Analyses | Education
Read
Article as PDF
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No. 726
Thursday, September 30, 2010
by Angelica Gonzalez and Courtney O'Sullivan
Soft consumer demand in a weak economy has led many businesses to cut prices. But this is not the case in the market for higher education. Entering college freshmen and returning students face ever-higher tuition and fees. In fact, tuition at American universities has been increasing faster than inflation for the past 30 years.
According to the College Board, from the 1979-1980 school year to the 2009-2010 school year, average tuition and fees at private four-year universities rose more than 175 percent - from $9,501 to $26,273 (in 2009 dollars). Over the same period, in-state tuition and fees at public four-year institutions rose more than 220 percent - from $2,174 to $7,020.
Where Is the Money Going? Much of the increased spending is going outside the classroom. For example, according to economist Richard Vedder, at four-year U.S. colleges and universities:
* The ratio of teachers to students remained
relatively stable, at about seven teachers per 100 students from 1976 to
2000.
* In contrast, the ratio of
nonteaching staff members to students doubled from three to six per 100 students
from 1976 to 2000.
This suggests that less money is being spent on students' education and more is being spent on noninstructional activities, such as administration and faculty research.
More universities are beginning to compete on providing the best college "experience," instead of focusing on the end product by educating students to earn a degree. Schools are building lavish student unions, first-rate gym facilities and expensive high-tech support centers. The Delta Cost Project on Postsecondary Education Costs, Productivity and Accountability reports that:
* Institutional spending per fulltime
equivalent student for student services - such as student organizations,
intramural athletics and career counseling - rose more than 36 percent at
private research universities from 1998 to 2008, after adjusting for
inflation.
* By contrast,
institutional spending on instruction increased only 22.4 percent at private
universities.
* At public research
universities, student services spending increased 20.1 percent and instructional
spending rose just 10.1 percent over the same time period. [See the
figure.]
Are High Costs Producing Better Results? The number of total degrees awarded per 100 fulltime equivalent students enrolled has not increased much in recent years, according to the Delta Cost Project:
* Private research universities awarded 31
degrees per 100 fulltime equivalent students enrolled in 2006.
* This is only one more degree than was awarded in
2002.
* Public research universities
awarded 25 degrees per 100 fulltime students in 2006 compared to 23 in
2002.
Universities are also spending more per degree awarded:
* Private research universities spent
$83,054 per degree completed in 1995.
* By contrast, private research universities spent
$109,954 on education and related spending (direct and indirect spending for
instruction and student services) per degree completed in 2006 - a 32 percent
increase.
* Spending also increased
at public research universities, but less dramatically - $56,743 per degree
completed in 2006 compared to $53,261 in 1995.
One reason costs have increased is because students are taking longer to graduate. The share of students completing a bachelor's degree in four years or less fell from about 45 percent in 1977 to 31 percent in the 1990s, according to a National Bureau for Economic Research (NBER) report.
A separate NBER study found that students are also spending less time studying. For example:
* On the average, fulltime students reported
studying 24 hours per week in 1961.
* Students reported only 14 hours of study per week in 2003.
After ruling out possible explanations, such as innovations in technology, work status and parents' education levels, the researchers concluded the most plausible explanation for the decreased study time is falling academic standards.
What about Student Aid? An increasing proportion of the cost of college education is paid for with federal aid, much of it in the form of student loans. Between 1999 and 2009, total federal aid to college students rose from $61.1 billion to $116.8 billion, according to the College Board. Including state aid, total government subsidies nearly doubled from $66.6 billion to $126.2 billion. Indeed:
* The average amount of a federal student
loan increased 180 percent from 1990 to 2008, after adjusting for
inflation.
* Students borrowed
$1,637 in federal loans (in 2008 dollars) during the 1990-1991 school year, on
the average.
* By contrast, students
borrowed an average of $4,585 during the 2008-2009 school year.
As a result, during this period, the portion of average tuition and fees at a four-year public university financed by federal loans rose from less than 60 percent to about 75 percent.
Conclusion. Rising government subsidies have increased the quantity of education demanded. This means that the rising cost of a college education is due in large part to the increased financial aid available rather than any general improvement in the quality of education.
Angelica Gonzalez is a research assistant and Courtney
O'Sullivan is an editor with the National Center for Policy Analysis.
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