Global Freedom
Global Freedom Had Few Blooms
Why 2009 was a bleak year
Not to China, which had an anniversary of its own—the 20th since Chinese students occupied Tiananmen Square in an inspiring call for democracy and liberty, only to be crushed by the army. Looking back, Beijing shows no remorse. In fact, Human Rights Watch said in May, it "continues to victimize survivors, victims' families, and others who challenge the official version of events."
This June 4, Tiananmen Square was occupied again—by battalions of police. This month, Liu Xiaobo, the chief author of a manifesto calling for democracy and human rights, was indicted for "incitement to subvert state power."
A human rights lawyer was shot to death, along with a student journalist, in broad daylight on a Moscow street. After his government passed a law making it a crime to equate Josef Stalin with Adolf Hitler, Russian President Dmitry Medvedev urged the creation of museums documenting his crimes. A grandson of the dictator filed a libel suit against a newspaper that called Stalin a "bloodthirsty cannibal," but he lost.
Among the last Stalinists in power is Kim Jong Il of North Korea, whose new constitution mysteriously dropped all reference to "communism" but gave him the new title of "supreme leader." The human rights organization Impunity Watch claimed his regime holds 154,000 political prisoners, while a North Korean official told the United Nations Human Rights Council the actual number is zero.
Another old-school communist is Cuba's Raul Castro, who took over the government from brother Fidel three years ago but has maintained his repressive policies. A new law allows the incarceration of dissidents for "dangerousness" before they have committed any crime. When one of them, Alexander Santos Hernandez, was ordered to serve four years in prison, the sentence was dated two days before his trial began.
Such logic would pass muster in Tehran. After opponents charged Iranian President Mahmoud Ahmadinejad with rigging the June vote to secure re-election, a state agency agreed to recount the votes—well, 10 percent of them—after declaring that no major irregularities had occurred. Protests by the opposition continue six months later, with mourners at the December funeral of a prominent opposition cleric chanting, "Our shame, our shame, our idiot leader!"
There was shame as well in the West African nation of Guinea Bissau. At a stadium rally put on by opponents of the military junta, one officer on the scene said, "They all must be killed. They think there is democracy here." When soldiers were done, hundreds of people had been killed or raped.
Somalia, plagued with civil war and piracy, was called "the worst country on Earth" by The Economist magazine of Britain. Dictator Robert Mugabe of Zimbabwe, which could contest that distinction, was forced into a tense power-sharing deal with an opponent after losing parliamentary elections last year.
A committee set up to give a $5 million annual prize for African leaders who serve well and then relinquish power found no worthy recipient this year. Calling it "an outstanding example of democracy in Africa," President Obama visited Ghana, which has had five consecutive free elections.
Democracy did not fare so well in Honduras, where the military roused President Manuel Zelaya from his bed at gunpoint and put him on a plane to exile in Costa Rica. He managed to return to Honduras, but not to the presidency.
On Election Day in Afghanistan, the man in charge of one voting station discovered the ballot boxes were full—before the polls opened. Despite rampant fraud, President Hamid Karzai was forced into a runoff. He won by default when his opponent, concluding that a "transparent election is not possible," withdrew.
Iraqi lawmakers approved a new electoral law that will allow balloting in March. If things go well, it will be the first time in Iraq, reported Reuters, "that a fully democratic, full-term parliament hands over to a successor."
Positive developments like that were not as common this year as they were in the glorious days of 1989. But the few that occurred suggest that the important moments in the progress of democracy may not all be in the past.
Nanny of the Year 2009!
Reason.tv: Nanny of the Year 2009!
In 2009, America's meddlers worked overtime minding other people's business.
Nanny of the Month winners have targeted everything from fish pedicures to feeding the homeless. But there can be only one Nanny of the Year.
Who took home top honors as the year's biggest buttinsky? Click the video to find out.
Worst. Decade. Ever.
Reason.tv: Worst. Decade. Ever.
Hands down, the '00s were the worst political decade at least since the 1990s.
Reason.tv looks back at the (lack of) personalities, the scandals, and the screw-ups that made us all want to forget the first 10 years of the 21st century.
Aviation Security
Will We Get Serious About Aviation Security?
After $40 billion in spending, amateurs are still getting on planes with explosives.
Two egregious security failures allowed this to happen. First, despite an explicit warning from the terrorist’s father, his name did not get added to either of the TSA’s lists—the 4,000-name no-fly list or the 14,000-name selectee list. Had he been on the latter list, he would have been subjected to secondary screening at Amsterdam Schiphol airport, where a routine swabbing of his hands and/or carry-ons would likely have revealed traces of the PETN explosive.
But even if this trace-detection had not been carried out, the PETN which the terrorist concealed in his underwear would have been detected had he been required to pass through one of the 15 of millimeter-wave body-scanners now in use at Schiphol. But airport officials there maintain that they are not permitted to use these machines for U.S.-bound passengers (though TSA has disputed that).
Both failures reflect the flawed philosophy that underlies U.S. aviation security policy. For the most part, it continues to be fixated on keeping bad things—as opposed to bad people—off of airplanes. It also implicitly assumes every passenger is equally likely to be a terrorist, so every passenger must get equal treatment, except in extreme cases. That’s why it’s so hard to shift potential bad guys from the Department of Homeland Security’s much larger databases to TSA’s selectee and no-fly lists. As a libertarian, I agree that we should be very leery of forbidding people to fly without good reason. But requiring potentially high-risk travelers to undergo secondary screening (especially since we do some of this randomly, in any case) is hardly the end of the world.
In fact, shifting to a risk-based approach to aviation security would likely mean increased security and lower costs, both for the TSA and especially lower wasted-time costs for most travelers. Under a risk-based approach, air travelers would be divided into three groups: lower-risk, ordinary, and higher-risk. The three groups would be treated differently, for very good reason.
Lower-risk people would be those with active government-issued security clearances and anyone who joined a risk-based “trusted traveler” program by passing an FBI background check and getting a biometric ID card. These people would get streamlined processing at airports, similar to what existed pre-9/11. (Note that TSA’s sister agency within the Department of Homeland Security, Customs & Border Protection, operates a number of similar programs for U.S. citizens returning to this country, such as the recently expanded Global Entry program.) Higher-risk people would be those placed on an expanded selectee list and would be subjected to mandated secondary screening, including a body scan, backed up (if necessary) by a full body search. Now that terrorists have started hiding explosives in their underwear and body cavities, we have no alternative to these intrusive measures.
This risk-based approach would be significantly more effective than current practice in dealing with the increasingly serious threat of airborne suicide bombers. It should be supplemented by beefed-up control of access to planes and their cargo holds on the tarmac at airports, to thwart those who would place bombs on board without getting on board as passengers.
Fortunately, the Flight 253 bomber failed, due largely to his own incompetence. But unless we shift to a risk-based security policy, the next such attempt could well succeed.
Robert Poole is director of transportation policy at Reason Foundation. He advised the White House and members of Congress on airport security issues following the September 11, 2001 attacks. Poole’s aviation security research and newsletters are archived here.
The Right to Work
The Right to Work
[Speaking before the Committee on Education and Labor of the House of Representatives, 1948]
Since I am both an employer and a union officer, I might claim to be well acquainted with the virtues and the sins of both management and unions; but I do not speak for either.
My concern is for the individual. He has been battered from both sides. Business management has treated him like a commodity or a tool. Union management has lorded it over him as if he were a serf or a slave whose rights depended on the whim of a master.
Through the Wagner Act, the Taft-Hartley Act, and other legislation, Congress has given the individual some measure of protection from his management bosses and union bosses.
But bosses never take kindly to restraint. You have heard reactionary businessmen urging the total repeal of the Wagner Act. Now you are hearing the clamor of reactionary union leaders for the repeal of the Taft-Hartley Act.
But millions of workers are looking to Congress to keep this nation face forward on the road charted by our forefathers — the road of liberty under laws that protect and expand individual freedom, not restrict it.
The touchstone for any law — or any government, anywhere in the world — is the question: How does individual freedom fare? In many parts of the world, the freedom of the individual has been set back by centuries.
Mussolini is dead, but his fascist idea lives — the idea that the individual is the creature of the state, that he exists for the state, that he has no rights except what the state gives him and can take away.
America has been a living revolt against that pagan idea, ever since the founders of America declared that "all men … are endowed by their creator with certain unalienable rights" and "that among these rights are life, liberty, and the pursuit of happiness."
I ask the Congress to apply that touchstone to whatever proposals are made in the crucial field of labor legislation.
The Declaration of Independence specified "life, liberty, and the pursuit of happiness" as inalienable rights. The Constitution goes further. The Bill of Rights mentions freedom of speech, press, assembly, worship, and other rights which the state may not invade.
But neither the Declaration nor the Constitution pretends to exhaust the list of man's God-given and inalienable rights.
One of the most fundamental of those rights is the right to work. I submit that the time has come for Congress to declare it to be the public policy of the United States that every individual should have the right to work, when he pleases, where he pleases, for himself or for whoever wants to hire him — and that the full protection of the government should be put behind this right to work.
Need I point out how basic the right to work is? It is the same as the right to life, for it is by work that men live. Deny the right to work, and you have cut off the right to life.
The government itself does not claim the power to take away a man's right to work, unless he has been convicted of crime, after fair trial and due process of law.
No one else — certainly no private business or private organization — should have the right to convict or condemn a man to this extreme penalty.
A man or woman can enjoy no freedom if denied the right to earn a living. Alexander Hamilton said, "A power over a man's subsistence amounts to a power over his will."
If any private individual or group usurps the right to say who shall work and who shall not, then any citizen, even if he stands entirely alone, should be able to look to his government for full, speedy, and effective justice.
It is the boast of American democracy that all the might and majesty of government exist for one purpose: to secure the rights of the individual.
That is an empty boast if one American can be denied the right to work.
Let me remind the Committee that this insistence upon the right to work is not a notion of my own. Again and again, the courts have declared that the right to work is a constitutional right.
In Truax vs. Raich (239 U.S. 33, 41), discussing the Fourteenth Amendment, Mr. Justice Hughes declared, for the Supreme Court
It requires no argument to show that the right to work for a living in the common occupations of the community is of the very essence of the personal freedom and opportunity that it was the purpose of the Amendment to secure.
In Allgeyer vs. Louisiana (165 U.S. 589, 590), discussing the same amendment, the Supreme Court said
The liberty mentioned in that amendment means, not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties:
"To be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned."
In Meyer vs. Nebraska (262 U.S. 390, 399), again discussing the Fourteenth Amendment's guarantee of liberty, the Supreme Court declared
While this court has not attempted to define with exactness the liberty thus guaranteed, the term has received much consideration and some of the included things have been definitely stated.
"Without doubt, it denotes not merely freedom from bodily restraint but also the right of the individual to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, establish a home and bring up children, to worship God according to the dictates of his own conscience, and generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness by free men."
What privilege — I would prefer to say what right — could be more essential to the orderly pursuit of happiness than the right of a man to earn bread for himself and his family — the right to work?
Yet in practice, as this committee knows, the right to work has been violated in a multitude of instances, of which my own case — denial of the right to work because I refused to pay a political assessment to a union — is only one.
What is the reason for this strange inconsistency — for the fact that a clearly established constitutional right has been and can be challenged with impunity?
One reason may be that the courts have never been given a clear mandate by federal law to protect the right to work absolutely and at all events. In fact, nowhere in federal statute law is the positive right to work stated in unqualified terms.
This lack and this need become glaringly noteworthy when we examine the present legal protection for the right not to work, the right to strike.
The right to strike is a valuable and necessary right. It is properly emphasized in such statutes as the Norris-LaGuardia Act and the Wagner Act.
But what man in his right mind would say that the right to strike is more important than the right to work?
Which is more basic? Which is more essential to life and the pursuit of happiness? The questions answer themselves.
Yet nowhere in the federal statutes is the right to work even asserted, much less emphasized or explicitly defended. And this silence of the law has helped to produce an entirely unwarrantable interpretation of the right to strike.
By the right to strike I mean the right of workers to quit their work in concert for lawful purposes, provided public health or safety is not endangered thereby.
Furthermore, strikers have the right, by peaceful picketing and other lawful means, to acquaint the public with their case and to enlist all the public sympathy and support they can muster by the methods of persuasion.
That, I believe, is what Congress had in mind in enacting legal protection of the right to strike. But the right to strike is not so understood in some quarters. Another element has been added.
The right to strike has been stretched to mean not only the right of workers to quit in concert, but to prevent their fellow-workers, who want to work, from going to their jobs, by assault, threats, intimidation, and abuse — a violent method called peaceful picketing.
For what goes on under the cloak of peaceful persuasion, I need only refer to the mass of evidence your files and mine contain. And more is contained in the pent-up minds and hearts of victims whose lips are locked by fear.
None of it is surprising, as long as the federal statutes put more emphasis on the right to strike than they do on the right to work. To pretend that it is constitutional to deprive some people of the right to work because others have the right to strike is a travesty.
To continue to wink at it would be treason. It may be said that there are state laws against violence in labor disputes. There are. But drawing nice distinctions between federal and state authority is small comfort to a man whose home has been bombed — and an injunction makes a poor plaster for a broken head.
There is already on the federal statute books provision for a five thousand dollar fine and a ten-year prison term for any "two or more persons" who "conspire to injure, oppress, threaten, or intimidate any citizen in the free exercise or enjoyment of any right or privilege secured to him by the Constitution or laws of the United States" (R.S. SS 5508; Mar. 4,1909, c. 321, SS 19, 35 Stat. 1092).
Perhaps this statute is broad enough to be applied to interference with the constitutional right to work.
It is certainly an adequate precedent for making such interference a federal offense.
But we should not stop with providing criminal penalties. If we mean to protect the individual's right to work, we should put further means of redress in the individual's own hands. The man or woman whose right to work has been violated should be enabled to recover damages — heavy damages —because the right to work is so basic a human right.
Let the law pin down responsibility where it belongs — on the executive officers and strategy committees of striking groups. Let the penalties and damages be heavy enough. Let there be a few convictions and a few judgments awarded. And you will see men and women, who want to work, going to their work without fear. Please note that I said "going to their work." I am not advocating the revival of professional strikebreakers or urging any support to employers who would use them. Employers' thugs are as bad as union thugs. I am speaking for the man or woman who has a job and is satisfied with it and wants to keep it. That man or woman deserves the protection of the full power of the United States.
The power of government would be better employed in calling out federal troops, if need be, to escort one worker through the gates of his plant than in encouraging plant owners, at the first hint of a labor dispute, to shut down and throw out men and women who want to work.
Fail to protect the right to work — and you may read our epitaph in the words I quote from a Los Angeles newspaper.
If a government cannot or will not protect those who want to work, it eventually succumbs to a Communist dictatorship under which men will not be permitted to strike and will work according to decrees or go to their deaths in concentration camps. (Hollywood Citizen News, December 16, 1947.)
Ana Pauker will not allow my pictures to be seen on the screens of Rumania because I disagree with her politically.
The American Federation of Radio Artists will not allow my voice to be heard over the microphones of America because I would not pay a political assessment.
I see a pattern there — a pattern that can mean slavery for free men everywhere if it is not broken.
Improve the Culture
How to Improve the Culture
The culture is going to hell in a handbag, we've been told for hundreds of years, and the free market gets a large share of the blame. The observation stretches from Left to Right and everywhere in between. It is universally agreed that letting markets run loose runs roughshod over all the finer things in life, from books to arts to clothing to manners.
Mises himself traces this ideological tendency to 19th-century critic John Ruskin, who "popularized the prejudice that capitalism, apart from being a bad economic system, has substituted ugliness for beauty, pettiness for grandeur, trash for art." The same argument appears today in conservative periodicals, every week, as a built-in bias; everyone knows that markets have unleashed a race to the bottom.
One response might be to say, This is not decline at all but just difference. Whether it's opera or rap, frescos or graffiti, black tie or grunge, it doesn't really matter. Culture takes different forms in different times, so get used to it.
I'm not really satisfied with that answer, mainly because of my own cultural biases. My tastes in music predate Bach. Dancing to me means ballet. Popular fiction I find insulting in every way. Kids, in my view, should spend their time mastering piano rather than gaming on computers.
I admit that it would not be impossible for me to be mistaken for a snob.
And yet, I would like to offer a contrary view — but not in the form of a big theory. Rather, consider some cases of cultural entrepreneurship that made a real difference by the same means through which every innovation comes about: risk taking, hard work, and marketing.
Let's begin with dance. Some ten years ago, I found myself at a ballet recital for young people. I had expected something like we used to see on GE commercials: little girls in tutus dancing to Tchaikovsky. Instead, the girls danced to ridiculous rock music and danced without discipline at all, flailing around this way and that. It was clear that they were learning no technique at all. And yet the parents were wild for it.
I'm not against jazz and rock dance but to do it right requires a foundation in ballet, which is the fundamental language of all dance in the West. Those amazing dancers you see on Fosse — they knew ballet first. But in these self-indulgent times, no one cares about discipline and hard work. Everyone wants to jump right into the fun thing even if it looks stupid.
I left that recital despairing that another epoch of goodness had passed into the night, replaced by a state of permanent slop. And then suddenly, out of nowhere, a 20-something dance entrepreneur showed up in town and opened a new studio, pricing her teaching below the competition. Through good will, efficiency, low prices, and smiles all around, she attracted a slew of new customers.
But this wasn't just any ballet entrepreneur. She had an attachment to the old ideals, old music, and old pedagogy. This is what she emphasized and pushed. At the first recital after one year of operation, the parents of the students all enjoyed the recital with new standards: the classical training, the old-world music, great attention to costumes, and all the trappings everyone once expected in real ballet. The parents cheered to the high heavens the glories of these kids and the program.
And so, voila! In one year, thanks to one entrepreneur with a vision and the dedication to carry it out, the local culture is massively and dramatically improved — the old world and its high standards carried on toward the future. I looked back at my previous despair with embarrassment. It turns out that there was nothing inevitable about cultural decline. All it takes is one person to make the change.
Let's move on to the subject of children's choirs. Since the ancient world, children's choirs have been the incubator of great musicians for the future. But today? It's a disaster. If there are choirs at all, they are taught pop tunes, bad technique, American Idol approaches, all of which end in creating would-be stars that never really do the hard work necessary for serious music making in any field. The result is inevitable: a musically ignorant culture, and no real choirs at all.
But right here in my own town a woman decided to change that with a civic chorus of children. In the first year there were 25, and in the second that doubled, and then a split-off of older children was started. They wear concert clothing and sing all the classic repertoire, even music in Latin. They have a rigorous schedule of rehearsals, very much like sports-team practices. They learn technique and discipline. The parents love it! And the choir is singing all over town in a wonderful way.
To be sure, the director does not make the big bucks. She works extremely hard, giving private lessons and working with parents and spending far more time on this project than the payoff would seem to dictate. But she does it anyway because she has a passion for it and she is living out a dream.
Because of this one cultural entrepreneur, the community is changed.
Now, in both cases, we see that it could have gone the other way. If these two people had not come along with the desire to raise the standards and provide a valuable service, another generation's cultural education would have been missed. Instead, they both acted and took a risk. As a result, their legacy on this earth will outlive them.
Another case in point concerns a new immigrant family from India who opened a wonderful new Indian restaurant in a town overrun with fast-food chains and chicken-finger shacks. Everyone I know has long bemoaned the lack of great foreign cuisine here. It's the first point cited as evidence that this backwoods place has been given over to the capitalist pigs.
Then one day it was there: an Indian restaurant as good as any that one would find in any major city in the world, with a vast and varied menu and all the ambience one would want. And what made it possible? Not the overthrow of the capitalist order but rather the risk, hard work, and dedication of a single entrepreneur. Again, there was no guarantee that this would happen. It was a choice that was made by one individual. He and his family decided to open the restaurant.
It was Mises's fundamental point about the cultural critique of capitalism that capitalism makes more of everything available to the consumer. That means more trashy novels and rotten music, but it also means more great literature and high-level music, all of which is accessible as never before.
But today, cultural entrepreneurs are seriously inhibited in their innovations by high taxes, regulations, and mandated benefits. This produces fewer attempts to improve our world than there would otherwise be. Some markets are hobbled to the point of near inaction, such as the education market, and others are less vibrant than they would otherwise be.
Sticking to the Official Narrative
Sticking to the Official Narrative
In a politicized society, it seems to me that the true believers really don't have conversations as much as they deliver monologues of talking points. For example, a colleague of mine recently told me that "global warming" has become such a crisis that "new hurricanes are being created every 13 seconds." This would mean that more than a million hurricanes appear in the Atlantic every year — a claim that is preposterous on its face — but this does not seem to faze her. Her political party has told her that "global warming" is a catastrophe, and that is good enough for her.
One of the characteristics of people who perpetuate political talking points is their inability to be "confused with facts." In such a society, one sticks to the narrative no matter what. So it is with Paul Krugman.
There is real irony in what Krugman writes concerning so-called financial deregulation. In a recent New York Times column, Krugman declares,
When I first began writing for The Times, I was naïve about many things. But my biggest misconception was this: I actually believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs.
If there is anything that characterizes Paul Krugman, it is his constant devotion to following his chosen narrative — that Ronald Reagan and his gang of free marketeers turned the US financial sector into a free-market experiment with disastrous results. Furthermore, in his narrative, government regulation (when a Democratic administration is in office) is always wise, all knowing, and locked in battle against irresponsible free enterprise. Krugman has demonstrated himself to be incapable of grasping any other viewpoint, even when the historical evidence has refuted him.
So it is with his latest column. I will let Krugman's own words speak for him:
Let's recall how we got into our current mess.
America emerged from the Great Depression with a tightly regulated banking system. The regulations worked: the nation was spared major financial crises for almost four decades after World War II.…
The first big wave of deregulation took place under Ronald Reagan — and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s. Taxpayers ended up paying more than 2 percent of G.D.P., the equivalent of around $300 billion today, to clean up the mess.
But the proponents of deregulation were undaunted, and in the decade leading up to the current crisis, politicians in both parties bought into the notion that New Deal-era restrictions on bankers were nothing but pointless red tape. In a memorable 2003 incident, top bank regulators staged a photo-op in which they used garden shears and a chainsaw to cut up stacks of paper representing regulations.
Well, not exactly. It seems that Krugman has tried to stuff a few facts down the memory hole. History and Paul Krugman might not be allies here.
For instance, the first real, sweeping legislation toward banking and financial "deregulation" was the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), which was passed by a Congress dominated by the Democratic Party and signed by President Jimmy Carter in 1980. Now, unless I am mistaken, Carter and the Democrats of that time were not exactly ideological Reaganites, but none of that matters to Krugman and his followers. The idea is that if they repeat the mantra enough times, it will come true.
The DIDMCA legislation did not occur in a vacuum, and it certainly was not created in an ideological frenzy. In the late 1970s, the United States was suffering from serious stagflation, with unemployment rates rising to their highest levels since the Great Depression, and inflation soaring in the double digits.
To make matters worse, interest rates were rising (the prime rate ultimately reached 21.5 percent in 1982) and banks and savings-and-loans institutions were constrained from allowing market rates on their savings accounts by Regulation Q. (Interestingly, the New York Times itself editorialized in favor of eliminating Regulation Q, and it was the Democrats that did away with it, not conservative Republicans or Ronald Reagan.)
The push to eliminate interest-rate ceilings was not borne of conservative ideology, no matter what Krugman might claim. Instead, savings and loan institutions (S&Ls) found themselves rapidly losing reserves, and people pulled their money from the low-interest accounts and put them into money-market accounts. To make matters worse, a number of S&Ls had mortgages being paid back at interest rates of 5 and 6 percent, which meant they were losing money.
Thus, it should not be surprising that banks and S&Ls were facing some real crises, and Congress sought to address those problems. (Whether or not DIDMCA was the best way to deal with the issues is up for debate.)
Second, many of the early advocates for deregulation came from the so-called "liberal" side of the Democratic Party. Ted Kennedy sponsored airline deregulation in 1978, and Alfred Kahn, Jimmy Carter's economic advisor and his "Inflation Czar," was the architect for many of the deregulation initiatives. In fact, Ronald Reagan received an endorsement from the Teamsters union in 1980 after he agreed to delay trucking deregulation for two years.
The small, highly regulated banking sector that Krugman praises was clearly not able to handle the numerous new investments in high technology and telecommunications that came about during the 1980s. In fact, for many of these innovations, from Ted Turner's Cable News Network, founded in 1980, to the advent of modern cell phones via McCaw Cellular, the main financial engine was Michael Milken and his "junk bond" empire at Drexel Burnham Lambert. Milken also was behind the financing of many leveraged buyouts and mergers that shook up the complacent US firms, which were clearly falling behind in global business.
Contrary to what Krugman or others might think, Milken was not a product of financial deregulation; he operated outside the banking sector. Furthermore, his investments were not "protected" by the moral hazard of deposit insurance or any implicit guarantee that the Federal Reserve System would "bail out" Drexel if it made bad economic choices.
What Drexel did not have, however, was the political backing to survive. Regarding the opposition to Drexel, Jeff Scott said,
In general, established business interests do not like innovations that undermine their competitive position. It is well documented that the exaggerated charges against junk bond-financed takeovers had a basis in self-serving motives. One can only grimace in disbelief at the inconsistencies of top U.S. companies who rationalize mergers when big buys small but inveigh against LBOs (small buying big).[1]
Murray N. Rothbard also spoke out against the opposition to Milken and Drexel:
What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the "leveraged buy-out").
The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process, Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.…
The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market.
I bring out the Milken situation because the so-called ideological "deregulators" that Krugman claims turned Wall Street into a chaotic, "free-market" free-for-all actually supported action against Milken. The notion that David Rockefeller is an apostle for free markets might play well in the New York Times, but it does not square with the facts.
The other point is that the "deregulation" of the savings and loan system in particular and financial services in general expanded the moral hazard that is built into a fractional-reserve system. For all of the talk that the banking system needs to be re-regulated, one cannot have a wide-open financial system and a government backstop that keeps financial institutions from experiencing the full force of bad investment decisions.
Despite Krugman's rewriting of history, there is no doubt that the banking and financial systems in 1980 were in trouble. Ironically, by turning on Milken, the government actually increased the moral hazard within the system. The reason I make this point is because Milken did not operate with government financial guarantees. If the system he developed succeeded, then he and others associated with him profited; if it failed, they and those that invested with them bore the costs, but the costs could be contained within the economy.
Once the government made it clear that the success of Drexel and Milken would not be tolerated (Rudy Giuliani used his unjustified prosecution of Milken and others on Wall Street to jump-start his political career), that made it even easier for the government-protected banking system to gain political favors. They had used the state to destroy the competition, but by encouraging expansion of the subsidized financial backstop, the banking sector also set the stage for its own set of major crises.
Certainly, the S&L meltdown of 1989–1990 (which occurred in part because tax "reform" in 1986 affected the value of real estate, the asset that dominated S&L portfolios) was a precursor. But instead of trying to deal directly with the cause of the problem, Congress and the Federal Reserve created a system in which the government took over "troubled" assets from failed S&Ls and sold them to the general public.
To make matters worse, after Alan Greenspan became chairman of the Fed in 1987, the government's policy of creating and expanding moral hazard became even more pronounced. First, after the stock-market crash of October 1987 (caused, as financial economist Mark Mitchell noted 20 years ago, by unwise legislation being pushed through Congress), Greenspan vowed that the Fed stood by to "provide liquidity" to the financial system. Thus, the infamous "Greenspan Put" was born.
Second, Greenspan used his influence to recklessly expand not only the nation's monetary base but also the power of the Fed. The recession of 2001, coming in the wake of the collapse of the Fed-produced stock-market bubble, should have been a dire warning, but Greenspan managed (in the words of Peter Schiff) to "seamlessly move from one bubble to another."
Taking cues from Greenspan and Bernanke, the financial system not only had some of the regulatory handcuffs removed but also pursued "opportunities" they never would have gone after had there not been the wink and a nod from the Fed. Ironically, the most free-market financial titan had been Milken himself, and it is no accident that many of the companies he financed would become major leaders in the development of high technology. Perhaps it is not at all ironic that the Wall Street barons and the political classes would unite to stop the free market.
None of this will make it into Krugman's narrative. His response to our financial history of the past 30 years reminds me of detective Hercule Poirot in Murder on the Orient Express. After having examined all of the evidence in the murder and being faced with an obvious conclusion, Poirot decides to pursue an alternate (and untrue) explanation, mostly to protect the killers.
There is sound economic theory and evidence that clearly explains what has happened in the US financial system these past three decades. But Krugman pursues the easier (and less-believable) account: ideological free marketeers recklessly permitted other ideological free marketeers on Wall Street to pursue their ideological investments, all of which came crashing down. Instead of providing even a cursory reading of the actual financial situation in 1980, Krugman creates his own politicized narrative.
Now, if a politician or an English professor were to be providing this account, that would be one thing. I expect politicians to be dishonest and self-serving, and I expect English professors to be ideological leftists incapable of coherent economic thought. But when an economist — and one as decorated as Krugman — says these things, my mood turns much darker. There is a reason for him to pursue this false narrative, and it is not because he actually believes it.
JOBS OF THE FUTURE
Landing a Job of the Future Takes a Two-Track Mind
Career Experts Say Positions in Growing Fields Will Require an In-Demand Degree Coupled With Skills in Emerging Trends
DIANA MIDDLETON
If you're gearing up for a job search now as an undergraduate or returning student, there are several bright spots where new jobs and promising career paths are expected to emerge in the next few years.
Technology, health care and education will continue to be hot job sectors, according to the Bureau of Labor Statistics' outlook for job growth between 2008 and 2018. But those and other fields will yield new opportunities, and even some tried-and-true fields will bring some new jobs that will combine a variety of skill sets.
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Jason Schneider The degrees employers say they'll most look for include finance, engineering and computer science, says Andrea Koncz, employment-information manager at the National Association of Colleges and Employers. But to land the jobs that will see some of the most growth, job seekers will need to branch out and pick up secondary skills or combine hard science study with softer skills, career experts say, which many students already are doing. "Students are positioned well for future employment, particularly in specialized fields," Ms. Koncz says.
Career experts say the key to securing jobs in growing fields will be coupling an in-demand degree with expertise in emerging trends. For example, communications pros will have to master social media and the analytics that come with it; nursing students will have to learn about risk management and electronic records; and techies will need to keep up with the latest in Web marketing, user-experience design and other Web-related skills.
Technology Twists
More than two million new technology-related jobs are expected to be created by 2018, according to the BLS. Jobs that are expected to grow faster than average include computer-network administrators, data-communications analysts and Web developers. Recruiters anticipate that data-loss prevention, information technology, online security and risk management will also show strong growth.
More on Jobs of the Future
A computer-science degree and a working knowledge of data security are critical to landing these jobs. Common areas of undergraduate study for these fields include some of the usual suspects, such as computer science, information science and management-information systems.
But those might not be enough. That's because not all of those jobs will be purely techie in nature. David Foote, chief executive officer of IT research firm Foote Partners, advises current computer-science students to couple their degrees with studies in marketing, accounting or finance. "Before, people widely believed that all you needed to have were deep, nerdy skills," Mr. Foote says. "But companies are looking for people with multiple skill sets who can move fluidly with marketing or operations."
Social media has opened the door to the growth of new kinds of jobs. As companies turn to sites like Twitter, LinkedIn and Facebook to promote their brands, capture new customers and even post job openings, they will need to hire people skilled in harnessing these tools, Mr. Foote says. In most cases, these duties will be folded into a marketing position, although large companies such as Coca-Cola Co. are creating entire teams devoted exclusively to social media.
Similarly, employment for public-relations positions should increase 24% by 2018. Job titles—like interactive creative director—will reflect the duality of the required skill sets.
Back to School
Students will have to study strategy to maximize relationships between third-party content providers and their company's Web team. Other key skills will be search-engine optimization to maximize Web traffic and marketing analytics to decipher the company's target demographic, says Donna Farrugia, executive director of Creative Group, a marketing and advertising staffing agency in Menlo Park, Calif.
Many universities and community colleges are offering certification programs focused on burgeoning sectors. For example, the University of California at Los Angeles's extension program offers a certificate in information design.
That, program, like similar certificate studies at other schools, aims to give students an edge in Web site search optimization—a major attraction for Web-based companies who want to boost user traffic, says Cathy Sandeen, dean of UCLA's extension program.
User-experience design—a sort of architecture for information that Web viewers see—is another emerging field. Jobs there include experience specialists and product designers at firms ranging from computer-game companies to e-commerce Web sites.
Ms. Sandeen says the school will offer a certificate program for user-experience design as well, at a cost of about $3,000 to $5,000. The program will run one to two years, depending on a student's schedule, and will couple product design with consumer psychology and behavior.
"Our students [will] learn to think like anthropologists, evaluating how easy it is to utilize the products," she says.
Not surprisingly, green technology, including solar and wind energy and green construction, are also booming areas. Engineers who can mastermind high-voltage electric grids, for example, will have a great advantage over other job applicants, says Greg Netland, who oversees recruiting for the U.S., Latin America and Canada for Sapphire Technologies, an IT staffing firm in Woburn, Mass.
"Global sustainability will become more important to employers," Mr. Netland says. "It cuts costs, making experts in the field highly attractive to employers."
Jobs in alternative-energy systems, including wind and solar energy, will require a variety of skills: engineers to design systems, consultants who will audit companies' existing energy needs, and those who will install and maintain the systems.
Financial Opportunities
Despite the slashing of positions seen in the financial sector during the economic crisis, recruiters also expect thousands of new jobs to be created in the compliance field, says Dawn Fay, district New York/New Jersey president of Robert Half International.
Ms. Fay counsels job seekers to look at the misdeeds of the past year or two to identify where new jobs will bloom in the financial sector. "It was a year of Ponzi schemes and banking meltdowns," she says. "Be strategic and position yourself as someone who can mitigate those risks."
That makes risk management an emerging specialty with strong growth in jobs expected. Those on track to be financial analysts can get additional certification in risk management through organizations like the Risk Management Association or the Risk and Insurance Management Society.
"Risk management was a mainstay in financial companies, but I believe it will be present in every Fortune 500 company," says Jeff Joerres, chairman and chief executive officer at staffing firm Manpower Inc.
Hospital Upgrades
Health care is expected to continue to see a surge in hiring, with more than four million new openings estimated by 2018, according to the BLS. Hiring for physical and occupational therapists will likely be strongest. But new specialties are popping up, particularly in case management, says Brad Ellis, a partner with Kaye Bassman International, an executive-search firm based in Plano, Texas.
Case managers do everything from managing the flow of information between practitioner and insurance company to mitigating risk to the hospital.
"If you're a licensed nurse, for example, getting a certificate in risk management from the state board of health would make you extremely competitive," Mr. Ellis says.
Harris Miller, president of the Career College Association in Washington, D.C., says IT will be increasingly important in the quest to drive down health-care costs, too. Students specializing in nursing informatics, which combines general nursing with computer and information sciences, at the master's degree level will swap a clipboard for a smart phone to manage patient data. Schools like Vanderbilt University are offering nursing informatics degrees via distance learning, and certification is offered through American Nurses Credentialing Center, based in Silver Springs, Md.
The strong push toward making medical records and information more accessible through computerized record-keeping means opportunity, Mr. Miller says. "This is going to require people who are skilled in the hardware and software of nursing informatics."
After the Bailouts, Washington's the Boss
After the Bailouts, Washington's the Boss
BOB DAVIS, DEBORAH SOLOMON JON HILSENRATH
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Associated Press President Obama, with Congressional financial committee leaders and his economic team in February.
In 2008 and 2009, Washington strove to save the economy. In 2010, Americans will get a clearer picture of how Washington has changed the economy.
Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.
One thing is clear: The government is a much bigger force in today's U.S. economy than it was before the financial crisis. "The frontier between the state and market has shifted," says Daniel Yergin, whose 1998 book "Commanding Heights" chronicled the ascent of free-market forces starting in the 1980s. "The realm of the state has been enlarged."
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To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.
Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.
It bailed out two of the three U.S. auto makers. It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending. In two February stimulus bills enacted a year apart, the government committed $955 billion to rouse the economy.
Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis. Just last week, the Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.
Those who defend this robust interventionism and those who decry its effects are vying to shape the nation's take on the events of the past 16 months.
Lawrence Summers on the U.S. as Investor
The director of the White House's National Economic Council talked with The Wall Street Journal's Bob Davis about the evolving role of government in the economy. Read an edited transcript.
Lawrence Summers, President Barack Obama's chief economic adviser, says the intervention was essential, short-term therapy, not a reinvention of capitalism. "Our overarching goal was to save an economy that was near the abyss, where depression looked like a real possibility," he says. By that measure, he sees success: "The kind of financial and economic collapse that looked very possible last fall appears remote right now."
The bailouts "were designed to be, and have proved to be, temporary," Mr. Summers says. "There is no aspiration of any kind to change the private-sector basis of our economy."
Even so, he says government won't return to its pre-crisis form. "The way our financial system was operating was much more fragile than many had supposed. Those events point up a need for substantial changes in the way in which we regulate the economy and regulate finance," he says.
John Taylor, a former Bush Treasury official who is now a Stanford University economist, says the government's role will be far greater than Mr. Summers suggests. "While we may be past the emergency, we're still in a mode that will create similar interventions for quite a while, even for minor emergencies," he says. "We have a bailout mentality in this country."
One concern: Even if the government withdraws, business will expect bailouts in the next crisis, and that will inspire another round of cavalier risk-taking. "If we don't re-regulate the banking system properly, we'll either get very slow growth from overregulation, or another financial crisis in just 10 to 15 years," says Kenneth Rogoff, a Harvard University economist and co-author of a new book on financial crises since the Middle Ages.
The story isn't over yet.
Although the economy is growing, unemployment remains a very high 10%. It is far from clear how strongly the economy will grow when the adrenaline of stimulus is withdrawn.
In finance, the recovery has been striking. Since bottoming on March 9, the Dow Jones Industrial Average is up 60%, and financial stocks have more than doubled. Yields on junk bonds, issued by companies with the highest risk of default, have fallen from almost 17 percentage points above yields on Treasury bonds in March to about 6.5 points higher now. That signals both an improving economy and a renewed investor appetite for risk.
Most big banks appear back on their feet. Of the $245 billion invested in bank shares by the Troubled Asset Relief Program, more than $175 billion has been repaid. Since the Treasury tested the financial strength of 19 large financial firms in May, they have raised $136 billion in equity capital and borrowed $64 billion without U.S. guarantees.
The Long Arm of Uncle Sam
Some ways the government's reach has been extended since the financial crisis began. Click to see full chart .
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But the strengthening of the big banks may be distorting the market. Although smaller banks have long had a higher cost of funds than big ones, the gap has widened. The gap averaged 0.03 percentage point for the first seven years of the decade, but it jumped to a 0.66-point disadvantage for smaller banks in the four quarters ended Sept. 30, estimates Dean Baker of the Center for Economic and Policy Research, a liberal think tank. That suggests investors think the government would bail out big banks, but not small ones, if crisis erupted anew, he says.
Not all of the rescues look successful. The U.S. had to redo its initial bailouts of giant insurer American International Group Inc. and of GMAC Financial Services, which was once a car-finance and mortgage firm and is now a bank holding company. Both remain unable to raise private capital.
The intervention comes with long-lasting costs, among them huge budget deficits that could eventually push up inflation and interest rates.
The International Monetary Fund estimates U.S. government debt will swell to the equivalent of 108% of annual economic output in 2014, from 62% in 2007, absent politically difficult steps such as raising taxes or cutting benefit programs. As federal debt climbs, an ever-greater fraction of the budget goes just to pay interest, much of it to overseas creditors. The bill will worsen if interest rates rise from their current low levels.
Interest on the debt cost $182 billion in the fiscal year ended Sept. 30. Robert Pozen, chairman of MBS Investment Management, worries that within a decade, the interest bill could rival the defense budget, which was $637 billion last year.
The interventions also carry political costs. Their chief architects -- Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and former Treasury chief Henry Paulson -- say saving Wall Street was essential to saving Main Street. Many Americans, and a vocal group of lawmakers, disagree.
Only 21% of Americans polled by The Wall Street Journal and NBC News in December said they trusted the government to "do what is right," versus 64% shortly after the attacks of Sept. 11, 2001. In Congress, there is growing support for having the Government Accountability Office review the Fed's monetary policy, a move the Fed says would crimp its independence.
For some businesses, Washington now looms larger, affecting everything from the choice of executives to the fate of car dealerships. U.S. Bancorp has repaid its TARP money, but CEO Richard Davis nonetheless checked with Fed regulators in December to make sure it would be all right for the Minneapolis-based bank to raise its dividend. "We are still awaiting this guidance," Mr. Davis said in a statement announcing that the bank would retain its dividend level for now.
Bank of America Corp. also has repaid its aid, freeing itself from the condition lenders hate most about the bailouts: Treasury oversight of executive pay. Even so, it sought the Treasury's advice on a pay package before hiring a new chief executive.
President Obama, accompanied by, from left, Economic Adviser Christina Romer, Mr. Geithner and Mr. Summers.
The bank was considering paying $35 million to $40 million to hire Robert Kelly, CEO of Bank of New York Mellon Corp., much of it to buy out his unvested shares and options. The Bank of America board wanted to know how that would go over in Washington. Treasury paymaster Kenneth Feinberg told the bank that if it were still under his purview, he would reject the package. Around the same time, President Obama publicly bashed "fat cat" bankers.
With those two signals, the talks with Mr. Kelly fizzled, according to officials involved with the decision. The bank instead promoted an insider, Brian Moynihan, who had been working to repair the bank's reputation in Washington.
It thus chose a more politic man to lead it, post-crisis, than departing CEO Kenneth Lewis, who in a March meeting with the president had said he wouldn't "suck up" to federal economic aides, according to people familiar with the exchange. Mr. Moynihan, by contrast, told Obama aides in October that Bank of America wanted to work with the White House to achieve U.S. policy goals in areas like small-business lending and foreclosure prevention. As for his pay, Mr. Moynihan asked that it be determined later.
In the insurance business, some of the strong are complaining that the U.S. is warping the market by keeping the weak on life support.
Edmund "Ted" Kelly, chief executive of Boston-based insurer Liberty Mutual Group, points to the case of competitor Hartford Financial Services Group Inc. After acquiring a thrift and qualifying as a bank holding company, Hartford got $3.4 billion of TARP funds in June.
Liberty Mutual says it didn't ask for cash, and doesn't see why Hartford got any. "Nothing would have happened to the economy if Hartford failed," Mr. Kelly said. Hartford declined to comment.
The nature of post-crisis capitalism will depend in part on how the administration and Congress wield their new power. Inside Washington, there is profound ambivalence about this. Should the government, for instance, be an activist shareholder demanding change, like a Carl Icahn, or a passive one like an index mutual fund?
Herbert Allison, who left the private sector to run TARP, says, "We can't wait to get out of these investments. We don't view ourselves as a long-term investor." But in the here and now, the government is torn between its roles as shareholder and guardian of the public interest.
At Fannie Mae and Freddie Mac, where the Treasury holds warrants allowing it to acquire stakes of nearly 80%, the administration has put public interest first. It has instructed their regulator to have them administer efforts to cut monthly mortgage payments for millions of Americans to avert foreclosure.
The disagreements over how to wield power over business are playing out both within the Obama administration and between the administration and Congress -- as is happening now in the auto industry.
The White House forced out a CEO of General Motors in March, and crafted car-maker bankruptcy restructurings that drew howls from some creditors. But it later lightened its hand. It appointed a board of private-sector directors and let that board oversee GM. The board, six months later, was able to fire a subsequent CEO without getting prior White House approval, according to Treasury officials.
Congress isn't so willing to surrender its leverage. That was clear when GM and Chrysler decided to terminate about 3,400 dealers. Many turned to their lawmakers, and Congress got involved, prompting the companies to reinstate about 110. But the dealers felt that was insufficient.
GM's frustration with the process boiled over at a mid-November meeting in the office of Sen. Richard Durbin (D., Ill.). GM's usually cool-headed chief lobbyist, Ken Cole, was too agitated to sit, say several participants. When Tammy Darvish, an executive of a dealership in Silver Spring, Md., pressed Mr. Cole about whether it would cost the company any money to reinstate a terminated dealer, the GM team started to pack their briefcases and threatened to walk out, according to Ms. Darvish and a government participant in the meeting. They say the GM team stayed only at the insistence of congressional staffers.
Congress later enacted a provision giving axed dealerships broadened grounds to appeal in arbitration procedures -- broader than the White House or car companies sought.
A spokesman for GM declined to comment on the dealers meeting or Mr. Cole. But the auto maker, now 60% federally owned, said the arbitration law will hurt its efforts to turn a profit and repay the government, which has invested roughly $50 billion in the company.
Obama's Christmas present
America's health-care bill
Obama's Christmas present
From Economist.com
The Senate votes to bring affordable health care for Americans a huge step closer
IT WAS, critics and admirers agreed, the most consequential vote in the Senate for more than 40 years; since, in fact, the bill that created America's state-run health scheme for the elderly back in 1965. On the morning of Christmas Eve, Barack Obama's promise to deliver affordable health care to every American moved a giant leap closer to fulfillment as the chamber voted, on strictly party lines, in favour of a bill that has already been the best part of a year in the making.
The previous Democratic president, Bill Clinton, failed at the same task, and that failure marked the remaining seven years of his presidency. Universal health care has been the most cherished goal of Democratic politicians for close to a century; and now, the shameful fact that a country as rich and powerful as America leaves tens of millions of its citizens with only the most basic health care is on its way to being expunged. The bill still has tricky obstacles to negotiate before it ends up on the president's desk. But Mr Obama can reflect, as 2009 comes to an end, that his place in the pantheon of American reformers looks secure.
There is plenty for the reformers to congratulate themselves about. Working within the framework of America's distinctive health system based on private providers, some 30m people who are not currently covered will be given access to health insurance via a system of subsidies and regulated insurance exchanges. Life-time caps of payouts to sick people will be largely eliminated; insurance companies will lose the right to refuse coverage to applicants on the basis of past or present ill-heath; and price discrimination against older people will be sharply scaled back. Employers will be obliged to provide coverage for their workers, or face a stiff fine. Younger people, who often regard themselves as "invincibles" with no need to insure themselves, will be required to do so.
On the other hand a golden opportunity to effect a root-and-branch reform of the cost side of the equation has been missed. America's health system, excellent though it is for those with good insurance, is hideously expensive. America spends twice the share of its national product on health care as any other industrialised nation, for overall results that are surprisingly mediocre. This is because the set-up contains distortions that encourage over-consumption and over-prescription. And the bill that has emerged from the Senate, like the version that was passed by the House earlier in the year, does far too little to tackle these problems. Will Congress, after the bruising battles of 2009, be minded to come back for a second round any time soon? It seems unlikely.
Yet without radical change, the constantly increasing cost of caring for an aging population with ever-more advanced technologies risks bankrupting the government, which bankrolls payment for the poor, for children, for its own employees and for the old. Extending health insurance to tens of millions more Americans is estimated to cost just under $900 billion over the next ten years. Though this amount is supposedly paid for in the shape of tax increases and spending cuts, those are savings that were urgently needed just to help contain the swelling budget deficit but which now will not be available for that purpose. As a reminder of that, the Senate rounded off its work for 2009 by voting to increase the national debt ceiling to $12.4 trillion; and it is sure to have to increase it again early in 2010, as next year will see another $1 trillion-plus federal deficit.
Republicans, of course, contend that for just this reason it would be far better for the health bill never to become law. That is possible, but unlikely. There will be difficult work ahead in January to reconcile the two versions of the bill that now exist, one passed by the House and the other by the Senate. But the chances are that this will go smoothly, as long as the House mostly defers to the Senate version, in recognition of the fact that the Senate bill passed with no safety-margin at all. While there are some substantial differences, mainly in the way that the bills are paid, and on the vexed question of abortion, the basics of the two bills are pretty similar. Mr Obama seems to be on track for his goal of being able to sign the bill into law before he delivers his state-of-the-union address in late January.
The Republicans also contend that this is a bill that is deeply unpopular with most American voters, and polling data certainly backs the argument that support for the bill has been steadily declining since the summer: one reason, it is argued, that the Democrats were in such a hurry to get it passed before Christmas. If the Republicans are right, the Democrats will be hammered for it at mid-term elections in November. But it also may well be the case that, once the bill is passed, a lot of the poison will go out of the debate. The shortcomings of the bill, in the form of higher deficits and possibly higher insurance premiums, may well not be apparent to voters for quite some time.
United States
Square-root reversal
America will recover, but too weakly for comfort
The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.
Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.
That won’t happen. But growth could still beat the consensus forecast of 2.5% in 2010. Business inventories are deeply depressed and even a modest swing to restocking will bring a rapid rebound in factory production. New-home construction is at its lowest proportion of GDP since 1960, and the inventory of unsold new homes the slimmest in 17 years. A sizeable upturn is in store. Capital spending is at its lowest relative to GDP in 40 years and is due to rise. The Obama administration’s $787 billion fiscal-stimulus package has been criticised for dribbling money into the economy too slowly, but for that reason it will support growth well into 2010.
None of these factors, however, can sustain strong growth past 2010 without a self-sustaining cycle of private spending and income growth. Several obstacles stand in the way of that transition. Through to mid-2009 households had lost $12 trillion, or 19% of their wealth, because of the collapse in house and stock prices. That saps their purchasing power and pushes them to save more, especially those nearing retirement. Though they’ll boost their saving only gradually, that still means consumer spending (about 70% of GDP) will grow more slowly than income, after two decades in which it usually grew more quickly. High unemployment will hold back wage gains (see chart); wage cuts are already commonplace. Leaving aside swings in energy prices, inflation, now about 1.5%, will slip to zero and may turn to deflation in late 2010. Deflation drives up real debt burdens, further sapping consumer spending.
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High interest rates caused most previous recessions, and low rates ended them. Not this one. When it began, the Fed’s short-term rate at 5.25% was not particularly high. The Fed cut it in effect to zero and aggressively expanded its balance-sheet by making loans and buying long-term bonds. In spite of that, bank loans to business and consumers are falling, as are loans packaged into private, asset-backed securities. Only the government-backed mortgage agencies, Fannie Mae, Freddie Mac and Ginnie Mae, continue to expand credit.
This reflects not just a lack of willing borrowers, but the lasting damage to the financial infrastructure that matches savers with investors. The International Monetary Fund studied 88 banking crises in the past four decades and found they led to sustained losses of output. Swathes of America’s “shadow banking system” of finance companies, investment banks and hedge funds have been vaporised. The government won’t let any more big banks fail, but the survivors are neither inclined nor able to expand their lending much. Residential- and commercial-property values fell by $8 trillion, or almost 20%, through to mid-2009, impairing existing loans and eroding the collateral for new ones. Regulators are also proposing to raise capital requirements, which will further encourage bankers to turn down borrowers.
Other crisis-racked countries, such as Sweden in the early 1990s and South Korea in the late 1990s, rode devalued currencies and booming exports back to health. That won’t work for America: the rest of the world isn’t big or healthy enough, and a steeply falling dollar would inflict deflationary harm on others.
Fiscal and monetary policies were admirably aggressive in 2009, but a withdrawal of either would threaten growth beyond 2010. The scheduled expiration of Mr Obama’s stimulus will subtract up to 2% from GDP in 2011. But Mr Obama will not want to push for significantly more stimulus since voters are already worried about big government and the deficit, and Republicans will exploit that sentiment as they seek to pick up seats in the 2010 congressional elections. The Fed, under fire for its meddling in the markets and expanded balance-sheet, may be tempted to raise interest rates early in 2010 if growth is surprisingly good; it will resist.
The list of roadblocks is depressing, but America will not slip back into recession or a lost decade akin to Japan’s in the 1990s. It did not enter its crisis with as much overinvestment as others, Japan in particular; its population is still growing (Japan’s is shrinking). It took two years to tackle its banks’ problems; Japan took seven. Boom times will be back. Just not very soon.
Obama’s Next Trillion Spending Might Be Worth It:
Commentary by Amity Shlaes
Dec. 29 (Bloomberg) -- President Barack Obama is under fire for saying he wants to boost investment in infrastructure in the next decade. The critics say this is flawed stimulus because infrastructure projects take too long to get started and don’t boost the economy now.
Obama’s best move would be to stop spending. But given that he won’t, and that he has three more years in office, the right kind of infrastructure splurge might not be such a bad idea -- especially if you don’t call it a stimulus.
That at least is what the record of the 1930s, 1940s and 1950s suggests, especially when it came to the classic American infrastructure project, highway construction.
Back in the 1930s, presidents started with the proposition that the primary aim of all spending should be to put people to work. Road construction was viewed as one of the tools to that end. In a single year, between June 1933 and April 1934, relief workers repaired 500,000 miles of highways.
As historian Mark Rose has noted, in the mid-1930s, almost $3 billion, then a good share of an annual federal budget, was poured into highway projects by relief officials and the Bureau of Public Roads.
But observers, including President Franklin Roosevelt himself, began to notice flaws with this plan. For one thing, as today, road projects were not shovel-ready -- their lengthy planning coincided with the direst moments of recession. By the late 1930s, Roosevelt concluded that highway programs generally “do not provide as much work as other methods of taking care of the unemployed.”
Cutting Spending
In early 1938 the president suggested that federal assistance to roads ought to revert to pre-Depression levels. That April, he reluctantly allowed that appropriating an extra $100 million for roads was all right, but “only for projects which can be definitely started this calendar year.”
What was worse, the Hoover and Roosevelt road outlays didn’t make enough sense as infrastructure. A highway expert, Wilfred Owen, pointed out that New Deal construction had “denied congested metropolitan areas” and were instead “lavished upon local rural roads.”
As the country emerged from World War II, it was clear the unprecedented 1930s spending hadn’t prepared the U.S. for exploding postwar road use. General Dwight Eisenhower, for his part, was put off by the heavy political element of New Deal outlays.
Washington doesn’t shift gears easily. As the 1950s began, lawmakers therefore also presented construction as a tool to create jobs or manage the business cycle. The memory of the Depression was fresh. Recessions were still hitting with regularity -- there were four between the end of World War II and 1959.
Man of Action
But Eisenhower, now president, was a man of action. He recalled the embarrassing number of days -- 62 -- it had taken a cross-country convoy to get from Washington to San Francisco in 1919. In his view, the one good thing that Adolf Hitler had done was to build the Autobahn. Where was the American Autobahn? In the end the bill that Eisenhower was able to push through Congress was straightforward.
Under the Highway Act of 1956, the federal government spent billions to build new roads and piece together older ones and construct a national highway system. There were secondary goals, such as national defense and job creation, among them. But the most obvious goal, serving a country that wanted to move at 65 miles an hour, came first.
Less Than Optimal
The outcome of the interstate highway program wasn’t optimal. It favored truckers over cities. The roads cut off some downtowns from the commerce that had heretofore sustained them. Minorities pointed out that their communities often bore the brunt of construction. According to Rose, some black political and business leaders spoke of white men’s roads going through black men’s bedrooms.
As for budgeting, the interstate so far outran its original cost estimates that Senator William Proxmire awarded it his so- called golden fleece prize for federal profligacy.
But on balance, the highway achievement lasted in a way that stimulus or make-work projects did not. In the 1960s, one quarter of all productivity gains came from highway improvements. The interstate did its part to make the U.S. an economic superpower. By concentrating on one coherent infrastructure project, we helped to assure growth.
There were other benefits. As early as 1959, the New York Times was publishing headlines that said things like “Pay Roads Save Time and Tempers as They Lead Tourists to Far Places.”
Today the country can ill afford another trillion in stimulus. But if such an outlay is inevitable, then let that trillion go to a national Big Dig. As Eisenhower demonstrated, a growth project like a road can be superior to a new social program. A road, or a railway, or a plan to collect water in space, after all, reflects more hope. Obama will achieve the happiest outcome if he simply makes like Ike and plows forward.
Biggs, Faber Predict Dollar Rally
By Nikolaj Gammeltoft
Dec. 29 (Bloomberg) -- Barton Biggs and Marc Faber, who recommended buying stocks in March when investors were dumping them, are again united as they predict gains for U.S. equities and the dollar.
Shares in the largest equity market and the U.S. currency may add 10 percent as economies improve around the world, Biggs of New York-based hedge-fund firm Traxis Partners LP said in a Bloomberg Television interview yesterday. Faber, publisher of the “Gloom Boom & Doom” newsletter, told Bloomberg TV that the dollar may rise 5 percent to 10 percent against the euro while stocks gain, reversing the inverse relationship that existed between March and November.
Biggs and Faber’s advice nine months ago proved profitable as the Standard & Poor’s 500 Index surged 67 percent in the biggest rally since the 1930s. They saw a buying opportunity as investors speculating the financial crisis would cause a depression drove stock valuations to the cheapest level since 1986. Now, Biggs, 77, and Faber, 63, see gains as the economic recovery accelerates and investors shift money from Treasuries.
“History would suggest that after such a severe economic shock like we’ve just had that the odds are that we’re going to have a pretty good burst of growth in 2010, 2011,” Biggs said. “I don’t see any reason why we can’t have a further rally in the dollar and a further rally in stocks. And my guess is that the next move in both could be on the order of 10 percent.”
GDP Recovery
The S&P 500 added 0.1 percent to 1,129.06 at 9:55 a.m. today in New York, rising for a seventh consecutive day.
U.S. gross domestic product will increase 2.6 percent next year after contracting 2.5 percent in 2009, according to the median economist forecast in a Bloomberg survey. GDP will expand 3.5 percent next year, the most since 2004, as spending increases and companies boost investment, said London-based Barclays Plc’s Dean Maki, the most-accurate forecaster.
Equities started rebounding after investors paid a 23-year low of 11.9 times earnings at S&P 500 companies on March 9, according to data compiled by Yale University’s Robert Shiller, who adjusts valuations for inflation and uses a decade of profit to smooth out short-term fluctuations.
Shiller’s earnings multiple has surged to 20.3, matching the level before New York-based Lehman Brothers Holdings Inc. collapsed in September 2008, after the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession.
The rally in stocks was accompanied by a 17 percent retreat in the Dollar Index between March 5 and Nov. 25, the biggest slump since 1986. The measure tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
Stocks, Dollar Rise
The S&P 500 has added 1.5 percent since Nov. 25 while the Dollar Index advanced 4.7 percent.
Biggs, the chief global strategist for Morgan Stanley until 2003, said in a Bloomberg interview on Feb. 18 that the S&P 500 was poised to rise because economic indicators were starting to improve. Biggs reiterated his optimism in the March issue of Newsweek. His bullish bets during the worst of the credit crisis are giving his six-year-old firm its best returns ever.
Faber advised investors to buy U.S. stocks on March 9 when the S&P 500 was at a 12-year low.
Stocks may rise as Federal Reserve Chairman Ben S. Bernanke is forced to inject more liquidity into the financial system, spurring inflation that prompts investors to shift assets to equities from Treasuries and cash, Hong Kong-based Faber said.
The yield on Treasury 10-year notes has increased 0.64 percentage point this month to 3.84 percent, approaching the seven-month high of 3.95 percent reached in June. The 100 largest taxable U.S. funds returned an annualized 0.06 percent during the past week, according to data compiled by Westborough, Massachusetts-based Crane Data LLC.
“The worst investment will be U.S. Treasuries and cash, which has no return at present,” Faber said. “That money will shift into other assets, and this is the one reason that I am moderately positive about equities.”
China Executes British Drug Smuggler
By Ben Richardson
Dec. 29 (Bloomberg) -- China executed a British national for smuggling heroin, brushing off clemency pleas from the U.K. government and protests that the father of five was suffering from a mental illness that made him unfit to stand trial.
“I condemn the execution of Akmal Shaikh in the strongest terms,” U.K. Prime Minister Gordon Brown said in a statement released by the Foreign Office. “No mental health assessment was undertaken.”
Shaikh’s execution is the first of a national from a European Union country in China in more than 50 years, according to Reprieve, a charity that campaigns for death row prisoners globally. China carried out more executions than the rest of the world put together last year, Amnesty International says.
“We have carried out the matter according to Chinese law,” Foreign Ministry spokeswoman Jiang Yu said in Beijing at a regular press conference. “We are extremely disappointed by the comments made by the U.K. and we urge the U.K. to take appropriate action to ensure that Sino-British ties aren’t harmed.”
In London, the Foreign Office said it summoned the Chinese ambassador to protest the execution and to reiterate Brown’s concerns.
Lethal Injection
Shaikh was killed by lethal injection, Xinhua reported. The sentence was carried out at 10:30 a.m. local time in Urumqi, the capital of China’s westernmost Xinjiang province, Reprieve said, without saying where it got the information. Shaikh’s family carried out a vigil outside the Chinese Embassy in London seeking a reprieve, the charity said on its Web site.
The execution followed repeated attempts to have Shaikh examined by a doctor to assess his mental health, Reprieve said.
“China’s refusal to even allow a proper medical evaluation is simply disgusting,” Reprieve director Clive Stafford Smith said.
The British government and Reprieve had failed to provide documentary evidence that Shaikh or members of his family had a mental illness, Xinhua said.
“Drug trafficking is considered a heinous crime according to world consensus,” Xinhua cited the Supreme Court verdict as saying. “Chinese law requires that everybody who commits a crime be treated equally. The use of the capital punishment creates an effective deterrent against drug trafficking.”
At his last appeal hearing, Shaikh’s 50-minute testimony was “rambling and often incoherent” and “greeted with incredulity and sometimes mirth by court officials,” Reprieve said. The charity also published e-mails it said were from Shaikh and illustrated his mental instability.
‘Long History’
“Our specific concerns about the individual in this case were not taken into consideration despite repeated calls by the prime minister, ministerial colleagues and me,” Foreign Secretary David Miliband said in the U.K. government’s statement. “These included mental health issues, and inadequate professional interpretation during the trial.”
Shaikh was arrested with 4 kilograms of heroin in September 2007, according to a statement by Reprieve. He was suffering a delusion and being manipulated by a drug gang, it said.
Shaikh, from Kentish Town in London, had a “long history of strange behavior” and believed he was going to record a hit single in China, Reprieve said. The gang had promised to help him record the song, and asked him to carry the suitcase on a flight for them, according to the statement. He told authorities that the suitcase wasn’t his and he didn’t know about the drugs.
Before landing in Urumqi, Shaikh had been living in Poland, where he met a man named Carlos, who told him he had contacts in the music business in China, according to Reprieve.
Song
Witnesses cited by Reprieve recounted a history of deteriorating mental health in Poland. Shaikh had written a song called “Come Little Rabbit” that he wanted to record, said Gareth Saunders, a U.K. musician who met Shaikh there, according to testimony on Reprieve’s Web site dated Dec. 28. Saunders said he had only just heard of Shaikh’s circumstances.
“It was clear that Akmal had absolutely no musical talent, no sense of timing, and the song itself was dreadful,” Saunders wrote, adding that he was “totally delusional,” living in a shelter and seemingly homeless.
Shaikh became the first European executed in China for 58 years since Antonio Riva was shot by firing squad in 1951, accused of plotting to kill Mao Zedong, Reprieve said.
Home Prices Rose for Fifth Month
By Bob Willis
Dec. 29 (Bloomberg) -- Home prices in 20 U.S. cities rose in October for a fifth consecutive month, putting the housing market and economy farther along the path to recovery.
The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September, the group said today in New York. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007. The median forecast of economists surveyed by Bloomberg News anticipated a 7.2 percent drop.
Tax credits for first-time buyers and mortgage rates that are less than a percentage point from record lows may prevent the market from retreating after sales jumped 35 percent over the first 11 months of 2009. Rising home and stock prices over the past two quarters enabled households to recover 28 percent of the record $17.5 trillion of wealth lost since mid 2007.
“We’re starting to get a little bit of a turnaround, things are stabilizing,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “People aren’t in a panic in terms of selling their homes.”
Stock-index futures held earlier gains following the report. The contract on the Standard & Poor’s 500 Index was up 0.4 percent to 1,127 at 9:23 a.m. in New York.
Median Forecast
The median forecast was based on projections from 31 economists surveyed. Estimates ranged for declines of 4.6 percent to 8 percent.
The seasonally adjusted 20-city index has been rising on a month-to-month basis since June, the first gain since it started dropping in June 2006.
Compared with the prior month, 11 of the 20 areas covered showed an increase on a seasonally adjusted basis while eight had a decline. The biggest month-to-month gain was in San Francisco, which increased 1.7 percent.
All of the 20 cities in the S&P/Case-Shiller index showed a smaller year-over-year decline than in September.
To help ensure housing doesn’t weaken again, President Barack Obama and Congress last month extended a tax credit for first-time homebuyers until April 30 from Nov. 30, and expanded it to include some current owners.
Existing home sales in November rose to a 6.5 million annual rate, the highest level since February 2007, the National Association of Realtors said last week. They were still 10 percent lower than September 2005 peak levels.
Tax Credit
“The tax credit had the intended impact of drawing buyers in and lowering inventory,” Lawrence Yun, the real-estate agents group’s chief economist, said in a news conference. “An estimated 2 million buyers have taken advantage of the credit.”
Mounting foreclosures and an unemployment rate that economists surveyed by Bloomberg News this month forecast will exceed 10 percent in the first half of 2010 remain risks for the housing market and the economy.
Foreclosure filings in 2009 will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc., the Irvine, California- based company said Dec. 10. This year’s filings will surpass 2008’s total of 3.2 million.
Still, homebuilders are seeing some improvement. Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, said Dec. 16 its fourth-quarter loss narrowed as more buyers signed purchase contracts. “On the whole, we are seeing more price stability across our markets,” Chief Financial Officer Larry Sorsby said in a Dec. 17 conference call
Karl Case, an economist professor at Wellesley College, and Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, created the home-price index based on research from the 1980s. Case this month announced his retirement from teaching.
Consumer Confidence in U.S. Climbs
By Courtney Schlisserman
Dec. 29 (Bloomberg) -- Confidence among U.S. consumers rose in December for a second month as pessimism over the outlook for jobs diminished.
The Conference Board’s confidence index increased to 52.9, in line with the median forecast of economists surveyed by Bloomberg News, from 50.6 in November, the New York-based research group said today. Another report showed home prices climbed in October for a fifth consecutive month.
The report showed consumer attitudes about current conditions decreased to the lowest level in 26 years and expectations over wages also fell, a reminder that spending may be slow to recover with government assistance. A jobless rate that is forecast to exceed 10 percent through the first half of next year may prompt policy makers and retailers to maintain tax breaks and incentives to entice buyers.
“Confidence is slowly climbing out of the cellar,” Ryan Sweet, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “The consumer remains very focused on necessities, and spending has been very focused on subsidies and discounting. Consumers are still nervous about their jobs and future income.”
Stocks trimmed earlier gains following the report. The Standard & Poor’s 500 Index was up 0.1 percent to 1,128.29 at 10:04 a.m. in New York.
Median Estimate
Economists surveyed by Bloomberg News forecast the confidence measure would increase to 53, according to the median of 64 projections, from a previously reported 49.5 in November. Estimates ranged from 46 to 56.5.
The group’s index averaged 58 in 2008 and 103.4 in 2007.
The S&P/Case-Shiller home-price index increased 0.4 percent in October from the prior month on a seasonally adjusted basis, the group said today in New York. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007.
Compared with the prior month, 11 of the 20 areas covered showed an increase on a seasonally adjusted basis while eight had a decline. The biggest month-to-month gain was in San Francisco, which rose 1.7 percent.
The Conference Board’s measure of present conditions decreased to 18.8, the lowest level since February 1983, from 21.2 the prior month.
Jobs Outlook
The share of consumers who said jobs are plentiful fell to 2.9 percent from 3.1 percent, according to the Conference Board. The proportion of people who said jobs are hard to get decreased to 48.6 percent from 49.2 percent.
The gauge of expectations for the next six months climbed to 75.6, the highest since the recession began two years ago, from 70.3 the prior month.
The proportion of people who expect their incomes to rise over the next six months decreased to 10.3 percent from 10.9 percent. The share expecting more jobs improved to 16.2 percent from 15.8 percent.
The U.S. lost the fewest number of jobs in November since the recession began, according to Labor Department data. Also, jobless claims have receded, with the number of first-time applicants reaching the lowest level in more than a year in the week ended Dec. 18.
Regarding incomes, “consumers remain rather pessimistic about their short-term prospects and this will likely continue to play a key role in spending decisions in early 2010,” Lynn Franco, director of the Conference Board’s Consumer Research Center, said in a statement.
Recovery Into 2010
The world’s largest economy will expand 2.6 percent in 2010 after shrinking 2.5 percent this year, according to the median forecast of 58 economists surveyed by Bloomberg from Dec. 1 to Dec. 8. Consumer spending, which accounts for about 70 percent of the economy, will grow 1.8 percent next year after declining 0.6 percent in 2009, the worst performance in 35 years, according to the survey median.
Federal Reserve officials two weeks ago declared financial markets healthy enough to remove most emergency aid. At the same time kept a pledge to keep interest rates “exceptionally low” for an “extended period.”
“Deterioration in the labor market is abating,” the FOMC said in a statement Dec. 16 after meeting in Washington. “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.”
Retail sales rose an estimated 3.6 percent this holiday seasons from a year earlier, data from MasterCard Advisors’ SpendingPulse showed yesterday. The estimate for Nov. 1 to Dec. 24 excludes automotive and gasoline sales, the company said.
Retailers are extending discounts beyond Christmas to lure customers.
‘Very Aggressive’
“We are going to be very aggressive, we’ve been aggressive all season,” Toys “R” Us Chief Executive Officer Jerry Storch said by telephone Dec. 23 from Wayne, New Jersey, where the largest U.S. toy chain is based.
Buying plans for automobiles and real estate dropped this month, today’s Conference Board report showed. Home-buying expectations fell to the lowest level since 1982.
“It’s clear that consumer concerns about unemployment levels and the economic climate are weighing on spending,” Walgreen Co. Chief Executive Officer Gregory Wasson said on a conference call with analysts Dec. 21. “Consumers are focused on value and discretionary items are not high on their shopping lists.”
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