History > 2006 > USA > Economy (V)

Thousands stormed the Fashion Place Mall in Murray, Utah,

which opened its doors to shoppers at 12:01 a.m.

Tom Smart for The New York Times

Black Friday Turned Green at the Malls Before Dawn

NYT

27.11.2006

http://www.nytimes.com/2006/11/27/business/27shop.html

New-home sales fall in October,

but prices rise

Updated 11/29/2006 10:48 PM ET
By Jeannine Aversa, Associated Press
USA Today

WASHINGTON — Sales of new homes fell in October by the largest amount in three months, a fresh sign of continued cooling in the once-sizzling housing sector.

The Commerce Department reported Wednesday that new-home sales totaled 1.004 million at a seasonally adjusted annual rate, down 3.2% from September. That was the largest drop since July, when home sales plunged 9.2%.

Home prices, meanwhile, rose in October, after falling sharply in September.

The median price of a new home sold in October was $248,500, up 1.9% from the same month a year ago. The median price is where half sell for more and half sell for less.

The 1.004 million pace of sales last month was slightly weaker than the 1.050 million economists were forecasting.

Sales fell in all parts of the country, except the West.

In the Northeast, sales plunged 39%, steepest drop since January 1996. In the Midwest, they dropped 5.6% and in the South, they slipped 1.7%. In the West, sales rose 3.2%.

At the current sales pace, it would take 7 months to exhaust the supply of unsold new homes. That's up slightly from a supply of 6.7 months for September.

The cooling in the housing market figured prominently in the national economy's 2.2% gross domestic product growth rate logged in the third quarter, slowest pace since the end of last year.

Builders cut spending on home building at an 18% annual rate, the most in 15 years, the government said in a separate report. That sliced 1.16 percentage points off third-quarter GDP, the most in nearly 25 years.

Outside the struggling housing sector, other parts of the economy remain in decent shape, Federal Reserve Chairman Ben Bernanke said in a speech Tuesday. Consumers and businesses are spending and investing. Employers are hiring and workers' wages are growing.

Economists don't believe the housing slump will short-circuit the five-year-old economic expansion and throw the economy into recession.

Bernanke also struck an optimistic tone on this front, but said there is always the risk of a sharper-than-expected slowdown in the housing sector.

The Fed chief said "the slowing pace of residential construction is likely to be a drag on economic growth into next year." Even though there are signs that the demand for homes is stabilizing, builders still need to work off a bloated inventory of unsold homes and that will take time and further adjustments, he said.

New-home sales fall in October, but prices rise, UT, 29.11.2006, http://www.usatoday.com/money/economy/housing/2006-11-29-newhomes-oct_x.htm

30,000 Union Workers

Accept Buyouts at Ford

November 29, 2006
The New York Times
By NICK BUNKLEY

DEARBORN, Mich., Nov. 29 — Thirty thousand Ford Motor Company workers — nearly half of the automaker’s unionized work force — have agreed to leave their jobs in exchange for a buyout or a package of early retirement benefits, the company said this morning.

All of the 75,000 Ford employees represented by the United Automobile Workers union were offered eight different deals worth as much as $140,000 in September, and had to decide by Monday whether to accept.

In all, 38,000 U.A.W. workers at Ford have now agreed to take buyouts this year, including 8,000 who accepted packages offered at specific plants earlier in the year, before the company made the deals available to its entire hourly work force.

The departures will leaves Ford with its smallest workforce in decades.

Combined with almost 34,000 employees who took buyouts over the summer — reducing G.M.’s hourly payroll by about one-third — the Ford announcement brings tp 72,000 the number of workers at Detroit’s automakers who have voluntarily agreed to leave an industry that can no longer can guarantee them the high wages and job security enjoyed by their parents and grandparents.

The “take rate” at Ford surpassed the expectations both of management and of Wall Street analysts, and will allow Ford to reduce its costs faster than called for in the company’s much-discussed overhaul plan, called the Way Forward. Ford said earlier in the year that it needed to eliminate 25,000 to 30,000 jobs as it closes plants and sheds production capacity left idle as the company’s market share in the United States declines.

Union leaders were apparently surprised by the high take rate as well: before the Monday deadline, news reports said they expected only about 15,000 workers to accept a buyout.

Investors reacted positively, bidding up Ford’s stock price by about 20 cents, or 2.5 percent, to $8.35 a share in morning trading on the New York Stock Exchange.

“While I know that, in many cases, decisions to leave the company were difficult for our employees, the acceptances received through this voluntary effort will help Ford to become more competitive,” Ford’s new chief executive, Alan Mulally, said in a statement. “We’d also like to thank the U.A.W. for working closely with us in developing packages that will help employees to move productively into a new phase of their lives. It is clear that we were successful in providing appropriate options; this, in turn, is helping the company to meet its cost objectives.”

Ford said “just over half” of the workers who accepted buyouts chose a package that gives them a lump-sum payment, plus tuition reimbursement or scholarship money for family members, but absolved the company from having to pay them retirement benefits. Other packages included cash payouts of up to $35,000 and allowed workers to receive health insurance and other benefits as if they had retired in the usual manner.

Workers will begin leaving Ford in January and must be gone by September.

Ford lost $7 billion through the first nine months of this year, and has said it does not expect to earn a profit in North America until 2009 at the earliest. On Monday, Ford said it planned to mortgage most of its assets in the United States, along with its stock in Volvo and the Ford Motor Credit Company, in order to raise $18 billion to finance its overhaul. Never before in its 103-year history had Ford pledged major assets to raise money.

The automaker has not said how much it expects the buyout program to cost. G.M. has pegged the price of its buyouts at $3.8 billion, or roughly $100,000 for each worker.

Ford also intends to eliminate about 14,000 salaried positions through buyouts. Those workers still have time to decide whether to accept a package and leave.

    30,000 Union Workers Accept Buyouts at Ford, NYT, 29.11.2006, http://www.nytimes.com/2006/11/29/business/30fordcnd.html

New Chief at Pfizer Will Reduce Sales Force

November 29, 2006
The New York Times
By ALEX BERENSON

Pfizer, the world’s largest drug company, said yesterday that it would lay off almost 2,400 sales representatives and managers, which is a fifth of its United States sales force but only 2 percent of its overall worldwide work force.

The move may indicate the beginning of a wider retrenchment by Pfizer and the rest of the drug industry.

Drug makers have sharply increased the size of their sales forces over the last decade as the research productivity of the companies has plunged and the pipeline of important new drugs has dwindled.

The bloated sales forces, analysts say, have alienated doctors and contributed to high drug prices.

Because Pfizer led the sales force expansion, other companies will probably follow its decision to cut back, said Michael Krensavage, a drug industry analyst at Raymond James.

“The other companies were reluctant to cut their sales forces while Pfizer was continuing to have people on the ground,” he said. “It seems like it’s the end of an arms race.”

Drug sales representatives promote medicines by visiting doctors’ offices to offer physicians promotional literature, journal articles and free samples for patients. But many doctors now complain that they are overrun by too many representatives who have little useful information.

Now, with revenue barely rising at most companies and Democratic leaders in Congress vowing to wring savings from the Medicare prescription drug program, drug makers are under pressure to bring their costs down.

In a statement about the layoffs, Pfizer said it would announce more “actions for transforming the company” in January.

The restructuring program comes on top of an earlier set of layoffs that trimmed Pfizer’s work force by 5,300 employees since early 2005, according to a Pfizer filing with the Securities and Exchange Commission.

The new cuts are one of the first moves by Jeffrey B. Kindler, the former General Electric executive who in July replaced Pfizer’s ousted chief executive, Hank McKinnell. Mr. Kindler has pledged to review every aspect of the company’s operations.

Pfizer has also promised to reduce its overall costs in 2007 compared with 2006, and further reduce them in 2008.

Paul Fitzhenry, a Pfizer spokesman, said the company expected to notify affected employees by mid- to late December. The layoffs should be complete by Jan. 1, he said.

The layoffs will be spread broadly across the United States sales force, including both field representatives and managers, not confined to any geographic area or category of drugs.

Pfizer did not disclose details of the severance packages employees would be offered.

Pfizer has 106,000 employees worldwide, including 42,000 in the United States. Its sales force, including managers, totals just under 12,000 in the United States and another 24,000 outside the United States. The cuts announced yesterday do not cover the international sales force.

The company made the announcement after the close of trading yesterday, during which shares of Pfizer rose 8 cents, to $27.05. In after-hours trading shares were up an additional 20 cents. Pfizer shares have risen 16 percent this year but are still down by almost half from the highs they set six years ago.

“This is overdue,” said Les Funtleyder, an industry analyst at Miller Tabak. “Pfizer was probably the innovator in the ‘Mongol horde’ approach to the sales force, and that model served them well in the past. Now they simply don’t need as many.”

Like other big drug companies, Pfizer remains very profitable. Last year, the company had $14 billion in profits, excluding one-time charges, on $51 billion in sales.

But despite a $7 billion annual research budget, Pfizer has had deep difficulties bringing new drugs to market.

Earlier yesterday, Pfizer announced it had ended a research collaboration with a European company to develop asenapine, a treatment for schizophrenia that analysts had predicted could be a multibillion-dollar drug.

Pfizer has also run into unexpected problems with torcetrapib, a drug meant to raise so-called good cholesterol. Torcetrapib appears to raise blood pressure slightly in patients, a serious side effect for a drug intended to reduce heart disease.

As a result, most analysts now believe that the Food and Drug Administration will not approve torcetrapib unless Pfizer can prove through studies that it reduces heart attacks and other cardiovascular problems. That data will probably not be available until at least 2010.

Tomorrow, Pfizer will play host to an all-day conference with analysts, investors, and the news media at its research campus in Groton, Conn., to discuss its pipeline of new drugs. Analysts are expecting greater transparency from the company, which in the past has been reluctant to discuss its early-stage drug candidates.

    New Chief at Pfizer Will Reduce Sales Force, NYT, 29.11.2006, http://www.nytimes.com/2006/11/29/business/29pfizer.html?hp&ex=1164862800&en=c36914b0f9de4d59&ei=5094&partner=homepage

Existing home prices post record decline, and more drops to come, economists say

Updated 11/28/2006 11:30 AM ET
USA Today
By Noelle Knox

Existing home prices fell a record 3.5% last month, the third decline in a row, as more sellers were forced to lower their asking prices to lure buyers back into the market. Those price cuts, coupled with a dip in mortgage rates, helped end a six-month losing streak for home sales, which edged up 0.5% in

October, the National Association of Realtors said Tuesday.
Yet with a 7.4-month supply of homes for sale, prices will probably decline for the rest of the year.

"Sellers will have to overcome their state of denial and start dropping prices even more to clear this market," says Joel Naroff, chief economist of Naroff Economic Advisors. "And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."

The median price for an existing, single-family home was $221,300, down 3.4% from October last year. Sales of existing single-family homes rose 1.3% from September, but were down 11% from October last year.

Condo owners felt even more pain as the median price skidded 5.3% to $214,300. Sales dropped 4.8% from September and 14.5% below October a year ago.

"There is little chance of significant near-term relief," says Ian Shepherdson, chief U.S. economist for High Frequency Economics. "We expect prices to continue falling at an accelerating rate for both single family and condo homes."

The hardest hit last month were homeowners in the South, where the median price plunged 7% to $185,000 from a spike in October. Home sales slipped 1.2% from September to October, and were 8.8% below a year ago.

In the Northeast, prices skidded 5.2% to $254,000. Sales declined 2.9% from September, and were 9.8% off from October last year.

The median price in the Midwest was $170,000, a dip of 1.2% below October last year. Sales were flat, but off 10.2% compared with October last year.

The median price in the West was $340,000, down 0.6% from October 2005. Sales rose 6.4% from September to October, but were 18.9% lower than a year earlier.

    Existing home prices post record decline, and more drops to come, economists say, UT, 28.11.2006, http://www.usatoday.com/money/economy/housing/2006-11-28-existing-home-sales_x.htm

Black Friday Turned Green at the Malls Before Dawn

November 27, 2006
The New York Times
By MICHAEL BARBARO

The clock struck midnight. Then the mall struck back.

Early openings, deep discounts and resurgent department stores appeared to give merchants at the mall an edge over discount retailers during the holiday weekend, a reversal of fortune from 2005.

ShopperTrak RCT, which measures purchases at 45,000 mall-based stores, found that sales for the day after Thanksgiving rose 6 percent from last year, to $9 billion. On the same day last year, sales at stores monitored by ShopperTrak dropped 0.9 percent.

Discount chains, with their 5 a.m. openings and $70 portable DVD players, typically dominate the opening day of the holiday shopping season, known as Black Friday, because it was traditionally when retailers started turning a profit, or moved into the black.

But Wal-Mart, by far the nation’s biggest discount chain, threw cold water on that legacy this weekend, estimating that sales in November — including Black Friday — fell 0.1 percent, below its expectations.

Retail analysts and industry executives credited the strong performance of mall stores to an unusually aggressive posture this holiday season. Badly beaten in 2005, they stole a page from their discount rivals, pushing up their openings by as much as six hours, to 12 a.m., and offering bigger early-morning deals.

The tactics succeeded in drawing crowds but could come back to haunt the chains if consumers snatched up the bargains and skipped over the full-priced merchandise.

Gap offered 30 percent off purchases of $50 or more until noon Friday and the Limited Too promoted a buy-one-get-one-half-off sale.

Mall retailers “turned up the dial a full notch this year,” said John D. Morris, senior retail analyst a Wachovia Securities, who deployed aides across the country to track business at chains like Gap, Abercrombie & Fitch and Aéropostale.

Strong early-morning traffic, he said “did not drift off around noon. Stores were holding the attention of customer.”

An experiment with 12 a.m. openings bolstered mall traffic across the country. The crowds swelled to 15,000 at the Fashion Place Mall in Murray, Utah; 20,000 at the Christiana Mall in Newark, Del.; and 50,000 at the Maine Mall in Portland, Me.

Wally Brewster, the head of marketing at General Growth Properties, which owns the three malls, said stores that opened at midnight reported “significantly higher sales” than those that waited until 6 a.m.

Sixty percent of the stores at malls like Fashion Place opened at midnight but, because of the turnout, stores that sat it out were already planning to participate next year, Mr. Brewster said.

Emily Spendlove, 35, drove 45 minutes to wait in line outside the Fashion Place Mall on Thursday night, skipping sleep “to be part of the excitement.” Once inside, she spent $120 at an athletic clothing store called Fanzz, buying four Chicago Bears football products — two helmets, a beach towel and a photo montage.

Ernest Speranza, the chief marketing officer at KB Toys, a mall-based chain, said customers showed up for the discounts but walked out with full-priced merchandise. KB marketed Barbie dolls at 30 percent off, yet thousands of customers still bought higher-priced Bratz dolls. “I think the customer is in the mood to spend,” he said. “They seem very up, very positive.”

Visa USA said preliminary data, culled from spending by its cardholders, supported its forecast that holiday sales would increase 7.5 percent this year, compared with an 8.3 percent increase last year. Wayne Best, senior vice president of economic analysis for the company, said the average amount spent on Visa-branded credit and debit cards Friday grew 9 percent, compared with the same day last year.

Unlike in years past, Visa did not divulge detailed data about spending, but it did report that electronics and home furnishings stores experienced the biggest growth over the weekend. “They really stole the show,” Mr. Best said.

As always, stores outside the mall, like Best Buy, Wal-Mart and Target, drew large crowds by dangling deals like 42-inch flat-screen TVs for less than $1,000. But the November results from Wal-Mart have dampened the outlook for big-box retailers.

The chain’s troubles are, in part, unique. It has built hundreds of supercenters so close together that individual store sales have dropped and its plans to carry more fashionable clothing have hit a snag.

But analyst said the success of department stores, which have experienced a revival over the last six months, could not be discounted as a factor.

For the first time in years, they said, discounters faced stiff competition from the mall. In its Black Friday circular, J. C. Penney advertised 35 pages of “doorbuster” deals that expired at noon, and Macy’s put a $10 coupon on the front of its print advertisements.

J. C. Penney, in a statement, reported “brisk traffic” at its stores on Friday, while Terry J. Lundgren, the chief executive of Federated Department Stores, the owner of Macy’s, said “we are off to a strong start.”

Mr. Brewster, of General Growth Properties, predicted “it is going to be a very strong season for the mall.”

Martin Stolz contributed reporting from Murray, Utah.

    Black Friday Turned Green at the Malls Before Dawn, NYT, 27.11.2006, http://www.nytimes.com/2006/11/27/business/27shop.html

Gilded Paychecks

Very Rich Are Leaving the Merely Rich Behind

November 27, 2006
The New York Times
By LOUIS UCHITELLE

A decade into the practice of medicine, still striving to become “a well regarded physician-scientist,” Robert H. Glassman concluded that he was not making enough money. So he answered an ad in the New England Journal of Medicine from a business consulting firm hiring doctors.

And today, after moving on to Wall Street as an adviser on medical investments, he is a multimillionaire.

Such routes to great wealth were just opening up to physicians when Dr. Glassman was in school, graduating from Harvard College in 1983 and Harvard Medical School four years later. Hoping to achieve breakthroughs in curing cancer, his specialty, he plunged into research, even dreaming of a Nobel Prize, until Wall Street reordered his life.

Just how far he had come from a doctor’s traditional upper-middle-class expectations struck home at the 20th reunion of his college class. By then he was working for Merrill Lynch and soon would become a managing director of health care investment banking.

“There were doctors at the reunion — very, very smart people,” Dr. Glassman recalled in a recent interview. “They went to the top programs, they remained true to their ethics and really had very pure goals. And then they went to the 20th-year reunion and saw that somebody else who was 10 times less smart was making much more money.”

The opportunity to become abundantly rich is a recent phenomenon not only in medicine, but in a growing number of other professions and occupations. In each case, the great majority still earn fairly uniform six-figure incomes, usually less than $400,000 a year, government data show. But starting in the 1990s, a significant number began to earn much more, creating a two-tier income stratum within such occupations.

The divide has emerged as people like Dr. Glassman, who is 45, latched onto opportunities within their fields that offered significantly higher incomes. Some lawyers and bankers, for example, collect much larger fees than others in their fields for their work on business deals and cases.

Others have moved to different, higher-paying fields — from academia to Wall Street, for example — and a growing number of entrepreneurs have seen windfalls tied largely to expanding financial markets, which draw on capital from around the world. The latter phenomenon has allowed, say, the owner of a small mail-order business to sell his enterprise for tens of millions instead of the hundreds of thousands that such a sale might have brought 15 years ago.

Three decades ago, compensation among occupations differed far less than it does today. That growing difference is diverting people from some critical fields, experts say. The American Bar Foundation, a research group, has found in its surveys, for instance, that fewer law school graduates are going into public-interest law or government jobs and filling all the openings is becoming harder.

Something similar is happening in academia, where newly minted Ph.D.’s migrate from teaching or research to more lucrative fields. Similarly, many business school graduates shun careers as experts in, say, manufacturing or consumer products for much higher pay on Wall Street.

And in medicine, where some specialties now pay far more than others, young doctors often bypass the lower-paying fields. The Medical Group Management Association, for example, says the nation lacks enough doctors in family practice, where the median income last year was $161,000.

“The bigger the prize, the greater the effort that people are making to get it,” said Edward N. Wolff, a New York University economist who studies income and wealth. “That effort is draining people away from more useful work.”

What kind of work is most useful is a matter of opinion, of course, but there is no doubt that a new group of the very rich have risen today far above their merely affluent colleagues.

Turning to Philanthropy

One in every 825 households earned at least $2 million last year, nearly double the percentage in 1989, adjusted for inflation, Mr. Wolff found in an analysis of government data. When it comes to wealth, one in every 325 households had a net worth of $10 million or more in 2004, the latest year for which data is available, more than four times as many as in 1989.

As some have grown enormously rich, they are turning to philanthropy in a competition that is well beyond the means of their less wealthy peers. “The ones with $100 million are setting the standard for their own circles, but no longer for me,” said Robert Frank, a Cornell University economist who described the early stages of the phenomenon in a 1995 book, “The Winner-Take-All Society,” which he co-authored.

Fighting AIDS and poverty in Africa are favorite causes, and so is financing education, particularly at one’s alma mater.

“It is astonishing how many gifts of $100 million have been made in the last year,” said Inge Reichenbach, vice president for development at Yale University, which like other schools tracks the net worth of its alumni and assiduously pursues the richest among them.

Dr. Glassman hopes to enter this circle someday. At 35, he was making $150,000 in 1996 (about $190,000 in today’s dollars) as a hematology-oncology specialist. That’s when, recently married and with virtually no savings, he made the switch that brought him to management consulting.

He won’t say just how much he earns now on Wall Street or his current net worth. But compensation experts, among them Johnson Associates, say the annual income of those in his position is easily in the seven figures and net worth often rises to more than $20 million.

“He is on his way,” said Alan Johnson, managing director of the firm, speaking of people on career tracks similar to Dr. Glassman’s. “He is destined to riches.”

Indeed, doctors have become so interested in the business side of medicine that more than 40 medical schools have added, over the last 20 years, an optional fifth year of schooling for those who want to earn an M.B.A. degree as well as an M.D. Some go directly to Wall Street or into health care management without ever practicing medicine.

“It was not our goal to create masters of the universe,” said James Aisner, a spokesman for Harvard Business School, whose joint program with the medical school started last year. “It was to train people to do useful work.”

Dr. Glassman still makes hospital rounds two or three days a month, usually on free weekends. Treating patients, he said, is “a wonderful feeling.” But he sees his present work as also a valuable aspect of medicine.

One of his tasks is to evaluate the numerous drugs that start-up companies, particularly in biotechnology, are developing. These companies often turn to firms like Merrill Lynch for an investment or to sponsor an initial public stock offering. Dr. Glassman is a critical gatekeeper in this process, evaluating, among other things, whether promising drugs live up to their claims.

What Dr. Glassman represents, along with other very rich people interviewed for this article, is the growing number of Americans who acknowledge that they have accumulated, or soon will, more than enough money to live comfortably, even luxuriously, and also enough so that their children, as adults, will then be free to pursue careers “they have a hunger for,” as Dr. Glassman put it, “and not feel a need to do something just to pay the bills.”

In an earlier Gilded Age, Andrew Carnegie argued that talented managers who accumulate great wealth were morally obligated to redistribute their wealth through philanthropy. The estate tax and the progressive income tax later took over most of that function — imposing tax rates of more than 70 percent as recently as 1980 on incomes above a certain level.

Now, with this marginal rate at half that much and the estate tax fading in importance, many of the new rich engage in the conspicuous consumption that their wealth allows. Others, while certainly not stinting on comfort, are embracing philanthropy as an alternative to a life of professional accomplishment.

Bill Gates and Warren Buffett are held up as models, certainly by Dr. Glassman. “They are going to make much greater contributions by having made money and then giving it away than most, almost all, scientists,” he said, adding that he is drawn to philanthropy as a means of achieving a meaningful legacy.

“It has to be easier than the chance of becoming a Nobel Prize winner,” he said, explaining his decision to give up research, “and I think that goes through the minds of highly educated, high performing individuals.”

As Bush administration officials see it — and conservative economists often agree — philanthropy is a better means of redistributing the nation’s wealth than higher taxes on the rich. They argue that higher marginal tax rates would discourage entrepreneurship and risk-taking. But some among the newly rich have misgivings.

Mark M. Zandi is one. He was a founder of Economy.com, a forecasting and data gathering service in West Chester, Pa. His net worth vaulted into eight figures with the company’s sale last year to Moody’s Investor Service.

“Our tax policies should be redesigned through the prism that wealth is being increasingly skewed,” Mr. Zandi said, arguing that higher taxes on the rich could help restore a sense of fairness to the system and blunt a backlash from a middle class that feels increasingly squeezed by the costs of health care, higher education, and a secure retirement. The Federal Reserve’s Survey of Consumer Finances, a principal government source of income and wealth data, does not single out the occupations and professions generating so much wealth today. But Forbes magazine offers a rough idea in its annual surveys of the richest Americans, those approaching and crossing the billion dollar mark.

Some routes are of long standing. Inheritance plays a role. So do the earnings of Wall Street investment bankers and the super incomes of sports stars and celebrities. All of these routes swell the ranks of the very rich, as they did in 1989.

But among new occupations, the winners include numerous partners in recently formed hedge funds and private equity firms that invest or acquire companies. Real estate developers and lawyers are more in evidence today among the very rich. So are dot-com entrepreneurs as well as scientists who start a company to market an invention or discovery, soon selling it for many millions. And from corporate America come many more chief executives than in the past.

Seventy-five percent of the chief executives in a sample of 100 publicly traded companies had a net worth in 2004 of more than $25 million mainly from stock and options in the companies they ran, according to a study by Carola Frydman, a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management. That was up from 31 percent for the same sample in 1989, adjusted for inflation.

Chief executives were not alone among corporate executives in rising to great wealth. There were similar or even greater increases in the percentage of lower-ranking executives — presidents, executive vice presidents, chief financial officers — also advancing into the $25 million-plus category.

The growing use of options as a form of pay helps to explain the sharp rise in the number of very wealthy households. But so does the gradual dismantling of the progressive income tax, Ms. Frydman concluded in a recent study.

“Our simulation results suggest that, had taxes been at their low 2000 level throughout the past 60 years, chief executive compensation would have been 35 percent higher during the 1950s and 1960s,” she wrote.

Trying Not to Live Ostentatiously

Finally, the owners of a variety of ordinary businesses — a small chain of coffee shops or temporary help agencies, for example — manage to expand these family operations with the help of venture capital and private equity firms, eventually selling them or taking them public in a marketplace that rewards them with huge sums.

John J. Moon, a managing director of Metalmark Capital, a private equity firm, explains how this process works.

“Let’s say we buy a small pizza parlor chain from an entrepreneur for $10 million,” said Mr. Moon, who at 39, is already among the very rich. “We make it more efficient, we build it from 10 stores to 100 and we sell it to Domino’s for $50 million.”

As a result, not only the entrepreneur gets rich; so do Mr. Moon and his colleagues, who make money from putting together such deals and from managing the money they raise from wealthy investors who provide much of the capital.

By his own account, Mr. Moon, like Dr. Glassman, came reluctantly to the accumulation of wealth. Having earned a Ph.D. in business economics from Harvard in 1994, he set out to be a professor of finance, landing a job at Dartmouth’s Tuck Graduate School of Business, with a starting salary in the low six figures.

To this day, teaching tugs at Mr. Moon, whose parents immigrated to the United States from South Korea. He steals enough time from Metalmark Capital to teach one course in finance each semester at Columbia University’s business school. “If Wall Street was not there as an alternative,” Mr. Moon said, “I would have gone into academia.”

Academia, of course, turned out to be no match for the job offers that came Mr. Moon’s way from several Wall Street firms. He joined Goldman Sachs, moved on to Morgan Stanley’s private equity operation in 1998 and stayed on when the unit separated from Morgan Stanley in 2004 and became Metalmark Capital.

As his income and net worth grew, the Harvard alumni association made contact and he started to give money, not just to Harvard, but to various causes. His growing charitable activities have brought him a leadership role in Harvard alumni activities, including a seat on the graduate school alumni council.

Still, Mr. Moon tries to live unostentatiously. “The trick is not to want more as your income and wealth grow,” he said. “You fly coach and then you fly first class and then it is fractional ownership of a jet and then owning a jet. I still struggle with first class. My partners make fun of me.”

His reluctance to show his wealth has a basis in his religion. “My wife and I are committed Presbyterians,” he said. “I would like to think that my faith informs my career decisions even more than financial considerations. That is not always easy because money is not unimportant.”

It has a momentum of its own. Mr. Moon and his wife, Hee-Jung, who gave up law to raise their two sons, are renovating a newly purchased Park Avenue co-op. “On an absolute scale it is lavish,” he said, “but on a relative scale, relative to my peers, it is small.”

Behavior is gradually changing in the Glassman household, too. Not that the doctor and his wife, Denise, 41, seem to crave change. Nothing in his off-the-rack suits, or the cafes and nondescript restaurants that he prefers for interviews, or the family’s comparatively modest four-bedroom home in suburban Short Hills, N.J., or their two cars (an Acura S.U.V. and a Honda Accord) suggests that wealth has altered the way the family lives.

But it is opening up “choices,” as Mrs. Glassman put it. They enjoy annual ski vacations in Utah now. The Glassmans are shopping for a larger house — not as large as the family could afford, Mrs. Glassman said, but large enough to accommodate a wood-paneled study where her husband could put all his books and his diplomas and “feel that it is his own.” Right now, a glassed-in porch, without book shelves, serves as a workplace for both of them.

Starting out, Dr. Glassman’s $150,000 a year was a bit less than that of his wife, then a marketing executive with an M.B.A. from Northwestern. Their plan was for her to stop working once they had children. To build up their income, she encouraged him to set up or join a medical practice to treat patients. Dr. Glassman initially balked, but he was coming to realize that his devotion to research would not necessarily deliver a big scientific payoff.

“I wasn’t sure that I was willing to take the risk of spending many years applying for grants and working long hours for the very slim chance of winning at the roulette table and making a significant contribution to the scientific literature,” he said.

In this mood, he was drawn to the ad that McKinsey & Company, the giant consulting firm, had placed in the New England Journal of Medicine. McKinsey was increasingly working among biomedical and pharmaceutical companies and it needed more physicians on staff as consultants. Dr. Glassman, absorbed in the world of medicine, did not know what McKinsey was. His wife enlightened him. “The way she explained it, McKinsey was like a Massachusetts General Hospital for M.B.A.’s,” he said. “It was really prestigious, which I liked, and I heard that it was very intellectually charged.”

He soon joined as a consultant, earning a starting salary that was roughly the same as he was earning as a researcher — and soon $100,000 more. He stayed four years, traveling constantly and during that time the family made the move to Short Hills from rented quarters in Manhattan.

Dr. Glassman migrated to Merrill Lynch in 2001, first in private equity, which he found to be more at the forefront of innovation than consulting at McKinsey, and then gradually to investment banking, going full time there in 2004.

Linking Security to Income

Casey McCullar hopes to follow a similar circuit. Now 29, he joined the Marconi Corporation, a big telecommunications company, in 1999 right out of the University of Texas in Dallas, his hometown. Over the next six years he worked up to project manager at $42,000 a year, becoming quite skilled in electronic mapmaking.

A trip to India for his company introduced him to the wonders of outsourcing and the money he might make as an entrepreneur facilitating the process. As a first step, he applied to the Tuck business school at Dartmouth, got in and quit his Texas job, despite his mother’s concern that he was giving up future promotions and very good health insurance, particularly Marconi’s dental plan.

His life at Tuck soon sent him in still another direction. When he graduates next June he will probably go to work for Mercer Management Consulting, he says. Mercer recruited him at a starting salary of $150,000, including bonus. “If you had told me a couple of years ago that I would be making three times my Marconi salary, I would not have believed you,” Mr. McCullar said.

Nearly 70 percent of Tuck’s graduates go directly to consulting firms or Wall Street investment houses. He may pursue finance later, Mr. McCullar says, always keeping in mind an entrepreneurial venture that could really leverage his talent.

“When my mom talks of Marconi’s dental plan and a safe retirement,” he said, “she really means lifestyle security based on job security.”

But “for my generation,” Mr. McCullar said, “lifestyle security comes from financial independence. I’m doing what I want to do and it just so happens that is where the money is.”

    Very Rich Are Leaving the Merely Rich Behind, NYT, 27.11.2006, http://www.nytimes.com/2006/11/27/business/27richer.html?hp&ex=1164690000&en=8ce83432e4bd8730&ei=5094&partner=homepage

Peer Pressure: Inflating Executive Pay

November 26, 2006
The New York Times
By GRETCHEN MORGENSON

LIKE Lake Wobegon, Garrison Keillor’s fictitious Minnesota town where all the children are above average, executive compensation practices often assume that corporate managers are equally superlative. When shareholders question lush pay, they are invariably met with a laundry list of reasons that businesses use to justify such packages. Among that data, no item is more crucial than the “peer group,” a collection of companies that corporations measure themselves against when calculating compensation.

But according to a handful of pay experts who are privy to the design of pay practices at the nation’s largest corporations, many of these peer groups are populated with companies that are anything but comparable. They also say corporate managers themselves — who have an interest in higher pay — are selecting which companies make it into a peer group. And because these companies are often inappropriate for comparison purposes, their use has helped inflate executive pay in recent years.

“The peer group is the bedrock of the compensation philosophy at a company,” said James F. Reda, an independent compensation consultant in New York. “But a lot of people do it by the seat of their pants, and that is part of the reason why executive pay has really skyrocketed.”

The use of peer groups to calculate executive pay has become ubiquitous in recent years. This is partly in response to the Securities and Exchange Commission’s requirement that companies compare their stock performance with a peer group in tables in the section of their proxy filings devoted to shareholder returns. Theoretically, these tables allow investors to compare their company’s performance against objective benchmarks.

But as is true with much about executive pay, details about exactly how peer groups are compiled have been kept under wraps. The worry among investors, of course, is that executives, consultants and directors simply cherry-pick peer-group members, thereby pumping up pay packages.

Current disclosure rules require neither the identification of companies in a compensation-related peer group nor the rationale behind their selection. Usually, the most a shareholder learns about companies in a compensation peer group is that they are in the same industry or of a similar size.

This ambiguity will change when new Securities and Exchange Commission disclosure rules go into effect on Dec. 15. The rules will require a corporation to reveal which companies it uses in its peer group and to provide an extensive description of its compensation philosophy.

Under the new rules, company officials will also have to certify the accuracy of their pay disclosures. As a result, peer groups are likely to attract increased scrutiny, said Mark Van Clieaf, managing director of MVC Associates International, a consulting firm that specializes in organization design and pay-for-performance standards.

“Is benchmarking pay across companies truly comparing apples to apples?” Mr. Van Clieaf asked. “Failure to have a legally defensible process” can lead to “materially false” disclosures, he said.

POSSIBLE problems with the use of peer groups burst onto the scene in 2003, when the New York Stock Exchange disclosed that it had paid its chairman, Richard A. Grasso, about $140 million in total compensation. Amid a firestorm over the pay, Mr. Grasso resigned.

One reason for the outcry was the makeup of the peer group that the exchange’s compensation committee used to determine Mr. Grasso’s pay. The group included highly profitable investment banks and financial institutions that were far larger and more complex than the Big Board, which, at that time, was a nonprofit organization.

Brian J. Hall, a Harvard Business School professor and an expert on management incentive systems, conducted an analysis of Mr. Grasso’s compensation and provided it to the judge overseeing the case that the New York attorney general’s office filed against Mr. Grasso.

Mr. Hall, hired by the attorney general as an expert witness, found that the companies the New York Stock Exchange board used in its peer group had median revenue of $26 billion, more than 25 times that of the exchange. Median assets of companies in the group were 125 times the Big Board’s assets, and the median number of employees in the peer-group companies was 50,000, or roughly 30 times that of the exchange.

The peer group was flawed, Mr. Hall contended, resulting in unreasonably high compensation for Mr. Grasso. Experts hired by Mr. Grasso concluded that his pay was, in fact, reasonable. But the judge presiding over the case ruled last month that Mr. Grasso must return as much as $100 million to the exchange. Mr. Grasso has continued to defend his pay as appropriate; earlier this month, he asked a state appeals court to block the judge from requiring him to return the money. A hearing on the matter is set for Wednesday .

Some state pension officials have become concerned that certain companies in their portfolios may be relying on peer groups that are flawed. “Peer-group comparisons assume that job responsibilities and job skills of the peer groups are similar and they may not be,” said Denise L. Nappier, the treasurer of Connecticut and fiduciary of the state’s $23 billion Retirement Plans and Trust Funds. “The thing about looking at C.E.O. pay of competitive companies, often companies will want a C.E.O. to be paid in the top quartile of his peers. But not everyone can be above average and this tends to ratchet pay up.”

Peer groups typically appear twice in proxies: first, in portions of the reports disclosing the annual comparison of total stockholder returns at a company versus its peers, and, second, in a section devoted to the calculation of executive pay. In the pay section, shareholders are sometimes told the peer-group percentile in which their top executives’ compensation falls. Typically, the filings state that corporate executives’ pay was in the 50th or 75th percentile of the benchmark group. If an executive is in the 50th percentile, he or she is in the middle of the pack; the 75th percentile means that only one-quarter of the group is paid more.

Compensation experts note that when a majority of companies in any given industry are in the 75th compensation percentile, pay packages may be subject to the Lake Wobegon effect: that all chief executives are suddenly above average. Corporate directors argue that comparing pay practices with those of competitors is only fitting, given that those are the companies they usually look to when recruiting employees and executives. But pay critics contend that an unquestioning reliance on the use of such peer groups is too simplistic and contributes to a one-size-fits-all mentality in pay.

“Sometimes it doesn’t matter what the other guy is doing,” said Brian Foley, an independent pay consultant in White Plains. “First and foremost is what makes sense for this company. If you’re in a turnaround and you are comparing yourself to guys who never had a dip and are quite successful, it’s a question not just of comparison based on size but also based on circumstances. I think these questions are asked sometimes, but sometimes they seem to be glossed over.”

Ms. Nappier said her office was looking at how Eli Lilly used a peer group in its executive compensation practices. According to Lilly’s 2006 proxy statement, the company judges itself against a group of eight companies: Abbott Laboratories; Bristol-Myers Squibb; GlaxoSmithKline; Johnson & Johnson; Merck; Pfizer; Schering-Plough and Wyeth. Lilly’s stock underperformed the peer-group average in 2004 and 2005.

Comparing Eli Lilly with Johnson & Johnson, Ms. Nappier said, shows a stark difference, particularly when you look at the number of profit centers at J. & J. and the complexity of its business.

An official at Lilly did not return a phone call seeking comment.

Sometimes, compensation peer groups include companies that are not even in the same industry or are not of a similar size. An example is the peer group used by the Ford Motor Company, which described its selection this way in its 2006 proxy: “The consultant develops compensation data using a survey of several leading companies picked by the consultant and Ford. General Motors and DaimlerChrysler were included in the survey. Twenty leading companies in other industries also were included.” Ford, however, did not identify those companies.

Ford’s proxy also stated that the peer group it used in the compensation section of its filing was larger than the peer group it used in the stock performance portion of the same filing because “the job market for executives goes beyond the auto industry.” Ford said it chose the companies based on “size, reputation and business complexity” and said that over time, its goal was to peg its pay roughly at the median of the peer group, adjusted for company size and performance.

A Ford spokeswoman, Marcey Evans, declined to comment.

Mr. Reda, the compensation consultant, has a different perspective on how Ford uses peer groups. “That is just not appropriate,” he said. “A peer group should be based on size, profit margin — financial success, perhaps — but you can’t pick a company that has 15 percent profit margins when Ford is doing 8” percent.

Ford is by no means alone in extending its peer group well beyond its industry, Mr. Reda said. He noted that about 10 years ago, big brand-name companies began measuring themselves against other household-name companies, even though they were not in the same industry. Companies that made it onto Fortune magazine’s list of “most admired companies,” for instance, began to compare their pay to others on the roster.

Never mind that the connection was irrelevant, Mr. Reda said. “The result was a lot of pay got jacked up,” he said, “because companies in low-margin industries that didn’t do too well got pay hikes because they were in the ‘most admired’ candy store.”

EVEN companies that have won kudos for corporate governance can fall prey to peer-group traps. Consider the proxy filed last month by Campbell Soup, which provides continuing education programs for its directors. The filing, made after the S.E.C.’s 2007 proxy rules were issued but before they took effect, noted that its compensation committee compared total pay levels at 29 companies “in the food and consumer products industries with which Campbell competes for attraction and retention of talent.” Campbell’s compensation committee approved the companies in the peer group but did not identify them.

In computing Campbell’s total shareholder return, however, the company did not use the 29-company pay peer group as a benchmark. Instead, it used the Standard & Poor’s 500-stock index and the S.& P. 500 Packaged Foods Index, a subset of the S.& P. 500 that consists of only 11 companies, including Campbell. The company outperformed both benchmarks last year.

The use of dueling peer groups — one to measure stockholder return, another to calibrate executive pay — is common in corporate America. But Paul Hodgson, author of “Building Value Through Compensation,” questions the practice. “Best practice would dictate that, if a compensation committee report is to include a graph showing the company’s relative performance to peers, those peers should be the same as the group actually used to test performance,” he wrote in his book.

Anthony J. Sanzio, a Campbell Soup spokesman, said: “In terms of recruitment, we believe the landscape needs to be broader to attract and retain the best talent. For talent, we compete with a much broader group of companies that are much larger.” Mr. Sanzio declined to identify the 29 companies in the peer group but said Coca-Cola, Anheuser-Busch, Procter & Gamble and Johnson & Johnson were among them.

Mr. Van Clieaf, the compensation consultant, said the composition of peer groups is usually more heavily weighted to larger companies, even though corporations typically look to companies smaller than themselves when they are recruiting top executives. This reality calls into question the oft-heard argument that outsized pay is based on market forces and that because companies have to jockey for the very best, enormous compensation deals are reasonable.

“Where would you really go to look for talent,” Mr. Van Clieaf asked. “Either at the second or third layer down at bigger companies or the No. 1 role at smaller companies. Do you really think the C.E.O. of Johnson & Johnson is going to go to work at Eli Lilly?”

Even so, the pay handed out to executives at smaller companies — or to lower-level managers at larger concerns — are rarely included in peer groups, compensation experts and analysts say. Consider the pay awarded to the former Hewlett-Packard chief executive, Carleton S. Fiorina, which was based on a peer-group analysis. Although Hewlett hired Mark V. Hurd, the chief executive of the data processing giant NCR to succeed Ms. Fiorina as chief executive in 2005, Hewlett never included NCR in its peer group when calculating Ms. Fiorina’s compensation, according to Mr. Van Clieaf.

In fact, Mr. Van Clieaf said, Mr. Hurd’s pay while at NCR pay was 40 percent of Ms. Fiorina’s compensation at Hewlett. If Hewlett had included NCR in its peer group — thus adding Mr. Hurd’s lower compensation into the mix — Ms. Fiorina’s compensation would have wound up in a far higher percentile of the peer group than the median percentile that Hewlett reported, Mr. Van Clieaf said.

THIS year, Hewlett-Packard changed its peer group from a so-called blended one that included technology concerns as well as those from other industries, to a group that is limited to technology companies alone. They are I.B.M., Dell, Apple Computer, Cisco Systems, Electronic Data Systems, EMC, Intel, Lexmark International, Microsoft, Motorola, Oracle, Sun Microsystems and Xerox.

“This ensures that the cost structures that we create will enable us to remain competitive in our markets,” Hewlett’s 2006 filing said of its switch.

While Hewlett also noted in the filing that it believed that the design of its compensation plan was appropriate, it — like Campbell and Ford — used a different set of companies to compare its stock performance for shareholders. This shareholder peer group does not contain Intel, Oracle or Cisco. The company declined to comment further.

In the meantime, analysts say, compensation practices continue to be built on the same cheery performance assumptions found at Lake Wobegon.

“I think it is safe to say that in various situations the peer-group analysis has been soft,” said Mr. Foley, the compensation consultant. “And because it’s been soft, the determinations made about pay have been somewhat soft as well.”

Gilded Paychecks Articles in this series are examining executive compensation. Previous articles in the series can be found at nytimes.com/business.

    Peer Pressure: Inflating Executive Pay, NYT, 26.11.2006, http://www.nytimes.com/2006/11/26/business/yourmoney/26peer.html?hp&ex=1164603600&en=403aa4ccb0b25bf4&ei=5094&partner=homepage

Editorial

Taming King Coal

November 25, 2006
The New York Times

The front page of this newspaper’s business section recently featured two articles about the world’s most plentiful fuel, coal. Written from different parts of the globe, they framed the magnitude of the task confronting international negotiators and the newly empowered Democrats in Congress who want to put the brakes on emissions of carbon dioxide, the main global warming gas.

One article pointed out that China will surpass the United States as the world’s largest emitter of carbon dioxide by 2009, a decade ahead of previous predictions. A big reason is the explosion in the number of automobiles, but the main reason is China’s ravenous appetite for coal, the dirtiest of all the fuels used to produce electricity. Already, China uses more coal than the United States, the European Union and Japan combined. Every week to 10 days, another coal-fired power plant opens somewhere in China, with enough capacity to serve all the households in Dallas or San Diego.

What’s frightening about this for those worried about the long-term consequences of warming is that nearly all of these plants are being built along traditional lines, burning pulverized coal to make electricity. And what’s sad about it is that there’s a much cleaner coal-burning technology available. Known as I.G.C.C. — for integrated gasification combined cycle — this cleaner technology coverts coal into a gas before it is burned.

These plants produce fewer of the pollutants that cause smog and acid rain than conventional power plants do. More important, from a global warming perspective, they also have the potential to capture and sequester greenhouse gases like carbon dioxide before they enter the atmosphere.

This new technology is not readily available in China, but it is available to utilities in the United States. Which brings us to the second article — an announcement by TXU, a giant Texas energy company, that it intends to build 11 new coal-fired power plants in Texas, plus another dozen or so coal-fired monsters elsewhere in the country. All told, this would be the nation’s largest single coal-oriented construction campaign in years.

Is TXU availing itself of the cleaner technology? No. TXU will use the old pulverized coal model. The company says the older models are more reliable. But the real reason it likes the older models is that they are easier to build, cheaper to run and, ultimately, much more profitable. So, like the Chinese, TXU is locking itself (and the country) into at least 50 more years of the most carbon-intensive technology around.

Barbara Boxer, the California Democrat who will shortly assume command of the Senate environment committee, believes that we should impose a price on carbon emissions (as Europe has done) so that companies like TXU will begin to think about investing in cleaner technologies — technologies that China could then use in its power plants. The message from both Texas and China is that Ms. Boxer should get cracking.

    Taming King Coal, NYT, 25.11.2006, http://www.nytimes.com/2006/11/25/opinion/25sat1.html

Dollar Falls Sharply Against Euro and Pound

November 25, 2006
The New York Times
By JEREMY W. PETERS and CARTER DOUGHERTY

The dollar dropped sharply yesterday against a range of major currencies, with the euro breaking through $1.30 for the first time in a year and a half. The fall highlighted concerns about softness in the American economy as economies abroad continue to expand.

The currency sell-off came as investors weighed a number of issues that complicate the prospects of the United States in the coming months, including a huge trade imbalance with China and a slowing domestic housing market. On top of that, economic growth in some European countries is gaining momentum, threatening to siphon investment away from the dollar.

The dollar’s losses came in a thin trading day in which the British pound rose to its strongest value against the dollar in two years. The euro traded at $1.3079 yesterday afternoon, up from $1.2941 on Thursday. The pound was trading at $1.9317, up from $1.9156.

Stocks closed lower on Wall Street yesterday after a shortened holiday trading session that was soured by news of the dollar’s woes.

“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas in London.

Economists say the United States is in a vulnerable position compared with its global competitors. While the most recent data show that the trade imbalance tightened in September, the decline was largely a result of falling oil prices. The deficit between what Americans import and export was a negative $586.2 billion for the first nine months of the year, and it remains on track to break last year’s record of a negative $716.7 billion. The biggest chunk by far represents imports from China.

The trade gap will be one of the major issues that Treasury Secretary Henry M. Paulson Jr. and other top Bush administration officials discuss next month when they travel to China. Mr. Paulson, along with a delegation that will include Ben S. Bernanke, the Federal Reserve chairman, is expected to press Chinese officials on a number of economic issues, from cracking down on piracy to allowing the Chinese yuan to trade more freely in currency markets.

Analysts said that the dollar’s drop yesterday, which was accelerated by orders from traders to sell automatically once it fell past $1.30 against the euro, reflected a growing anxiety over Chinese economic policy. China’s central bank holds a large amount of American currency, and speculation has intensified recently that it could begin selling off dollars to avoid being burned if the dollar collapses.

Also lurking behind the dollar’s depreciation is the rising probability, in the view of some economists and currency investors, that a slowing American economy will force the Federal Reserve to begin cutting borrowing costs next year.

Against the backdrop of a European Central Bank that seems determined to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.

“There can be no doubt that the E.C.B. has more shots in its gun,” said Erik Nielsen, chief Europe economist at Goldman Sachs in London. “If the Fed starts cutting next year, then the gap begins to widen.”

Already, the European Central Bank has signaled that it will raise rates by a quarter percentage point, to 3.5 percent, on Dec. 7, and bank watchers have been voicing rising expectations of more rate increases after that.

This week, data on German business confidence, French economic growth in the third quarter and a historically reliable gauge of business sentiment in Belgium all pointed toward stronger growth. All these factors are more likely than not to push the European bank to raise interest rates in a bid to head off inflation, a course of action that would damp the appeal of the dollar in relation to the euro, currency specialists said.

“This drop in the dollar has been justified for some time,” said Chris Turner, head of foreign exchange strategy at ING Baring in London. “The American economy could do more than simply land softly, and Europe is pretty strong right now.”

But there was no single event yesterday to touch off such a sharp drop in the value of the dollar. Rather, economists said, it was a culmination of recent signs of weakness in the American economy that investors found troubling. Some experts said that could suggest that the dollar’s losses would deepen.

Julian Jessop, chief international economist for Capital Economics in London, said in a research note yesterday that the sudden drop in the dollar was “an indication of a much more fundamental lack of support for the currency.” He said this suggests that “the falls will be all the larger once the markets do start to anticipate persistently sluggish growth.”

Jeremy M. Peters reported from New York and Carter Dougherty from Frankfurt.

    Dollar Falls Sharply Against Euro and Pound, NYT, 25.11.2006, http://www.nytimes.com/2006/11/25/business/worldbusiness/25dollar.html?hp&ex=1164517200&en=1d76f21e262bcafc&ei=5094&partner=homepage

Wealth gap swallows up American dream

Posted 11/24/2006 1:32 AM ET
USA Today
By Noelle Knox

NAPLES, Fla. — In the luxurious neighborhood of Port Royal, home to the likes of mystery writer Janet Evanovich and mutual fund magnate John Donahue, homeowners are insulated from many of life's daily cares — including the real estate slump. This year, 15 estates in the country club community have sold for $5 million to $16 million. But in the rest of Collier County, home sales have plunged a gut-wrenching 50%.

Elsewhere across the USA, the megarich are still snapping up homes in such enclaves as Vail, Colo., and Beverly Hills, and often paying cash. Sales of homes above $5 million are up 11% this year and are on track to break another record, according to an analysis by DataQuick Information Systems for USA TODAY. As for the national average, by contrast, sales are off about 8%. Prices fell in September for a second-consecutive month, partly because they'd soared beyond the reach of many.

The divergent housing trends are a sign of how a widening wealth gap is reshaping U.S. neighborhoods. In Naples, as in other areas, the consequences of the growing divide between rich and working class are increasingly visible. Residents here face "Not in My Backyard" resistance to affordable housing, so workers live in distant suburbs and towns, roads are jammed, and labor shortages unsettle the economy.

In Naples, about 130 homes over $5 million are for sale. That's more homes than the county will let Habitat for Humanity build this year.

"There's the rich, and then there's everything else, in terms of the economy but also in terms of social class," says Edward Wolff, a New York University professor and expert on the wealth gap. He likens it to the social divisions of the 1890s, adding: "If you don't counteract the extreme inequality trends, I see some social upheaval coming. That's my worst fear."

The disparity in wealth could draw the scrutiny of the new Congress, now led by Democrats. Rep. Barney Frank, D-Mass., who will head the House Financial Services Committee, has said that addressing affordable housing is a top priority.

Residents in Naples will tell you there's little friction between the haves and have-nots. But if you want to draw 500 people to a public meeting, just put affordable housing on the agenda, says Cormac Giblin, manager of the county's housing and grants office.

Bill Earls, a real estate broker who lives in Port Royal, knows the area needs affordable housing but says, "In the real high-end part of Naples, we don't want to see those 10,000 rooftops going in. We don't want to see our streets clogged. ... I don't want to see the Chevy Spectrums and Ford Focuses on our highways. I know we need them, but there's got to be a balance."

That attitude is not lost on Ezequiel Quiroz, a 27-year-old tow truck driver. Quiroz works six days a week to keep up with his mortgage in the working-class neighborhood of Golden Gate, 35 miles from the chic section of Naples.

'They make you feel like you're nothing'

Asked if he's frustrated by the growing gap between rich and poor, he says: "No, but sometimes it bothers me that a lot of rich people look at you like you're nothing because you're not driving a BMW or expensive car. They make you feel like you're nothing."

He's not the only one who feels shunned.

"Unfortunately, (rich residents) don't want people like me, a working-class person, living in their backyard," says Brian Settle, who works for NCH health care System, which runs the two hospitals in Naples. "They don't want firefighters, teachers. I don't understand that, because we are the infrastructure."

Settle says more than two dozen people have turned down jobs at the hospitals in the past year because they couldn't afford to live in the area, and 140 employees have moved out of the area.

The company rents 200 apartments for the nurses who work between October and May, when the population of Naples swells by nearly 50% with the addition of "snowbirds," who live up North in summer.

"Naples is a beautiful place," Settle says, "but we have to provide reasonable-priced workforce housing, or the infrastructure of our community will crash."

The state of Florida estimates that Collier County, which includes Naples, has a shortage of at least 35,000 affordable homes. That's the estimated number of residents who spend 30% or more of their income on housing. It doesn't include the thousands who commute from the surrounding counties because they can't afford to live in Naples.

The lack of affordable housing in Naples has been magnified by growth — population has doubled in the past 15 years, to about 300,000 — and the real estate boom. Investors and vacation-home buyers helped drive up the median home price to $446,900, second-highest in Florida after the Keys. Though prices are falling a little, they're still too high for most people in the area. More than 80% of the workforce is employed in the four lowest-paying industries: construction, retail, agriculture and services (pool cleaners, for instance, and golf instructors). Median income for a family of four: $66,100. That would qualify you for only about a $350,000 house, nearly $100,000 below the median.

House rich, cash poor

Homeownership is the No. 1 source of wealth-building for middle and lower classes, and the housing boom made millions of homeowners "house rich." But over the past five years, once you account for inflation, incomes for these groups are actually down. Many low- and moderate-income families are spending home equity just to maintain their lifestyles.

Nationwide, nearly 90% of homeowners who refinanced homes from July through September took cash out of their property — the highest level in 16 years, according to Freddie Mac.

And while rising home prices mean rising wealth, they also mean larger mortgages. For the middle class, the ratio of debt to net worth has nearly doubled since 2001 and is now in dangerous territory.

"The figures are astonishing," says Wolff, the NYU professor.

The number of homeowners who spend 30% or more of their income on housing has jumped to 35%, up from 27% in 2000, leaving little or nothing left to save. By contrast, incomes for the rich are rising, protecting them from the downsides of real estate cycles.

"We've seen the prestige market go up when the rest of the market is going down, and we've seen that market decline when the rest of the market was cooking," says John Karevoll, analyst with DataQuick. "These people are trying to figure out the best place to park their assets. They are evaluating tax considerations, capital gains considerations and return on investment. They are not exposed to the normal real estate cycle like the rest of us."

There are three homes for sale in the USA for $100 million or more: Donald Trump's estate ($125 million) in Palm Beach, Fla.; one near Aspen, Colo., owned by Saudi Arabian diplomat Prince Bandar bin Sultan ($135 million); and a third in Lake Tahoe, Calif. ($100 million), owned by Joel Horowitz, co-founder of Tommy Hilfiger.

And in 24 states and the District of Columbia, the top 20 properties on the market are all priced at $5 million or higher, according to the recently published magazine Unique Homes: State by State.

"We've had probably one of the strongest high-end runs we've ever had," says Stephen Shapiro of the Westside Estate Agency in Beverly Hills. He laments that there aren't enough homes over $7.5 million for sale. "There's a dramatic lack of inventory being chased by a lot of people with money."

'Not in my backyard' politics

Each year, Habitat for Humanity in Collier County is inundated by about 1,500 applications from low-income families seeking the American dream. The non-profit has built about 100 homes a year in the area for the past five years, more than in any other county in the USA.

"The biggest impediment is the local politics," says Sam Durso, CEO of the local chapter of Habitat for Humanity. "The 'not in my backyard' attitude is what keeps people from building more affordable housing. We could build two to three times what we do, but we can't get enough land rezoned."

Dee Proehl, her longtime partner and their two children will move in January into a Habitat home, six miles from Port Royal, where she cleans several mansions. Her partner, George Cervantes, 41, is a forklift driver and dock master at Cedar Bay Yacht Club. Together, they make under $42,000 a year, and she has no health insurance.

"There's people who own businesses and own homes, and there's the people who work for them — there's no in between," says Proehl, 42. "It's frustrating. They want us here. They want us to do the work, but they don't want us to live here."

Yet some wealthier residents are starting to feel that the lack of affordable housing is eroding their quality of life. Roads at rush hour look like parking lots. Restaurant service is slower. Checkout lines are longer because businesses can't find enough people willing to work here. And companies that raise wages to lure job candidates usually pass the cost on to customers.

"For years it's been, 'Yeah, there's a problem, but it doesn't affect me personally,' " says Giblin, of the county's housing and grants office. "What we're finding now is, it's starting to affect the normal routines of the people who live in Naples and Collier County in terms of getting quality services."

Efforts to encourage the building of affordable housing have had limited success. The county lets developers build more homes per acre if they include affordable housing as part of the project. Over five years, Collier County has added 5,000 affordably priced homes, including about 500 homes built by Habitat for Humanity.

County planners are considering changing the zoning to force developers to include some portion of workforce housing. That's likely to meet with fierce opposition from builders and residents.

Homeowners in Collier County pay the lowest property taxes in Florida. They want new residents to cover the cost burden that new homes impose on existing schools, roads and other facilities. So the county hits builders with a one-time charge of $30,000 in "impact fees" per house — the highest in the state. Those extra costs make it all but impossible for a traditional developer to build a home at a price a working-class family could afford.

"When you go to Kmart, and you've got 20 cash registers but only two are open, it's not because Kmart wants to have the line 15-people deep," Giblin says. "It's because they can't find people to work. It's starting to hit people in the face."

Contributing: Barbara Hansen

    Wealth gap swallows up American dream, UT, 24.11.2006, http://www.usatoday.com/money/perfi/housing/2006-11-24-luxury-homes-usat_x.htm

Point & click holidays: More consumers go online for holiday shopping

Updated 11/24/2006 2:02 AM ET
USA Today
By Jayne O'Donnell and Mindy Fetterman

Retailers want this to be the best cyber-Christmas you've ever had.

HomeDepot.com just introduced do-it-yourself video tips. A week-long sale starts Monday at Walmart.com, where you can get better deals than in Wal-Mart stores. And Staples.com's experts will take the answers to five questions about the person you're shopping for and suggest gifts.

"Consumers are clearly shifting their preferences to online," says Kurt Peters, editor in chief of Internet Retailer magazine. "Retailers who want to have a future will have to have a good website."

More than 80% of retailers' websites now offer free shipping, usually with minimum purchases, to online shoppers. Some let you order online and pick up merchandise at a store. Many offer more selection, different products and hard-to-find sizes that aren't available in stores. And still others bring the best of Web shopping — product comparisons, reviews and easy-to-find products — to the mall with in-store computers.

It's all part of a push to get your foot in the website door and keep you there. Sure, they still want you to come into the bricks-and-mortar stores where most of their sales come from, but they're perfecting how to use the Web to do that.

U.S. online sales, including travel, are predicted to grow by 20% to $211.4 billion this year, including travel, according to Shop.org, a part of the National Retail Federation. More than one-third of all U.S. households shop online, and that's expected to increase to 40% by 2009.

Overall, Internet sales make up just 5% of total retail sales, but stores with catalogs often conduct 50% of their sales online. People who shop both online and offline spend up to 60% more than those who shop only at stores, according to research by retail consulting firm Bain & Co. Those are the customers retailers want to capture.

Today is Black Friday, so-called because retailers depend on the hordes of day-after-Thanksgiving shoppers to push their bottom lines into the black.

But it's Cyber Monday that's getting a lot of retail attention these days. On Monday, millions head back to work and log on to their employers' really high-speed Internet access and start shopping.

Waiting for them: nearly 400 retailers that will have special deals available only online at CyberMonday.com.

Last year, Cyber Monday was the second-biggest online shopping day after Dec. 12, one of the last days most sites offered standard free shipping for delivery by Christmas. Now, the entire week after Thanksgiving is "big and getting bigger," says Carter Cast, CEO of Walmart.com. He expects his site will get more than 30 million visits during the week.

Online shopping on Cyber Monday is about 40% more than online shopping on Black Friday, says Susan Phillips, vice president of marketing for Pay Pal, an online payment company. In 2005, it processed about $61 million in online purchases on the Friday after Thanksgiving. That jumped 54% to $94 million three days later on Cyber Monday.

"People still go to the malls, and they still plunk down a lot of money on Black Friday," Phillips says. "But they go back to work on Monday to find out if they can get a better price online than they can find at the stores."

Andrea Warren, a programs coordinator for the Houston Bar Association, says she loves to shop on the Internet because it's so convenient. "Plus, you can get excited when you buy it and then get excited all over again when it arrives at your home," she says.

Merging online and offline

Many retailers originally kept their websites and bricks-and-mortar stores separate, but they've realized that doesn't make sense. websites have invaluable information about customers' purchasing preferences and can help build brand loyalty.

Darrell Rigby, head of Bain's global retail practice, says, "Online and offline retailing are finally converging."

"Retailers are realizing that when they keep the consumer within their brand, whether it's online or in the store, they win," says Kelly Mooney, president of Resource Interactive, an Internet marketing agency that specializes in retailing.

The merging of operations is "easy to see when you buy something online and try to return it to a physical store," Rigby says.

Mooney says the next step will be an expansion of what consumer electronics stores already offer: allowing products to be reserved online then picked up at a store. She says apparel retailers will be the next to offer this, or at least the ability to have an item held to try on.

Retailers are trying to bring more aspects of the online experience to their stores because they can influence consumers more once they're inside their doors, says Chad Doiron, an e-commerce strategist at Kurt Salmon Associates.

For instance, office supplier Staples has computer kiosks in its stores so customers can do research and check product details before they buy. J.C. Penney, Doiron notes, has added Internet access to all its cash registers so sales associates can get more information about its products.

"Retailers want to take the great service they are providing online and provide it in-store," Doiron says. "It really boils down to treating a customer one-on-one."

Terry Fike of Midland, Ga., prefers to do her shopping online, especially when retailers offer her thumbnail photos of similar items and accessories.

"I don't get that kind of service in a store," Fike says.

Internet sales are retailers' fastest-growing outlet. While store sales are growing by up to 6% a year, online sales are increasing by 25% annually, Peters says.

Mooney predicts Internet sales will increase from 5% now to 10% of retail sales by 2010. While that's still much less than what's sold in stores, online sales can be more profitable. Retailers can sell more types of goods on the Web than they can within the four walls of a retail building, and they don't have to have as many employees to handle those sales.

So retail websites are finding new ways to draw more shoppers to their sites:

•Amazon.com is offering one-of-a-kind deals. The site is asking consumers each week for the next four weeks to pick the products they would most like to see discounted and will offer below-cost deals for a limited number of customers. An Xbox 360, which retails for about $299, went on sale Thanksgiving Day for $100. Amazon will sell 1,000 at that price.

•Bath & Body Works is e-mailing customers to lure them into stores with a gift with purchase. But it is offering the same deal for online customers who want to avoid the holiday crowds.

•FAO Schwarzis offering exclusive online merchandise, including Tutu Couture ballet apparel for children. It offers interactive customization for the tutus, dollhouses, dolls and train sets on its website.

•Sam's Clubis selling luxury packages on its website, including a Super Bowl trip and a Tony Bennett concert in London.

•Crate & Barrel, which conducts 22% of its sales online, is offering free shipping on its heaviest products until Dec. 15. Spokeswoman Bette Kahn says Crate & Barrel's online sales increase up to 10% each year.

"We are always surprised people buy so much furniture through the Internet, because we'd want to sit in it and feel it before we bought it," Kahn says. "It's almost amazing to us and especially to the CEO."

Comparing online

More consumers are comparison shopping online before they show up at a store to buy in person, says Shira Goodman, Staples' marketing executive vice president. That's persuaded Staples to integrate its online and offline marketing. TV commercials can be seen online, and this year's Department of Unexpected Gifts, which features gift suggestions including shredders and leather chairs, is featured online and in stores. A panel of experts, including digital camera aficionado and crooner Engelbert Humperdinck, helps choose gifts for website users.

"A lot of our attention focuses on trying to make shopping online as easy as possible," says John Giusti, who heads Staples' website. Sites used to be "very clunky and not necessarily focused on the user."

"We're more focused on making it easy for customers to learn, easy to shop, easy to find, easy to compare and easy to purchase online," Walmart.com's Cast says.

Retailers are revamping their websites to keep shoppers online longer. They're using interactive tricks such as games and video and cartoon avatars to lure shoppers to linger.

This year, visitors to Home Depot's website can drive Santa's sleigh over a three-dimensional, snow-covered scene or turn the pages in a Mrs. Santa home-decorating book to get tips on holiday decor. You can "hang" different styles of lights on different houses. Or if you have a more-extensive home-improvement project, such as lining a closet with cedar planks or laying tile, the retailer has just started offering video tips online through its Home Depot TV.

"It's the most interactive that we've ever been," says Chief Marketing Officer Roger Adams. "The virtual sleigh ride is like a game, just to have fun while you're on our site. We want kids to say, 'Hey, Mom, let's go to Home Depot.' "

Blue Shirt tips

Best Buy is emphasizing the expertise of its salespeople, known as Blue Shirts. It soon will launch online videos with Blue Shirts giving tips on buying electronics. It also has a new "click to call" button on its website that lets you talk directly to a Blue Shirt; its 800-number now links you immediately to a person, and it has a new website, askablueshirt.com, that lets you chat online with a salesperson.

This month, Walmart.com added more interactivity and third-party experts to its website. Users can, for instance, "peel back" a cover on a baby's room to see all the furnishings, then click on the baby bed and find price and order information.

Online sales won't ever eclipse those of Wal-Mart's retail stores, Cast says. But Walmart.com has surprised some competitors that didn't expect the retailer's customers to be online shoppers.

"A lot of people thought our customers wouldn't shop online, but they've been wrong," says Cast. He says 74% of Wal-Mart customers have access to the Internet. Walmart.com has "the same shopper. They're just a little higher in income, a little higher in education and a little more urban than our typical shopper," he says.

And maybe they're a little less willing to brave the mall crowds this supercharged holiday season.

They aren't alone.

In an online poll this month by Shop.com, almost a quarter of respondents said they would "rather eat their arm off" than visit a store on Black Friday.

    Point & click holidays: More consumers go online for holiday shopping, UT, 24.11.2006, http://www.usatoday.com/money/industries/technology/2006-11-23-online-shopping_x.htm

Expanded Hours, Discounts Lure Shoppers

November 24, 2006
By THE ASSOCIATED PRESS
Filed at 9:09 a.m. ET
The New York Times

Bargain shoppers headed to the nation's stores and malls before the sun rose on Friday to nab specials on everything from toys to flat-screen TVs as the holiday shopping season officially opened.

Retailers heightened their pitch to shoppers with expanded hours, generous discounts and free money in the form of gift cards to lure consumers in a slowing but still steady economy. A growing number of stores and malls unlocked their doors at midnight to jump-start the season. CompUSA Inc. and BJ's Wholesale Club Inc. even opened on Thanksgiving for the first time.

''Retailers are doing more to get consumers into the stores earlier this year,'' said C. Britt Beemer, chairman of America's Research Group, based in Charleston, S.C.

This year, a growing number of shoppers like Sean Humphreys headed straight from their turkey dinner to the malls to take advantage of midnight openings.

''I wanted to see if I could get anything early,'' said Humphreys, who was picking out clothing at a Ralph Lauren Polo store at 12:04 a.m. Friday at the Premium Outlet Center 25 miles north of Dallas.

Chelsea Premium Outlets, the center's owner, experimented with the early start last year and more than tripled the number of participating centers this year, including three of its Texas outlets.

At a Wal-Mart store in Cincinnati, Gary Miller, a 45-year-old computer programmer, was at the discounter at 5 a.m. to hunt for a 20-inch LCD television that he had seen advertised online.

''My wife sent me out for this one,'' he said, pointing to the television in his shopping cart. ''But then I saw this one (a 20-inch conventional TV) for $85 and said, what the heck, I'll get that one, too.''

Meanwhile, Monica Midkiff, a 27-year-old homemaker from Peebles, Ohio, said she got up at 3:30 a.m. to go to Wal-Mart for a VTech game system.

''They usually cost about $60, but this was on sale for $30. That's a deal,'' she said.

Midkiff said she was on her way next to KB Toys and Toys ''R'' Us while her husband took care of their five children. She said she didn't mind the crowded stores on Friday morning.

Also at the Wal-Mart in Cincinnati was Clint Stapleton, 20, a construction worker from Mount Orab, who said he was happy with the deal he got on one of Wal-Mart's featured items, a 32-inch LCD TV. He said he paid $630 for a TV that usually costs about $1,000.

''After I got that, I said, that's enough, but I think I'll still look for an Xbox somewhere,'' Stapleton said, referring to the game console made by Microsoft Corp.

In Albany, Ga., Cheryl Haley, 37, was among the 300 people lined up outside a Circuit City store when it opened at 5 a.m.

''This is the only thing on my little boy's list,'' said Haley, of Albany, Ga., pointing to the store circular advertising a $299 laptop. ''I couldn't pay $800 for it.''

She and her sister, Wendy Blount, 35, of nearby Lee County, argued over who earned the spot at the head of the line.

''I drove her here, so I'm first,'' Blount said.

Eric Gordon, 30, of Albany, arrived half an hour before the store opened -- far too late to get one of the limited number of bargain computers.

''I should have stayed in bed and shopped online,'' he said. He noted it was his first Black Friday shopping experience.

Plenty of shoppers, like Rochelle Little, 28, of Palmyra, N.J., had been preparing for Black Friday since mid-October, helped by of a swath of new Web sites, like blackfriday.info and fatwallet.com, that post retailers' deals.

Little monitored a Web site called BFAds.net to help plan her shopping excursion -- as precisely as a military campaign -- which began with Toys ''R'' Us before planned stops at Wal-Mart and Target. She said the planning worked. Little was able to get her 7-year-old son Taron Hampton, a razo motorized scooter for $99 -- a savings of $70 -- and a Robosapien remote control robot for $30.

While Black Friday officially starts holiday shopping, it's generally no longer the busiest day of the season -- that honor now falls to the last Saturday before Christmas. Stores see Black Friday as setting an important tone to the overall season, however: What consumers see that day influences where they will shop for the rest of the season.

Last year, total Black Friday sales dipped 0.9 percent to $8 billion from the year before, dampened by deep discounting, according to Shopper Trak RCT Corp., which tracks total sales at more than 45,000 mall-based retail outlets. For the Thanksgiving weekend, total sales rose just 0.4 percent to $16.8 billion.

Last year, merchants ended up meeting their holiday sales projections, helped by a last-minute buying surge and post-Christmas shopping.

This year, analysts expect robust holiday sales gains for the overall retail industry, though the pace is expected to be slower than a year ago. The National Retail Federation projects a 5 percent gain in total holiday sales for the November-December period, less than the 6.1 percent in the year-ago period.

Meanwhile, the International Council of Shopping Centers estimates sales at stores open at least a year will rise 3 percent in the November-December period, less than last year's 3.6 percent.

------

Associated Press Writers Geoff Mulvihill in Mount Laurel, N.J., Elliott Minor, in Albany, Ga., Steve Quinn in Dallas, Tex., Ron Word in Jacksonville, Fla., and Terry Kinney in Cincinnati contributed to this report.

Expanded Hours, Discounts Lure Shoppers, NYT, 24.11.2006, http://www.nytimes.com/aponline/business/AP-Holiday-Shopping.html

Income Soars

on Wall St., Widening Gap

November 23, 2006
The New York Times
By PATRICK McGEEHAN

In Manhattan’s boom-or-bust financial businesses, the good times are rolling with no end in sight.

The average weekly pay for finance jobs in Manhattan was about $8,300 in the first quarter of 2006, up more than $3,000 per week in just three years, new federal data show. And with another year’s bounty from Wall Street about to be paid out in annual bonuses, that number is expected to jump again.

The 280,000 workers in the finance industry collect more than half of all the wages paid in Manhattan, although they hold fewer than one of every six jobs in the borough. The pay gap between them and the 1.5 million other workers in Manhattan continues to widen, causing some economists to worry about the city’s growing dependence on their extraordinary incomes.

Despite their recent success, the financial companies that have long formed the economic engine of New York City have not created many more jobs. More of the job growth in the city is occurring in lower-paying service jobs in restaurants, stores and home health care, but the pay for those jobs has been lagging, said Michael L. Dolfman, regional commissioner of the federal Bureau of Labor Statistics.

“We’re not seeing jobs being created to any great degree, but we are seeing significant increases in salaries,” said Mr. Dolfman, who published a study this week on how Manhattan’s economy has changed since Sept. 11, 2001.

Those high salaries have been contributing to job growth, but they are not translating into many jobs in highly paid areas, he explained. Pay has been rising at a healthy rate in professional areas like law and engineering, but is showing nowhere close to the gains in the finance industry.

For all of the 1.8 million jobs in Manhattan, the average weekly salary in the first quarter of this year was slightly more than $2,500, a rise of about 35 percent from the first quarter of 2003, the federal data show. But the raises are not spread evenly across Manhattan’s job market, economists said.

The average is skewed by the large number of high-paying jobs at investment banks, brokerage firms and hedge funds, they said. They also cautioned that much of the pay on Wall Street is doled out in the first quarter in the form of annual bonuses, so average weekly salaries are lower during the rest of the year.

Still, the figures illustrate how far ahead financial workers are. For example, at Merrill Lynch, the biggest brokerage firm, the expenses so far this year for employee pay and benefits are up about 25 percent, a company spokesman said.

At Goldman Sachs, the large investment bank, the increase has been even larger: The firm’s compensation expenses so far this year amount to more than $500,000, on average, for each of its 25,647 employees, from young secretaries to senior executives.

The rising pay in the financial industry “is certainly good news in the short run for state tax collections and city tax collections,” said James A. Parrott, chief economist at the Fiscal Policy Institute. “But it doesn’t do anything about the underlying challenge of trying to make the city less dependent on Wall Street.”

Reducing that dependence has been a goal of Mayor Michael R. Bloomberg’s administration, but “that’s difficult when you have a sector like the finance sector, which throws off so much compensation,” Mr. Parrott said. He added, “If the city was really serious about diversifying the economy, it would focus more on how they could create middle-income jobs or better-paying jobs at the lower end of the job market.”

Most of the workers at those levels are struggling to obtain raises that keep pace with inflation, he said.

Mr. Dolfman, whose report is included in the bureau’s Monthly Labor Review, said one negative consequence of the unequal distribution of income gains is that “the middle class is being squeezed out of the city because of the tremendous purchasing power of the people in the global sectors of the economy.”

Joshua J. Sirefman, interim president of the city’s Economic Development Corporation, said that city officials have had success in building up other areas of the local economy, like tourism and health care, but that some of those gains have been in other boroughs. Wall Street is “the single largest engine for the city, but it’s not the only one,” he said.

“Remember that this is a very cyclical industry,” Mr. Sirefman said. “We need to capture their growth when it happens and not be held hostage to it when it declines.”

Jason Bram, an economist at the Federal Reserve Bank of New York, agreed that there were signs of growth in other areas, but said they had been overshadowed by the gains on Wall Street.

“In terms of dollars, you have this 400-pound gorilla, and it just dominates,” Mr. Bram said. “When you look at finance, it just goes off the charts.”

Health services, which has been one of faster-growing job categories in the city in the past year, is “a low-paying industry compared to finance, but I think of that as a big part of the middle class of New York,” Mr. Bram said.

Indeed, the health care industry looks like Wall Street in reverse: Its share of the jobs in Manhattan has been growing, but its share of wages has been shrinking.

In the first quarter of 2006, health care and social services accounted for 11.3 percent of the borough’s jobs, but just 4 percent of the pay, the federal data show. The average weekly pay for health care jobs was $903 in the first quarter, an increase of $49 a week in the last two years.

Income Soars on Wall St., Widening Gap, NYT, 23.11.2006, http://www.nytimes.com/2006/11/23/nyregion/23income.html

NYT        November 18, 2006

No Playtime at Toy Chain on Its Road to Recovery        NYT        19.11.2006

http://www.nytimes.com/2006/11/19/business/yourmoney/19toys.html

No Playtime at Toy Chain on Its Road to Recovery

November 19, 2006
The New York Times
By MICHAEL BARBARO

Wayne, N.J.

LOCATED on the edge of a tired and dated strip mall here, Toys “R” Us store No. 6344 was built 14 years ago. There are weather-beaten wooden shingles over the entrance, unflattering fluorescent lights hovering above the aisles and pock-marked linoleum tiles on the floor.

But the floors are clean and shiny.

In one of his first moves at what is perhaps the best-known and most ubiquitous toy vendor in the country, the new chief executive of Toys “R” Us, Gerald L. Storch, ordered overnight cleaning crews to wax the floors of every store precisely twice as often as they did before he took over.

Mr. Storch, 50, marches briskly down the aisles, plucking toys from the shelves. “This is so cool, so cool,” he says, slipping his hand into the plastic display for a Blue Man Group Percussion Tube ($70) — a disc jockey system for 8-year-olds that, after weeks of intense deliberations, Toys “R” Us named as a top toy pick for the coming holiday season.

While Mr. Storch cast a vote during those meetings, he is clearly more comfortable crunching numbers and fine-tuning store operations than he is around toys. Discussing the future of the business in his office recently, he leapt out of his chair and enthusiastically began punching population projections into a computer spreadsheet.

As cold and detached as that may seem in an industry known for warm and fuzzy dolls, such analytical steeliness may be just the medicine that Toys “R” Us needs to survive.

Decades ago, Toys “R” Us was the very embodiment of the big-box retailer, and its huge stores redefined how toys were sold. Yet today, two of its stepchildren, the discount retailing giants Wal-Mart and Target, have pushed the company to the edge of a competitive cliff. Mr. Storch’s challenge is to reorient and resurrect Toys “R” Us before time runs out, a task that analysts say is not child’s play.

“The biggest problem, and I do not see a cure to this, is that the average consumer goes into Toys “R” Us once every nine months,” said Sean McGowan, a toy industry analyst at Wedbush Morgan Securities. “If they are not coming in the store more than once a year, there is only so much you can do.”

It is not only the future of Toys “R” Us that is at stake here. Major toy makers say that their profitability depends on its survival. If Toys “R” Us fails, everyone from industry conglomerates like Hasbro and Mattel to scrappy innovative upstarts like Wild Planet and Zizzle say they will be at the mercy of the penny-pinching merchants at Wal-Mart and Target.

“The reality,” said Neil B. Friedman, the president of Mattel Brands, “is that it’s not healthy for this industry to not have a healthy Toys ‘R’ Us.”

Founded in 1957, Toys “R” Us spent nearly 50 years assembling a three-pronged retailing empire — in toys, children’s clothes and baby supplies. But during the last decade it has tumbled from its perch as the No. 1 toy retailer in the country. It has also shut down its children’s clothing business and contemplated both a spinoff of its baby division and putting itself up for sale.

Last March, three private equity firms bought the retailer, then publicly traded, for nearly $7 billion, privatized it and then handed it over to Mr. Storch. As the former vice chairman of Target, where he oversaw the retailer’s supply chain, technology and financial services divisions, he was a surprise choice, given his lack of experience in the toy industry.

When Mr. Storch arrived at Toys “R” Us, he found an undisciplined company that he believed blamed others for its problems rather than facing its own mistakes. He also found a corporate culture wedded to impulsive strategic forays rather than hard data, a reactive business strategy that he believed would never allow Toys “R” Us to beat its competitors and reinvigorate employees who had given up on the toy industry.

“Toys ‘R’ Us had fallen into the pattern of being a follower, not a leader,” he said, before veering into vintage Target-speak. “Instead of buying product that is hot, we need to make products hot. We need to be like a fashion house.”

DURING the last several months, he has replaced more than half of his senior executives, begun testing a wide range of new store concepts and overhauled the company’s marketing efforts — with a decidedly Target approach.

For example, its newspaper circulars, the bread and butter of the chain’s advertising, now use thicker, glossier paper and kinetic images of children playing, rather than photographs of toys sitting idle on a table. Toys “R” Us is also using more engaging television advertising and more sophisticated marketing techniques intended to project an image as the biggest and best toy vendor.

Mr. Storch has also begun a campaign to restore the confidence of a work force badly shaken by its misfortunes. He calls his internal public relations effort “playing to win” — a slogan he has slapped on signs across the company’s headquarters, glued to employee ID badges and even adopted as the greeting on his personal cellphone.

He approaches his work force with the acuity of a headmaster, correcting employees’ grammar and taking them to task for missing meetings. He rejected the first draft of a recent internal newsletter when he noticed that a sentence ended in a preposition.

Such obsessiveness may bolster Mr. Storch’s plans to return Toys “R” Us, which has annual sales of $13 billion, into what it once was, a kingpin in the toy business. And he plans to do that by mimicking retailers like Best Buy and Home Depot that have thrived in their niches of electronics and home improvement — while plucking executives from both companies to make it happen.

Easier said than done, however. To pull it off, the company will have to juggle a number of balls: it must persuade manufacturers to provide it with even more exclusive toy lines, it must design more toys on its own and it must renovate or relocate hundreds of stores that unfortunately resemble No. 6344.

“In every segment of retail, there are dedicated specialty retailers that are succeeding against Wal-Mart and Target,” he said. “The model is out there. Best Buy is clearly thriving. Walgreen’s is the leader in pharmacy. Bed Bath & Beyond does very well in the home segment. What they all do is become the authority.”

Which, of course, is exactly what Toys “R” Us is not.

When the retailer revolutionized the toy industry, it borrowed a page from Kmart, the nation’s first major discount retailer. Charles Lazarus, the founder of Toys “R” Us, piled merchandise high and drastically underpriced his competitors, betting that sales volume would compensate for thin profit margins. And it did.

The company, which began with a baby furniture store in Washington, became the dominant force in the toy industry, wiping out hundreds of independent toy stores and earning veto power over what toys manufacturers produced.

Circuit City, Office Depot, Home Depot and Lowe’s would soon mimic the idea. But Toys “R” Us was the first of what the retail industry would eventually call “category killers” — stores whose strategy of swallowing an entire category of merchandise, like office supplies or hardware, disrupted entire industries.

What Toys “R” Us and its later peers did not foresee was the rise of giant discount chains like Wal-Mart that could sell even cheaper products from dozens of categories in one convenient location.

By 1998, Wal-Mart had dethroned Toys “R” Us as the nation’s largest toy seller, a shock from which it has never quite recovered. For the people at Toys “R” Us, that outcome simply made no sense: Wal-Mart’s toy department was roughly 5,000 square feet. Toys “R” Us, as its ads boasted, was the biggest toy store in the world, selling 40,000 square feet or more of dolls, board games, bicycles and crayons.

How could it lose?

The answer, as it always is in mass-market retailing, was price. Wal-Mart could never match the broad selection of toys sold at Toys “R” Us, but it did not have to. Instead, it sold 500 toys at significant discounts.

During the 2003 holiday season, widely regarded as a bloodbath for toy retailers, Wal-Mart proved just how devastating this strategy could be. It reduced prices on dozens of popular toys, undercutting Toys “R” Us by 12 percent on average for the most popular toys. By the start of 2004, two toy rivals, F. A. O. Schwarz and K B Toys, had filed for bankruptcy. Profits at Toys “R” Us plunged by more than 50 percent.

Everyone at the chain, from the highest ranks to lower-level sales clerks, sang the same refrain when discussing the company’s woes: blame the competition. Mr. Storch would have none of that. When he arrived, he pointedly addressed what he saw as the real problem in slide shows he presented to executives and employees: “We did it to ourselves.”

Toys “R” Us, he argued, had made several obvious blunders. One of the biggest came in 1996, when executives separated the toy and child products businesses. The new Babies “R” Us stores proved popular with shoppers, but at Toys “R” Us the sudden absence of items like pacifiers and bibs caused a sharp drop in customer traffic. This was rooted in shopping patterns: most consumers buy toys once or twice a year, while new mothers tend to buy baby clothing once a month.

In addition, the company’s original store locations, typically on roads leading to and from regional malls, had become outdated as consumers began favoring smaller suburban shopping centers lined with retailers like Best Buy, Kohl’s and Target.

Toys “R” Us stores, meanwhile, remained cluttered, poorly lit and dreary, and renovations fell behind schedule, giving the entire chain a dated appearance that put off customers. Despite fierce price wars, Toys “R” Us continued to sell the same brand-name toys as its lower-priced competitors, failing to find a way to distinguish itself from Wal-Mart and Target.

In meetings with employees, Mr. Storch has repeatedly sketched out this version of events as he crusades against what he calls the company’s “victim culture.” He may literally stop people in midsentence when they begin shifting the blame away from themselves.

He has kept a list of the excuses. “Wal-Mart and Target are growing faster; kids are growing up faster,” he recalled hearing. “That’s all victim thinking — and it’s ludicrous.”

YET it still pervades the company, according to Mr. Storch. Several weeks ago, when he was visiting West Coast stores, he said, a regional manager attributed poor sales to difficulties in distributing enough circulars in his district. When Mr. Storch asked the manager how he handled the problem, the response was a blank stare. “That was somebody in New Jersey’s fault, so we are going to sit here and complain,” is how Mr. Storch characterized the manager’s complaint.

At Mr. Storch’s request, the manager flew to the company’s headquarters in New Jersey, met with marketing executives and quickly resolved the problem with the circulars. “When you learn how to lose and put the blame elsewhere,” Mr. Storch said, “the whole team loses.”

Ultimately, accountability will get Toys “R” Us only so far. The toy industry is shrinking, with sales falling at least 2 percent annually since 2003, according to the NPD Group, a market research firm.

To revive the company, Mr. Storch will have to do what few companies have ever done: steal back business from Wal-Mart and Target. That will require undoing the damage Toys “R” Us inflicted on itself by separating the toy and baby businesses.

Mr. Storch has a simple solution: reunite them. In a test he calls “side by side,” he has fused a Toys “R” Us and Babies “R” Us in several locations, a format he plans to expand rapidly if the results are positive. He also plans to emphasize seasonal products (a practice his predecessors had discontinued) in order to entice shoppers into his stores even when there is no impending birthday or holiday. This year, Toys “R” Us advertised a back-to-school sale, and it plans a similar sale for Halloween next year.

To position toys in the same way as the hottest of fashion items, Mr. Storch has created a senior position, director of trends, whose responsibilities will include scouring the showrooms of toy makers for the next big thing. At Mr. Storch’s direction, the chief merchants from Toys “R” Us divisions around the world — the company operates in 33 countries — now participate in monthly conference calls focused on which toys are generating buzz. (The calls invariably start with Japan, whose consumers set trends worldwide.) Managers who miss the calls face a stern lecture.

“This is the most important competitive thing we can do,” Mr. Storch said, recalling how upset he was when an executive skipped the call two weeks ago. “We have global trend power with one phone call.”

After an aggressive courtship of toy makers, Mr. Storch has gained at least 70 exclusive products for this holiday season, like the 160-piece Thomas Ultimate Train Set ($89.99), Lego Star Wars X-Wing Fighter ($49.99) and the Bratz Girlfriendz line ($14.99 for each doll).

Finally, Mr. Storch has begun fixing up his worn-down stores. A plan to renovate the shabbiest in the chain is under way. He has deployed scores of signs — at the front of stores, at the end of aisles and from the ceiling — that tell busy shoppers exactly where to find dolls, preschool toys and video games. And employees are under strict orders to approach every customer and ask if they need help finding a toy — a cost-free sales technique that Mr. Storch said had already improved sales.

WHETHER Mr. Storch revives Toys “R” Us, however, will require more than just these diligent efforts.

It will depend on whether toy makers meet his needs by giving the chain one-of-a-kind merchandise; whether Target and Wal-Mart keep a lid on their ambitions in toy retailing; and whether there is enough residual good will among consumers who have come to associate Toys “R” Us with gloomy stores, unattractive prices and run-of-the-mill products.

Though private equity firms are known to buy and quickly flip companies they pick off, Mr. Storch says he is at Toys “R” Us to revivify the business and not simply make a quick financial hit.

“I’m at a place in my life where I have the independence to do nothing or to do something,” Mr. Storch said, emphasizing that his job is a professional challenge, not a necessity. “The first choice is to make a lot of money by turning around the company. I am not a liquidator.”

    No Playtime at Toy Chain on Its Road to Recovery, NYT, 19.11.2006, http://www.nytimes.com/2006/11/19/business/yourmoney/19toys.html

Op-Ed Contributor

The Great Liberator

November 19, 2006
The New York Times
By LAWRENCE H. SUMMERS

Brookline, Mass.

IF John Maynard Keynes was the most influential economist of the first half of the 20th century, then Milton Friedman was the most influential economist of the second half.

Not so long ago, we were all Keynesians. (“I am a Keynesian,” Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites. Mr. Friedman, who died last week at 94, never held elected office but he has had more influence on economic policy as it is practiced around the world today than any other modern figure.

I grew up in a family of progressive economists, and Milton Friedman was a devil figure. But over time, as I studied economics myself and as the world evolved, I came to have grudging respect and then great admiration for him and for his ideas. No contemporary economist anywhere on the political spectrum combined Mr. Friedman’s commitment to clarity of thought and argument, to scientifically examining evidence and to identifying policies that will make societies function better.

Mr. Friedman is perhaps best known for his views on money and monetary policy. Fierce debates continue on how the Federal Reserve and other central banks should set monetary policy. But the debates take place within the context of nearly total agreement on some basics: Monetary policy can shape an economy more than budgetary policy can; extended high inflation will not lead to prosperity and can lead to lower living standards; policy makers cannot fine-tune their economies as they fluctuate.

These insights may seem self-evident — but they were won through a combination of Mr. Friedman’s powerful argument and painful experience. I know. As an undergraduate in the early 1970s, I was taught that everyone other than Milton Friedman and a few other dissidents knew that fiscal policy was of primary importance for stabilizing economies, that the Phillips curve could be exploited to increase employment if only society would tolerate some increase in inflation and that economists would soon be able to tame economic fluctuations through finely calibrated policies. When I started teaching undergraduates a decade later, Mr. Friedman’s heresies had become the orthodoxy.

While much of his academic work was directed at monetary policy, Mr. Friedman’s great popular contribution lay elsewhere: in convincing people of the importance of allowing free markets to operate.

From what I’ve heard, Milton Friedman’s participation on a government commission on the volunteer military in the late 1960s was a kind of intellectual version of the play “Twelve Angry Men.” Gradually, through force of persistent argument and marshaling of evidence, he brought his fellow commission members around to the previously unthinkable view that both our national security and our broader interest would be best served by a volunteer military.

Another example of Mr. Friedman’s influence is the structure of modern financial markets. Today we take it as given that free financial markets shape finance. The dollar fluctuates unhindered against other currencies and there is an entire industry of trading futures and options on interest rates and currencies. At the time Mr. Friedman first proposed flexible exchange rates and open financial markets, it was thought that they would be inherently destabilizing and that governments needed to control the movement of capital across international borders.

There are other areas like vouchers for school choice, drug legalization and the abolition of certification requirements for lawyers, doctors and other professionals where Mr. Friedman has not yet and may never carry the day. But even in these areas, the climate of opinion and the nature of policy have shifted because of his powerful arguments.

This all would be enough to mark Milton Friedman as a great man. But beyond Milton Friedman the economist, there was Milton Friedman the public philosopher. Ask reformers in any one of the countries behind what we used to call the Iron Curtain where they learned to contemplate alternatives to communism during the closed era before the Berlin Wall fell and they will often tell you about reading Milton Friedman and realizing how different their world could be.

Milton Friedman and I probably never voted the same way in any election. To my mind, his thinking gave too little weight to considerations of social justice and was far too cynical about the capacity of collective action to make people better off. I believe that some of the great challenges we face today, like rising inequality and global climate change, require that the free market be tempered instead of venerated. And like any economist, I have my list of areas where I believe Mr. Friedman oversimplified or was simply wrong.

Nonetheless, like many others I feel that I have lost a hero — a man whose success demonstrates that great ideas convincingly advanced can change the lives of people around the world.

Lawrence H. Summers, a university professor of economics at Harvard, was Treasury secretary in the Clinton administration.

    The Great Liberator, NYT, 19.11.2006, http://www.nytimes.com/2006/11/19/opinion/19summers.html

Showing a New Style, Department Stores Surge

November 17, 2006
The New York Times
By MICHAEL BARBARO

From the modest cubicles inside Macy’s headquarters in Cincinnati to the spacious corner offices at Saks Fifth Avenue in Manhattan, merchants are beginning to discuss something virtually unheard-of in the American department store industry: a comeback.

After four decades of decline, said Myron E. Ullman, the chief executive of J. C. Penney, “The department store has become a destination again.”

That is not just boasting. In a remarkable reversal of fortune, the performance of department stores has quietly overtaken that of specialty clothing retailers like Gap and Limited — scrappy, mall-based stores whose emergence over the last 30 years forced many regional department stores, like Marshall Field’s in Chicago and B. Altman in New York, to shut or be sold to competitors.

Over the last 12 months, sales at department stores open at least a year, a widely used measure of a retailer’s health, have grown 4.1 percent, compared with a 1.3 percent increase at specialty apparel chains, according to the International Council of Shopping Centers, a trade group. This holiday season, the gap is expected to grow even wider. At the same time, profits are surging and executives accustomed to cutting back are dusting off old plans for new stores.

Executives attribute the resurgence of the department store to well-laid plans, drawn up several years ago, at chains like Kohl’s, Macy’s, Bloomingdale’s, Nordstrom and Saks to develop stronger store clothing brands, carry higher fashions and to tidy up cluttered aisles and grimy restrooms.

Two megamergers in the last several years — between Sears and Kmart and Federated and May department stores — resulted in store closings, leaving those who shopped there up for grabs just as the chains completed their makeovers.

In the midst of all that, consumer tastes evolved away from basic apparel at chains like Old Navy toward name-brand clothing and accessories, the very merchandise department stores have sold for years.

Kenneth McCoy, 27, is the kind of customer the specialty clothing store industry has relied upon for years — too stylish for the dowdy department store, too busy to wade through its unwieldy aisles. But to find the Prada Teflon pants and Rock & Republic jeans he covets, Mr. McCoy shops at Bloomingdale’s and Saks, not J. Crew and Abercrombie & Fitch. “I might go to those stores for underwear,” he said as he walked around Macy’s Herald Square store with a friend.

The most popular apparel categories over the last five years — premium denim and handbags — have been dominated by labels like Diesel and Coach that, for the most part, cannot be found at the specialty clothing chains that line the corridors of the mall.

Relying on national brands, a hallmark of the department store, was once considered a disadvantage, saddling chains like Macy’s and Kohl’s with the same piles of Liz Claiborne woven shirts and Dockers pants.

But now, department store executives say, it is the specialty clothing stores, which design most if not all of their own clothing, who are struggling to stand out, their aisles chock full of roughly the same fur-lined puffer jackets and hooded sweaters.

More options, it turns out, is exactly what consumers want, despite years of advice from retail consultants, who told department store executives their stores overwhelmed shoppers with floor after floor of merchandise.

“The great advantage the department store has is the ability to quickly move from one brand to another to keep itself fresh,” said Stephen I. Sadove, the chief executive of Saks, whose sales have improved sharply over the last three months on the strength of designer brands like Tahari, Theory and Juicy Couture.

“The specialty store does not have that luxury,” he said.

Unaccustomed to success, department store executives are approaching the strong sales figures, which first appeared in June, with all the requisite reservations. Profit margins may be growing, they say, but, in many cases, like Saks and Dillard’s, they have not reached levels that satisfy Wall Street analysts or investors.

Customer service remains weak, if not nonexistent at some stores. Popular name brands could lose their luster, dragging down sales. And, the executives concede, the entire industry is still vulnerable to attack from fast-fashion chains like Zara and H&M that offer designer-inspired clothes at rock-bottom prices, and discount retailers like Target and Wal-Mart, which have hired well-known designers to create budget clothing lines.

But those who run the nation’s biggest department stores chains say that after years of casting about for the right strategies, their companies have never been better positioned to beat back the competition.

Five years ago, for example, Federated Department Stores, which operates Macy’s and Bloomingdale’s, was struggling, locked in seemingly endless battles of 20 percent off coupons with its biggest rival, May, owner of chains like Hecht’s in Washington and Filene’s in Boston.

But in 2003, when Terry J. Lundgren became the chief executive of Federated, he instituted a program called Reinvent that required the renovation of Macy’s dressing rooms, the widening of aisles and the use of price scanners to make shopping more convenient.

His next move, the $11 billion merger with May and the conversion of 400 May department stores into Macy’s, created a department store with the size and power to demand better prices from clothing suppliers and more exclusive merchandise. In the last year, Martha Stewart said she would develop an upscale furniture line for Macy’s and the designer Elie Tahari agreed to create a collection of women’s clothing for the chain.

The merger has proved bumpy — business at the old May stores remains disappointing — but sales at stores open at least a year have grown 3.6 percent over the last 12 months, compared with a 1.1 increase in 2005. (The numbers, though seemingly small, represent tens of millions in sales.)

“We have been on a tremendous roll here,” said Mr. Lundgren, who credited years of research into what consumers want in a department store. The surprise answer: “Fitting rooms,” he said, “was the No. 1 issue.”

No wonder, perhaps, that in its newest stores, unveiled this holiday season, Kohl’s introduced far more spacious fitting rooms with stylish benches and faux modern artwork; that Bloomingdale’s has just rolled out larger lingerie dressing rooms with call buttons that allow shoppers to summon a sales clerk; and that Bergdorf Goodman has built a sumptuous personal shopping area that offers robes and multicourse meals.

But the biggest explanation for the success of the department store industry, executives and analyst said, is the clothing. Take the progress at J. C. Penney, which only a decade ago was known among shoppers for dowdy clothes and among investors for trailing its competitors in financial performance.

Under the leadership of the former chief executive, Alan Questrom, and Mr. Ullman, who once ran the luxury conglomerate LVMH Moët Hennessy Louis Vuitton, J. C. Penney has become a force in fashion. Its new store brands, like A.N.A. (with its gaucho capri pants) and East5th (with its faux fur hooded swing coats) are considered as stylish as anything in Macy’s.

So after losing more than $900 million in 2003, J. C. Penney earned more than $1 billion last year. It plans to open 28 new stores this year, its biggest expansion in two decades and a clear vote of confidence in the future of the department store.

Kohl’s, a rival of Penney’s, appears to be even more confident about the industry’s prospects. It opened 65 new stores on a single day last month. Bloomingdale’s is opening four stores this year, its biggest expansion in a decade.

At the highest end of the department store spectrum, stores are awash in profits. Over the last three months, monthly sales rose 6.8 percent at Neiman Marcus and 8.8 percent at Saks, as bankers and brokers (and their spouses) have splurged on $700 Dolce & Gabbana peep toe pumps and $2,000 Zegna cashmere coats.

James Gold, the chief executive of Bergdorf Goodman, the Manhattan luxury department store owned by Neiman Marcus, explained that “the rich are getting richer at a staggering rate.”

And the benefits have trickled down. As Bloomingdale’s and Nordstrom, relative bargains next to Bergdorf, have beefed up their designer collections and dialed up the price of merchandise in their stores, already strong sales have improved further. A recent bet by Nordstrom on Michele watches, which routinely sell for $2,000 to $3,000, has paid off handsomely.

“Those are pretty darn expensive,” said Peter E. Nordstrom, president of merchandising at the company and the great-grandson of its founder. “But the more we carry, the more we sell.”

The success is building upon itself. After years of timid management and small ideas, department store leaders are thinking boldly. J. C. Penney, a mainstay at the mall, is building stand-alone stores in the smaller suburban shopping centers where more consumers shop, and hiring outside retailers, like Sephora, to help run its cosmetics counters.

Macy’s, which long ago ceded the electronics business to specialty stores like Best Buy, is installing vending machines that will dispense iPods and, eventually, digital cameras. And Neiman Marcus has created a new chain, called Cusp, tailored to younger consumers, that is less than half the size of regular outlets.

“The ones that have survived in this industry are the ones that have finally figured it out,” said Mr. Ullman of J. C. Penney, as he mournfully ticked off the names of department stores that have vanished over the last century (he put the number, conservatively, at 65).

“The strong,” he said, “are only getting stronger.”

    Showing a New Style, Department Stores Surge, NYT, 18.11.2006, http://www.nytimes.com/2006/11/17/business/17stores.html?em&ex=1163998800&en=e0ac4c8c10670bb2&ei=5087%0A

Milton Friedman, 94, Free-Market Theorist, Dies

November 17, 2006
The New York Times
By HOLCOMB B. NOBLE

Milton Friedman, the grandmaster of free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility, died yesterday. He was 94 and lived in San Francisco.

His death was confirmed by Robert Fanger, a spokesman for the Milton and Rose D. Friedman Foundation in Indianapolis.

Conservative and liberal colleagues alike viewed Mr. Friedman, a Nobel laureate, as one of the 20th century’s leading economic scholars, on a par with giants like John Maynard Keynes and Paul Samuelson.

Flying the flag of economic conservatism, Mr. Friedman led the postwar challenge to the hallowed theories of Lord Keynes, the British economist who maintained that governments had a duty to help capitalistic economies through periods of recession and to prevent boom times from exploding into high inflation.

In Mr. Friedman’s view, government had the opposite obligation: to keep its hands off the economy, to let the free market do its work. He was a spiritual heir to Adam Smith, the 18th-century founder of the science of economics and proponent of laissez-faire: that government governs best which governs least.

The only economic lever that Mr. Friedman would allow government to use was the one that controlled the supply of money — a monetarist view that had gone out of favor when he embraced it in the 1950s. He went on to record a signal achievement, predicting the unprecedented combination of rising unemployment and rising inflation that came to be called stagflation. His work earned him the Nobel Memorial Prize in Economic Science in 1976.

Rarely, colleagues said, did anyone have such impact on his own profession and on government. Though he never served officially in the halls of power, he was around them, as an adviser and theorist.

“Among economic scholars, Milton Friedman had no peer,” Ben S. Bernanke, the Federal Reserve chairman, said yesterday. “The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate.”

Professor Friedman also fueled the rise of the Chicago School of economics, a conservative group within the department of economics at the University of Chicago. He and his colleagues became a counterforce to their liberal peers at the Massachusetts Institute of Technology and Harvard, influencing close to a dozen American winners of the Nobel in economics.

It was not only Mr. Friedman’s antistatist and free-market views that held sway over his colleagues. There was also his willingness to create a place where independent thinkers could be encouraged to take unconventional stands as long as they were prepared to do battle to support them.

“Most economics departments are like country clubs,” said James J. Heckman, a Chicago faculty member and Nobel laureate. “But at Chicago you are only as good as your last paper.”

Alan Greenspan, the former Federal Reserve chairman, said of Mr. Friedman in an interview Tuesday: “From a longer-term point of view, it’s his academic achievements which will have lasting import. But I would not dismiss the profound impact he has already had on the American public’s view.”

To Mr. Greenspan, Mr. Friedman came along at an opportune time. The Keynesian consensus among economists, he said — one that had worked well from the 1930s — could not explain the stagflation of the 1970s.

But he also said that Mr. Friedman had made a broader political argument: that you have to have economic freedom to have political freedom.

Mr. Friedman had a gift for communicating complicated ideas in simple and lucid ways, and it served him well as the author or co-author of more than a dozen books, as a columnist for Newsweek from 1966 to 1983 and even as the star of a public television series. He was a bridge between the academic and popular worlds, and his broader impact stemmed in large part from the fact that he was preaching a gospel of capitalism that fit neatly into American self-perceptions. He was pushing on an open door.

A Staunch Libertarian

As a libertarian, Mr. Friedman advocated legalizing drugs and generally opposed public education and the state’s power to license doctors, car drivers and others. He was criticized for those views, but he stood by them, arguing that prohibiting, regulating or licensing human behavior either does not work or creates inefficient bureaucracies.

Mr. Friedman insisted that unimpeded private competition produced better results than government systems. “Try talking French with someone who studied it in public school,” he argued, “then with a Berlitz graduate.”

Once, when accused of going overboard in his antistatism, he said, “In every generation, there’s got to be somebody who goes the whole way, and that’s why I believe as I do.”

In the long period of prosperity after World War II, when Keynesian economics was riding high in the West, Mr. Friedman alone warned of trouble ahead, asserting that policies based on Keynesian theory were part of the problem.

Even as he was being dismissed as an economic “flat-earther,” he predicted in the 1960s that the end of the boom was at hand. Expect unemployment to grow, he said, and inflation to rise, at the same time. The prediction was borne out in the 1970s. It was Paul Samuelson who labeled the phenomenon stagflation.

Mr. Friedman’s analysis and prediction were regarded as a stunning intellectual accomplishment and contributed to his earning the Nobel for his monetary theories. He was also cited for his analyses of consumer savings and of the causes of the Great Depression: he blamed the Federal Reserve, accusing it of bad monetary policy and saying it had bungled early chances for recovery. His prestige and that of the Chicago school soared, and his analysis of the Depression changed the way that the Fed thought about monetary policy.

Government leaders like President Ronald Reagan and Prime Minister Margaret Thatcher of Britain were heavily influenced by his views. So was the quietly building opposition to communism within the East bloc.

As the end of the century approached, Professor Friedman said events had made his views seem only more valid than when he had first formed them. One event was the fall of communism. In an introduction to the 50th-anniversary edition of Friedrich A. Hayek’s book predicting totalitarian consequences from collectivist planning, “The Road to Serfdom,” Mr. Friedman wrote it was clear that “progress could be achieved only in an order in which government activity is limited primarily to establishing the framework with which individuals are free to pursue their own objectives.”

“The free market is the only mechanism that has ever been discovered for achieving participatory democracy,” he said.

Professor Friedman was acknowledged to be a brilliant statistician and logician. To his critics, however, he sometimes pushed his data too far. To them, the debate over the advantages or disadvantages of an unregulated free market was far from over.

Milton Friedman was born in Brooklyn on July 31, 1912, the last of four children and only son of Jeno S. Friedman and Sarah Landau Friedman. His parents worked briefly in New York sweatshops, then moved their family to Rahway, N.J., where they opened a clothing store.

Mr. Friedman’s father died in his son’s senior year at Rahway High School. Young Milton later waited on tables and clerked in stores to supplement a scholarship he had earned at Rutgers University. He entered Rutgers in 1929, the year the stock market crashed and the Depression began.

Mr. Friedman attributed his success to “accidents”: the immigration of his teen-age parents from Czechoslovakia, enabling him to be an American and not the citizen of a Soviet-bloc state; the skill of a high-school geometry teacher who showed him a connection between Keats’s “Ode to a Grecian Urn” and the Pythagorean theorem, allowing him to see mathematical beauty; the receipt of a scholarship that enabled him to attend Rutgers and there have Arthur F. Burns and Homer Jones as teachers.

He said Mr. Burns, who later became chairman of the Federal Reserve, instilled in him a passion for scientific integrity and accuracy in economics; Mr. Jones interested him in monetary policy and a graduate school career at Chicago.

In his first economic-theory class at Chicago, he was the beneficiary of another accident — the fact that his last name began with an “F.” The class was seated alphabetically, and he was placed next to Rose Director, a master’s-degree candidate from Portland, Ore. That seating arrangement shaped his whole life, he said. He married Ms. Director six years later. And she, after becoming an important economist in her own right, helped Mr. Friedman form his ideas and maintain his intellectual rigor.

After he became something of a celebrity, Mr. Friedman said, many people became reluctant to challenge him directly. “They can’t come right out and say something stinks,” he said. “Rose can.”

In 1998, he and his wife published a memoir, “Two Lucky People” (University of Chicago Press), in which they reveled in “having intellectual children throughout the world.”

His wife is among his survivors. They also include a son, David, and a daughter, Janet Martel, four grandchildren and three great-grandchildren.

A Fateful Class

That fateful class at the University of Chicago also introduced him to Jacob Viner, regarded as a great theorist and historian of economic thought. Professor Viner convinced Mr. Friedman that economic theory need not be a mere set of disjointed propositions but rather could be developed into a logical and coherent prescription for action.

Mr. Friedman won a fellowship to do his doctoral work at Columbia, where the emphasis was on statistics and empirical evidence. He studied there with Simon Kuznets, another American Nobel laureate. The two turned Mr. Friedman’s thesis into a book, “Income From Independent Professional Practice.” It was the first of more than a dozen books that Mr. Friedman wrote alone or with others.

It was also the first of many “Friedman controversies.” One finding of the book was that the American Medical Association exerted monopolistic pressure on the incomes of doctors; as a result, the authors said, patients were unable to reap the benefits of lower fees from any real price competition among doctors. The A.M.A., after obtaining a galley copy of the book, challenged that conclusion and forced the publisher to delay publication. But the authors did not budge. The book was eventually published, unchanged.

During the first two years of World War II, Mr. Friedman was an economist in the Treasury Department’s division of taxation. “Rose has never forgiven me for the part I played in devising and developing withholding for the income tax,” he said. “There is no doubt that it would not have been possible to collect the amount of taxes imposed during World War II without withholding taxes at the source.

“But it is also true,” he went on, “that the existence of withholding has made it possible for taxes to be higher after the war than they otherwise could have been. So I have a good deal of sympathy for the view that, however necessary withholding may have been for wartime purposes, its existence has had some negative effects in the postwar period.”

After the war, he returned to the University of Chicago, becoming a full professor in 1948 and commencing his campaign against Keynesian economics. Robert M. Solow of M.I.T., a Nobel laureate who often disagreed with Mr. Friedman, called him one of “the greatest debaters of all time.” But his wisecracking style could infuriate opponents.

Mr. Samuelson, also of M.I.T., who was not above wisecracking himself, had a standard line in his economics classes that always brought down the house: “Just because Milton Friedman says it doesn’t mean that it’s necessarily untrue.”

But Professor Samuelson said he never joked in class unless he was serious — that his friend and opponent was, in fact, often right when at first he sounded wrong.

Mr. Friedman’s opposition to rent control after World War II, for example, incurred the wrath of many colleagues. They took it as an unpatriotic criticism of economic policies that had been successful in helping the nation mobilize for war. Later, Mr. Samuelson said, “probably 98 percent of them would agree that he was right.”

In the early 1950s, Mr. Friedman started flogging a “decomposing horse,” as Mrs. Thatcher’s chief economic adviser, Alan Waters, later put it. The horse that most economists thought long dead was the monetarist theory that the supply of money in circulation and readily accessible in banks was the dominant force — or in Mr. Friedman’s view, the only force — that should be used in shaping the economy.

In the 1963 book “A Monetary History of the United States, 1867-1960,” which he wrote with Anna Jacobson Schwartz, Mr. Friedman compiled statistics to buttress his theory that recessions, as well as the Great Depression, had been preceded by declines in the money supply. And it was an oversupply, he argued, that caused inflation.

In the late 1960s, Mr. Friedman used his knowledge of empirical evidence and statistics to calculate that Keynesian government programs had the effect of constantly increasing the money supply, a practice that over time was seriously inflationary.

Paul Krugman, a Princeton University economist and Op-Ed columnist for The New York Times, said Mr. Friedman then managed “one of the decisive intellectual achievements of postwar economics,” predicting the combination of rising unemployment and rising inflation that came to be called stagflation.

In this regard, his Nobel award cited his contribution to the now famous concept “the natural rate of unemployment.” Under this thesis, the unemployment rate cannot be driven below a certain level without provoking an acceleration in the inflation rate. Price inflation was linked to wage inflation, and wage inflation depended on the inflationary expectations of employers and workers in their bargaining.

A spiral developed. Wages and prices rose until expectations came into line with reality, usually at the natural rate of unemployment. Once that rate is achieved, any attempt to drive down unemployment through expansionary government policies is inflationary, according to Mr. Friedman’s thesis, which he unveiled in 1968.

For years economists have tried to pinpoint the elusive natural rate, without much success, particularly in recent years.

Mr. Friedman was right on the big economic issue of that time — inflation. And his prescription — to have the governors of the Federal Reserve System keep the money supply growing steadily without big fluctuations — figured in the thinking of policy makers around the world in the 1980s.

A Retort to Kennedy

Mr. Friedman also pursued his attack on Keynesianism in a more general way. He warned that a government allowed to regulate the economy could not be trusted to keep its hands off individual liberties.

He had first been exposed to this line of attack through his association with Mr. Hayek, who was predicting in the early 1940s that communism would lead inevitably to totalitarianism and the crushing of individual rights. In an introduction to a 1971 German edition, Professor Friedman called Mr. Hayek’s book “a revelation particularly to the young men and women who had been in the armed forces during the war.”

“Their recent experience had enhanced their appreciation of the value and meaning of individual freedom,” he wrote.

In 1962, Mr. Friedman took on President John F. Kennedy’s popular inaugural exhortation: “Ask not what your country can do for you. Ask what you can do for your country.” In an introduction to his classic book “Capitalism and Freedom,” a collection of his writings and lectures, he said President Kennedy had got it wrong: You should ask neither.

“What your country can do for you,” Mr. Friedman said, implies that the government is the patron, the citizen the ward; and “what you can do for your country” assumes that the government is the master, the citizen the servant. Rather, he said, you should ask, “What I and my compatriots can do through government to help discharge our individual responsibilities, to achieve our several goals and purposes, and above all protect our freedom.”

It was not that Mr. Friedman believed in no government. He is credited with devising the negative income tax, which in a modern variant — the earned-income tax credit — increases the incomes of the working poor. He also argued that government should give the poor vouchers to attend the private schools he thought superior to public ones.

In forums he would spar over the role of government with his more liberal adversaries, including John Kenneth Galbraith, who was also a longtime friend (and who died in April 2006). The two would often share a stage, presenting a study in contrasts as much visual as intellectual: Mr. Friedman stood 5 feet 3; Mr. Galbraith, 6 feet 8.

Though he had helped ignite the conservative rebellion after World War II, together with intellectuals like Russell Kirk, William F. Buckley Jr. and Ayn Rand, Mr. Friedman had little or no influence on the administrations of Presidents Dwight D. Eisenhower, Kennedy, Lyndon B. Johnson and Richard M. Nixon. President Nixon, in fact, once described himself as a Keynesian.

It was frustrating period for Mr. Friedman. He said that during the Nixon years the talk was still of urban crises solvable only by government programs that he was convinced would make things worse, or of environmental problems produced by “rapacious businessmen who were expected to discharge their social responsibility instead of simply operating their enterprises to make the most profit.”

Rising With Reagan

But then, after the 1970s stagflation, with Keynesian tools seemingly broken or outmoded, and with Ronald Reagan headed for the White House, Mr. Friedman’s hour arrived. His power and influence were acknowledged and celebrated in Washington.

With his wife, in 1978 he brought out a best-selling general-interest book, “Free to Choose,” and went on an 18-month tour, from Hong Kong to Ottumwa, Iowa, preaching that government regulation and interference in the free market was the stifling bane of modern society. The tour became the subject and Mr. Friedman the star of a 10-part PBS series, “Free to Choose,” in 1980.

In 1983, having retired from teaching, he became a fellow at the Hoover Institution at Stanford University. Five years later he was awarded the Presidential Medal of Freedom and the National Medal of Science.

The economic expansion in the 1980s resulted from the Reagan administration’s lowered tax rates and deregulation, Professor Friedman said. But then the tide turned again. The expansion, he argued, was halted when President George H. W. Bush imposed a “reverse-Reaganomics” tax increase.

What was worse, by the mid-1980s, as the finance and banking industries began undergoing upheavals and money began shifting unpredictably, Mr. Friedman’s own monetarist predictions — of what would happen to the economy and inflation as a result of specific increases in the money supply — failed to hold up. Confidence in his monetarism theory waned.

Prof. Robert Solow of M.I.T., a Nobel laureate himself, and other liberal economists continued to raise questions about Mr. Friedman’s theories: Did not President Reagan, and by extension Professor Friedman, they asked, revert to Keynesianism once in power?

“The boom that lasted from 1982 to 1990 was engineered by the Reagan administration in a straightforward Keynesian way by rising spending and lowered taxes, a classic case of an expansionary budget deficit,” Mr. Solow said. “In fairness to Milton, however, it should be said that one of the reasons for his wanting a tax reduction was to force the spending cuts that he presumed would follow.” Professor Samuelson said that “Milton Friedman thought of himself as a man of science but was in fact more full of passion than he knew.”

Mr. Friedman remained the guiding light to American conservatives. It was he, for example, who provided the economic theory behind “prescriptions for action,” as his onetime professor, Jacob Viner, put it, like the landslide Republican victory in the off-year Congressional elections of 1994.

By then Professor Friedman had grown into a giant of economics abroad as well. He was sharply criticized for his role in providing intellectual guidance on economic matters to the military regime in Chile that engineered a coup in the early 1970s against the democratically elected president, Salvador Allende. But for Mr. Friedman that was just a bump in the road.

In Vietnam, where the Constitution was amended in 1986 to guarantee the rights of private property, the writings of Mr. Friedman were circulated at the highest levels of government. “Privatize,” he told Chinese scholars at a meeting at Fudan University in Shanghai; and he told those in Moscow and elsewhere in Eastern Europe: “Speed the conversion of state-run enterprises to private ownership.” They did.

Mr. Friedman had long since ceased to be called a flat-earther by anyone. “What was really so important about him,” said W. Allen Wallis, a former classmate and later faculty colleague at the University of Chicago, “was his tremendous basic intelligence, his ingenuity, perseverance — his way of getting to the bottom of things, of looking at them in a new way.”

Louis Uchitelle and Edmund L. Andrews contributed reporting.

    Milton Friedman, 94, Free-Market Theorist, Dies, NYT, 17.11.2006, http://www.nytimes.com/2006/11/17/business/17friedman.html

Economic Scene

A Charismatic Economist Who Loved to Argue

November 17, 2006
The New York Times
By AUSTAN GOOLSBEE

Someone walked into our lunchroom yesterday at the University of Chicago and announced that Milton Friedman had died. Mr. Friedman spent his intellectual life here, so I started asking people here about him and what they remembered. It became clear that despite retiring almost 30 years ago (and despite being only 5-foot-3), he still casts a long shadow.

To much of the world, he is known for his free market, antigovernment message and his influence on conservative leaders. But in an interview, Mr. Friedman once said that while his efforts to influence public policy had received more public attention, they had been more of an avocation. “My real vocation,” he said, “has been scientific economics.”

What struck me as I talked with my colleagues yesterday was how Mr. Friedman’s legacy among economists is in some ways similar but in some ways quite different from the public view. His manner of research, his personality, even the topics he studied spawned a great deal of the economics we know today — even among economists whose politics differ greatly from his. A striking number of topics he worked on, for example, ultimately developed into other people’s Nobel awards.

One of Mr. Friedman’s major impacts on economics was in establishing a basic worldview. Economics is not a game or an academic exercise, in that view. Economics is a powerful tool to understand how the world works. He used straightforward theory. He gathered data from anywhere he could get it. He wanted to see how well economics fitted the world. That view now holds sway throughout much of the profession.

Mr. Friedman loved to argue. They say he was the greatest debater in all of economics. As improbable as it sounds, given Mr. Friedman’s small frame and thick glasses, few who saw him would deny that he had an astounding amount of charisma. It probably explains why he was so successful on television. While being an academic powerhouse, he really could explain things clearly.

Mr. Friedman brought his brashness and his love of debate to the University of Chicago and commenced the golden age for the most heralded center of economics. In his autobiographical statement for the Nobel in economic science, which he received in 1976, Mr. Friedman said that when he arrived in the 1930s, he encountered a “vibrant intellectual atmosphere of a kind that I had never dreamed existed.”

“I have never recovered.”

And we never recovered, either. Chicago remains a place with an intensity without precedent in the world of economics, where we seem to eat, drink and breathe economics, and Mr. Friedman’s personality has much to do with that. He always wanted to engage in a debate on something (or, according to his detractors, to make a pronouncement about something). Nowadays, much of the political edge to the research is gone — there are Democrats and Republicans on the faculty — but the intensity remains.

The funny thing about Mr. Friedman’s transition to iconic status is that it happened without his ever losing his bluntness. He wasn’t, necessarily, polite. Even at 93, he was out declaring that fixed exchange rates are price controls and so the euro is doomed. He really didn’t care if you liked what he said. That was true within economics just as much as it was in the policy arena.

Mr. Friedman was proof that a great economist could become famous for just talking about economics. But he wasn’t afraid to poke his nose in places where people said economists had no business being. He passed that attitude on to students like Gary S. Becker, who would win the Nobel in 1992, and in the wider profession, especially among a younger set of economists like Steven D. Levitt of “Freakonomics” fame.

Mr. Friedman’s legacy might mean laissez-faire politics to the outside world, but to economists — and especially Chicago economists — it is more about trying to understand how the world works and engaging in a debate about it.

When we heard the news at the University of Chicago that he had died, we actually stopped arguing and were quiet for a moment. It was a most extraordinary event for Chicago economists. Each of us seemed to contemplate Mr. Friedman’s legacy for ourselves. After that bit of calm, the argument resumed. It was, perhaps, just what the old man would have wanted.

Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business.

    A Charismatic Economist Who Loved to Argue, NYT, 17.11.2006, http://www.nytimes.com/2006/11/17/business/17milton.html

Housing construction plunges in October to lowest level in six years

Updated 11/17/2006 9:10 AM ET
By Martin Crutsinger, Associated Press
USA Today

WASHINGTON — Housing construction plunged to the lowest level in more than six years in October as the nation's once-booming housing market slowed further.

The Commerce Department said Friday that construction of new single-family homes and apartments dropped to an annual rate of 1.486 million units last month, down a sharp 14.6% from September.

The decline, bigger than expected, was the largest percentage drop in 19 months and pushed total activity down to the lowest level since July 2000.

The level of building activity in October was 27.4% below October 2005, biggest year-over-year decline since March 1991.

Applications for new building permits, seen as a sign of future plans, fell for an eighth month, declining 6.3% to an annual rate of 1.535 million units.

Construction of single-family homes fell 15.9% in October from the seasonally adjusted September level, dropping to an annual rate of 1.177 million units. Construction of multi-family units dropped 9.1% to an annual rate of 309,000 units.

The drop in construction was led by a 26.4% decline in the South. Construction fell 11.7% in the Midwest and 2.1% in the West.

The only region showing strength was the Northeast, where construction jumped 31%.

The sharp slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades powered a housing boom that pushed sales of new and existing homes to five consecutive records.

The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate. Housing is expected to continue acting as a drag over the next year but analysts believe the adverse effects of falling sales and construction cutbacks will not be enough to push the country into a recession.

There were signs that the steep plunge in housing was beginning to level off. The monthly survey of builder sentiment edged up slightly in early November after a small increase in October. It marked the first back-to-back improvements in builder sentiment since June 2005.

Housing construction plunges in October to lowest level in six years, UT, 17.11.2006, http://www.usatoday.com/money/economy/housing/2006-11-17-october-new-homes_x.htm

US Airways Seeks to Acquire Delta in Bid to Be No. 1        NYT       

16.11.2006

http://www.nytimes.com/2006/11/16/business/16delta.html

The Many Lives of US Airways

November 16, 2006
The New York Times
By JEREMY W. PETERS

Say what you will about US Airways, but don’t write it off.

In the last four years, it has filed for bankruptcy twice, lost business to low-fare airlines that moved aggressively into its backyard and entered a merger that critics said would not work.

Yet there it was yesterday, making an $8 billion offer for a larger carrier, Delta Air Lines. The ever-scrappy US Airways had emerged from its trials scarred but with a different business strategy, now aiming to become the world’s largest airline.

“It’s an amazing story when you look at where US Airways was over the last three to four years," said the airline consultant Bob Harrell of Harrell Associates in New York. “They’ve done a lot with a little, and the market has rewarded them for that.”

Four years ago, after US Airways filed its first Chapter 11 bankruptcy petition and kicked off a round of downsizing that is still shuddering through the industry, many analysts said it was entirely possible that US Airways would join Eastern, Pan Am and T.W.A. in the nation’s corporate graveyard.

But US Airways shed billions of dollars in costs, secured a $900 million lifeline from the federal government and emerged from bankruptcy after just seven months.

A year and a half later, in September 2004, buffeted by soaring fuel prices and unrelenting competition from low-fare airlines like JetBlue that were thriving on its turf, US Airways sought bankruptcy protection again. A second trip to bankruptcy court, skeptics noted, rarely has a happy ending.

Not only did US Airways pull itself out of the second bankruptcy after a year, but it came out paired with a suitor, the low-fare airline, America West Airlines. Yet again, many analysts wrote it off, saying the merger was ill conceived.

The staid corporate culture of US Airways would not mesh with that of a more nimble discount carrier, they argued. The labor unions at each airline would not be able to sort out seniority issues for workers. A merger would do little to consolidate the bloated industry other than removing a name from airline ticket counters. But US Airways proved the skeptics wrong again.

The merger with America West has been, by most accounts, a success thus far.

The US Airways of 2006 is an undeniably different airline from the one in 2005. And analysts now say that the company’s path over the last year illustrates how it may succeed in taking on the burden of a wounded airline like Delta, which has sought its own protection from creditors in bankruptcy court.

The strategy of taking on a troubled business like Delta is not a new concept for US Airways’ chief executive, W. Douglas Parker. In fact, it is the same tack he used as chief executive of America West to push for a merger with US Airways. He learned that bankruptcy, which allows airlines to cut costs by reducing their airline fleets, jobs and benefits, makes a company like Delta an attractive target for a merger.

Before yesterday, US Airways’ share price had more than doubled since the merger with America West was completed last September. The news of a merger with Delta sent shares soaring 17 percent more.

When America West began consolidating its operations with US Airways, it downsized its jet fleet and closed unneeded gates — a move that sharply reduced costs. Through September of this year, US Airways had an operating profit of $483 million, compared with an operating loss of $25 million for the period last year.

“That kind of performance gets people’s attention,” said Roger King, a transportation analyst with CreditSights. “It really shows the value of taking overhead out of a very high-fixed-cost business. Airlines are basically just fixed costs, and when you merge two airlines you can take a lot of those fixed costs out but retain the same amount of sales.”

When the operations of the two airlines are completely fused, which could happen sometime over the next year, the combined company will save $600 million a year, according to US Airways.

Analysts said some of the savings and efficiencies with the America West merger could be repeated with a Delta merger.

“It’s been done before, and there’s no reason to suspect that with good management, it couldn’t be done again,” said John Weber, vice president for information services at Back Aviation Solutions, an airline industry consulting service.

Analysts said that US Airways’ new management team and the culture it brought with it from America West could benefit the company after a merger with Delta.

A main reason US Airways has been able to survive, they said, is that its corporate culture has been almost entirely supplanted by the America West approach Mr. Parker brought with him after he moved the company’s headquarters from Arlington, Va., to Tempe, Ariz.

“US Airways as it was doesn’t exist anymore,” Mr. Boyd said.

But a merger between US Airways and America West, which created an airline only a fraction the size of what a combined US Airways-Delta would be, could be more complicated than Mr. Parker and his management team expect, analysts said.

“Delta is a monumental task,” said William Warlick, an analyst with Fitch Ratings. “It’s a much larger carrier. And there’s the labor-integration issue, which is the ever-present question in airline mergers.”

Indeed, the unions from US Airways and America West still have not resolved the seniority issues that arose from that merger. When airlines merge, workers have to reschedule their shifts, routes and vacation time. With workers of varying seniority from two different airlines, this can be a formidable task.

And yesterday, the Air Line Pilots Association said that it planned to picket US Airways hubs in Charlotte, N.C., and Phoenix in opposition to the proposed Delta merger, arguing that such mergers have trampled over them.

Nick Bunkley contributed reporting.

    The Many Lives of US Airways, NYT, 16.11.2006, http://www.nytimes.com/2006/11/16/business/16airways.html

US Airways Seeks to Acquire Delta in Bid to Be No. 1

November 16, 2006
The New York Times
By ANDREW ROSS SORKIN

US Airways made an $8 billion offer for Delta Air Lines yesterday in an effort to become the largest airline in the world and dominate travel on the East Coast of the United States.

The surprise offer may presage a wave of mergers in the struggling airline industry. While consolidation of companies often leads to higher prices, it is unclear at this point whether this merger would do anything like that.

But any deal for Delta would have to overcome high hurdles, including antitrust scrutiny and a lack of support from Delta’s management, which rebuffed advances from US Airways this summer.

In an unusual tack, the unsolicited offer is being made to the creditors of Delta, which is operating under bankruptcy protection — a process that will give Delta management control over any plan to get out of bankruptcy for at least several more months.

Delta said yesterday that it would review the offer. Delta is now the fourth-largest domestic airline and US Airways is No. 5. US Airways said the combined carrier would be bigger than the current leader, American Airlines, and would be called Delta Air Lines. It noted that Delta is a “very, very powerful” brand worldwide.

A deal would presumably be welcomed by many investors and analysts, who maintain that there are too many airlines fighting for razor-thin profits.

Since the drop in air travel after the Sept. 11 attacks, nearly all the established carriers have sought bankruptcy protection. US Airways has filed for bankruptcy protection twice since 2002 and has turned itself around through a merger with America West last year.

This competition among airlines has benefited some passengers. Even as the economy has rebounded and planes are as heavily booked as they have ever been, competition has kept a lid on fares on some popular routes at certain times of the year. That has sliced airlines’ profit margin thinner, making mergers — and the opportunity to pare some of their high costs — an attractive proposition.

The offer for Delta changes the calculations for deals to come. It had been widely expected that Delta would find a merger partner after emerging from bankruptcy protection, not before. The airlines that it has code-sharing relationships with now, notably Northwest and Continental, were seen as the most likely partners.

US Airways estimated that a merger would save at least $1.65 billion in operating costs annually by combining facilities at some airports, eliminating flights and cutting capacity by about 10 percent.

About 50 percent of the routes served by Delta and US Airways overlap, said Daniel Kasper, an airline consultant with LECG.

Robert W. Mann, a consultant in Port Washington, N.Y., said, “If the combined companies reduce the number of flights offered in routes where they overlap, you could see higher prices for consumers.”

As a result, any deal can be expected to receive scrutiny from the Justice Department and it might well result in the sale of either the US Airways or the Delta shuttle services connecting New York, Washington and Boston. A merger of the airlines could be among the first to be reviewed in Washington after the Democrats take control of Congress in January.

News of the offer drew a mixed reaction from travelers yesterday. While some welcomed the possible combination — particularly if it ensured the survival of Delta — others worried about the prospect of higher fares and still lower customer-service levels.

“They’re taking two poorly performing airlines, especially from a passengers’ point of view, and putting them together,” said Michael J. Grossman, a lawyer from Lexington, Ky., and a Delta frequent flier. “What you’re left with is the lowest common denominator.”

A regulatory inquiry would not be the only gantlet US Airways would have to run. The first is overcoming resistance from Delta. US Airways’ chief executive, W. Douglas Parker, has approached Delta’s chief executive, Gerald Grinstein, over the last several months about merging, but was rebuffed, according to letters that US Airways released yesterday. In late September, he tried again. Mr. Grinstein turned him down once more.

Yesterday, Mr. Grinstein said in a statement, "We received a letter from US. Airways this morning and will, of course, review it.” Then he added, “Delta’s plan has always been to emerge from bankruptcy in the first half of 2007 as a strong stand-alone carrier.”

Mr. Parker, a longtime proponent of consolidation, said in an interview yesterday that it was imperative that Delta engage in discussions with US Airways while it was still in bankruptcy protection. “We need to act on this before they emerge,” he said.

Striking a deal with Delta before it comes out of Chapter 11 protection could have major advantages for US Airways. Mr. Parker said that half the projected $1.65 billion in merger savings could not be achieved outside bankruptcy status.

While in bankruptcy, a company can seek court permission to reject contracts, renegotiate aircraft leases or terminate labor contracts — powers that US Airways exercised during its stays in Chapter 11.

But until February, only Delta management can present a plan to take the airline out of bankruptcy.

To succeed, US Airways will have to win the support of a significant chunk of Delta’s creditors, a group that may include hedge funds that acquired the debt in the secondary markets, and hope that they will put pressure on Delta’s management to engage in discussions.

GE Commercial Aviation Services, which finances much of the aircraft borrowing in the global industry, could prove to be a powerful player in the discussions because it provided the equivalent of debtor-in-possession financing to Delta at the beginning of its bankruptcy.

With enough backing, "it is very possible that, with patience and fortitude, they could get somewhere," said J. Andrew Rahl, head of the bankruptcy group at the law firm of Anderson Kill & Olick. Delta’s unsecured debt has recently traded at 40 cents on the dollar, US Airways noted.

In a sign that creditors welcomed the offer from US Airways, Delta’s bonds surged yesterday. The price of its 2009 note rose 21.25 cents, to 61.75 cents on the dollar. Airline stocks, including shares of US Airways, also rose sharply.

If enough creditors think that they would do better in a merger than in a stand-alone reorganization, "Delta’s going to have a hard time putting a plan out there," said David W. Dykhouse, a partner at Patterson Belknap Webb & Tyler in New York.

Wilbur L. Ross Jr., whose investment firm has bought many distressed companies, said that when a company has been in bankruptcy protection as long as Delta, its debt “starts to move into the hands of the distressed-investment community.” These investors, many of them hedge funds, are likely to promote rival offers, he said, adding, “Chances are they would be pushing for an auction.”

Two of the largest holders of Delta’s unsecured claims are the federal Pension Benefit Guaranty Corporation and the Air Line Pilots Association, which represents Delta pilots.

Members of Delta’s committee of unsecured creditors either did not return calls requesting comment yesterday or declined to comment.

US Airways said it was offering $4 billion in cash, plus US Airways stock valued at $4 billion at the market close on Tuesday. That price would represent a substantial premium for Delta’s creditors, who would own about 45 percent of the combined company.

Still, it remains possible that Delta’s creditors’ committee could end up siding with Mr. Grinstein because it could take regulators far longer to decide whether to permit a US Airways-Delta merger than for Delta to come out of bankruptcy alone, antitrust lawyers said.

Regulators are likely to look hard at the combined company’s prospective dominance on routes into the Southeast; Delta maintains a hub in Atlanta and US Airways has a hub in Charlotte, N.C., antitrust experts noted.

For instance, US Airways has 19 flights today from La Guardia Airport in New York to Orlando, Fla., and Delta offers 28. From Boston to Fort Lauderdale, Fla., US Airways has 20 flights and Delta has 31.

And the deal could face an outpouring of criticism from consumers and consumer advocacy groups. Susan Johnson, an auditor from Philadelphia and an elite-level US Airways flier, said yesterday that she was “concerned about the monopoly this will present for US Airways, and how that will affect pricing.”

“Sure, prices will be low initially,” she said. “But in the long run, will they increase the cost of their ticket?”

Mr. Parker, the US Airways chief, said he was confident that the proposed combination would pass muster under antitrust laws.

Analysts said a merger could result in a leaner, more efficient airline.

“Even though airline mergers tend to be messy while employees, cultures and fleet types are integrated,” said Ray Neidl, an analyst with Calyon Securities, “in the long term, a merged carrier should benefit in synergies from revenue generation, the ability to cut overhead costs and the probability that marginal hubs would be closed.”

Not all industry watchers are convinced that consolidation will cure the airline industry’s ills.

“Airlines are notoriously risky to operate,” said Allen Michel, a professor at the Boston University School of Management. “Far in excess of 100 airlines have gone into bankruptcy since airline deregulation in 1978.”

Moreover, US Airways has not completed integrating last year’s America West combination, “and it is questionable whether the Delta deal will pass antitrust muster,” said Professor Michel said. “Adding these factors to the complexities associated with an ordinary merger increase the odds against success.’’

Labor-management relations are potentially another problem. Both airlines have clashed in recent years with their unions, principally the Air Line Pilots’ Association. And both have struggled to cope with low-price competitors like JetBlue and Southwest.

For fliers, the deal may mean more routes and frequency in the long term, but it could also create headaches as the companies merge their operations, schedules and frequent-flier mile programs.

In an e-mail message to members of US Airways’ frequent-flier club yesterday, the carrier promised to “work hard to mitigate transition difficulties,” like those that occurred after its merger with America West, when many passengers were left confused. In the same message, US Airways tried to emphasize the “enormous benefits” of a deal with Delta.

The message made no mention of US Airways’ plan to cut flight capacity by 10 percent.

Reporting was contributed by Clifford Krauss, Micheline Maynard, Peter Edmonston, Charles Duhigg, Christopher Elliott, Jeremy W. Peters and Michael J. de la Merced.

    US Airways Seeks to Acquire Delta in Bid to Be No. 1, NYT, 16.11.2006, http://www.nytimes.com/2006/11/16/business/16delta.html?hp&ex=1163739600&en=d337d3172de9a128&ei=5094&partner=homepage

Agricultural Mainstay Gets a New, Urban Face

November 16, 2006
The New York Times
By MONICA DAVEY

INDIANAPOLIS — The number of family farms in America is dwindling, as is the number of young people who say they hope to take over their parents’ farms. So the National FFA Organization, once known as the Future Farmers of America, would seem doomed to a parallel fate.

But a swarm of blue corduroy jackets, not so different from the jackets the Future Farmers wore in the 1930s, seemed to fill every street corner of this city’s downtown in October for the FFA’s national convention, which the group says has grown into the largest annual student gathering in the nation.

The Future Farmers declined precipitously as the country’s farm economy fell into crisis and agriculture classes, like other vocational classes, fell out of favor. But the group, which for nearly 80 years bound together farm youths in the country’s most isolated parts, has swelled by more than 100,000 members over the last decade and a half to almost a half-million this year.

A new face has emerged on this old-fashioned tradition. More FFA members now come from towns, suburbs and city neighborhoods, including Queens and the South Side of Chicago, than from rural farm regions, FFA officials say. The largest chapter in the country? At W. B. Saul High School of Agricultural Sciences in Philadelphia.

Mainly, the FFA, created to build pride among young farmers-to-be, is drawing students who say they do not in the least wish to become farmers, but rather food industry scientists, seed bioengineers, florists, landscapers and renewable fuels engineers.

Awards at the national convention were offered not just for students deemed the best at keeping up wheat crops or tending to hogs, but also to those who presented science research like an examination of the effects of ethanol on small gasoline engines, a top “agri-entrepreneur” who sold soaps in her California city, and to a boy who worked at his local country club and beat out a half-dozen other state champions in the newer realm of “turf grass management.”

The shift at FFA (whose leaders officially dumped the word “Farmers” from their name in 1988, saying FFA was more palatable and appropriate to their broader audience) may be a perfect reflection of the broader changes in the nation’s farm economy, agricultural economists say.

“No, no, I don’t mess with animals,” said Ryan Jameson, the president of an FFA chapter in Chicago, when asked if he knew how to milk a cow. Mr. Jameson, 17, said he hoped to study economics in college, then work in the food industry.

Lucille Shaw, the FFA adviser at Mr. Jameson’s school, the Chicago High School for Agricultural Sciences, on the city’s far South Side, said the school had a working farm on 39 acres, a rare sight inside the city limits.

“But you ask any of my kids — we do not associate FFA with farming,” Ms. Shaw said. “It’s a total misconception. It’s so, so, so much more than that.”

In the crush of students filling the convention center in Indianapolis, there were sights one might expect at an FFA convention: minitractor races by remote control and science displays on the effects of hurricane storm surges on Gulf Coast farm equipment, a look at pH levels in cow urine, and a study of hydrostatic tractors. But mixed among all the blue jackets bearing the names of chapters from places like Taylorsville, Ky., and Nebraska City were jackets that read Philadelphia, New York and 9 others among the nation’s 20 most populous cities.

“There’s no doubt, we stand out,” said Mr. Jameson, who pointed out that his Chicago chapter consists largely of blacks. Although the FFA has always accepted blacks, some Southern states did not include them until 1965 (before then they had a separate organization), said Bill Stagg, a spokesman for FFA, and the organization did not allow girls national membership until four years after that.

The group remains about 81 percent white, but Hispanic members are now estimated at 12 percent, blacks 4 percent. Girls now account for 38 percent of the members.

This is all, in a way, an unlikely shift, given where Future Farmers began.

In 1928, 33 students from 18 states established Future Farmers of America during a national livestock judging contest, said Debra Brookhart, who tends the FFA’s historic archives at Indiana University-Purdue University Indianapolis. It was seen as a way to help farm boys focus on agricultural education and stick with farming. In part, it was meant to counter a sense some rural leaders had that their youths were feeling inferior about being farmers.

“Especially is this true when the farm boy goes to the city and has to compete with his city cousin,” Walter S. Newman, a Virginia agriculture educator, said in the 1920s, as he pressed for such an organization. “In this way, they will develop confidence in their own ability and pride in the fact that they are farm boys.”

And so, over the years, Future Farmers was braided into the culture of generations in rural areas. As Travis Winters, 16, of Joliet, Mont., lassoed a dummy steer on the convention floor, he noted that his parents had been in the organization, and a grandparent before that.

The clean-cut Future Farmers image popped up in books and songs (like “I’m in Love With a Boy of the FFA,” which was performed at the 1951 convention and promised that “those big city slickers can’t compare with a certain lad I know”).

“All my buddies were in FFA,” said Ben Alsum of Randolph, Wis., a community of fewer than 2,000. “If I didn’t join, I would have been a loser.”

But students in the suburbs and cities said their initial sense of FFA was either nonexistent — or a distinctly country, slightly corny, cultural image, from movies like “Napoleon Dynamite” or lyrics like those of “Goodbye Earl” by the Dixie Chicks.

“Some people haven’t gotten over that, but I tell anyone who laughs” that the organization does not even include the word ‘Farming’ in its title any longer, said Sarah Caltabiano, 18, and now in college, who joined FFA in Queens at John Bowne High School in Flushing.

The number of farms has dropped from nearly seven million in the 1930s to about two million, according to federal figures. And farm jobs have dropped from more than 21 percent of the nation’s employment in 1930 to less than 2 percent.

Even as the number of farmers has dipped, those who process agriculture’s raw materials have expanded greatly, said Peter F. Orazem, a professor of economics at Iowa State University. And the echo of that larger shift is felt in places like the FFA. Among the booming fields FFA members now say they aspire to work in are food science, renewable energies, genetic engineering of food and seed, environmental law, nutrition, and even the prevention of agricultural bioterrorism.

The FFA reached its highest membership in 1977 with 509,735 people. Then came the farming crash. By 1992, the group had fewer than 383,000 members.

“You had family farms, family lifestyles, family histories that were collapsing in the middle of the 1980s,” said Mr. Stagg, the FFA spokesman. “The advice from nearly any mom and dad was to steer clear of agriculture.”

In recent years, though, the group has been climbing back, along its changed path. More than 495,000 members were logged this year.

Most students and advisers here said they were relieved to see the FFA’s resurgence, even if it meant dropping the word — and the notion — “Farmer.”

But a few people, mainly from smaller places, admitted quietly that they wondered sometimes whether the influence of the suburbs and the cities might change this tradition too much, whether the farm boy could soon be overlooked by the very group that came along to celebrate him.

“Farming was what Future Farmers was all about in my time, and that was a good thing,” said Tim Ostrem, an FFA member from the 1970s and a corn and bean farmer in South Dakota. “But what are you going to do?”

Mr. Ostrem said that his son, who was in the FFA in high school, is studying to become an agricultural engineer.

    Agricultural Mainstay Gets a New, Urban Face, NYT, 16.11.2006, http://www.nytimes.com/2006/11/16/us/16farmers.html?hp&ex=1163739600&en=3d106cb12469063e&ei=5094&partner=homepage

Treasury Chief Set to Seek Deals

November 11, 2006
The New York Times
By STEVEN R. WEISMAN

WASHINGTON, Nov. 10 — For his first months in office, Treasury Secretary Henry M. Paulson Jr. kept to the shadows while cabinet colleagues were campaigning for a Republican Congress. He made it plain that he disliked politicking, and he irritated some Republicans the Friday before Election Day by not joining the administration chorus talking up a drop in the jobless rate.

But now the new Treasury chief is set to plunge in. Untainted by the harshly partisan rhetoric of the past, he hopes to use his prowess as the former head of Goldman Sachs not just to pursue critical economic deals with China and other American trading partners but — equally important for the weakened administration — to explore deal-making with Democrats in Congress, as well.

An objective is to restore the long-term financial stability of Social Security and Medicare as baby boomers head toward retirement.

While that may prove politically impossible, in the short term Mr. Paulson is also expected to be at the center of efforts to find economic issues on which Congressional Democrats and the Bush administration can agree next year.

Lawmakers in both parties say talks may include middle-class tax breaks and simplification of the tax code. Democrats, for their part, hope to use Mr. Paulson’s comments this summer, in which he deplored income inequality, to press for a minimum wage increase.

The White House says it is counting on the best from Mr. Paulson. But the chances for real cooperation are limited.

Mr. Paulson could easily run up against hard-liners in the administration who are likely to doubt that negotiation with the Democrats is the best course for Republicans already looking ahead to the 2008 elections. And while there is much talk in Washington of finding common ground after the vitriolic campaign, the mood could sour as early as next week when Congress returns for a lame-duck session where Republicans will still be in control.

“I have every reason to believe that Paulson will have some influence with the president,” said Representative Charles B. Rangel of New York, the expected Democratic chairman of the House Ways and Means Committee. “The question is how much.”

The day after the Democratic victory in the midterm elections, President Bush announced that he asked Mr. Paulson “to reach out to folks on the Hill” on Social Security and Medicare, subjects that inevitably will lead to discussions about taxes and spending.

“With the election over, there may be an opportunity for some renaissance of bipartisanship,” said Joshua B. Bolten, the White House chief of staff. “Hank Paulson is an important ingredient in that chemistry.”

In an interview after the voting this week, Mr. Paulson said he was determined to work with Democrats to get something done next year.

“It has always been my view, even before the election, that on the major issues this country is facing, any solution was going to have to take a bipartisan approach,” he said. “We were going to have to build a consensus, no matter who won the election.”

Mr. Paulson is a professed neophyte in political and legislative warfare, but is recognized as a master at striking bargains in the business world. As chief executive of Goldman Sachs he made billions of dollars in investment banking deals in the United States, as well as in China, Germany and other countries.

“I don’t think you’ll find anybody as tenacious as he is,” said John F. W. Rogers, a managing director at Goldman Sachs who served for a time as Mr. Paulson’s chief of staff there. He added that it was instructive to go hiking with Mr. Paulson, an avid outdoorsman whose environmental views are not always in sync with the administration’s.

“It’s like a forced march,” Mr. Rogers said. “If he sees a downed tree, he says, ‘You can go over it, you can go under it, but you can’t go around it.’ There’s an active sense of attacking problems head-on.”

He has already delved into the issues presented by China. Mr. Paulson plans to lead an unusual delegation to China in December that will include at least a half-dozen cabinet colleagues dealing with issues like commerce, trade, energy and transportation. The trip underscores his first-among-equals status in the cabinet when it comes to economic matters.

For all his business experience, though, others who know Mr. Paulson say that he may have trouble navigating the egos and competing interests on Capitol Hill as well as those inside the administration.

Beginning to address government benefit programs could be an early test of Mr. Paulson’s leadership and negotiating skills. The Treasury chief has repeatedly asserted that he wants to fix Social Security and Medicare, which are set to rise sharply in cost in the coming years, and to work with Democrats on solutions.

But Democrats say that if the Treasury chief revives Mr. Bush’s emphasis on private investment accounts, as a partial replacement for Social Security for future retirees, it will be rejected — and seen as an act of bad faith.

“I once told President Bush that if he took private accounts off the table, I would go around the country with him in support of Social Security reforms,” Mr. Rangel recalled. “He said, ‘As long as I’m president, private accounts will be on the table.’ Well, if he says that now, he’s basically saying he doesn’t want a deal on Social Security.”

Mr. Bush said a couple of weeks ago that he would continue to push for private investment accounts. But the president also said that he would retain Defense Secretary Donald H. Rumsfeld, only to reverse himself this week.

Senator Charles E. Grassley, the Iowa Republican who will lose his position as chairman of the Finance Committee next year, said it appeared that Mr. Paulson was already advocating more efforts to listen to Congress. But it was not clear whether he could persuade Vice President Dick Cheney or Karl Rove, the political strategist, to go along.

“I don’t know whether he’s going to win or lose,” Mr. Grassley said, “but I sure applaud what he’s doing.”

In recent weeks, the Treasury secretary has spent a lot of time courting lawmakers like Mr. Rangel, who will be at the center of any discussion of taxes and benefit programs, and Senator Max Baucus of Montana, his counterpart as the expected chairman of the Finance Committee.

“I’m very impressed,” Mr. Baucus said. “Hank Paulson seems to have very few ideological bones in his body.”

But there is also precedent to consider or — possibly for this president — to avoid. Mr. Bush’s father, President George H. W. Bush, negotiated a grand budget and tax deal with Congress in 1990, only to have it shot down by Republicans in the House because it contemplated some tax increases. (Later that year, after a temporary government shutdown, lawmakers finally approved a budget that included limited tax increases.)

That budget deal remains a source of bitterness among conservatives. Some argued that it was an excellent model for cooperation — in that Democrats accepted some spending cuts — and helped usher in economic growth in the 1990s. But it also involved Mr. Bush’s going back on his “read my lips: no new taxes” pledge in the 1988 presidential campaign.

If there are marathon negotiations to resolve tax and budget issues, an administration official said, they would not take place at Andrews Air Force Base, the scene of the 1990 talks.

Taking over as Treasury chief this summer, Mr. Paulson has surrounded himself with an eclectic team. The only top official he has brought from his time at Goldman Sachs is Robert K. Steel, now the under secretary of the Treasury for domestic finance.

His chief of staff and top political aide is James Wilkinson, a veteran of Texas politics who has served as a top aide to Mr. Bush and Secretary of State Condoleezza Rice.

The environment in Congress on budget and tax issues will be tricky, because Democrats are loath to begin the discussion of increasing any taxes, having been accused by Republicans of being a bunch of tax raisers in the last election.

But Democrats all say they embrace enactment of a “pay as you go” regime in which any future tax cuts or spending increases will have to be paid for by spending cuts or tax increases elsewhere. While few insiders expect major changes to Mr. Bush’s big tax cuts until after the 2008 election, the subject of increasing some taxes, or scaling back past tax cuts, may end up on the table next year.

Democrats, however, are determined to increase the minimum wage, now $5.15 an hour, to $7 or more. Mr. Paulson has not taken any stand on whether he would favor such an increase.

Mr. Paulson has declared that his other economic priorities are to combat protectionist sentiment in the United States and to engage in a widespread dialogue with China that could eventually prod the Chinese leadership to overhaul their nation’s economic practices.

Mr. Paulson succeeded in persuading Mr. Bush to let him head an inter-agency committee of cabinet members on dealing with China. He did so by lining up support among the cabinet members and the White House staff first.

The mid-December trip is aimed at persuading the Chinese to liberalize their economy, crack down on piracy, discuss future cooperation on energy and encourage greater flexibility in currency practices.

Mr. Paulson is to be accompanied by Susan C. Schwab, the United States trade representative; Carlos M. Gutierrez, the commerce secretary; and Samuel W. Bodman, the energy secretary. Treasury officials say they would like quick progress on China’s practice of keeping its currency artificially low in relation to the dollar, which aggravates the trade imbalance by making exports to America cheaper and imports to China more expensive. But many experts say the Chinese are resisting out of concern that such a step could damage their banking system, throwing people out of work.

Mr. Paulson will be raising the pressure on China, but political experts say his skills have mostly revealed themselves so far in getting United States lawmakers to withdraw a bill punishing China if it does not change its currency policy.

The Treasury secretary also hopes to help Ms. Schwab get a global trade deal that could be approved by Congress next year. But the consensus among Congressional leaders is that it is probably too late for that.

Beyond a possible breakthrough with China, they say that Mr. Paulson’s greatest hope for success lies in striking smaller bargains on the budget and taxes. Mr. Rangel and Mr. Baucus said it would be better to reach agreements on incremental tax issues first to build up trust.

Mr. Paulson, in the interview, also said he thought that the approach of reaching for “low-hanging fruit” on economic issues might make sense.

“I’m hoping there will be some things that we can get some quick victories on,” Mr. Paulson said. “Then if we can get some things done, it will be a good basis for going on to more difficult issues.”

    Treasury Chief Set to Seek Deals, NYT, 11.11.2006, http://www.nytimes.com/2006/11/11/business/11paulson.html?hp&ex=1163307600&en=15a08433cdfed990&ei=5094&partner=homepage

Microsoft Strikes Deal for Music

November 9, 2006
The New York Times
By JEFF LEEDS

In a rare move, Microsoft said yesterday that it had agreed to pay a percentage of the sales of its new portable media player to the Universal Music Group.

Universal Music, a unit of Vivendi, will receive a royalty on the Zune player in exchange for licensing its recordings for Microsoft’s new digital music service, the companies said.

Universal, which releases recordings from acts like U2 and Jay-Z, said it would pay half of what it receives on the device to its artists. The company is expected to receive more than $1 for each $250 device, according to executives who were briefed on the pact.

The deal represents a big departure from the standard set by Apple Computer, which pays record companies for songs sold through its iTunes service but does not give them a cut of the sales of its hugely successful iPod.

Under the deal, Universal, the world’s largest music corporation, will receive a percentage of both download revenue and digital player sales when the Zune and its related service are introduced next week.

The pact comes after weeks of tense talks and averts a standoff that might have crippled Microsoft’s attempt to compete against the iPod.

The accord also could represent a sea change in the dynamics between technology developers and the media companies that provide the content that plays on their devices. It illustrates how music companies are scrambling to attach themselves to fast-developing online businesses. The move also reflects Universal’s recognition that, for all the runaway success of gadgets like the iPod, consumers are still not buying enough digital music to make up for declining sales of music on compact disk. Universal said it was only fair to receive payment on devices that may be repositories for stolen music.

A recent study estimated that Apple has sold an average of 20 songs per iPod — a fraction of its capacity. The rest of consumers’ music files — 95 percent or more — come from ripped CDs, possibly including discs from their own collections, and illegal file-trading networks, the study said.

As a result, music companies have long coveted the revenue being generated through devices like the iPod. But so far, they have had little recourse.

In 1999, a federal appeals court ruled that one of the earliest digital music players, the Diamond Rio, was not covered by a federal law that required makers of certain audio recording devices to use anticopying technology and pay a royalty to the record labels.

In announcing the deal with Universal, Microsoft said it would now offer similar royalty deals to the rest of the industry. In discussing the rationale for the royalty, Chris Stephenson, general manager for global marketing in Microsoft’s entertainment unit, said the company “needed people to rally behind” the new device and service.

“It’s a higher-level business relationship,” he said.

In addition, the deal may provide leverage for Universal to insist on a cut of future iPod sales when its existing contract with Apple expires next year.

“It’s a major change for the industry,” said David Geffen, the entertainment mogul who more than a decade ago sold the record label that bears his name to Universal. “Each of these devices is used to store unpaid-for material. This way, on top of the material people do pay for, the record companies are getting paid on the devices storing the copied music.”

He added: “It certainly changes the paradigm.”

Under federal legislation passed in the early 1990s, the recording industry receives a royalty on sales of certain audio devices like digital-audio tape machines. But the devices covered by the law do not generate much: the nonprofit organization that oversees those royalties distributed just $3.5 million to labels and artists last year, according to its Web site.

But Universal Music’s chairman, Doug Morris, has been increasingly vocal about securing compensation for the company’s music.

Two months ago, Mr. Morris took a public swipe at user-driven Web sites like MySpace and YouTube, telling a Merrill Lynch investor conference that “these new businesses are copyright infringers and owe us tens of millions of dollars.” (Universal later struck a licensing deal with YouTube.)

“I’m hopeful that technology companies and creative companies will understand how each other’s futures are intertwined,” Mr. Morris said last night. “It can only work if one doesn’t try and take advantage of the other, and so far we’ve come out on the short end.”

Given the industry’s sluggish sales, Mr. Morris has had plenty of reason to try new business models. CD sales continue to decline, and digital music has not offset the drop. In addition, the pace of growth in digital sales has been slowing by some measures.

Microsoft ultimately had plenty of incentive to make a deal with Universal. Microsoft is laying a huge wager on the Zune. If it had not struck a deal, it would have been left in the position of trying to mount a credible challenge to the iPod without Universal, which accounts for a third of new albums sold in the United States. Microsoft also stands to benefit by cultivating a fan-friendly image with the notion that artists — not just corporations — will share in the Zune’s sales.

Steve Gordon, an entertainment lawyer, said that Universal was saying, in effect: “Look, we know new technologies are here to stay. We know CDs are like typewriters, and are being replaced. ”

When the companies initially licensed Apple’s fledgling iTunes service, “they didn’t figure he’d make tens of billions of dollars from the iPod,” said Mr. Gordon, author of the book “The Future of the Music Business.”

“This time they’re saying, ‘Well, we want a piece.’ ”

    Microsoft Strikes Deal for Music, NYT, 9.11.2006, http://www.nytimes.com/2006/11/09/technology/09music.html

In Arizona, 'For Sale' Is a Sign of the Times

November 7, 2006
By VIKAS BAJAJ
The New York Times

Correction Appended

PHOENIX — Until recently, this fast-growing area was a paradise on earth for home builders. Fulton Homes’ developments, for example, were so popular last year that it was able to raise prices on its new homes by $1,000 to $10,000 almost every week.

“People were standing in line for lotteries,” recalled Douglas S. Fulton, president of the company, one of the largest private builders in the Phoenix area. And they were “camping overnight begging to be the next number in the next lot in the next house.”

No more.

Today, it is the company’s sales agents that do most of the waiting. Not only are there few new customers to talk to, but many buyers who put down a deposit are not even bothering to come back for the walk-through.

“All of a sudden, they just don’t show up,” Mr. Fulton said, noting that such cancellations often mean the buyers forfeit as much as 5 percent of the price. The reason? The prospective buyers got cold feet or simply could not sell their old home.

The striking contrast tells the tale of a housing bonanza turned bust. Today, the number of unsold homes in the area has soared to almost 46,000 from just a few thousand in early 2005. And builders are pulling back as fast as they can.

They have little choice. Sales cancellations among big builders, not just here but around the country, are running as high as 40 percent, double the rate a year ago.

Across the nation, new-home sales are down by more than 20 percent from their peak last year. Prices fell almost 10 percent in September from a year ago. And that reported drop does not take into account the extras that builders are throwing in free or at steep discounts to lure buyers, which means that effective prices are even lower.

The reversal in fortune is at its starkest here in the West. For-sale signs in some new subdivisions are so common that Janet L. Yellen, the president of the Federal Reserve Bank of San Francisco, recently described them as “the new ghost towns of the West.”

Tumbleweeds may not be blowing through the dozen new developments along Hunt Highway in and around Queen Creek, but driving down the two-lane road about 30 miles southeast of downtown Phoenix provides a revealing look into the area’s now vanished housing boom.

Road signs welcoming visitors to Pinal County proffer a menu of new subdivisions. Looking for houses by D. R. Horton, the nation’s largest builder? Keep driving, you have not far to go. Make a U-turn for KB Home’s latest four-bedroom Mc-Mansions. For Centex homes in the Johnson Ranch development, hang a right after the next bend.

Don’t worry, there are plenty more down the road.

So it goes in this and other suburbs of Phoenix, where builders turned scraggly desert and what were once cotton fields into neat rows of homes so fast that traffic on many country roads is often backed up a mile or more during rush hour.

Local officials issued 60,000 single-family permits in the metropolitan area in 2005, twice the number issued in 2000. But in the first nine months of this year, permits fell by 27 percent from the same period last year. And builders are suddenly refusing to pay the asking prices for developable land.

On the strength of a local economy that has added 300,000 jobs since 2000 and a population that grew nearly 20 percent from 2000 to 2005, Phoenix became an epicenter of the nation’s recent building boom, along with Las Vegas and Atlanta, as well as parts of California, Texas, Florida and stretches of the Northeast.

Phoenix, with its endless sun, lush golf resorts and myriad retirement communities, also attracted thousands of second-home buyers looking for bargains and investors seeking instant wealth.

The influx of buyers from California, many of them individual speculators, was so strong that builders overestimated demand and constructed a lot more homes than there were people wanting to live in them, said John Burns, a real estate consultant in Irvine, Calif. He noted that investors bought roughly a third of homes sold in the Phoenix area last year, according to mortgage application data.

Until recently, the calculation was fairly simple for individual real estate investors. “You put $5,000 down and you sell it for a $100,000 profit,” sometimes almost before the paint dried, Mr. Burns said. “And then you roll into 15 more houses.”

The speculators are gone. But builders predict that the current downturn will last no more than six months to a year, arguing that prices and sales will start rising again after the homes on the market are absorbed by the normal influx of migrants to the area.

Though job growth here is not as strong as it once was, local developers like Mr. Fulton contend that most of the positive fundamentals of the region’s economy remain intact.

Google’s plan to hire several hundred employees here is frequently cited as a sign of vitality.

“We will quickly grow out of it,” said Gregory J. Vogel, a land acquisition consultant in Scottsdale who advises builders and developers, noting that before the boom it was considered normal to have about 30,000 homes on the market at any given moment.

But other experts are not as sanguine. They worry that the supply of homes overshot demand by far more than is commonly understood.

“By the time all the dust settles, will this be an 18-month correction or a 36-month correction?” said Thomas Bruin, chief executive of Hearthstone, a firm based in San Rafael, Calif., that invests pension fund assets in land and residential real estate. “Nobody really knows.”

Economists note that the construction sector, itself dependent on the housing boom, accounted for about a quarter of all new jobs created in the last six years. Lower-paying retail jobs added about 15 percent.

Wages rose, too, but not nearly as fast as home prices. In Maricopa County, which includes Phoenix and Scottsdale, median home values — half the homes are worth more, half are worth less — increased 64 percent, to $212,700, from 2001 to 2005, while the typical household’s income rose just 5 percent, to $48,711, according to the Census Bureau.

New homes cost more: the median price was $270,000 at the end of August, up from $250,000 a year ago, according to Hanley Wood, a research firm.

Jay Q. Butler, director of the Real Estate Center at Arizona State University, agrees that Phoenix is generally healthy but he wonders which industry will generate enough new high-paying jobs to soak up the more expensive homes. “What’s the next semiconductor industry?” he asks.

The housing correction has, thus far, had only a modest impact on the broader economy. While home builders have cut back, contractors remain busy erecting shopping malls, office buildings, schools and civic projects. Builders and contractors say the costs of concrete, drywall, copper and other building materials remain high, though the supply shortages seen last year have dissipated.

“We have been at such a breakneck pace here,” said Mark Minter, executive director of the Arizona Builders’ Alliance, that a slowdown “might be good.”

Perhaps an early indication of things to come can be found in what has happened with land sales. In September, the Arizona State Land Department postponed the auction of two parcels of prime residential land north of downtown Phoenix after builders said the starting levels were too high.

One of those parcels, 325 acres in the Desert Ridge development, had been set at $461,000 an acre, far above the $243,000 an acre Toll Brothers, the luxury-home builder, had been willing to pay in April for an 81-acre parcel.

Land developers and builders say they remain interested in Phoenix but not at current, lofty prices. Among them is Newland Communities, a developer based in San Diego that is financed in part by Calpers, the large California pension fund.

Newland is developing a sprawling project southwest of Phoenix called Estrella Mountain Ranch, which has 3,300 homes today but is planned to eventually have as many as 60,000. A 30-minute drive from downtown, the development abuts a state park and features winding parkways lined with date palm trees, a Jack Nicklaus-designed golf course, two artificial lakes and numerous other amenities.

Several builders recently delayed construction on 650 single-family homes there, but on an adjacent parcel workers were starting to prepare the ground for what will in five years be 1,700 homes for retirees.

Daniel C. Van Epp, Newland’s chief operating officer, said the company was negotiating to acquire more land in the Phoenix area, some of it from builders starting to pare their land holdings. In a few years, Newland, which has a $1 billion land acquisition fund, expects to turn around and sell that same land back to builders in the form of finished lots.

“As sure as the grass is green, it will all come back,” Mr. Van Epp said about the housing market.

Thomas V. Caldwell is making essentially the same bet — on a much smaller scale.

Mr. Caldwell, a 32-year-old entrepreneur, started a property management firm with a childhood friend six years ago but quickly realized he could make far more by buying homes as well as managing them for others. He and his partner, D. Brett Brewer, now own about 30 homes each and manage a total of 2,200 properties for clients, many in California.

Their firm, Brewer Caldwell, employs about 100 people and puts on seminars in California and Arizona to teach people how to buy and manage investment properties. On a recent afternoon, their two-story office building was decorated as a haunted house for a Halloween party the company was throwing that night for the children of its employees. As they talked to visitors, a fog machine set off a piercing fire alarm.

Asked what he thought of the contention that investors were to blame for the glut of homes on the market, Mr. Caldwell acknowledges “there was some fluff.”

But smart investors, he argued, were absorbing the surplus by buying up homes that builders were now unloading at bargain prices — some for as little as $60 to $80 a square foot, which local experts say is barely enough to cover construction costs let alone land expenses.

At such prices and with interest rates still low, an investor can cover his monthly costs, maybe even earn a modest income, by renting homes for $900 to $1,400 a month while the market recovers, Mr. Caldwell noted.

“It is not a get-rich quick scheme,” he acknowledged. “But investments in real estate,” he added, “do go up over time.”

Ron Nixon contributed reporting from Washington.

Correction: Nov. 8, 2006

A front-page article yesterday about a slowdown in the housing market in the Phoenix area misstated the location of Hunt Highway, where a number of new housing developments are located. It is around Queen Creek, Ariz. — not Tempe

    In Arizona, 'For Sale' Is a Sign of the Times, NYT, 8.11.2006, http://www.nytimes.com/2006/11/07/realestate/07land.html?em&ex=1163134800&en=31b63ce81ff4289b&ei=5087%0A

Jobless Rate Hits 5-Year Low

November 4, 2006
The New York Times
By JEREMY W. PETERS

The labor market for American workers is continuing to improve, the latest government statistics showed yesterday, with job growth advancing in recent months and the unemployment rate falling last month to the lowest level since May 2001.

In a report that eased concerns that economic growth might be faltering, the Labor Department reported yesterday that the jobless rate, seasonally adjusted, dropped in October to 4.4 percent, from 4.6 percent in September.

The government, in its initial estimate, said that employers added a modest 92,000 jobs last month — but it revised the two previous months up so strongly that they outweighed any evidence of weakness. And economists suggested that the new numbers for October may not be any more reliable than the earlier initial estimates and could be revised higher once the Labor Department collects more information.

“What this report says is the job market is still going to be a source of strength for the economy,” said Stuart Hoffman, chief economist with PNC Financial in Pittsburgh. “Concerns about the economy snowballing down the hill and picking up momentum as it heads for a crash landing are just not consistent with this kind of job data.”

As employers added more people to their payrolls, paychecks are starting to improve as well. The average hourly wage gain in October surpassed inflation by the largest amount since early 2002.

Adding to the picture of a strengthening job outlook, the amount of time unemployed Americans spend out of work has shrunk for the third consecutive month.

As a result, economists predicted that the Federal Reserve is likely to keep interest rates steady, with some now arguing that its next move may be up, rather than down.

Coming just four days before the midterm elections, the new job numbers added fuel to the political debate.

The Bush administration quickly trumpeted the low unemployment rate as evidence that its tax cuts have stimulated growth and claimed that a Democratic takeover in Congress could harm the economy.

“Now is the time to make these tax cuts permanent,” said Rob Portman, the White House budget director. “Otherwise, we put all this strong economic growth we’re talking about at risk.”

Democrats pointed to the rather tepid job growth figure from last month as a sign that the economy remains vulnerable. And they said that the tax cuts approved early in the Bush administration have little to do with today’s economic performance.

“Job growth in October was too modest to allay concerns about whether job opportunities will expand in the coming months,” Senator Jack Reed, Democrat of Rhode Island, said in a statement. “Staying the course on the president’s policies has failed to deliver greater prosperity and economic security for most families.”

Labor market conditions are uneven, with the auto industry and housing cutting back, particularly in the Midwestern industrial belt, while government and most other business sectors show strength elsewhere in the country.

In general, though, workers are in their best shape in years. Until recently, wage increases had been trailing inflation. With overall price increases slowing as energy prices fall — general prices are running at roughly 2 percent — the 3.9 percent gain in hourly wages over the last year is beginning to go further.

Hourly wages rose in October by 15 cents, to $16.77, the government said.

With greater tightness in the labor market — beyond the low jobless rate, which only measures those actively in the labor market, the share of the working-age population that is employed also reached its highest point in five years. And economists said that many workers are beginning to enjoy more leverage with their employers.

For their part, employers have been hiring at a more robust pace than first appeared. The government nearly tripled its estimate of job growth in September, to 148,000. It also revised August’s numbers, to 230,000 from 188,000.

But there were some signs of weakness, particularly in private- sector job growth. Government jobs last month accounted for nearly two-thirds of the reported 92,000 added jobs, a sign that some economists say is worrisome.

“We actually had a pretty hefty boost in government jobs,” said Jared Bernstein, an economist with the Economic Policy Institute, a research organization in Washington. “If you want the job machine to be humming, you’ve got to do a lot better in the private sector.”

But Mr. Bernstein agreed that “the job market is relatively strong.”

“Unemployment is low,” he added, “and we’re finally generating wage gains that are likely to beat inflation.”

Compared with the employment boom of the late 1990s, though, job growth remains relatively modest. Moreover, the percentage of the working-age population that is employed, at 63.3 percent, is still below the peak of 64.7 percent, set in April 2000.

The job outlook in housing and manufacturing has dimmed. Home builders are cutting back, eliminating an estimated 26,000 jobs last month. Manufacturers shed 39,000 jobs, led by the shrinking domestic automobile companies.

The government jobs data, which is laid out in two separate surveys each month, provided a typically mixed picture.

The household survey showed that employment growth was strong, while the payroll report, which has been repeatedly revised lately, suggested that it was more modest. They often send opposite signals in a given month, since one is based on hiring records while the other is based on a survey. Factors like self-employment, informal employment and people joining or dropping out of the labor pool can account for some of the differences.

In October, the preliminary estimate of 92,000 new jobs from the business survey compared with an estimate of 437,000 new workers in the household survey.

“The truth is probably somewhere between the two,” said Lynn Reaser, chief United States economist at Bank of America. “But even if that is the case, it would suggest that the labor market is very strong.”

The combination of a taut job market and rising wages will probably keep the Fed from cutting interest rates anytime soon, economists said. If anything, they said, it might raise them next year if the economy picks up steam.

“The Fed can’t possibly think of reducing rates with an unemployment rate that continues to sink,” said Richard Yamarone, director of economic research at Argus Research. “And the Fed can’t truly justify lowering rates in this inflationary environment.”

Jobless Rate Fell in Canada

OTTAWA, Nov. 3 ( Reuters) — A rush of hiring in the western oil fields pushed Canada’s unemployment rate down to 6.2 percent in October, close to a 30-year low.

Economic growth in the oil fields of Alberta helped create a larger-than-expected 50,500 new jobs last month, Statistics Canada said on Friday.

October was the second consecutive month of job gains after a three-month downturn.

“A stunningly strong report,” the chief strategist at TD Securities, Marc Lévesque, said. “Canada’s job market still looks like it is plowing along at a pretty solid clip.”

Some 15,000 factory jobs were lost nationwide, mostly in central Canada’s manufacturing hub. Those losses were offset by more jobs in construction, education, business, building, public administration and other support services, the agency reported.

Jobless Rate Hits 5-Year Low, NYT, 4.11.2006, http://www.nytimes.com/2006/11/04/business/04job.html