History > 2011 > USA > Economy (VI)

Matthew Bors

Matt Bors is a syndicated editorial cartoonist for United Media,

as well as a graphic novelist, illustrator, witticist and blogger.

Bors scribbles from Portland, OR.

Cagle

28 November 2011

A World in Denial of What It Knows

December 31, 2011
The New York Times
By GEOFFREY WHEATCROFT

Bath, England

COULD there be a single phrase that explains the woes of our time, this dismal age of political miscalculations and deceptions, of reckless and disastrous wars, of financial boom and bust and downright criminality? Maybe there is, and we owe it to Fintan O’Toole. That trenchant Irish commentator is a biographer and theater critic, and a critic also of his country’s crimes and follies, as in his gripping if horrifying book, “Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger.”

He reminds us of the famous if gnomic saying by Donald H. Rumsfeld, then the United States secretary of defense, that “There are known knowns... there are known unknowns ... there are also unknown unknowns.” But the Irish problem, says Mr. O’Toole, was none of the above. It was “unknown knowns.”

What he means is something different from denial, or evasion, irrational exuberance or excess optimism. Unknown knowns were things that were not at all inevitable, and were easily knowable, or indeed known, but which people chose to “unknow.”

Unknown knowns were everywhere, from Wall Street to Brussels, from the Pentagon to Penn State. Ireland merely happened to offer an extreme case, where “everyone knew.” They just chose to forget that they knew — about the way that Irish banks ran wild, how easy credit fueled a monstrous explosion of property prices and speculative house-building. Bertie Ahern, the Irish prime minister at the time of the rapid economic growth, merely boasted, “The boom is getting boomier,” preferring to unknow the truth that booms always go bust.

Beginning in 2008, the skies were lighted up by financial conflagrations, from Lehman Brothers to the Royal Bank of Scotland. These were dramatic enough — but were they unforeseeable or unknowable? What kind of willful obtusity ever suggested that subprime mortgages were a good idea? An intelligent child would have known that there is no good time to lend money to people who obviously can never repay it.

Or recall how we were taken into the Iraq war. That was the origin of Mr. Rumsfeld’s curious words 10 years ago. When he murmured about “things we do not know we don’t know,” he was touching on the unconventional weapons that Saddam Hussein might — or might not — have held.

In a sense, Mr. Rumsfeld was more right than he realized. Those of us who opposed the war may be asked to this day whether we knew what weaponry Iraq possessed, to which the answer is that of course we didn’t. Nor, as it transpired, did President George W. Bush, Vice President Dick Cheney, Mr. Rumsfeld or Prime Minister Tony Blair of Britain.

But that was the wrong question. It should have been not “what weaponry does Saddam Hussein possess?” but “Is Saddam Hussein’s weaponry, whatever it may be, the real reason for the war, or is it a pretext confected after a decision for war had already been taken?” The answer to that was obvious and could have been known to all, but too many people chose to unknow it.

Then there was another unknown known: the likely consequences of an invasion. Shortly before it began, Mr. Blair met President Jacques Chirac of France. As well as reiterating his opposition to the coming war, Mr. Chirac offered the prime minister specific warnings. Mr. Blair and his friends in Washington seemed to think that they would be welcomed with open arms in Iraq, Mr. Chirac said, but that they shouldn’t count on it. It was foolish to think of creating a modern democracy in an artificial country with a divided society like Iraq. And Mr. Chirac asked whether Mr. Blair realized that, by invading Iraq, they might yet precipitate a civil war.

This has been described in a BBC documentary by someone present, Sir Stephen Wall, a Foreign Office man then attached to Downing Street. As the British team was leaving, Mr. Blair turned and said, “Poor old Jacques, he just doesn’t get it,” to which Sir Stephen now adds dryly that he turned out to get it rather better than “we” did.

At that time, Mr. Chirac was reviled in America, and his career has just ended in disgrace, with a court conviction for embezzlement. But who was right about Iraq? All the calamities that followed the invasion were not only foreseeable, they were foreseen. And yet for Mr. Blair, as well as Washington, they were unknown knowns.

One more such, bitter as it is to say so when many people have been ruined, was the Bernard L. Madoff fraud. For years, his investors gratefully and unquestioningly accepted returns that were strictly incredible. Loud warning voices sounded. Harry Markopolos, a former investment officer, exhaustively back-analyzed Mr. Madoff’s supposed figures by computer. He spent nearly nine years repeatedly trying to explain to the Securities and Exchange Commission that these figures were not merely incredible but mathematically impossible. And still the S.E.C. chose to unknow it. Leos Janacek wrote a harrowing opera called “The Makropulos Affair”; Peter Gelb at the Met should commission someone to write “The Markopolos Affair” as a fable for our times.

In a very different kind of scandal, not everyone at Penn State, and certainly not every fan, knew what had happened in the showers. But quite enough was known by people who could have acted. They chose instead to unknow. And so to another classic unknown known, the euro. The recent summit in Brussels turned into a silly melodrama, with a British prime minister, David Cameron this time, once more playing the pantomime villain. But Mr. Cameron was right, if for the wrong reasons, to oppose the European Union’s latest frantic (and doomed) plan to prop up the euro.

If truth be told (but it so rarely is!), the euro cannot work and could never have worked. That is, a single currency embracing countries as diverse in social culture, productivity, work practices and taxation as Germany and Greece, or the Netherlands and Portugal, is economically impossible without much closer fiscal and financial union — which is politically impossible. Anyone could have known that at the time the euro was introduced, but for the rulers of the European Union it was their very own unknown known.

“The Cloud of Unknowing” is a medieval classic of mystical writing, and unknowing still hangs over us. It will be a happier new year if we can dispel some of that cloud, try to unknow less, and know a little more.

Geoffrey Wheatcroft is the author of “The Controversy of Zion,”

“The Strange Death of Tory England” and “Yo, Blair!”

    A World in Denial of What It Knows, NYT, 31.12.2011,
    http://www.nytimes.com/2012/01/01/opinion/sunday/unknown-knowns-avoiding-the-truth.html

As Good as It Gets?

December 31, 2011
The New York Times

The economy was weak in 2011, but it ended better than it started, with growth up from its lows and unemployment down from its highs. The question now is whether that progress will continue into 2012. We wish we could say yes, but unless policy makers are incredibly lucky or remarkably adept — certainly not the description that comes to mind when thinking of, say, Congress — the answer is no.

When data is released later this month, economists expect growth of around 3 percent for the last quarter of 2011, compared with 1.2 percent on average in the first three quarters. But there is little in the latest growth spurt to signal a self-reinforcing recovery going forward.

Holiday shoppers had more cash to spend because of the decline in oil prices, not a rise in wages. A drop in the jobless rate was driven by a mix of new hiring and a large number of potential workers who gave up futile job searches. Signs of life in the housing market, including more sales, were dampened by falling prices as foreclosures continued.

The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures. As things stand now, however, Washington will provide less help, not more, in 2012. Republican lawmakers refuse to acknowledge that government cutbacks at a time of economic weakness will only make the economy weaker. And too many Democrats, who should know better, have for too long been reluctant to challenge them.

The drag from premature cuts is significant. Waning stimulus spending subtracted an estimated half a percentage point from growth in 2011; this year, cutbacks will very likely cost the economy a full percentage point of growth. That means the best-case economic projection is for a new year of anemic expansion and high joblessness — muddling along with growth of about 2 percent, which is too weak to push unemployment much below its current 8.6 percent.

And even that dismaying prospect assumes that Congress will extend the payroll tax cut and federal unemployment benefits beyond their expiration in late February. It also assumes that the inevitable recession in Europe and the expected slowdown in China will be shallow and pose no real threat to the United States recovery. If those assumptions are wrong, growth in the United States economy, if any, will be exceedingly meager and joblessness will rise.

It does not have to be this way. After nearly a year of trying to accommodate Republicans in their calls for excessive budget cuts, President Obama finally pushed a strong jobs bill including spending for public works, aid to state and local governments and an infrastructure bank, as well as renewal of a payroll tax break and jobless aid. Congressional Republicans blocked the bill, and with it, the chance to create some 1.9 million jobs. But late last month, the Republican leadership in the Senate and House retreated — even if extremists in the party did not — and managed to temporarily extend the payroll tax cut and jobless benefits.

The extension is only for two months, setting up another fight. But the good news is that in the showdown, Mr. Obama and the Democratic leadership did not back down. And at least some Republicans seemed to realize that their relentless calls for cutting may have a political cost.

The economy, and struggling Americans, need a lot more help. Mr. Obama needs to translate his newfound focus on the middle class into an agenda for broad prosperity, making the case that what the nation needs now is a large short-run effort to create jobs coupled with a plan to cut the deficit as the economy recovers.

    As Good as It Gets?, NYT, 31.12.2011,
    http://www.nytimes.com/2012/01/01/opinion/sunday/as-good-as-it-gets-for-the-economy.html

Oil Prices Predicted to Stay Above $100 a Barrel

Through Next Year

December 28, 2011
The New York Times
By DIANE CARDWELL and RICK GLADSTONE

The United States economy managed to cope this year despite triple-digit prices for barrels of oil. The lessons may come in handy, economists say, because those prices will probably be sticking around.

With Iran threatening to cut off about a fifth of the world’s oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from $100 a barrel to $120 a barrel in 2012.

For consumers, who have been driving less and buying more fuel-efficient cars, weakened demand has helped lower gasoline prices 70 cents since May, to a national average of $3.24 for a gallon of regular unleaded, according to the AAA Fuel Gauge Report.

Now, though, the focus has turned to Iran. On Wednesday, Iran and the United States sharpened their tone over Iran’s vow to close the Strait of Hormuz if Western powers tried to stifle Iran’s petroleum exports.

The catalyst for the Iranian threats are new efforts by the United States and the European Union to pressure Iran into ending its nuclear program, which Iran has refused to do despite four rounds of sanctions imposed by the United Nations Security Council.

Those sanctions have not focused on Iran’s oil exports. But in recent weeks, the European Union has talked openly of imposing a boycott on Iranian oil, and President Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all buyers of Iran’s oil, with the aim of severely impeding Iran’s ability to sell it.

Rear Adm. Habibollah Sayyari, Iran’s naval commander, said in remarks carried by an official Iranian new site that “closing the Strait of Hormuz is very easy for Iranian naval forces.” Admiral Sayyari, whose forces were in the midst of ambitious war game exercises in waters near the Strait of Hormuz, was the second top Iranian official to make such a threat in 24 hours.

A spokeswoman for the United States Navy’s Fifth Fleet, which is based in Bahrain and patrols the strait, responded: “Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated.”

The Strait of Hormuz, with two mile-wide channels for commercial shipping, connects the Gulf of Oman to the Persian Gulf, the principal loading point for oil shipped from Saudi Arabia, the world’s largest oil exporter.

A Saudi official told The Associated Press that the other oil-producing gulf nations are prepared to fill any shortfall in Iranian oil supply. But just as unrest in Libya shook the oil market in 2011, concern over Iran could influence prices in 2012.

Markets seemed to shrug off Iran’s threats. The price of the benchmark crude oil contract on the New York Mercantile Exchange fell for the first time in more than week, settling at $99.36 on Wednesday, down $1.98.

But several investment banks predict that the price of the benchmark crude on the New York exchange will average about $110 next year while Brent crude oil, which analysts say affects what most of the world pays for oil, will average about $115 a barrel.

“The possibility that there might be a disruption in oil supply at some time in 2012 as Iran retaliates has, I think, permanently embedded a $10 to $20 premium in the price of oil,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “The danger is if oil starts to move toward $130 a barrel, or even higher, depending on whether that confrontation will escalate. Then you’re really talking about the prospect of the U.S. tipping over into recession in addition to Europe, and that the whole global economy will be facing an economic downturn.”

Analysts say that members of the Organization of the Petroleum Exporting Countries, including Iran and Saudi Arabia, have an incentive to keep prices near $100 a barrel. Many governments in the Middle East and North Africa spent heavily on social assistance programs in response to the unrest of the Arab Spring and are depending on higher prices to help meet their budgets.

“It would be nice if prices did come down quite substantially,” said Francisco Blanch, head of commodity strategy at Bank of America Merrill Lynch, who added that the chances were slim. “The idea that oil is going to stay high for a while is pretty well entrenched because this is a premium fuel in the world economy, there isn’t a lot of oil out there and whatever oil is available is pretty much off bounds.”

Economists say they expect prices to remain high despite the relative weaknesses of the American and European economies because global demand for oil — especially diesel — is escalating and outstripping supply.

“There’s a consensus view that high prices will persist through 2012 because of the premise that the rest of the world, the emerging economies, are using a lot more fuel,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.

At the same time, there is uncertainty in the forecasts, with some analysts predicting that prices could end up much lower as production increases in Libya and North America and could even drop sharply if the European economy falls apart. The United States Energy Information Administration, for instance, estimated this month that the price of the benchmark West Texas Intermediate, often called W.T.I., could fall as low as $49 a barrel or rise as high as $192 by the end of next year.

Sustained triple-digit oil prices could threaten the United States recovery, costing jobs, raising the prices of food and other consumer goods and pushing a gallon of gasoline to $5 or more. By one estimate, a $10 increase in the price of a barrel of oil shaves 0.2 to 0.3 percentage points off the economy’s annual growth rate.

Early this year, when W.T.I. crude oil finally reached $100 a barrel — the highest it had been in more than two years — the economy proved more resilient than in 2008, when crude crossed $100 a barrel and the country was mired in recession.

This spring, oil prices peaked at about $114 a barrel and then fell, stabilizing well below many predictions — in part because the Arab Spring did not stop oil from flowing out of the Middle East to the extent that had been anticipated. Gas prices have been declining since May and gross domestic product, while still sluggish, grew throughout the year, according to the most recent Commerce Department estimates.

Before 2008, gas prices had mainly stayed below $3 a gallon, and Americans were less focused on fuel economy, buying larger cars including S.U.V.’s. But after the price shock, when oil soared to $145 a barrel and average gas prices topped $4, many of those habits changed. Since then, gas prices have remained volatile, rising sharply toward the end of 2010 and the early part of this year before beginning to decline.

New figures from the Federal Highway Administration show that Americans cut back on their driving again in October. They logged 2.3 percent less, or 254 billion miles, compared with October a year ago, the eighth consecutive month there has been a decline. A broader measure — the 12-month total of miles driven — shows that motorists fell back to the low of 2.963 trillion miles driven reached at the end of the recession in 2009.

“It’s not just, I don’t have enough money, I don’t want to go out and buy gas,” said John Gamel, a macroeconomic analyst at MasterCard Advisors SpendingPulse. “It’s, I have found ways not to have to buy gas and so I’m going to keep doing that.”

He added that Americans had been doing less discretionary driving because they still perceived gas prices as being high. “Consumers have this belief that prices will either go up or they will remain at elevated levels.”

 

Seth Feaster and Elisabeth Bumiller contributed reporting.

    Oil Prices Predicted to Stay Above $100 a Barrel Through Next Year, NYT, 28.12.2011,
    http://www.nytimes.com/2011/12/29/business/oil-prices-predicted-to-remain-above-100-a-barrel-next-year.html

Economy Contributes

to Slowest Population Growth Rate Since ’40s

December 21, 2011
The New York Times
By SABRINA TAVERNISE

WASHINGTON — The population of the United States grew this year at its slowest rate since the 1940s, the Census Bureau reported on Wednesday, as the gloomy economy continued to depress births and immigration fell to its lowest level since 1991.

The first measure of the American population in the new decade offered fresh evidence that the economic trouble that has plagued the country for the past several years continues to make its effects felt.

The population grew by 2.8 million people from April 2010 to July 2011, according to the bureau’s new estimates. The annual increase, about 0.7 percent when calculated for the year that ended in July 2011, was the smallest since 1945, when the population fell by 0.3 percent in the last year of World War II.

“The nation’s overall growth rate is now at its lowest point since before the baby boom,” the Census Bureau director, Robert M. Groves, said in a statement.

The sluggish pace puts the country “in a place we haven’t been in a very long time,” said William H. Frey, senior demographer at the Brookings Institution. “We don’t have that vibrancy that fuels the economy and people’s sense of mobility,” he said. “People are a bit aimless right now.”

Underlying the modest growth was an immigration level that was the lowest in 20 years. The net increase of immigrants to the United States for the year that ended in July was an estimated 703,000, the smallest since 1991, Mr. Frey said, when the immigrant wave that dates to the 1970s began to pick up pace. It peaked in 2001, when the net increase of immigrants was 1.2 million, and was still above 1 million in 2006. But it slowed substantially when the housing market collapsed, and the jobs associated with its boom that were popular among immigrants disappeared.

“Net immigration from Mexico is close to zero, and we haven’t seen that in at least 40 years,” said Jeffrey S. Passel, senior demographer at the Pew Hispanic Center. “We are in a very different kind of immigration situation.”

Mr. Passel said that the bulk of the reduction in recent years had been among illegal immigrants, adding that apprehensions at the border are just 20 percent of what they were a decade ago. (The Census Bureau does not ask foreign-born residents their status, but Mr. Passel believes the count includes most people here illegally. )

A lagging birth rate also contributed. Births in the United States declined precipitously during the recession and its aftermath, down by 7.3 percent from 2007 to 2010, according to Kenneth M. Johnson, the senior demographer at the Carsey Institute at the University of New Hampshire. There were slightly over four million births in the year that ended in July, the lowest since 1999.

Economic trauma tends to depress births. In the Great Depression, the birth rate fell by a third, Mr. Johnson said. It is unclear whether the current dip means that births are being delayed or that they are foregone, as they were in the Depression, he said.

In a particularly striking measure of economic distress, birth rates among Hispanics, who are concentrated in states hardest hit by the economic downturn, like Florida and Arizona, declined by 17 percent from 2007 to 2010, Mr. Johnson said. That is compared with a 3.8 percent decline for whites and a 6.7 percent decline for blacks. Rates dropped most sharply among young Hispanics, down by 23 percent for women ages 20 to 24 between 2007 and 2010.

There were bright spots. Florida, which had watched as the decades of robust migration into the state reversed into net declines during the economic downturn, was starting to recover. After net losses of migrants in 2008 and 2009, the state had a net gain of 108,000 newcomers in the year ending in July, Mr. Frey said, the highest since 2006 and a signal that the worst may be behind it.

Neither Arizona nor Nevada, other fast-growing states during the last decade, was so lucky. Nevada’s rate of population gain in the year ending in July was about a quarter what it was in the middle of the decade, and Arizona’s was about half, Mr. Johnson said.

    Economy Contributes to Slowest Population Growth Rate Since ’40s, NYT, 21.12.2011,
    http://www.nytimes.com/2011/12/22/us/economy-contributes-to-slowest-population-growth-rate-since-1940s.html

A Fight to Make Banks More Prudent

December 20, 2011
The New York Times
By JACK EWING

FRANKFURT — For Philipp M. Hildebrand, it was a reminder of what happens when you get between bankers and their bonuses.

Mr. Hildebrand, the president of the Swiss central bank, was called “arrogant” and “egotistical” by bankers quoted anonymously in the pages of Swiss newspapers. His supposed sin: Wanting banks to hold extra capital. The fact that Mr. Hildebrand was himself a former hedge fund manager in New York seemed only to heighten the sense that he had betrayed his profession.

“He’ll never find another job in Switzerland,” the Swiss newspaper Der Sonntag quoted an unnamed high-ranking banker as threatening Mr. Hildebrand in 2010.

The unusually bitter attacks on a central bank chief were a measure of what was at stake. Mr. Hildebrand, 48, had a high-visibility role in a struggle between bankers trying to preserve their most lucrative business practices and regulators trying to defuse a system that, many believe, nearly blew up the world economy.

“Many of us on the public side had to deal with industry push-back, at times amplified by public coverage,” Mr. Hildebrand said. “One lesson that emerges is that the capacity of the financial industry to lobby for its short-term interests is far reaching.”

The debate centers on an international accord that most people outside the industry have never heard of, the so-called Basel III rules. The core issue and main point of dispute is capital — the money that banks accumulate through issuing stock and holding onto profits, money that they do not have to repay. The regulators want banks to finance their operations with more capital and less borrowed money. Advocates argue that the bigger the capital buffer, the greater the stability of the financial system. But financing operations from capital, rather than borrowing money, is less profitable, and that means lower bonuses.

“In the financial crisis the banks got the upside and the public got the downside,” said Stephen G. Cecchetti, head of the monetary and economic department of the Bank for International Settlements, in Basel, Switzerland. The bank houses the Basel Committee on Banking Supervision, the secretive panel that establishes global banking standards. “We want to make sure that doesn’t happen again.”

After some fierce battles, proponents of the tighter rules have achieved some success in pushing through measures that will force banks to reduce risk. The Federal Reserve on Tuesday published draft regulations that draw heavily on the agreements reached in Basel. But there is a long phase-in period that the banking industry could use to try to water down the rules. And many economists fear that the new regulatory regime still allows banks to take outsize risks.

Flaws in earlier Basel rules, known as Basel II, allowed the financial crisis to gather in the first place, many economists say, enabling the illusion that banks were comfortably cushioned against risk. In fact, the banks had badly underestimated the malignant potential of their holdings. Faulty regulation also worsened the European sovereign debt crisis, assigning government bonds virtually zero risk. That encouraged banks to extend billions in credit to countries like Greece and Italy, setting up a dangerous correlation between the solvency of countries and the health of banks. The thinking, in effect, was “Why imprison capital to insure against losses that were unlikely ever to happen?”

The technical term was “risk weighted assets.” It was as if a homeowner only had to make a down payment on the part of a house that might catch fire. Other parts of the property, like the swimming pool and the lawn, would not count.

The flaws in this model became obvious in the days after investment bank Lehman Brothers collapsed in 2008. Banks that appeared to be well capitalized discovered that they had hugely underestimated risk. Derivatives tied to the United States real estate market, with top credit ratings, suddenly became impossible to sell and effectively worthless.

One of the most vivid examples was right around the corner from Mr. Hildebrand’s office in Zurich, the Swiss bank UBS. In the years before the crisis, UBS was, on paper, one of the best capitalized banks in the world. But in the course of 2008 UBS rapidly depleted its cushion as it absorbed losses from investments in the American real estate market.

On paper the risk-weighted assets of UBS — the total of all the money it had at risk — were 374 billion Swiss francs (about $400 billion in today’s dollars) at the end of 2007. But that was an adjusted figure based on the bank’s overly optimistic estimate of the amount at risk.

Gross assets, counting everything without adjusting for perceived risk, were much larger: 3.3 trillion Swiss francs. Measured against these total assets, UBS capital was well below 2 percent.

In October 2008, the Swiss National Bank, where Mr. Hildebrand was then vice president, was forced to commit $60 billion to rescue UBS.

In response, Mr. Hildebrand as well as top officials in the United States and Britain began trying to revive an old-fashioned idea, the so-called leverage ratio, as an extra layer of insurance in addition to tougher capital requirements for risk-weighted assets.

The aim was to set a minimum level of capital to be held against gross assets, regardless of estimated risk, to restrain the banks’ strong incentive to make optimistic assumptions and supercharge leverage.

Banks considered the leverage ratio a blunt tool, an insult to all the investments they had made in the last decade to create sophisticated risk management systems, as well as a threat to potential profits and payouts to top bankers.

A few months before Lehman Brothers went bankrupt, when UBS was already in trouble and Swiss regulators proposed a leverage ratio as part of a package of new capital rules, “the reaction was that we were completely crazy,” said Daniel Zuberbühler, vice chairman of the board of the Swiss financial regulator, known as Finma.

After Lehman, the mood swung sharply. “My impression was that at the highest political level there was pretty close to a global consensus that things needed to change,” said Stefan Ingves, governor of Sweden’s central bank, who has been chairman of the Basel Committee since June.

But there was powerful resistance from organizations like the Washington-based Institute of International Finance, whose membership includes most of the world’s largest banks.

Industry groups lobbied their national representatives on the Basel Committee furiously, to some effect. In countries like Germany and France, bankers helped convince top officials that differences in accounting standards effectively required European banks to hold more capital than their counterparts in the United States, putting them at a disadvantage.

The debate peaked in mid-2010, as the European sovereign debt crisis was emerging as a threat to the survival of the euro. In July of that year, the heads of central banks and top regulatory officials, who oversee the work of the Basel Committee, met to try to sign off on an agreement that would be approved by the Group of 20 leaders.

It was, Mr. Hildebrand and other participants agree, a difficult meeting. More than 50 representatives of 27 countries sat around a large elliptical table in a conference room at the Bank for International Settlements in Basel. Jean-Claude Trichet, then president of the European Central Bank, served as chairman.

According to several participants, the debate frequently became emotional, and it looked as if the meeting could break up without reaching an agreement, leaving the global financial system as vulnerable as before.

Mr. Trichet reminded the participants that it was up to them to prevent another financial crisis. The Western democracies, he warned darkly, could not survive another.

And he used a simple pressure tactic. The meeting began in the morning, with only beverages like coffee and water for sustenance. At lunchtime, employees set up a buffet lunch, but Mr. Trichet refused to adjourn.

The meeting dragged on until late afternoon. Finally, the exhausted and hungry delegates agreed on a compromise. It included a leverage ratio of 3 percent of assets, as well as several other provisions advocated by the Swiss, British and Americans but opposed by the banks. But the leverage ratio would not be fully enforced until 2018, to give banks plenty of time to raise more capital.

Soon after, the leaders of the G-20 nations endorsed the proposals. But that is hardly the end of the story. The rules are simply a benchmark, and it is up to individual nations to enshrine them in local law.

The Institute of International Finance has published studies maintaining that the Basel rules will force banks to substantially curtail lending and undercut economic growth. One study predicted that the Basel III rules would cost seven million jobs. Many economists counter that such studies ignore the huge cost to society of financial crises.

Mr. Cecchetti, of the Bank for International Settlements, called the Institute of International Finance forecasts “completely outside historical experience.”

Will Basel III make the world a safer place?

Many economists worry that the leverage ratio, at just 3 percent, is much too low. Banks can still borrow $32 for every dollar they hold in capital.

In Switzerland, Mr. Hildebrand pushed for local rules that would be more rigorous than the Basel rules. It was this push that inspired so much bile from the banks in 2010.

But circumstances were on Mr. Hildebrand’s side. As Swiss legislators were debating the proposals earlier this year, UBS disclosed that a 31-year-old employee had caused losses of $2.3 billion by making unauthorized trades.

Afterward, it was harder for banks to argue they had learned the lessons of the crisis. The law passed.

    A Fight to Make Banks More Prudent, NYT, 20.12.2011,
    http://www.nytimes.com/2011/12/21/business/global/a-fight-to-make-banks-hold-more-capital.html

Fed Proposes New Capital Rules for Banks

December 20, 2011
The New York Times
By EDWARD WYATT

WASHINGTON — The Federal Reserve on Tuesday proposed rules that would require the largest American banks to hold more capital — and to keep it more easily accessible — to protect against another financial crisis.

But the Fed, the nation’s chief banking regulator, added that the final capital rules were unlikely to be more stringent than international limits that were still under development.

That is a small victory for banks who warned that they would be severely disadvantaged if capital requirements here were stricter than those governing overseas banks. Bank representatives are still wary about details that remain to be worked out, however, including how much of an extra capital cushion would be imposed on the biggest of the big institutions like Bank of America, JPMorgan Chase and Citigroup.

In a 173-page proposal that tied to the Dodd-Frank regulatory law passed last year, the Fed also proposed formal limits on the amount of credit exposure that a bank holding company can have to any major borrower, be it another bank or corporation.

The goal is to prevent one bank from being susceptible to failure because of a relationship with another large institution. The lack of a cash cushion in the 2008 financial crisis caused many firms to try to rapidly unwind transactions that had troubled institutions on the other side of them, worsening a partner’s troubles and accelerating the market’s crash.

“A lot of the proposals are built around things that the Federal Reserve and other regulators believe did not work as well as they could leading up to the financial crisis,” said Deborah P. Bailey, a director in Deloitte & Touche’s banking and securities group. Over all, she added, the proposals “are designed to make sure that banks are strong and won’t need government help going forward.”

Of particular interest, she said, are provisions that require large banks to have a stand-alone committee of the board that would work with a company’s chief risk officer and be responsible for companywide risk management.

“Clearly that reflects the view that boards need to be more engaged and involved,” Ms. Bailey said.

Under the proposals, which will be open for public comment until March 31, banks with more than $50 billion in assets would be required, for now, to maintain a cushion equal to 5 percent of assets even during periods of unexpected stress. That standard is up from 4 percent previously and from much lower levels maintained by some large banks during the growth of the housing bubble.

That 5 percent is also the same level that was outlined by the Fed last month when it laid out plans for another round of bank stress tests. But the Fed also warned that banks will be required to match significantly stricter international requirements in the near future, including a larger amount of required capital based on a bank’s overall asset size.

The international standards, known as the Basel III accords, are expected to set capital requirements for the largest multinational financial institutions at 7 percent of capital plus a surcharge of up to 2.5 percent depending on a bank’s overall risk levels. Those standards are not expected to be phased in until 2016, at the earliest.

The Fed’s proposed rules also incorporate triggers intended to provide early warnings that a bank might be sliding into financial trouble. Those triggers would activate restrictions on growth, capital distributions and dividends, as well as limit executive compensation and asset sales.

The Federal Reserve tried in the proposals to address one of the central problems of the financial crisis: the interconnectedness of large financial institutions and its effect on bank stability.

For the roughly 30 banks in the United States with more than $50 billion in assets, the new requirements would limit their credit exposure to a single counterparty to 25 percent of the bank’s regulatory capital. The very largest banks face stricter limits of 10 percent of capital for credit exposure between two banks with more than $500 billion in total consolidated assets, or between one bank of that size and a large nonbank financial company.

Currently, there are only a handful of American banks with more than $500 billion in assets including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. The Fed and other regulators have yet to specify which nonbank financial companies will be treated as systemically important enough to be required to meet the stricter limits on credit exposure.

Individual banks were already subject to some limits on single-borrower lending and investments, but those limits did not apply to bank holding companies. The previous limits also did not account for credit exposures generated by derivatives and other complex transactions.

A trade group representing Wall Street firms and large banks expressed cautious optimism about the proposals, which are subject to revision based on public comments before they are finalized sometime next year.

“We are pleased to see the Fed is taking a phased-in approach to a number of these measures,” said Kenneth E. Bentsen Jr., an executive vice president at the Securities Industry and Financial Markets Association. He said he hoped that the final rules would help “to ensure the safety and soundness of our financial system while not significantly curtailing the system’s ability to contribute to economic growth and job creation.”

This article has been revised to reflect the following correction:

Correction: December 20, 2011

An earlier version of this article erroneously stated that only four American banks

(Bank of America, Citigroup, JPMorgan Chase and Wells Fargo)

had more than $500 billion in assets.

    Fed Proposes New Capital Rules for Banks, NYT, 20.12.2011,
    http://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.html

The Middle-Class Agenda

December 19, 2011
The New York Times

Earlier this month, President Obama delivered his first unabashed 2012 campaign speech. Unlike his opponents, Mr. Obama acknowledged the ravages of income equality, the hollowing out of the American middle class. There is no hyperbole in the urgency he conveyed about “a make-or-break moment for the middle class, and for all those who are fighting to get into the middle class.”

The challenge for Mr. Obama is to translate the plight of the middle class into an agenda for broad prosperity. Congress’s inability to cleanly extend even emergency measures though 2012 — including the temporary payroll tax cut and federal unemployment benefits — underscores the difficulty. The alternative is continued decline.

Recent government data show that 100 million Americans, or about one in three, are living in poverty or very close to it. Of 13.3 million unemployed Americans now searching for work, 5.7 million have been looking for more than six months, while millions more have given up altogether. Even a job is no guarantee of middle-class security. The real median income of working-age households has declined, from $61,600 in 2000 to $55,300 in 2010 — the result of abysmally slow job growth even before the onset of the recession.

Economic growth alone, even if it accelerated, would not be enough to restore the middle class. Mr. Obama refuted the Republican notion that market forces alone can ensure broad prosperity, when the economic health of American families also depends on government action.

It was a speech that called out for a plan. Here are the elements that matter most:

 

CREATING GOOD JOBS Despite Republican obstructionism, Mr. Obama must continue to offer stimulus bills that include spending for public works, high-tech manufacturing and an infrastructure bank. He must stress that obstruction costs jobs — the bill recently filibustered by Republicans would have created an estimated 1.9 million jobs in 2012. The Republican stance also endangers future prosperity by denying needed infrastructure upgrades and making it likely that international competitors will outstrip America in jobs and technology.

In particular, Mr. Obama needs to debunk the notion that job creation is at odds with environmental protection. Republicans have portrayed opposition to the Keystone XL oil pipeline as a job killer. The truth is, oil addiction and the failure to invest in new energy sources will be far bigger job killers. What’s needed is a plan to create millions of clean energy jobs and to link those jobs to workers in fossil fuel industries who otherwise would be displaced. The climate bill that died in 2010 would have begun that transformation; the need to try again only becomes more pressing with each passing year.

At the same time, Mr. Obama cannot ignore that most of the fast-growing occupations in America are lower-paying service jobs, like home health care and food service, in which it’s all but impossible to make a living. To lift wages requires generous tax credits for low earners, a higher minimum wage, and guaranteed health care so that wages are not consumed by medical costs. Job training efforts must also focus on the service sector, helping to build so-called career ladders, say, from home health aid to licensed vocational nurse.

 

STOPPING FORECLOSURES In his Kansas speech, Mr. Obama said banks “should be working to keep responsible homeowners in their homes.” That’s too weak. The banks have never made an all-out effort to help homeowners and unless compelled to do so, they never will, because, in many cases, they can make more by foreclosing rather than by modifying troubled loans.

Federal agencies can keep working with some state attorneys general and try to settle with banks over foreclosure abuses in exchange for a commitment from them to modify some $20 billion worth of troubled loans, or they can conduct a thorough federal investigation into the banks’ conduct during the mortgage bubble, looking for a far bigger settlement. The market is beset with $700 billion of negative equity; potential bank abuses are unexplored; the public is demanding accountability. Mr. Obama should opt for a thorough federal inquiry.

In the meantime, an antiforeclosure plan that is up to the scale of the problem would include unrelenting political pressure for principal write-downs of underwater loans, expanded refinancings for borrowers in high-rate loans, and forbearance for unemployed homeowners.

 

REGULATING THE BANKS Mr. Obama said banks are fighting the Dodd-Frank reform “every inch of the way.”

The question is what he will do to fight back. A good start would be for him to tell the American public whether the law is capable of performing as intended. Is he confident that a major bank on the verge of failure could be successfully dismantled? Is he sure that risky bank trading will be sufficiently curtailed? If he is not confident that the law can work as intended, he must ensure better implementation or call for a revamp of the statute itself.

He can also personally advance specific Dodd-Frank provisions. Republicans are intent on destroying the new Consumer Financial Protection Bureau; Mr. Obama should try to recess appoint his nominee to lead the bureau, Richard Cordray, whom Republicans recently filibustered. Mr. Obama must make clear that he supports a strong Dodd-Frank disclosure rule on the ratio of the pay of chief executives to that of rank-and-file employees. Such disclosure is crucial to changing the corporate norms that have allowed for unjustifiably vast pay discrepancies.

 

RAISING TAXES, REDUCING THE DEFICIT Tax reform is essential. But there is no way to build public consensus for broad reform without first reversing the lavish tax breaks for the rich. In addition to letting the high-end Bush-era tax cuts expire at the end of 2012, Mr. Obama could call for all forms of income to be taxed at the same rates, rather than allowing lower rates for investment income, which flows mostly to wealthy Americans. Income tax rates also need to be adjusted at the top of the scale, so that the affluent, say, couples with taxable income of $400,000 a year, are not paying the same top rate as multimillionaires.

Mr. Obama should also drop his opposition to a financial transactions tax. That stance may have made sense when the banks were reeling from the financial crisis, but it is now at odds with a stated desire to rein in the financial sector and raise needed revenue.

Mr. Obama has more than established his willingness to cut the deficit, agreeing to spending cuts that, in fact, are too deep for the weak economy. Now he needs to dominate the deficit debate, not by trying to meet Republican demands for ever more spending cuts, but by explaining that more cuts would undermine the recovery. In the near term, high-end tax increases are a better way to control the deficit. They are less of a drag on economic activity than broad tax increases or federal spending cuts.

More jobs. Fewer foreclosures. Less financial risk. Progressive taxation. Those policies will give the middle class a fighting chance. But the list is not exhaustive. The pillars of a healthy middle class also include public education, Social Security, unions, child care, affirmative action and, not least, campaign finance reform, since inequality is reinforced by the political power of the wealthy.

    The Middle-Class Agenda, NYT, 19.12.2011,
    http://www.nytimes.com/2011/12/20/opinion/the-middle-class-agenda.html

Life Goes On, and On ...

December 17, 2011
The New York Times
By JAMES ATLAS

A FRIEND calls from her car: “I’m on my way to Cape Cod to scatter my mother’s ashes in the bay, her favorite place.” Another, encountered on the street, mournfully reports that he’s just “planted” his mother. A third e-mails news of her mother’s death with a haunting phrase: “the sledgehammer of fatality.” It feels strange. Why are so many of our mothers dying all at once?

As an actuarial phenomenon, the reason isn’t hard to grasp. My friends are in their 60s now, some creeping up on 70; their mothers are in their 80s or 90s. Ray Kurzweil, the author of “The Singularity Is Near: When Humans Transcend Biology,” believes that we’re close to unlocking the key to immortality. Perhaps within this century, he prophesies, “software-based humans” will be able to survive indefinitely on the Web, “projecting bodies whenever they need or want them, including virtual bodies in diverse realms of virtual reality.” Neat, huh? But for now, it’s pretty much dust to dust, the way it’s always been — mothers included. (Most of our fathers are long gone, alas. Women live longer than men.)

It’s the ones who aren’t dead who should baffle us. My own mother, for instance, still goes to the Boston Symphony and attends a weekly current events class at Brookhaven, her “lifecare living” center (can’t we find a less technocratic word?) near Boston. She writes poems in iambic pentameter for every occasion. At 94, she’s hardly anomalous: there are plenty of nonagenarians at Brookhaven. Ninety is the new old age. As Dr. Muriel Gillick, a specialist in geriatrics and palliative care at Harvard Medical School, says, “If you’ve made it to 85 then you have a reasonable chance of making it to 90.” That number has nearly tripled in the last 30 years. And if you get that far... it’s been estimated that there will be eight million centenarians by 2050.

It won’t end there. Scientists are closing in on the mechanism of what are called “senescent cells,” which cause the tissue deterioration responsible for aging. Studies of mice suggest that targeting these cells can slow down the process. “Every component of cells gets damaged with age,” Leonard Guarente, a biology professor at M.I.T., explained to me. “It’s like an old car. You have to repair it.” We’re not talking about immortality, Professor Guarente cautions. Biotechnology has its limits. “We’re just extending the trend.” Extending the trend? I can hear it now: 110 is the new 100.

Is this a good thing or a bad thing? On the debit side, there’s the ... debit. The old-age safety net is already frayed. According to some estimates, Social Security benefits will run out by 2037; Medicare insurance is guaranteed only through 2024. These projected shortfalls are in part the unintended consequence of the American health fetish. The ad executives in “Mad Men” firing up Lucky Strikes and dosing themselves with Canadian Club didn’t have to worry. They’d be dead long before it was time to collect.

Then there’s the question of whether reaching 5 score and 10 is worth it — the quality-of-life question. Who wants to end up — as Jaques intones in “As You Like It” — “sans teeth, sans eyes, sans taste, sans everything”? You may live to be as old as Methuselah, who lasted 969 years, but chances are you’ll feel it.

Worse — it’s no longer a rare event — you can outlive your children. Reading the obituary of Christopher Ma, a Washington Post executive who had been a college classmate of mine, I was especially sad to see that Chris was survived by his wife, a daughter, a son, a brother, two sisters and “his mother, Margaret Ma of Menlo Park, Calif.” Can anything more tragic befall a parent than to be predeceased by a child?

These are the perils old people suffer. What about us, the boomers, now ourselves elderly children? One challenge my entitled generation faces is that many of our long-lived parents are running through their retirement money, which leaves the burden of supporting them to us. (To their credit, it’s a burden that often bothers our parents, too.) And the cost of end-stage health care is huge — a giant portion of all medical expenses in this country are incurred in the last months of life. Meanwhile, our prospects of retirement recede on the horizon.

Also, elder care is stressful and time consuming. The broken hips, the trips to the E.R., the bill paying and insurance paperwork demand patience. A paper titled “Personality Traits of Centenarians’ Offspring” suggests this cohort scores high marks “extraversion, openness, agreeableness and conscientiousness.” But even the well-adjusted find looking after old parents tough.

In the mid-’80s, when the idea of the “sandwich generation” was born — boomers saddled with the care of aging parents while raising their own children — it seemed like a problem we would eventually outgrow. Twenty-five years later, we’re still sandwiched, and some of those caught in the middle feel the squeeze.

So what’s the good part? Time spent with an elderly parent can offer an opportunity for the resolution of “unfinished business,” a chance to indulge in last-act candor. A college classmate writes in our 40th-reunion book of ministering to her chronically ill mother and being “moved by how the twists and turns of complicated health care have deepened our relationship.” I hear a lot about late-in-life bonding between parent and child.

My mother needs a minor operation. “I’ve outlasted my time,” she says as she’s wheeled into surgery. “Anyway, you’re too old to have a mother.” Thanks, Ma. What about Rupert Murdoch? His mother is 102. Also, if I’m too old to have a mother, why do I still feel like a child?

Two weeks later, Mom comes to Vermont to recuperate. My father, who died a decade ago at 87, is buried in the field behind our house (hope this is legal). His gravestone reads “Donald Herman Atlas 1913-2001,” and it has an epitaph from his favorite poet, T. S. Eliot, carved in italics: “I grow old ... I grow old .../ I shall wear the bottoms of my trousers rolled.” Mom likes to visit him there. Standing over Dad’s grave, she carries on a dialogue of one. “I thought I’d have joined you by now, Donny, but I’m a tough old bird.” As she heads back up to the house, she turns and waves. “À bientôt.” See you soon.

Not so fast, Mom. I still have issues.

 

James Atlas is the author of “My Life in the Middle Ages: A Survivor’s Tale.”

    Life Goes On, and On ..., NYT, 17.12.2011,
    http://www.nytimes.com/2011/12/18/opinion/sunday/old-age-life-goes-on-and-on.html

Text: Obama’s Speech in Kansas

December 6, 2011
The New York Times

Following is a text of President Obama’s speech in Osawatomie,
Kan. on Tuesday, as released by the White House:

THE PRESIDENT: Thank you, everybody. Please, please have a seat. Thank you so much. Thank you. Good afternoon, everybody.

AUDIENCE: Good afternoon.

THE PRESIDENT: Well, I want to start by thanking a few folks who’ve joined us today. We’ve got the mayor of Osawatomie, Phil Dudley is here. (Applause.) We have your superintendent Gary French in the house. (Applause.) And we have the principal of Osawatomie High, Doug Chisam. (Applause.) And I have brought your former governor, who is doing now an outstanding job as Secretary of Health and Human Services — Kathleen Sebelius is in the house. (Applause.) We love Kathleen.

Well, it is great to be back in the state of Tex — (laughter) — state of Kansas. I was giving Bill Self a hard time, he was here a while back. As many of you know, I have roots here. (Applause.) I’m sure you’re all familiar with the Obamas of Osawatomie. (Laughter.) Actually, I like to say that I got my name from my father, but I got my accent — and my values — from my mother. (Applause.) She was born in Wichita. (Applause.) Her mother grew up in Augusta. Her father was from El Dorado. So my Kansas roots run deep.

My grandparents served during World War II. He was a soldier in Patton’s Army; she was a worker on a bomber assembly line. And together, they shared the optimism of a nation that triumphed over the Great Depression and over fascism. They believed in an America where hard work paid off, and responsibility was rewarded, and anyone could make it if they tried — no matter who you were, no matter where you came from, no matter how you started out. (Applause.)

And these values gave rise to the largest middle class and the strongest economy that the world has ever known. It was here in America that the most productive workers, the most innovative companies turned out the best products on Earth. And you know what? Every American shared in that pride and in that success — from those in the executive suites to those in middle management to those on the factory floor. (Applause.) So you could have some confidence that if you gave it your all, you’d take enough home to raise your family and send your kids to school and have your health care covered, put a little away for retirement.

Today, we’re still home to the world’s most productive workers. We’re still home to the world’s most innovative companies. But for most Americans, the basic bargain that made this country great has eroded. Long before the recession hit, hard work stopped paying off for too many people. Fewer and fewer of the folks who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier from their incomes and their investments — wealthier than ever before. But everybody else struggled with costs that were growing and paychecks that weren’t — and too many families found themselves racking up more and more debt just to keep up.

Now, for many years, credit cards and home equity loans papered over this harsh reality. But in 2008, the house of cards collapsed. We all know the story by now: Mortgages sold to people who couldn’t afford them, or even sometimes understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets — and huge bonuses — made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.

It was wrong. It combined the breathtaking greed of a few with irresponsibility all across the system. And it plunged our economy and the world into a crisis from which we’re still fighting to recover. It claimed the jobs and the homes and the basic security of millions of people — innocent, hardworking Americans who had met their responsibilities but were still left holding the bag.

And ever since, there’s been a raging debate over the best way to restore growth and prosperity, restore balance, restore fairness. Throughout the country, it’s sparked protests and political movements — from the tea party to the people who’ve been occupying the streets of New York and other cities. It’s left Washington in a near-constant state of gridlock. It’s been the topic of heated and sometimes colorful discussion among the men and women running for president. (Laughter.)

But, Osawatomie, this is not just another political debate. This is the defining issue of our time. This is a make-or-break moment for the middle class, and for all those who are fighting to get into the middle class. Because what’s at stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, secure their retirement.

Now, in the midst of this debate, there are some who seem to be suffering from a kind of collective amnesia. After all that’s happened, after the worst economic crisis, the worst financial crisis since the Great Depression, they want to return to the same practices that got us into this mess. In fact, they want to go back to the same policies that stacked the deck against middle-class Americans for way too many years. And their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.

I am here to say they are wrong. (Applause.) I’m here in Kansas to reaffirm my deep conviction that we’re greater together than we are on our own. I believe that this country succeeds when everyone gets a fair shot, when everyone does their fair share, when everyone plays by the same rules. (Applause.) These aren’t Democratic values or Republican values. These aren’t 1 percent values or 99 percent values. They’re American values. And we have to reclaim them. (Applause.)

You see, this isn’t the first time America has faced this choice. At the turn of the last century, when a nation of farmers was transitioning to become the world’s industrial giant, we had to decide: Would we settle for a country where most of the new railroads and factories were being controlled by a few giant monopolies that kept prices high and wages low? Would we allow our citizens and even our children to work ungodly hours in conditions that were unsafe and unsanitary? Would we restrict education to the privileged few? Because there were people who thought massive inequality and exploitation of people was just the price you pay for progress.

Theodore Roosevelt disagreed. He was the Republican son of a wealthy family. He praised what the titans of industry had done to create jobs and grow the economy. He believed then what we know is true today, that the free market is the greatest force for economic progress in human history. It’s led to a prosperity and a standard of living unmatched by the rest of the world.

But Roosevelt also knew that the free market has never been a free license to take whatever you can from whomever you can. (Applause.) He understood the free market only works when there are rules of the road that ensure competition is fair and open and honest. And so he busted up monopolies, forcing those companies to compete for consumers with better services and better prices. And today, they still must. He fought to make sure businesses couldn’t profit by exploiting children or selling food or medicine that wasn’t safe. And today, they still can’t.

And in 1910, Teddy Roosevelt came here to Osawatomie and he laid out his vision for what he called a New Nationalism. “Our country,” he said, “…means nothing unless it means the triumph of a real democracy…of an economic system under which each man shall be guaranteed the opportunity to show the best that there is in him.” (Applause.)

Now, for this, Roosevelt was called a radical. He was called a socialist — (laughter) — even a communist. But today, we are a richer nation and a stronger democracy because of what he fought for in his last campaign: an eight-hour work day and a minimum wage for women — (applause) — insurance for the unemployed and for the elderly, and those with disabilities; political reform and a progressive income tax. (Applause.)

Today, over 100 years later, our economy has gone through another transformation. Over the last few decades, huge advances in technology have allowed businesses to do more with less, and it’s made it easier for them to set up shop and hire workers anywhere they want in the world. And many of you know firsthand the painful disruptions this has caused for a lot of Americans.

Factories where people thought they would retire suddenly picked up and went overseas, where workers were cheaper. Steel mills that needed 100 — or 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle. And these changes didn’t just affect blue-collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the Internet.

Today, even higher-skilled jobs, like accountants and middle management can be outsourced to countries like China or India. And if you’re somebody whose job can be done cheaper by a computer or someone in another country, you don’t have a lot of leverage with your employer when it comes to asking for better wages or better benefits, especially since fewer Americans today are part of a union.

Now, just as there was in Teddy Roosevelt’s time, there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger. Sure, they say, there will be winners and losers. But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.

Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. (Laughter.) But here’s the problem: It doesn’t work. It has never worked. (Applause.) It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. (Applause.) I mean, understand, it’s not as if we haven’t tried this theory.

Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class — things like education and infrastructure, science and technology, Medicare and Social Security.

Remember that in those same years, thanks to some of the same folks who are now running Congress, we had weak regulation, we had little oversight, and what did it get us? Insurance companies that jacked up people’s premiums with impunity and denied care to patients who were sick, mortgage lenders that tricked families into buying homes they couldn’t afford, a financial sector where irresponsibility and lack of basic oversight nearly destroyed our entire economy.

We simply cannot return to this brand of “you’re on your own” economics if we’re serious about rebuilding the middle class in this country. (Applause.) We know that it doesn’t result in a strong economy. It results in an economy that invests too little in its people and in its future. We know it doesn’t result in a prosperity that trickles down. It results in a prosperity that’s enjoyed by fewer and fewer of our citizens.

Look at the statistics. In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year. I’m not talking about millionaires, people who have a million dollars. I’m saying people who make a million dollars every single year. For the top one hundredth of 1 percent, the average income is now $27 million per year. The typical CEO who used to earn about 30 times more than his or her worker now earns 110 times more. And yet, over the last decade the incomes of most Americans have actually fallen by about 6 percent.

Now, this kind of inequality — a level that we haven’t seen since the Great Depression — hurts us all. When middle-class families can no longer afford to buy the goods and services that businesses are selling, when people are slipping out of the middle class, it drags down the entire economy from top to bottom. America was built on the idea of broad-based prosperity, of strong consumers all across the country. That’s why a CEO like Henry Ford made it his mission to pay his workers enough so that they could buy the cars he made. It’s also why a recent study showed that countries with less inequality tend to have stronger and steadier economic growth over the long run.

Inequality also distorts our democracy. It gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and it runs the risk of selling out our democracy to the highest bidder. (Applause.) It leaves everyone else rightly suspicious that the system in Washington is rigged against them, that our elected representatives aren’t looking out for the interests of most Americans.

But there’s an even more fundamental issue at stake. This kind of gaping inequality gives lie to the promise that’s at the very heart of America: that this is a place where you can make it if you try. We tell people — we tell our kids — that in this country, even if you’re born with nothing, work hard and you can get into the middle class. We tell them that your children will have a chance to do even better than you do. That’s why immigrants from around the world historically have flocked to our shores.

And yet, over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk. You know, a few years after World War II, a child who was born into poverty had a slightly better than 50-50 chance of becoming middle class as an adult. By 1980, that chance had fallen to around 40 percent. And if the trend of rising inequality over the last few decades continues, it’s estimated that a child born today will only have a one-in-three chance of making it to the middle class — 33 percent.

It’s heartbreaking enough that there are millions of working families in this country who are now forced to take their children to food banks for a decent meal. But the idea that those children might not have a chance to climb out of that situation and back into the middle class, no matter how hard they work? That’s inexcusable. It is wrong. (Applause.) It flies in the face of everything that we stand for. (Applause.)

Now, fortunately, that’s not a future that we have to accept, because there’s another view about how we build a strong middle class in this country — a view that’s truer to our history, a vision that’s been embraced in the past by people of both parties for more than 200 years.

It’s not a view that we should somehow turn back technology or put up walls around America. It’s not a view that says we should punish profit or success or pretend that government knows how to fix all of society’s problems. It is a view that says in America we are greater together — when everyone engages in fair play and everybody gets a fair shot and everybody does their fair share. (Applause.)

So what does that mean for restoring middle-class security in today’s economy? Well, it starts by making sure that everyone in America gets a fair shot at success. The truth is we’ll never be able to compete with other countries when it comes to who’s best at letting their businesses pay the lowest wages, who’s best at busting unions, who’s best at letting companies pollute as much as they want. That’s a race to the bottom that we can’t win, and we shouldn’t want to win that race. (Applause.) Those countries don’t have a strong middle class. They don’t have our standard of living.

The race we want to win, the race we can win is a race to the top — the race for good jobs that pay well and offer middle-class security. Businesses will create those jobs in countries with the highest-skilled, highest-educated workers, the most advanced transportation and communication, the strongest commitment to research and technology.

The world is shifting to an innovation economy and nobody does innovation better than America. Nobody does it better. (Applause.) No one has better colleges. Nobody has better universities. Nobody has a greater diversity of talent and ingenuity. No one’s workers or entrepreneurs are more driven or more daring. The things that have always been our strengths match up perfectly with the demands of the moment.

But we need to meet the moment. We’ve got to up our game. We need to remember that we can only do that together. It starts by making education a national mission — a national mission. (Applause.) Government and businesses, parents and citizens. In this economy, a higher education is the surest route to the middle class. The unemployment rate for Americans with a college degree or more is about half the national average. And their incomes are twice as high as those who don’t have a high school diploma. Which means we shouldn’t be laying off good teachers right now — we should be hiring them. (Applause.) We shouldn’t be expecting less of our schools –- we should be demanding more. (Applause.) We shouldn’t be making it harder to afford college — we should be a country where everyone has a chance to go and doesn’t rack up $100,000 of debt just because they went. (Applause.)

In today’s innovation economy, we also need a world-class commitment to science and research, the next generation of high-tech manufacturing. Our factories and our workers shouldn’t be idle. We should be giving people the chance to get new skills and training at community colleges so they can learn how to make wind turbines and semiconductors and high-powered batteries. And by the way, if we don’t have an economy that’s built on bubbles and financial speculation, our best and brightest won’t all gravitate towards careers in banking and finance. (Applause.) Because if we want an economy that’s built to last, we need more of those young people in science and engineering. (Applause.) This country should not be known for bad debt and phony profits. We should be known for creating and selling products all around the world that are stamped with three proud words: Made in America. (Applause.)

Today, manufacturers and other companies are setting up shop in the places with the best infrastructure to ship their products, move their workers, communicate with the rest of the world. And that’s why the over 1 million construction workers who lost their jobs when the housing market collapsed, they shouldn’t be sitting at home with nothing to do. They should be rebuilding our roads and our bridges, laying down faster railroads and broadband, modernizing our schools — (applause) — all the things other countries are already doing to attract good jobs and businesses to their shores.

Yes, business, and not government, will always be the primary generator of good jobs with incomes that lift people into the middle class and keep them there. But as a nation, we’ve always come together, through our government, to help create the conditions where both workers and businesses can succeed. (Applause.) And historically, that hasn’t been a partisan idea. Franklin Roosevelt worked with Democrats and Republicans to give veterans of World War II — including my grandfather, Stanley Dunham — the chance to go to college on the G.I. Bill. It was a Republican President, Dwight Eisenhower, a proud son of Kansas — (applause) — who started the Interstate Highway System, and doubled down on science and research to stay ahead of the Soviets.

Of course, those productive investments cost money. They’re not free. And so we’ve also paid for these investments by asking everybody to do their fair share. Look, if we had unlimited resources, no one would ever have to pay any taxes and we would never have to cut any spending. But we don’t have unlimited resources. And so we have to set priorities. If we want a strong middle class, then our tax code must reflect our values. We have to make choices.

Today that choice is very clear. To reduce our deficit, I’ve already signed nearly $1 trillion of spending cuts into law and I’ve proposed trillions more, including reforms that would lower the cost of Medicare and Medicaid. (Applause.)

But in order to structurally close the deficit, get our fiscal house in order, we have to decide what our priorities are. Now, most immediately, short term, we need to extend a payroll tax cut that’s set to expire at the end of this month. (Applause.) If we don’t do that, 160 million Americans, including most of the people here, will see their taxes go up by an average of $1,000 starting in January and it would badly weaken our recovery. That’s the short term.

In the long term, we have to rethink our tax system more fundamentally. We have to ask ourselves: Do we want to make the investments we need in things like education and research and high-tech manufacturing — all those things that helped make us an economic superpower? Or do we want to keep in place the tax breaks for the wealthiest Americans in our country? Because we can’t afford to do both. That is not politics. That’s just math. (Laughter and applause.)

Now, so far, most of my Republican friends in Washington have refused under any circumstance to ask the wealthiest Americans to go to the same tax rate they were paying when Bill Clinton was president. So let’s just do a trip down memory lane here.

Keep in mind, when President Clinton first proposed these tax increases, folks in Congress predicted they would kill jobs and lead to another recession. Instead, our economy created nearly 23 million jobs and we eliminated the deficit. (Applause.) Today, the wealthiest Americans are paying the lowest taxes in over half a century. This isn’t like in the early ‘50s, when the top tax rate was over 90 percent. This isn’t even like the early ‘80s, when the top tax rate was about 70 percent. Under President Clinton, the top rate was only about 39 percent. Today, thanks to loopholes and shelters, a quarter of all millionaires now pay lower tax rates than millions of you, millions of middle-class families. Some billionaires have a tax rate as low as 1 percent. One percent.

That is the height of unfairness. It is wrong. (Applause.) It’s wrong that in the United States of America, a teacher or a nurse or a construction worker, maybe earns $50,000 a year, should pay a higher tax rate than somebody raking in $50 million. (Applause.) It’s wrong for Warren Buffett’s secretary to pay a higher tax rate than Warren Buffett. (Applause.) And by the way, Warren Buffett agrees with me. (Laughter.) So do most Americans — Democrats, independents and Republicans. And I know that many of our wealthiest citizens would agree to contribute a little more if it meant reducing the deficit and strengthening the economy that made their success possible.

This isn’t about class warfare. This is about the nation’s welfare. It’s about making choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get into the middle class, and the economy as a whole.

Finally, a strong middle class can only exist in an economy where everyone plays by the same rules, from Wall Street to Main Street. (Applause.) As infuriating as it was for all of us, we rescued our major banks from collapse, not only because a full-blown financial meltdown would have sent us into a second Depression, but because we need a strong, healthy financial sector in this country.

But part of the deal was that we wouldn’t go back to business as usual. And that’s why last year we put in place new rules of the road that refocus the financial sector on what should be their core purpose: getting capital to the entrepreneurs with the best ideas, and financing millions of families who want to buy a home or send their kids to college.

Now, we’re not all the way there yet, and the banks are fighting us every inch of the way. But already, some of these reforms are being implemented.

If you’re a big bank or risky financial institution, you now have to write out a “living will” that details exactly how you’ll pay the bills if you fail, so that taxpayers are never again on the hook for Wall Street’s mistakes. (Applause.) There are also limits on the size of banks and new abilities for regulators to dismantle a firm that is going under. The new law bans banks from making risky bets with their customers’ deposits, and it takes away big bonuses and paydays from failed CEOs, while giving shareholders a say on executive salaries.

This is the law that we passed. We are in the process of implementing it now. All of this is being put in place as we speak. Now, unless you’re a financial institution whose business model is built on breaking the law, cheating consumers and making risky bets that could damage the entire economy, you should have nothing to fear from these new rules.

Some of you may know, my grandmother worked as a banker for most of her life — worked her way up, started as a secretary, ended up being a vice president of a bank. And I know from her, and I know from all the people that I’ve come in contact with, that the vast majority of bankers and financial service professionals, they want to do right by their customers. They want to have rules in place that don’t put them at a disadvantage for doing the right thing. And yet, Republicans in Congress are fighting as hard as they can to make sure that these rules aren’t enforced.

I’ll give you a specific example. For the first time in history, the reforms that we passed put in place a consumer watchdog who is charged with protecting everyday Americans from being taken advantage of by mortgage lenders or payday lenders or debt collectors. And the man we nominated for the post, Richard Cordray, is a former attorney general of Ohio who has the support of most attorney generals, both Democrat and Republican, throughout the country. Nobody claims he’s not qualified.

But the Republicans in the Senate refuse to confirm him for the job; they refuse to let him do his job. Why? Does anybody here think that the problem that led to our financial crisis was too much oversight of mortgage lenders or debt collectors?

AUDIENCE: No!

THE PRESIDENT: Of course not. Every day we go without a consumer watchdog is another day when a student, or a senior citizen, or a member of our Armed Forces — because they are very vulnerable to some of this stuff — could be tricked into a loan that they can’t afford — something that happens all the time. And the fact is that financial institutions have plenty of lobbyists looking out for their interests. Consumers deserve to have someone whose job it is to look out for them. (Applause.) And I intend to make sure they do. (Applause.) And I want you to hear me, Kansas: I will veto any effort to delay or defund or dismantle the new rules that we put in place. (Applause.)

We shouldn’t be weakening oversight and accountability. We should be strengthening oversight and accountability. I’ll give you another example. Too often, we’ve seen Wall Street firms violating major anti-fraud laws because the penalties are too weak and there’s no price for being a repeat offender. No more. I’ll be calling for legislation that makes those penalties count so that firms don’t see punishment for breaking the law as just the price of doing business. (Applause.)

The fact is this crisis has left a huge deficit of trust between Main Street and Wall Street. And major banks that were rescued by the taxpayers have an obligation to go the extra mile in helping to close that deficit of trust. At minimum, they should be remedying past mortgage abuses that led to the financial crisis. They should be working to keep responsible homeowners in their home. We’re going to keep pushing them to provide more time for unemployed homeowners to look for work without having to worry about immediately losing their house.

The big banks should increase access to refinancing opportunities to borrowers who haven’t yet benefited from historically low interest rates. And the big banks should recognize that precisely because these steps are in the interest of middle-class families and the broader economy, it will also be in the banks’ own long-term financial interest. What will be good for consumers over the long term will be good for the banks. (Applause.)

Investing in things like education that give everybody a chance to succeed. A tax code that makes sure everybody pays their fair share. And laws that make sure everybody follows the rules. That’s what will transform our economy. That’s what will grow our middle class again. In the end, rebuilding this economy based on fair play, a fair shot, and a fair share will require all of us to see that we have a stake in each other’s success. And it will require all of us to take some responsibility.

It will require parents to get more involved in their children’s education. It will require students to study harder. (Applause.) It will require some workers to start studying all over again. It will require greater responsibility from homeowners not to take out mortgages they can’t afford. They need to remember that if something seems too good to be true, it probably is.

It will require those of us in public service to make government more efficient and more effective, more consumer-friendly, more responsive to people’s needs. That’s why we’re cutting programs that we don’t need to pay for those we do. (Applause.) That’s why we’ve made hundreds of regulatory reforms that will save businesses billions of dollars. That’s why we’re not just throwing money at education, we’re challenging schools to come up with the most innovative reforms and the best results.

And it will require American business leaders to understand that their obligations don’t just end with their shareholders. Andy Grove, the legendary former CEO of Intel, put it best. He said, “There is another obligation I feel personally, given that everything I’ve achieved in my career, and a lot of what Intel has achieved…were made possible by a climate of democracy, an economic climate and investment climate provided by the United States.”

This broader obligation can take many forms. At a time when the cost of hiring workers in China is rising rapidly, it should mean more CEOs deciding that it’s time to bring jobs back to the United States — (applause) — not just because it’s good for business, but because it’s good for the country that made their business and their personal success possible. (Applause.)

I think about the Big Three auto companies who, during recent negotiations, agreed to create more jobs and cars here in America, and then decided to give bonuses not just to their executives, but to all their employees, so that everyone was invested in the company’s success. (Applause.)

I think about a company based in Warroad, Minnesota. It’s called Marvin Windows and Doors. During the recession, Marvin’s competitors closed dozens of plants, let hundreds of workers go. But Marvin’s did not lay off a single one of their 4,000 or so employees — not one. In fact, they’ve only laid off workers once in over a hundred years. Mr. Marvin’s grandfather even kept his eight employees during the Great Depression.

Now, at Marvin’s when times get tough, the workers agree to give up some perks and some pay, and so do the owners. As one owner said, “You can’t grow if you’re cutting your lifeblood — and that’s the skills and experience your workforce delivers.” (Applause.) For the CEO of Marvin’s, it’s about the community. He said, “These are people we went to school with. We go to church with them. We see them in the same restaurants. Indeed, a lot of us have married local girls and boys. We could be anywhere, but we are in Warroad.”

That’s how America was built. That’s why we’re the greatest nation on Earth. That’s what our greatest companies understand. Our success has never just been about survival of the fittest. It’s about building a nation where we’re all better off. We pull together. We pitch in. We do our part. We believe that hard work will pay off, that responsibility will be rewarded, and that our children will inherit a nation where those values live on. (Applause.)

And it is that belief that rallied thousands of Americans to Osawatomie — (applause) — maybe even some of your ancestors — on a rain-soaked day more than a century ago. By train, by wagon, on buggy, bicycle, on foot, they came to hear the vision of a man who loved this country and was determined to perfect it.

“We are all Americans,” Teddy Roosevelt told them that day. “Our common interests are as broad as the continent.” In the final years of his life, Roosevelt took that same message all across this country, from tiny Osawatomie to the heart of New York City, believing that no matter where he went, no matter who he was talking to, everybody would benefit from a country in which everyone gets a fair chance. (Applause.)

And well into our third century as a nation, we have grown and we’ve changed in many ways since Roosevelt’s time. The world is faster and the playing field is larger and the challenges are more complex. But what hasn’t changed — what can never change — are the values that got us this far. We still have a stake in each other’s success. We still believe that this should be a place where you can make it if you try. And we still believe, in the words of the man who called for a New Nationalism all those years ago, “The fundamental rule of our national life,” he said, “the rule which underlies all others — is that, on the whole, and in the long run, we shall go up or down together.” And I believe America is on the way up. (Applause.)

Thank you. God bless you. God bless the United States of America. (Applause.)

    Text: Obama’s Speech in Kansas, NYT, 6.12.2011,
    http://www.nytimes.com/2011/12/07/us/politics/text-obamas-speech-in-kansas.html 

Inconvenient Income Inequality

December 16, 2011
The New York Times
By CHARLES M. BLOW

Is income inequality becoming the new global warming? In other words, is this another case where the facts of an existential threat lose traction among a weary American public as deniers attempt to reduce them to partisan opinions?

It’s beginning to seem so.

A Gallup poll released on Thursday found that, after rising rather steadily for the past two decades, the percentage of Americans who said that the country is divided into “haves” and “have-nots” took the largest drop since the question was asked.

This happened even as the percentage of Americans who grouped themselves under either label stayed relatively constant. Nearly 6 in 10 Americans still see themselves as the haves, while only about a third see themselves as the have-nots. The numbers have been in that range for a decade.

This is the new American delusion. The facts point to a very different reality.

An Associated Press report this week on census data found that “a record number of Americans — nearly 1 in 2 — have fallen into poverty or are scraping by on earnings that classify them as low income.” The report said that the data “depict a middle class that’s shrinking.”

An October report from the Congressional Budget Office found that, from 1979 to 2007, the average real after-tax household income for the 1 percent of the population with the highest incomes rose 275 percent. For the rest of the top 20 percent of earners, it rose 65 percent. But it rose just 18 percent for the bottom 20 percent.

And a report released in May by the Organization for Economic Cooperation and Development found that “the gap between rich and poor in O.E.C.D. countries has reached its highest level for over 30 years.” In the United States, the average income of the richest 10 percent of the population had risen to around 14 times that of the poorest 10 percent.

Our growing income inequality is a fact. So is the possibility that it could prove economically disastrous.

An April report from the International Monetary Fund found that growing income inequality has a negative effect on economic expansion. The report said that long periods of high growth, which were called “growth spells,” were “much more likely to end in countries with less equal income distributions. The effect is large.” It continued: “Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a ‘growth spell.’ ”

Our income inequality could jeopardize our recovery.

Yet another Gallup report issued Friday found that most Americans now say that the fact that some people in the U.S. are rich and others are poor does not represent a problem but is an acceptable part of our economic system.

If denial is a river, it runs through doomed societies.

    Inconvenient Income Inequality, NYT, 16.12.2011,
    http://www.nytimes.com/2011/12/17/opinion/blow-inconvenient-income-inequality.html

Crippling the Right to Organize

December 16, 2011
The New York Times
By WILLIAM B. GOULD IV

Stanford, Calif.

UNLESS something changes in Washington, American workers will, on New Year’s Day, effectively lose their right to be represented by a union. Two of the five seats on the National Labor Relations Board, which protects collective bargaining, are vacant, and on Dec. 31, the term of Craig Becker, a labor lawyer whom President Obama named to the board last year through a recess appointment, will expire. Without a quorum, the Supreme Court ruled last year, the board cannot decide cases.

What would this mean?

Workers illegally fired for union organizing won’t be reinstated with back pay. Employers will be able to get away with interfering with union elections. Perhaps most important, employers won’t have to recognize unions despite a majority vote by workers. Without the board to enforce labor law, most companies will not voluntarily deal with unions.

If this nightmare comes to pass, it will represent the culmination of three decades of Republican resistance to the board — an unwillingness to recognize the fundamental right of workers to band together, if they wish, to seek better pay and working conditions. But Mr. Obama is also partly to blame; in trying to install partisan stalwarts on the board, as his predecessors did, he is all but guaranteeing that the impasse will continue. On Wednesday, he announced his intention to nominate two pro-union lawyers to the board, though there is no realistic chance that either can gain Senate confirmation anytime soon.

For decades after its creation in 1935, the board was a relatively fair arbiter between labor and capital. It has protected workers’ right to organize by, among other things, overseeing elections that decide on union representation. Employers may not engage in unfair labor practices, like intimidating organizers and discriminating against union members. Unions are prohibited, too, from doing things like improperly pressuring workers to join.

The system began to run into trouble in the 1970s. Employers found loopholes that enabled them to delay the board’s administrative proceedings, sometimes for years. Reforms intended to speed up the board’s resolution of disputes have repeatedly foundered in Congress.

The precipitous decline of organized labor — principally a result of economic forces, not legal ones — cemented unions’ dependence on the board, despite its imperfections. Meanwhile, business interests, represented by an increasingly conservative Republican Party, became more assertive in fighting unions.

The board became dysfunctional. Traditionally, members were career civil servants or distinguished lawyers and academics from across the country. But starting in the Reagan era, the board’s composition began to tilt toward Washington insiders like former Congressional staff members and former lobbyists.

Starting with a compromise that allowed my confirmation in 1994, the board’s members and general counsel have been nominated in groups. In contrast to the old system, the new “batching” meant that nominees were named as a package acceptable to both parties. As a result, the board came to be filled with rigid ideologues. Some didn’t even have a background in labor law.

Under President George W. Bush, the board all but stopped using its discretion to obtain court orders against employers before the board’s own, convoluted, administrative process was completed — a power that, used fairly, is a crucial protection for workers. In 2007, in what has been called the September Massacre, the board issued rulings that made it easier for employers to block union organizing and harder for illegally fired employees to collect back pay. Democratic senators then blocked Mr. Bush from making recess appointments to the board, as President Bill Clinton had done. For 27 months, until March 2010, the board operated with only two members; in June 2010, the Supreme Court ruled that it needed at least three to issue decisions.

Under Mr. Obama, the board has begun to take enforcement more seriously, by pursuing the court orders that the board under Mr. Bush had abandoned. Sadly, though, the board has also been plagued by unnecessary controversy. In April, the acting general counsel issued a complaint over Boeing’s decision to build airplanes at a nonunion plant in South Carolina, following a dispute with Boeing machinists in Washington State. Although the complaint was dropped last week after the machinists reached a new contract agreement with Boeing, the controversy reignited Republican threats to cut financing for the board.

In my view, the complaint against Boeing was legally flawed, but the threats to cut the board’s budget represent unacceptable political interference. The shenanigans continue: last month, before the board tentatively approved new proposals that would expedite unionization elections, the sole Republican member threatened to resign, which would have again deprived the board of a quorum.

Mr. Obama needs to make this an election-year issue; if the board goes dark in January, he should draw attention to Congressional obstructionism during the campaign and defend the board’s role in protecting employees and employers. A new vision for labor-management cooperation must include not only a more powerful board, but also a less partisan one, with members who are independent and neutral experts. Otherwise, the partisan morass will continue, and American workers will suffer.

William B. Gould IV, a law professor at Stanford,

was chairman of the National Labor Relations Board from 1994 to 1998.

    Crippling the Right to Organize, NYT, 16.12.2011,
    http://www.nytimes.com/2011/12/17/opinion/crippling-the-right-to-organize.html

Targeting the Unemployed

December 12, 2011
The New York Times

The House Republican leadership managed to get one thing right in its bill to extend the payroll tax cut and unemployment benefits. The bill does, indeed, extend the payroll tax cut for another year, but, beyond that, there is a lot to dislike. To help pay for the package, for instance, the bill would cut social spending more deeply than is already anticipated under current budget caps without asking wealthy Americans to contribute a penny in new taxes.

It also holds the expiring provisions hostage to irrelevant but noxious proposals to undo existing environmental protections. Worse, it would make unemployment compensation considerably stingier than it is now.

At last count, 13.3 million people were officially unemployed and 5.7 million of them had been out of work for more than six months. At no time in the last 60 years has long-term unemployment been so high for so long.

But Republican lawmakers would have you believe that the nation cannot afford jobless benefits and that many recipients are not so much needy, as lazy, disinclined to work as long as benefits are available. When was the last time any Republican lawmaker tried to live on $289 a week, the amount of the average benefit?

Under current policy, federal benefits kick in when state-provided benefits run out, typically after 26 weeks. The duration of the federal payouts depends on the level of unemployment in a given state. Currently, workers in 22 of the hardest-hit states — including California, New Jersey and Connecticut — qualify for up to 73 more weeks of aid. In five other states — including New York — up to 67 more weeks are available. In the remaining 23 states, maximum federal benefits range from 34 weeks to 60 weeks. The cost to continue the program for another year would be about $45 billion.

The Republican plan would cut $11 billion of that in 2012 by slashing up to 40 weeks from the program, reducing by more than half the maximum 73 weeks now available. Because of the way the program is structured, the biggest cuts would come in the states with the highest unemployment. Millions of jobless workers would be quickly left without subsistence, and the weak economy would be weakened further by the drop in consumer spending.

The bill would also impose onerous — and gratuitous — requirements on people who apply for jobless benefits. It would allow states to drug test applicants and would require recipients to be high-school graduates or working toward an equivalency degree.

Curtailing jobless benefits makes sense once hiring is clearly on the rebound, which is not yet the case. Joblessness remains high, not because the unemployed are lazy or on drugs, but because there are too many applicants for too few jobs. Labor statistics show that if all the job openings in America were filled tomorrow, nearly 10 million people would still be unemployed. That works out to about four jobless workers for every opening. In a normal job market, the expected ratio would be about one to one.

We need job creation, like the spending and infrastructure programs in President Obama’s jobs bills, which Republicans scoffed at. Lawmakers could also take smaller steps to help the long-term jobless, like outlawing discrimination in hiring against unemployed job-seekers.

In the meantime, the only humane and economically sensible choice is to renew unemployment benefits at a level that is up to the scale of the crisis. The Republican plan is way too small for a very big problem.

    Targeting the Unemployed, NYT, 12.12.2011,
    http://www.nytimes.com/2011/12/13/opinion/targeting-the-unemployed.html

Millionaires on Food Stamps and Jobless Pay? G.O.P. Is on It

December 12, 2011
The New York Times
By JENNIFER STEINHAUER

WASHINGTON — It’s an image many Americans would find rather upsetting: a recently laid-off millionaire, luxuriating next to the pool eating grapes bought with food stamps while waiting for an unemployment check to roll in.

Under the Republican bill to extend a payroll tax holiday scheduled to be voted on in the House as early as Tuesday, those Americans with gross adjusted income over $1 million would no longer be eligible for food stamps or jobless pay, producing $20 million in savings to help pay for the tax cut for American workers. The idea is also embraced by many Democrats, who had a similar version of the savings in a Senate bill to extend the payroll tax cut, as did a failed Republican Senate bill.

Yet as it turns out, millionaires on food stamps are about as rare as petunias in January, even if you count a lottery winner in Michigan who managed to collect the benefit until chagrined officials in the state put an end to it.

But the idea of ending unemployment insurance for very high earners — which would be achieved essentially through taxing benefits up to 100 percent with a phase-in beginning for those with gross adjusted income over $750,000 — demonstrates an increasing desire among members of Congress to find some way to make sure that the wealthiest Americans contribute more to reducing the deficit and paying for middle-class tax relief.

Democrats have sought a surtax on income over $1 million to pay for an extension of a tax break for the middle class, a surtax that Republicans have rejected. Employees’ share of the payroll tax, now 4.2 percent of wages, is scheduled to rise to 6.2 percent in January unless Congress takes action. The Senate is expected to come back this week with another version of its bill to extend the tax holiday. On Monday night, the majority leader, Senator Harry Reid, Democrat of Nevada, served notice to Congressional Republicans that he would prevent final votes on a must-pass bill to finance government operations until the Democrats get what they want on the payroll tax.

While tycoons on food stamps might be hard to find, some millionaires do indeed pursue unemployment pay when they find themselves out of job.

From 2005 to 2009, millionaires collected over $74 million in unemployment benefits, according to an estimate by Senator Tom Coburn, Republican of Oklahoma, who has paired with Senator Mark Udall, Democrat of Colorado, to push to end the practice.

According to Mr. Coburn’s office, the Internal Revenue Service reported that 2,362 millionaires collected a total of $20,799,000 in unemployment benefits in 2009; 18 people with an adjusted gross income of $10,000,000 or more received an average of $12,333 in jobless benefits for a total of $222,000.

“Making Coloradans pay for unemployment insurance for millionaires is frankly irresponsible, especially at a time when money is tight and our debt is out of control,” Mr. Udall said in an e-mail.

Unemployment benefits are essentially an insurance program financed through the state and federal governments. States charge employers taxes dedicated to cover the first 26 weeks of unemployment benefits paid to those Americans who lose their jobs, with the federal government paying for extensions.

Currently, unemployment benefits have stretched out to 99 weeks, through a series of nine extensions that began in 2008, reflecting the high levels of extended unemployment that have dogged the country, at a cost of roughly $180 billion to the federal government. (While there are also federal taxes charged to employers, those monies tend to be used for administrative costs and not benefits.) Roughly 3.5 million people are now receiving extended benefits. Some states have already begun to reduce the number of extended weeks unemployment offered.

The Republican legislation seeks to shorten the number of weeks that will be extended to the jobless, and offer states more flexibility with how they use their own unemployment taxes, including starting programs that train people for work while they accept benefits.

“It’s a water drop in a hurricane,” said Wayne Vroman, an economist at the Urban Institute. “I can see the PR appeal, but unemployment insurance collected by millionaires is not one of the major problems with the program. This is a way of trying to put an income test on the unemployment system that has never existed in the past.”

Food stamps are another matter, as recipients must demonstrate low income levels to receive them. Household income must not exceed 130 percent of poverty; for a family of three that would be a gross monthly income of $2,008.

However, of the 53 states and territories, 40 have no asset tests, which means that in some situations it would be possible for someone with, for instance, a large house or a luxury car — or in the case of Michigan, current lottery winnings not yet delivered in full — to receive food stamps.

Department of Agriculture officials dismissed the notion of millionaire food stamp recipients. “Federal law is clear,” said Aaron Lavallee, a spokesman for the department. “The program is intended for households with income not exceeding 130 percent of poverty.”

Among the 46 million Americans who receive the assistance — roughly one in seven Americans — few seem to be millionaires. As such, the $200 million in savings from this cut would be largely achieved through the cuts to the unemployment insurance for high earners.

 

Jackie Calmes contributed reporting.

    Millionaires on Food Stamps and Jobless Pay? G.O.P. Is on It, NYT, 12.12.2011,
    http://www.nytimes.com/2011/12/13/us/gop-bill-would-block-food-stamps-and-jobless-pay-for-millionaires.html

Depression and Democracy

December 11, 2011
The New York Times
By PAUL KRUGMAN

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony.

Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

Fidesz won an overwhelming Parliamentary majority last year, at least partly for economic reasons; Hungary isn’t on the euro, but it suffered severely because of large-scale borrowing in foreign currencies and also, to be frank, thanks to mismanagement and corruption on the part of the then-governing left-liberal parties. Now Fidesz, which rammed through a new Constitution last spring on a party-line vote, seems bent on establishing a permanent hold on power.

The details are complex. Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.

It’s not clear what can be done about Hungary’s authoritarian slide. The U.S. State Department, to its credit, has been very much on the case, but this is essentially a European matter. The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

    Depression and Democracy, NYT, 11.12.2011,
    http://www.nytimes.com/2011/12/12/opinion/krugman-depression-and-democracy.html

Class Matters. Why Won’t We Admit It?

December 11, 2011
The New York Times
By HELEN F. LADD and EDWARD B. FISKE

Durham, N.C.

NO one seriously disputes the fact that students from disadvantaged households perform less well in school, on average, than their peers from more advantaged backgrounds. But rather than confront this fact of life head-on, our policy makers mistakenly continue to reason that, since they cannot change the backgrounds of students, they should focus on things they can control.

No Child Left Behind, President George W. Bush’s signature education law, did this by setting unrealistically high — and ultimately self-defeating — expectations for all schools. President Obama’s policies have concentrated on trying to make schools more “efficient” through means like judging teachers by their students’ test scores or encouraging competition by promoting the creation of charter schools. The proverbial story of the drunk looking for his keys under the lamppost comes to mind.

The Occupy movement has catalyzed rising anxiety over income inequality; we desperately need a similar reminder of the relationship between economic advantage and student performance.

The correlation has been abundantly documented, notably by the famous Coleman Report in 1966. New research by Sean F. Reardon of Stanford University traces the achievement gap between children from high- and low-income families over the last 50 years and finds that it now far exceeds the gap between white and black students.

Data from the National Assessment of Educational Progress show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.

International research tells the same story. Results of the 2009 reading tests conducted by the Program for International Student Assessment show that, among 15-year-olds in the United States and the 13 countries whose students outperformed ours, students with lower economic and social status had far lower test scores than their more advantaged counterparts within every country. Can anyone credibly believe that the mediocre overall performance of American students on international tests is unrelated to the fact that one-fifth of American children live in poverty?

Yet federal education policy seems blind to all this. No Child Left Behind required all schools to bring all students to high levels of achievement but took no note of the challenges that disadvantaged students face. The legislation did, to be sure, specify that subgroups — defined by income, minority status and proficiency in English — must meet the same achievement standard. But it did so only to make sure that schools did not ignore their disadvantaged students — not to help them address the challenges they carry with them into the classroom.

So why do presumably well-intentioned policy makers ignore, or deny, the correlations of family background and student achievement?

Some honestly believe that schools are capable of offsetting the effects of poverty. Others want to avoid the impression that they set lower expectations for some groups of students for fear that those expectations will be self-fulfilling. In both cases, simply wanting something to be true does not make it so.

Another rationale for denial is to note that some schools, like the Knowledge Is Power Program charter schools, have managed to “beat the odds.” If some schools can succeed, the argument goes, then it is reasonable to expect all schools to. But close scrutiny of charter school performance has shown that many of the success stories have been limited to particular grades or subjects and may be attributable to substantial outside financing or extraordinarily long working hours on the part of teachers. The evidence does not support the view that the few success stories can be scaled up to address the needs of large populations of disadvantaged students.

A final rationale for denying the correlation is more nefarious. As we are now seeing, requiring all schools to meet the same high standards for all students, regardless of family background, will inevitably lead either to large numbers of failing schools or to a dramatic lowering of state standards. Both serve to discredit the public education system and lend support to arguments that the system is failing and needs fundamental change, like privatization.

Given the budget crises at the national and state levels, and the strong political power of conservative groups, a significant effort to reduce poverty or deal with the closely related issue of racial segregation is not in the political cards, at least for now.

So what can be done?

Large bodies of research have shown how poor health and nutrition inhibit child development and learning and, conversely, how high-quality early childhood and preschool education programs can enhance them. We understand the importance of early exposure to rich language on future cognitive development. We know that low-income students experience greater learning loss during the summer when their more privileged peers are enjoying travel and other enriching activities.

Since they can’t take on poverty itself, education policy makers should try to provide poor students with the social support and experiences that middle-class students enjoy as a matter of course.

It can be done. In North Carolina, the two-year-old East Durham Children’s Initiative is one of many efforts around the country to replicate Geoffrey Canada’s well-known successes with the Harlem Children’s Zone.

Say Yes to Education in Syracuse, N.Y., supports access to afterschool programs and summer camps and places social workers in schools. In Omaha, Building Bright Futures sponsors school-based health centers and offers mentoring and enrichment services. Citizen Schools, based in Boston, recruits volunteers in seven states to share their interests and skills with middle-school students.

Promise Neighborhoods, an Obama administration effort that gives grants to programs like these, is a welcome first step, but it has been under-financed.

Other countries already pursue such strategies. In Finland, with its famously high-performing schools, schools provide food and free health care for students. Developmental needs are addressed early. Counseling services are abundant.

But in the United States over the past decade, it became fashionable among supporters of the “no excuses” approach to school improvement to accuse anyone raising the poverty issue of letting schools off the hook — or what Mr. Bush famously called “the soft bigotry of low expectations.”

Such accusations may afford the illusion of a moral high ground, but they stand in the way of serious efforts to improve education and, for that matter, go a long way toward explaining why No Child Left Behind has not worked.

Yes, we need to make sure that all children, and particularly disadvantaged children, have access to good schools, as defined by the quality of teachers and principals and of internal policies and practices.

But let’s not pretend that family background does not matter and can be overlooked. Let’s agree that we know a lot about how to address the ways in which poverty undermines student learning. Whether we choose to face up to that reality is ultimately a moral question.

Helen F. Ladd is a professor of public policy and economics at Duke.

Edward B. Fiske, a former education editor of The New York Times,

is the author of the “Fiske Guide to Colleges.”, NYT

    Class Matters. Why Won’t We Admit It?, NYT, 11.12.2011,
    http://www.nytimes.com/2011/12/12/opinion/the-unaddressed-link-between-poverty-and-education.html

The Wonky Liberal

December 5, 2011
The New York Times
By DAVID BROOKS

Republicans have many strong arguments to make against the Obama administration, but one major criticism doesn’t square with the evidence. This is the charge that President Obama is running a virulently antibusiness administration that spews out a steady flow of job- and economy-crushing regulations.

In the first place, President Obama has certainly not shut corporate-types out of the regulatory process. According to data collected by the Center for Progressive Reforms, 62 percent of the people who met with the White House office in charge of reviewing regulations were representatives of industry, while only 16 percent represented activist groups. At these meetings, business representatives outnumbered activists by more than 4 to 1.

Nor is it true that the administration is blindly doing the bidding of the liberal activist groups. On the contrary, the White House Office of Information and Regulatory Affairs and its administrator, Cass Sunstein, have been the subject of withering attacks from the left. The organization Think Progress says the office is “appalling.” Mother Jones magazine is on the warpath. The Huffington Post published a long article studded with negative comments from unions and environmental activists.

If you step back and try to get some nonhysterical perspective, you come to the following conclusion: This is a Democratic administration. Many of the major agency jobs are held by people who come out of the activist community who are not sensitive to the costs they are imposing on the economy. President Obama has a political and philosophical incentive to restrain their enthusiasm. He has, therefore, supported a strong review agency in the White House that does rigorous cost-benefit analyses to review proposed regulations and minimize their economic harm.

This office, under Sunstein, is incredibly wonky. It is composed of career number-crunchers of no known ideological bent who try to measure the trade-offs inherent in regulatory action. Deciding among these trade-offs involves relying on both values and data. This office has tried to elevate the role of data so that every close call is not just a matter of pleasing the right ideological army.

Over all, the Obama administration has significantly increased the regulatory costs imposed on the economy. But this is a difference of degree, not of kind.

During the final year of their administrations, presidents generally issue tons of new rules. Nineteen-eighty-eight, under Ronald Reagan, 1992, under George H.W. Bush and 2008, under George W. Bush, were monster years for new regulations. In his first years, Obama has not increased regulatory costs more than Reagan and the Bushes did in their final years.

Data collected by Bloomberg News suggest that the Obama White House has actually reviewed 5 percent fewer rules than George W. Bush’s did at a similar point in his presidency. What has increased is the cost of those rules.

George W. Bush issued regulations over eight years that cost about $60 billion. During its first two years, the Obama regulations cost between $8 billion and $16.5 billion, according to estimates by the administration itself, and $40 billion, according to data collected, more broadly, by the Heritage Foundation.

That’s a significant step up, as you’d expect when comparing Republican to Democratic administrations, but it is not a socialist onslaught.

Nor is it clear that these additional regulations have had a huge effect on the economy. Over the past 40 years, small business leaders have eloquently complained about the regulatory burden. And they are right to. But it’s not clear that regulations are a major contributor to the current period of slow growth.

The Bureau of Labor Statistics asks companies why they have laid off workers. Only 13 percent said regulations were a major factor. That number has not increased in the past few years. According to the bureau, roughly 0.18 percent of the mass layoffs in the first half of 2011 were attributable to regulations.

Some of the industries that are the subject of the new rules, like energy and health care, have actually been doing the most hiring. If new regulations were eating into business, we’d see a slip in corporate profits. We are not.

There are two large lessons here. First, Republican candidates can say they will deregulate and, in some areas, that would be a good thing. But it will not produce a short-term economic rebound because regulations are not a big factor in our short-term problems.

Second, it is easy to be cynical about politics and to say that Washington is a polarized cesspool. And it’s true that the interest groups and the fund-raisers make every disagreement seem like a life-or-death struggle. But, in reality, most people in government are trying to find a balance between difficult trade-offs. Whether it’s antiterrorism policy or regulatory policy, most substantive disagreements are within the 40 yard lines.

Obama’s regulations may be more intrusive than some of us would like. They are not tanking the economy.

    The Wonky Liberal, NYT, 5.12.2011,
    http://www.nytimes.com/2011/12/06/opinion/brooks-the-wonky-liberal.html

Pain in the Public Sector

December 4, 2011
The New York Times

Buried in the relatively positive numbers contained in the November jobs report was some very bad news for those who work in the public sector. There were 20,000 government workers laid off last month, by far the largest drop for any sector of the economy, mostly from states, counties and cities.

That continues a troubling trend that’s been building for years, one that has had a particularly harsh effect on black workers. While the private sector has been adding jobs since the end of 2009, more than half a million government positions have been lost since the recession.

In most cases, states and cities had to lay off workers because of declining tax revenues, or reduced federal aid because of Washington’s inexplicable decision to focus more on the deficit in the near term than on jobs.

Those layoffs mean a lower quality of life when there are fewer teachers, pothole repair crews and nurses. On Thursday, a deteriorating budget situation prompted what officials in Marion, Ind., called a “radical reorganization” of city services, which will result in the layoffs of 15 police officers (out of 58) and 12 firefighters (out of 50).

The cutbacks hurt more than just services. As Timothy Williams of The Times reported last week, they hit black workers particularly hard. Millions of African-Americans — one in five who are employed — have entered the middle class through government employment, and they tend to make 25 percent more than other black workers. Now tens of thousands are leaving both their jobs and the middle class. Chicago, for example, is laying off 212 employees in the upcoming fiscal year, two-thirds of whom are black.

That’s one reason the black unemployment rate went up last month, to 15.5 percent from 15.1. The effect is severe, destabilizing black neighborhoods and making it harder for young people to replicate their parents’ climb up the economic ladder. “The reliance on these jobs has provided African-Americans a path upward,” said Robert Zieger, an emeritus professor of history at the University of Florida. “But it is also a vulnerability.”

Many Republicans, however, don’t regard government jobs as actual jobs, and are eager to see them disappear. Republican governors around the Midwest have aggressively tried to break the power of public unions while slashing their work forces, and Congressional Republicans have proposed paying for a payroll tax cut by reducing federal employment rolls by 10 percent through attrition. That’s 200,000 jobs, many of which would be filled by blacks and Hispanics and others who tend to vote Democratic, and thus are considered politically superfluous.

But every layoff, whether public or private, is a life, and a livelihood, and a family. And too many of them are getting battered by the economic storm.

    Pain in the Public Sector, NYT, 4.12.2011,
    http://www.nytimes.com/2011/12/05/opinion/pain-in-the-public-sector.html

Been Down So Long ...

December 2, 2011
The New York Times

The unemployment rate dropped to 8.6 percent in November from 9 percent in October in the jobs report released Friday. The economy added 120,000 jobs and job growth was revised upward in September and October.

That’s better than rising unemployment and falling payrolls. Yet, properly understood, the new figures reveal more about the depth of distress in the job market than about real improvement in job prospects.

Most of the decline in November’s unemployment rate was not because jobless people found new work. Rather, it is because 315,000 people dropped out of the work force, a reflection of extraordinarily weak demand by employers for new workers. It is also a sign of socioeconomic decline, of wasted resources and untapped potential, the human equivalent of boarded-up Main Streets and shuttered factories.

The job growth numbers also come with caveats. More jobs were created than economists expected, but with the job market so weak for so long, that is a low bar. It would take nearly 11 million new jobs to replace the ones that were lost during the recession and to keep up with the growth in the working-age population in the last four years. To fill that gap would require 275,000 new jobs a month for the next five years. That’s not in the cards. Even with the better-than-expected job growth in the past three months, the economy added only 143,000 jobs on average.

And most of those new jobs are low-end ones. In November, for example, big job-growth areas included retail sales, bartending and temporary services. Teachers and other public employees continued to lose jobs, and job growth in construction and manufacturing were basically flat. Indeed, work — once the pathway to a rising standard of living — has become for many a route to downward mobility. Motoko Rich reported in The Times recently on new research showing that most people who lost their jobs in recent years now make less and have not maintained their lifestyles, with many experiencing what they describe as drastic — and probably irreversible — declines in income.

Against that backdrop, the modest improvement in the jobs report, even if sustained in the months to come, would not be enough to repair the damage from the recession and its slow-growth aftermath. Help is needed, yet Congress is tied in knots over even basic recovery measures, like extending federal unemployment benefits and the temporary payroll tax cut.

Meanwhile, the increasing likelihood of a recession in Europe, or any other setback, could easily derail the weak American economy, sending unemployment back up to double-digit recession levels.

    Been Down So Long ..., NYT, 2.1.2.2011,
    http://www.nytimes.com/2011/12/03/opinion/been-unemployed-so-long.html

Signs of Hope in Jobs Report; Unemployment Drops to 8.6%

December 2, 2011
The New York Times
By CATHERINE RAMPELL

Somehow the American economy appears to be getting better, even as the rest of the world is looking worse.

In the midst of the European debt crisis, lingering instability in the oil-rich Middle East and concerns about a Chinese economic slowdown, the American unemployment rate unexpectedly dropped last month to 8.6 percent, its lowest level in two and a half years. The nation’s employers modestly increased their hiring, too, the Labor Department said Friday.

The figures come just a few months after economists were warning that the economy’s prospects were waning.

“If you go back to August, all sorts of people were telling us that the economy was headed straight into recession,” said Paul Ashworth, senior United States economist at Capital Economics. “Since that point, we’ve become more and more worried about the euro zone and other areas of the global economy, but somehow, at least for the moment, the U.S. economy seems to be shrugging all that off.”

Resilient as the economy has apparently been since then, the fate of the recovery appears to be more dependent on external — and especially European — events.

So far Europe’s problems have been relatively contained to the Continent. Many economists worry, however, that a disorderly default of Greece or Italy, which still looks alarmingly possible, could lead to a financial crisis that would plunge not only Europe but the entire world into a depression.

If recent history is any guide, even a modest credit tightening could throw the American economy off course; earlier this year, a series of shocks from higher oil prices, the Japanese earthquake and the stalemate over the United States debt ceiling managed to drain the energy from a newly rejuvenated recovery.

In addition to hawking its domestic jobs package, the Obama administration has stepped up its involvement in the euro zone crisis in recent days. The Treasury Department announced Friday that Secretary Timothy F. Geithner will visit European political and financial leaders in several cities next week.

“As president, my most pressing challenge is doing everything I can every single day to get this economy growing faster and create more jobs,” President Obama said Friday in Washington.

November’s drop in unemployment to 8.6 percent was a welcome relief, given that the jobless rate had been stuck at 9 percent for most of 2011.

The decline in the unemployment rate had a downside, though: It fell partly because more workers got jobs, but also because about 315,000 workers dropped out of the labor force. That left the share of Americans actively participating in the work force at a historically depressed 64 percent, down from 64.2 percent in October.

A separate survey of employers, which economists pay more attention to than the unemployment rate, found that companies added 120,000 jobs last month, after adding 100,000 jobs in October.

These payroll numbers were not particularly impressive by historical standards — payroll growth was just about enough to keep up with population growth — but there were other signs of resilience. Employment in the previous two months was revised upward substantially, and the report showed that companies have been taking on more and more temporary workers, indicating that more permanent hires may be in the cards, too.

Other recent economic reports have also been positive, including increases in help-wanted advertising, retail sales and auto sales in particular; decreases in jobless claims; and a loosening of credit conditions for small businesses. Perhaps most encouraging was a recent survey of small businesses that found hiring intentions to be at their highest level since September 2008, when Lehman Brothers collapsed.

“Small businesses were cheering up at the end of last year, but then got clobbered by the jump in oil prices, the Japanese earthquake and then the debt ceiling fiasco,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “Small businesses employ half the work force, and we need them on board.”

Still, serious concerns remain about the economy’s ability to weather the financial and economic turmoil from abroad.

American governments at all levels continued to bleed workers, for one. Even excluding the hundreds of thousands who left the labor force, the country still had a backlog of more than 13 million unemployed workers, whose unemployment averaged an all-time high of 40.9 weeks.

“They say businesses are refusing to look at résumés from the unemployed,” said Esther Perry, 59, of Bedford, Mass., who participated in a recent report on unemployed workers put together by USAction, a liberal coalition. “What do you think my chances are? Once unemployment runs out, I don’t know what I will do.”

Even those who are employed are in fragile positions. Average hourly earnings fell 0.1 percent in November, and a Labor Department report released Wednesday found that the share of national income going to labor was at an all-time low last quarter.

These softer spots in Friday’s numbers underscored just how much President Obama needs additional stimulus, a tidy and fast resolution to the European debt crisis or some other economic breakthrough to reinvigorate the job market before the 2012 presidential election.

On the issue of government action to stimulate the economy, there has been some movement in Washington toward extending the payroll tax cut, which is currently scheduled to expire at the end of this month. Economists have said that allowing the expiration of the tax cut — which lets more than 160 million mostly middle-class Americans keep two percentage points more of their pay checks — could be a severe drag on both job creation and output growth.

“If isn’t extended, it will have an impact on consumer spending in the first half of next year because it’ll put a big dent in consumer income,” said Conrad DeQuadros, senior economist at RDQ Economics. “To the extent that reduces spending, there will be second-round effects on hiring.”

Extending the tax cut would likely lead to 600,000 to 1 million more jobs, according to Adriana Kugler, the chief economist at the Department of Labor.

The other major stimulus program scheduled to expire by 2012 is the extended unemployment insurance benefits, which allow some jobless workers to continue receiving benefits for as long as 99 weeks. Already, millions of workers have exhausted their benefits, and ending extended benefits is likely to affect another sizable chunk of the unemployed.

Failing to renew the federal benefit extensions will cause 5 million additional people to lose benefits next year, Labor Secretary Hilda Solis said in an interview.

Unemployment benefits are believed to have one of the most stimulative effects on the economy, since recipients of these benefits are likely to spend all of the money they receive quickly and so pump more spending through the economy.

    Signs of Hope in Jobs Report; Unemployment Drops to 8.6%, NYT, 2.12.2011
    http://www.nytimes.com/2011/12/03/business/economy/
    us-adds-120000-jobs-unemployment-drops-to-8-6.html

For Jobless, Little Hope of Restoring Better Days

December 1, 2011
The New York Times
By MOTOKO RICH

People across the working spectrum suffered job losses in recent years: bricklayers and bookkeepers as well as workers in manufacturing and marketing.

But only a select few workers have fully regained their footing during the slow recovery.

Katie O’Brien Mowery is one of the lucky ones. After losing her job in the marketing department of a luxury resort in Santa Barbara, Calif., in early 2010, she eventually found a position with better benefits and the promise of a brighter future.

“I wished that it happened sooner than it did,” said Ms. Mowery, who is in her mid-30s, referring to her nearly yearlong job search. “But looking back, my new position wouldn’t have been available when I was laid off, and now I’m very happy.”

Even though the Labor Department is expected to report on Friday that employers added more than 100,000 jobs in November, a new study shows just how rare people like Ms. Mowery are. According to the study, to be released Friday by the John J. Heldrich Center for Workforce Development at Rutgers, just 7 percent of those who lost jobs after the financial crisis have returned to or exceeded their previous financial position and maintained their lifestyles.

The vast majority say they have diminished lifestyles, and about 15 percent say the reduction in their incomes has been drastic and will probably be permanent.

Bill Loftis is one of the unfortunate ones. He is without a college degree or specialized skills and also worked in an industry, manufacturing, that has added back only about 13 percent of the jobs that it lost during the recession.

After 22 years on the job, Mr. Loftis, 44, was laid off from a company that produces air filters and valves in Sterling Heights, Mich., three years ago. Managers “looked me dead in the eye,” he recalled, “and said, ‘We’re laying you off, but don’t worry, we’re calling you back.’ ”

He has heard nothing since. Despite applying for more than 100 jobs, he has been unable to find work. He has drained most of his 401(k) retirement fund, amassed credit card debt, and is about to sell his car, a 2006 Dodge Charger. “It’s looking hopeless,” he said.

According to the Rutgers study, those with less education were the most ravaged by job loss during the recession. Even among those who found work, many made much less than before the downturn.

“The news is strikingly bad,” said Cliff Zukin, a professor of public policy and political science at Rutgers who compiled the study, which was based on surveys of a random sample of Americans who were unemployed at some point from August 2008 to August 2009. The numbers represent “a tremendous impression of dislocation and pain and wasted talent,” he said.

More than two years after the recovery officially began, American employers have reinstated less than a quarter of the jobs lost during the downturn, according to Labor Department figures. Of the 13.1 million people still searching for work, more than 42 percent have been unemployed for six months or longer. About 8.9 million more are working part time because they cannot find full-time work.

While health care and some energy-related jobs have boomed throughout in recent years, the other winners have mostly been in skilled professions like computer systems design, management consulting and accounting, where employers have added back as many or more jobs than were cut during the downturn.

Companies like Ernst & Young, KPMG and PricewaterhouseCoopers, which offer accounting and other business advisory services, as well as management consulting firms like Bain & Company, have returned to peak hiring levels. Many Silicon Valley firms are aggressively recruiting. Google, for example, announced that it has hired more people in 2011 than in any previous year.

Other employers are adding back jobs that were cut, though not yet enough to reach prerecession peaks. What is more, these jobs are in areas like retail, hospitality and home health care, categories that pay low wages and are unlikely to give workers much economic security.

The sectors that have been slowest to recover are those that endured the most acute job losses, like construction and state and local government. Construction workers are among the biggest sufferers, stung by a housing collapse that led to the loss of two million jobs. Since the recovery began, the industry has added just 47,000 jobs.

Even manufacturing, which has shown a relatively healthy pace of job creation during the recovery, has added just over a tenth of the 2.3 million jobs that disappeared in the downturn.

“This recovery is really not a fair and balanced recovery,” said Scot Melland, chief executive of Dice Holdings, an online job search service. “There are certain sectors that have done well, and others that haven’t done well at all. If you’re in one of the losing sectors, it’s very tough.”

Based on previous recessions, employers would have been expected to fill more jobs at this point in the recovery. But the kinds of jobs that typically return first have lagged this time around. “Construction is usually one of the earlier sectors to come back,” said Harry J. Holzer, an economist at Georgetown University and the Urban Institute.

Because she had a college degree, it never occurred to Ms. Mowery that she would not eventually find a job. While collecting unemployment benefits, she tapped her network of friends and sought out the services of a unit of Randstad Holdings, a job placement firm. To brush up on her skills, she took online tutorials in software programs like Photoshop and InDesign.

When she landed a new marketing job last December at a company that resells networking equipment, she started at the same salary she had earned before, but with improved health and retirement benefits and more opportunities for promotion.

“I didn’t want to just take a job, but make a career move,” she said. “I was pretty confident. Things have a way of working out.”

Others are more desperate. Some of them are sending out scattershot applications for jobs for which they are overqualified. Jaison Abel, senior economist at the Federal Reserve Bank of New York, said there was “some evidence that people who, in a different time, would have been entering the work force in midskilled jobs are now entering into the lower-skilled jobs.”

Some are trying for slots even if they do not meet basic qualifications. PricewaterhouseCoopers received more than 250,000 applications through its Web site over the last year, but it has hired only 1 percent from that pool, said Holly Paul, its United States recruiting leader. She said a house painter with no qualifications beyond high school had applied for 10 different openings that required college degrees and accounting certification.

“It’s definitely an eye-opener for me because it gives you an idea of what unfortunately is happening in the economy,” said Ms. Paul.

Even many of those who have managed to find a job are struggling to restore financial stability. “They have had to take pay cuts or benefit cuts or maybe they don’t get any vacation,” said David Elliot, communications director for USAction, a coalition of grass-roots groups that will release a report on Friday about the experiences of unemployed and underemployed workers.

Mr. Loftis stays at his home in Michigan with his 4-year-old twins and looks for ways to shave costs. He and his wife, who has returned to work in a $10-an-hour factory job, canceled their cable service and no longer travel to see her family in the Philippines or relatives in Florida or Tennessee.

As he continues to apply for work, Mr. Loftis said employers have told him he has been out of a job for too long. “It’s just hard,” he said. “What can you do to get back on track, you know?”

    For Jobless, Little Hope of Restoring Better Days, NYT, 1.12.2011,
    http://www.nytimes.com/2011/12/02/business/for-jobless-little-hope-of-full-recovery-study-says.html

Killing the Euro

December 1, 2011
The New York Times
By PAUL KRUGMAN

Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely.

True, market pressure lifted a bit on Wednesday after central banks made a splashy announcement about expanded credit lines (which will, in fact, make hardly any real difference). But even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis.

How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!

But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.

The story so far: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe’s case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?

For the most part, by the way, this lending went to the private sector, not to governments. Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.

Then the bubble burst. Private spending in the debtor nations fell sharply. And the question European leaders should have been asking was how to keep those spending cuts from causing a Europe-wide downturn.

Instead, however, they responded to the inevitable, recession-driven rise in deficits by demanding that all governments — not just those of the debtor nations — slash spending and raise taxes. Warnings that this would deepen the slump were waved away. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

But the confidence fairy was a no-show.

Wait, there’s more. During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.

But to close the gap through rising prices in the north, policy makers would have to accept temporarily higher inflation for the euro area as a whole. And they’ve made it clear that they won’t. Last April, in fact, the European Central Bank began raising interest rates, even though it was obvious to most observers that underlying inflation was, if anything, too low.

And it’s probably no coincidence that April was also when the euro crisis entered its new, dire phase. Never mind Greece, whose economy is to Europe roughly as greater Miami is to the United States. At this point, markets have lost faith in the euro as a whole, driving up interest rates even for countries like Austria and Finland, hardly known for profligacy. And it’s not hard to see why. The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.

I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.

For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.

So the next time you hear someone claiming that if we don’t slash spending we’ll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we’ll turn into Europe. In fact, we’re well on our way.

    Killing the Euro, NYT, 1.12.2011,
    http://www.nytimes.com/2011/12/02/opinion/krugman-killing-the-euro.html

The Fed and the Euro

December 1, 2011
The New York Times

The Federal Reserve’s move on Wednesday to make it easier for European banks to acquire dollars shows that American policy makers understand the gravity of Europe’s turmoil and will do what they can to prevent a financial collapse across the Atlantic. European leaders, however, seem paralyzed and, even at this point, fail to share the Fed’s sense of urgency.

The Fed’s extraordinary intervention should impress upon the European Central Bank, as well as its paymasters in Germany, that it is high time it stopped sitting on its hands. Only aggressive action by the bank can arrest the government debt crisis that is spreading across the Continent and threatening the very survival of the euro.

The Fed offered to swap dollars for euros at a low interest rate with the E.C.B., which would allow it to offer cheap dollars to European banks. That became necessary when American money market funds and other financial institutions started cutting off financing to banks in Europe, which own piles of risky government bonds.

Absent an alternative source of dollars, Europe’s banks could have been forced into a fire sale of dollar-denominated bonds and other assets, which would have spread the crisis to American financial institutions. But, while it was necessary, the Fed’s move does not address the root of Europe’s immediate dilemma: investors are demanding high interest rates to buy the bonds of weak euro-area economies, which are burdened by big piles of debt and are unable to devalue their currencies to become more competitive.

The European leaders’ failure over the past two years to assemble a credible bailout plan to restore financial stability to the weak economies like Greece has pushed the crisis to Italy, the euro zone’s third-biggest economy, which owes $2.5 trillion and must refinance $530 billion of that debt next year. This week, Italy issued new debt at interest of nearly 8 percent, a rate that, if sustained, could force the country to default. The euro could not survive such an event.

This is why it is urgent for the E.C.B. — which can print euros at will — to act immediately by promising to purchase as many bonds of stricken countries as is necessary to reduce their interest rates to affordable levels.

Until now, the central bank has refused to intervene on a substantial scale. Leaders in Germany, the strongest European economy, argue that allowing the central bank to turn on the printing press would foster profligacy by taking weak nations off the hook. And it says it fears inflation, an implausible concern for economies that are slipping into recession.

On Thursday, Mario Draghi, the president of the E.C.B., made a veiled suggestion that the bank might buy more bonds if nations in the euro zone could agree to establish a “fiscal compact” that set credible rules and enforcement mechanisms to ensure that budget deficits are pared. This would be good news if the central bank started buying bonds right after the European summit meeting next week. But if it waits until euro-zone countries agree to give the central bank or the European Commission control over their budgets, the euro is probably doomed.

    The Fed and the Euro, NYT, 1.12.2011,
    http://www.nytimes.com/2011/12/02/opinion/the-fed-and-the-euro.html

A Banker Speaks, With Regret

November 30, 2011
The New York Times
By NICHOLAS D. KRISTOF

If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.

As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.

“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”

“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.

Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.

“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.

“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.

Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.

In late 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He says he bears no animus toward Chase, but he does think it is profoundly unfair that troubled banks have been rescued while troubled homeowners have been evicted.

When I called JPMorgan Chase for its side of the story, it didn’t deny the accounts of manic mortgage-writing. Its spokesmen acknowledge that banks had made huge mistakes and noted that Chase no longer writes subprime or no-document mortgages. It also said that it has offered homeowners four times as many mortgage modifications as homes it has foreclosed on.

Still, 28 percent of all American mortgages are “underwater,” according to Zillow, a real estate Web site. That means that more is owed than the home is worth, and the figure is up from 23 percent a year ago. That overhang stifles the economy, for it’s difficult to nurture a broad recovery unless real estate and construction revive.

All this came into sharper focus this week as Bloomberg Markets magazine published a terrific exposé based on lending records it pried out of the Federal Reserve in a lawsuit. It turns out that the Fed provided an astonishing sum to keep banks afloat — $7.8 trillion, equivalent to more than $25,000 per American.

The article estimated that banks earned up to $13 billion in profits by relending that money to businesses and consumers at higher rates.

The Federal Reserve action isn’t a scandal, and arguably it’s a triumph. The Fed did everything imaginable to avert a financial catastrophe — and succeeded. The money was repaid.

Yet what is scandalous is the basic unfairness of what has transpired. The federal government rescued highly paid bankers from their reckless decisions. It protected bank shareholders and creditors. But it mostly turned a cold shoulder to some of the most vulnerable and least sophisticated people in America. Last year alone, banks seized more than one million homes.

Sure, some programs exist to help borrowers in trouble, but not nearly enough. We still haven’t taken such basic steps as allowing bankruptcy judges to modify the terms of a mortgage on a primary home. Legislation to address that has gotten nowhere.

My daughter and I are reading Steinbeck’s “Grapes of Wrath” aloud to each other, and those Depression-era injustices seem so familiar today. That’s why the Occupy movement resonates so deeply: When the federal government goes all-out to rescue errant bankers, and stiffs homeowners, that’s not just bad economics. It’s also wrong.

    A Banker Speaks, With Regret, NYT, 30.11.2011,
    http://www.nytimes.com/2011/12/01/opinion/kristof-a-banker-speaks-with-regret.html

High Stakes, Little Time

November 30, 2011
The New York Times

At the end of this month, a federal payroll tax cut for all working Americans will expire, as will federal unemployment benefits. If Congress fails to renew both, the effect on the economy would be grim, or worse.

There is broad consensus among economists that letting these two provisions lapse — taking much-needed spending money out of an already fragile economy — would sharply reduce growth in 2012 below its already tepid annual rate of 2 percent. Conservatively estimated, that could mean the loss of some 725,000 jobs and a rise in the unemployment rate of almost half-a-percentage point, for a projected rate well above 9 percent next year.

While Congressional Democrats, and President Obama, are eager to move ahead with both, many Republicans have resisted the payroll tax cut extension and are lukewarm about renewing jobless benefits.

Republicans now say they want to help. But, as ever, they are more concerned about making sure the rich don’t have to pay their fair share of taxes. And denying Mr. Obama any “win” — and any claim to helping the economy — is always at the top of their campaign season to-do list.

To help jump-start the economy, Senate Democrats proposed increasing the size of the tax break for employees and also giving employers a break on their share of the tax. And they proposed to pay for it with a 3.25 percent surtax, starting in 2013, on incomes over $1 million.

There was a brief moment this week when it looked as though Republicans might be ready to put the interests of struggling Americans ahead of the wealthy. Senators Susan Collins of Maine, Pat Roberts of Kansas and Mike Johanns of Nebraska suggested that maybe, just maybe, they would support a plan in which the rich were asked to pay more to help out everyone else. On Wednesday, the full caucus was back to business as usual.

The Republican leadership proposed to offset the cost of the payroll extension mainly by extending a pay freeze on federal workers for an extra year, reducing the federal work force and increasing Medicare premiums for high-income recipients.

Including the federal work force hits at middle-class jobs, reducing pay and, with it, consumer spending and economic security — at a time when more pay, more spending and more security are needed. As for Medicare premiums, that is a complicated effort best handled in the context of a deficit-reduction plan that balances spending reductions with tax increases.

The glimmer of hope here is that by making a counteroffer, however unworkable, Republicans are acknowledging the need to extend the payroll tax cut. Whether that means they are willing to negotiate in good faith — and consider compromising — is by no means clear.

Congress also has to get moving on unemployment benefits. Even a one-month delay in extending those benefits — $295 a week, on average — would be devastating, cutting off an estimated 1.8 million unemployed workers in January alone. The right thing to do — for struggling Americans and for the broader economy — is to extend both the payroll tax cut and federal jobless benefits.

Asking the rich to help pay the cost is only fair, given that their lavish Bush-era tax cuts last until the end of 2012. It also makes good economic sense. The rich tend to save their tax cuts, while middle- and low-income workers tend to spend them. That helps those workers, and it helps the economy, which needs all the help it can get.

    High Stakes, Little Time, NYT, 30.11.2011,
    http://www.nytimes.com/2011/12/01/opinion/high-stakes-little-time.html

Central Banks Take Joint Action to Ease Debt Crisis

November 30, 2011
The New York Times
By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve moved Wednesday with other major central banks to buttress the financial system by increasing the availability of dollars outside the United States, reflecting growing concern about the fallout of the European debt crisis.

The banks announced that they would slash by roughly half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The loans will be available until February 2013, extending a previous endpoint of August 2012.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the banks said in a statement.

The participants in addition to the Fed were the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

The move makes clear that regulators increasingly are concerned about the strain that the European debt crisis is placing on financial companies. European banks in particular are facing difficulty in borrowing through normal channels the money that they need to fund their obligations.

On Wall Street, markets reacted to the announcement by racing ahead at the opening bell. After an hour of trading the Dow Jones industrial average was up 400 points, or 3.5 percent, and the broader Standard & Poor’s 500-stock index gained 3.6 percent; European markets were up more than 4 percent in late trading.

The cost for European banks to borrow in dollars in the open market has climbed to the highest level in three years, and the European Central Bank borrowed $552 million from the Fed last week to meet the rising demand for dollars from European banks. That brought the value of the Fed’s outstanding currency loans to $2.4 billion, all to the European Central Bank except $100 million on loan to the Bank of Japan.

The Fed’s vice chairwoman, Janet L. Yellen, underscored “the urgency of strengthened international policy cooperation” in a speech Tuesday in San Francisco in which she said that “the global economy is facing critical challenges.”

The terms of the revised agreement announced Wednesday reduces to half a percentage point an existing premium of one percentage point. Since the underlying price of the loans — the dollar overnight index swaps rate — stands at less than one-tenth of a percentage point, the move cuts the cost nearly in half. The most recent loan to the European Central Bank, which carried an interest rate of 1.08 percent, now would cost 0.58 percent.

The other central banks said they had also agreed to make similar loans of their own currencies as necessary, but they noted that the only extraordinary demand at present was for dollars.

The arrangements carry little risk for the Fed, which swaps the dollars for the currency of the borrowing country, together with a commitment to reverse the transaction at the same exchange rate. It is also modestly profitable, as the foreign central banks remit to the Fed the interest payments that they collect from borrowers.

The Fed operated a similar program with a broader range of central banks from December 2007 through February 2010, then allowed it to lapse because demand had dried up amidst signs of improvement in the global economy.

But the Fed was quickly forced to reverse course, announcing the new program in May 2010.

    Central Banks Take Joint Action to Ease Debt Crisis, NYT, 30.11.2011,
    http://www.nytimes.com/2011/12/01/business/central-banks-move-together-to-ease-debt-crisis.html

Lines Grow Long for Free School Meals, Thanks to Economy

November 29, 2011
The New York Times
By SAM DILLON

Millions of American schoolchildren are receiving free or low-cost meals for the first time as their parents, many once solidly middle class, have lost jobs or homes during the economic crisis, qualifying their families for the decades-old safety-net program.

The number of students receiving subsidized lunches rose to 21 million last school year from 18 million in 2006-7, a 17 percent increase, according to an analysis by The New York Times of data from the Department of Agriculture, which administers the meals program. Eleven states, including Florida, Nevada, New Jersey and Tennessee, had four-year increases of 25 percent or more, huge shifts in a vast program long characterized by incremental growth.

The Agriculture Department has not yet released data for September and October.

“These are very large increases and a direct reflection of the hardships American families are facing,” said Benjamin Senauer, a University of Minnesota economist who studies the meals program, adding that the surge had happened so quickly “that people like myself who do research are struggling to keep up with it.”

In Sylva, N.C., layoffs at lumber and paper mills have driven hundreds of new students into the free lunch program. In Las Vegas, where the collapse of the construction industry has caused hardship, 15,000 additional students joined the subsidized lunch program this fall. In Rochester, unemployed engineers and technicians have signed up their children after the downsizing of Kodak and other companies forced them from their jobs. Many of these formerly middle-income parents have pleaded with school officials to keep their enrollment a secret.

Students in families with incomes up to 130 percent of the poverty level — or $29,055 for a family of four — are eligible for free school meals. Children in a four-member household with income up to $41,348 qualify for a subsidized lunch priced at 40 cents.

Among the first to call attention to the increases were Department of Education officials who use subsidized lunch rates as a poverty indicator in federal testing. This month, in releasing results of the National Assessment of Educational Progress, they noted that the proportion of the nation’s fourth graders enrolled in the lunch program had climbed to 52 percent from 49 percent in 2009, crossing a symbolic watershed.

In the Rockdale County Schools in Conyers, Ga., east of Atlanta, the percentage of students receiving subsidized lunches increased to 63 percent this year from 46 percent in 2006.

“We’re seeing people who were never eligible before, never had a need,” said Peggy Lawrence, director of school nutrition.

One of those is Sheila Dawson, a Wal-Mart saleswoman whose husband lost his job as the manager of a Waffle House last year, reducing their income by $45,000. “We’re doing whatever we can to save money,” said Ms. Dawson, who has a 15-year-old daughter. “We buy clothes at the thrift store, we see fewer movies and this year my daughter qualifies for reduced-price lunch.”

She added, “I feel like: ‘Hey, we were paying taxes all these years. This is what they were for.’ ”

Although the troubled economy is the main factor in the increases, experts said, some growth at the margins has resulted from a new way of qualifying students for the subsidized meals, known as direct certification. In 2004, Congress required the nation’s 17,000 school districts to match student enrollment lists against records of local food-stamp agencies, directly enrolling those who receive food stamps for the meals program. The number of districts doing so has been rising — as have the number of school-age children in families eligible for food stamps, to 14 million in 2010-11 from 12 million in 2009-10.

“The concern of those of us involved in the direct certification effort is how to help all these districts deal with the exploding caseload of kids eligible for the meals,” said Kevin Conway, a project director at Mathematica Policy Research, a co-author of an October report to Congress on direct certification.

Congress passed the National School Lunch Act in 1946 to support commodity prices after World War II by reducing farm surpluses while providing food to schoolchildren. By 1970, the program was providing 22 million lunches on an average day, about a fifth of them subsidized. Since then, the subsidized portion has grown while paid lunches have declined, but not since 1972 have so many additional children become eligible for free lunches as in fiscal year 2010, 1.3 million. Today it is a $10.8 billion program providing 32 million lunches, 21 million of which are free or at reduced price.

All 50 states have shown increases, according to Agriculture Department data. In Florida, which has 2.6 million public school students, an additional 265,000 students have become eligible for subsidies since 2007, with increases in virtually every district.

“Growth has been across the board,” said Mark Eggers, the Florida Department of Education official who oversees the lunch program.

In Tennessee, the number of students receiving subsidized meals has grown 37 percent since 2007.

“When a factory closes, our school districts see a big increase,” said Sarah White, the state director of school nutrition.

In Las Vegas, with 13.6 percent unemployment, the enrollment of thousands of new students in the subsidized lunch program forced the Clark County district to add an extra shift at the football field-size central kitchen, said Virginia Beck, an assistant director at the school food service.

In Roseville, Minn., an inner-ring St. Paul suburb, the proportion of subsidized lunch students rose to 44 percent this fall from 29 percent in 2006-7, according to Dr. Senauer, the economist. “There’s a lot of hurt in the suburbs,” he said. “It’s the new face of poverty.”

In New York, the Gates Chili school district west of Rochester has lost 700 students since 2007-8, as many families have fled the area after mass layoffs. But over those same four years, the subsidized lunch program has added 125 mouths, many of them belonging to the children of Kodak and Xerox managers and technicians who once assumed they had a lifetime job, said Debbi Beauvais, district supervisor of the meals program.

“Parents signing up children say, ‘I never thought a program like this would apply to me and my kids,’ ” Ms. Beauvais said.

Many large urban school districts have for years been dominated by students poor enough to qualify for subsidized lunches. In Dallas, Newark and Chicago, for instance, about 85 percent of students are eligible, and most schools also offer free breakfasts. Now, some places have added free supper programs, fearing that needy students otherwise will go to bed hungry.

One is the Hickman Mills C-1 district in a threadbare Kansas City, Mo., neighborhood where a Home Depot, a shopping mall and a string of grocery stores have closed.

Ten years ago, 48 percent of its students qualified for subsidized lunches. By 2007, that proportion had increased to 73 percent, said Leah Schmidt, the district’s nutrition director. Last year, when it hit 80 percent, the district started feeding 700 students a third meal, paid for by the state, each afternoon when classes end.

“This is the neediest period I’ve seen in my 20-year career,” Ms. Schmidt said.

 

Robbie Brown and Kimberley McGee contributed reporting.

    Lines Grow Long for Free School Meals, Thanks to Economy, NYT, 29.11.2011,
    http://www.nytimes.com/2011/11/30/education/surge-in-free-school-lunches-reflects-economic-crisis.html

A New Shot at Mortgage Relief

November 29, 2011
The New York Times
By MOTOKO RICH

Like millions of other homeowners, William D. Compton would like to refinance his mortgage so that he pays less each month for his three-bedroom house in Gulf Breeze, Fla. With the savings, he figures he could afford a few extra movies and restaurant dinners or he could buy a new stove and brakes for his car, purchases he has postponed because finances are so tight.

Although he would appear to be a good candidate, Mr. Compton, 57, has been turned down twice for a federal refinancing program aimed at homeowners like him.

Still, he has renewed hope. That’s because the government is expanding the Home Affordable Refinance Program, which was meant to help homeowners whose mortgages are backed by the government and whose home values have declined sharply, even below what the borrowers owe. Mr. Compton is one of those underwater homeowners.

When the Treasury Department announced the program, referred to as HARP, two years ago, it said it could help four million to five million homeowners whose home values had plunged. Yet just 900,000 borrowers — whose loans are owned by Fannie Mae and Freddie Mac, the government-sponsored housing finance companies — have successfully refinanced through the program. Starting early next month, though, banks will begin using new criteria intended to make more borrowers eligible: raising the ceiling on how much owners can borrow over the value of their home as well as relaxing rules that might force banks to take back bad loans from the government. In announcing the change, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, carefully eased expectations, suggesting about 900,000 more homeowners would be helped, roughly doubling the size of the program to date.

Analysts welcomed the change, but some criticized it for still not capturing nearly enough of the people who could benefit from lower interest rates.

Of the 22 million borrowers who could be eligible for the government refinancing program, nearly 70 percent of them are paying interest rates of 5 percent or more, according to CoreLogic, a research firm. Conventional mortgage rates are currently closer to 4 percent.

Greater participation could help the beleaguered housing market, which showed renewed signs of decline in data released on Tuesday, as well as help shore up the broader economy.

“The universe is much larger than what has come through the pipeline,” said Paul Ballew, chief economist at Nationwide Insurance. Mr. Ballew said that if 10 million more people refinanced and saved an average of $200 a month, that would work out to be about $24 billion a year of additional spending power in the economy.

Other economists and officials of the Federal Housing Finance Agency say it is unrealistic to expect all those borrowers to refinance. Some people are wary of government programs, while others will be put off by upfront application fees and the paperwork burden. Those who have home equity loans or second mortgages could face tougher approvals.

Since the refinancing program is optional, lenders may impose additional restrictions. What is more, it is costly to devote staff to refinancing applications, so lenders may simply be reluctant to do so.

Mr. Compton has calculated that a refinancing would save him and his wife, Lynne, about $275 on their $1,397 monthly payment. He has not missed a payment, despite being laid off from one job and enduring two pay cuts in the last two years. His salary is now roughly two-thirds what it was when they bought the house five years ago — a house that has since fallen in value.

The loan servicer, JPMorgan Chase, initially turned down the refinancing application because the Comptons had been living in another, smaller property they owned while renting out their main house.

The couple moved back in September and reapplied after changing their drivers’ licenses and utility bills.

This time, a loan officer told Mr. Compton, who works as a public transportation planner, that he did not qualify because his loan had been sold to two different investors. Mr. Compton said he confirmed through a government Web site that his loan was now owned solely by Freddie Mac.

“It angers me quite a bit,” said Mr. Compton, who added that unlike other borrowers, he never took out a home equity loan during the boom and has consistently paid his bills. The refinancing program, he said, should be “a perfect fit for me.”

He suspects that Chase — as well as other lenders — believe “that if you just tell people ‘no’ often enough, eventually they will just say O.K., and move on.”

After being asked about Mr. Compton’s case, a Chase spokesman said the company was investigating his file. “We are reaching out to the customer to see if we could refinance him through HARP 2,” said the spokesman, referring to the expanded government program, “or offer another option.”

Meg Burns, senior associate director for housing and regulatory policy at the Federal Housing Finance Agency, said the agency could not control individual lenders.

Ms. Burns said the new criteria were intended to “serve these specific borrowers whose home values had declined and did not otherwise have access to a refinance or at a cost that we thought was reasonable.” She added that the program was not meant to bolster the overall economy. (Separately, since April 2009, Fannie Mae and Freddie Mac have refinanced eight million loans through other programs for borrowers who still have equity in their homes.)

Some analysts complain that the new rules are too narrow to spur enough refinancings to actually help the economy. Christopher J. Mayer, a professor of real estate at Columbia Business School, said the new criteria would do little to encourage banks to compete for refinancing business. “This was a program designed to be very small,” he said.

Even if the program were to help far more borrowers refinance, some economists expect little increase in consumer demand. A much larger refinancing boom last decade led to a rise in consumer spending that was only “modest and transitory,” said Sam Khater, senior economist at CoreLogic.

Indeed, the savings from a refinancing may go toward paying off other debts or creating a cushion for lean times.

It took two years for Leslie Davidson, a consultant who helps companies produce audio and Web conferences, to refinance the mortgage on her townhouse in Pacifica, Calif. After spending more than $1,200 on appraisals and getting rejected by several lenders, Ms. Davidson finally got approved through the federal government refinancing program with her current servicer, CitiMortgage, earlier this year.

She reduced her monthly payments by nearly $400, and bought an Apple laptop. But she is mostly using the savings to pay off more loan principal each month and reduce the credit card debt that she racked up during the economic downturn.

Government officials say the main benefit of the expanded refinancing program is to reduce the likelihood that borrowers — even those who have consistently made payments — will eventually default.

“The economy is weak, and the unemployment rate is high, and sometimes bad things happen to good people,” said Frank E. Nothaft, chief economist at Freddie Mac. “If they get hit with another whammy such as they lose their job,” he added, “they are more likely to go into delinquency and into foreclosure.”

But some critics say the government’s refinancing program sidesteps the fundamental problem that drives foreclosures, which is that close to 10.7 million borrowers — more than a fifth of all mortgage holders — owe more than their homes are worth. Many of them have already missed too many payments to be eligible for refinancing.

The housing market has yet to see its bottom, and an increasing number of economists worry that depressed housing prices and underwater borrowers are holding back a broader recovery.

“If the group we’re trying to reach is those who are underwater,” said Katherine Porter, a law professor at the University of California, Irvine who specializes in bankruptcy and mortgages, refinancing to lower monthly payments is “a very odd mismatch between the problem and the solution.”

She added: “Don’t get me wrong, that puts more dollars in families’ pockets and may have a stimulus effect, but it’s a very tangential way of addressing underwater homeowners.”

This article has been revised to reflect the following correction:

Correction: November 30, 2011

An earlier version of this article misstated the amount of spending power that would be added to the American economy if 10 million more people refinanced and saved an average of $200 a month. It is $24 billion, not $240 billion.

    A New Shot at Mortgage Relief, NYT, 29.11.2011,
    http://www.nytimes.com/2011/11/30/business/us-widens-scope-of-mortgage-refinancing-program.html

As Public Sector Sheds Jobs, Blacks Are Hit Hardest

November 28, 2011
The New York Times
By TIMOTHY WILLIAMS

Don Buckley lost his job driving a Chicago Transit Authority bus almost two years ago and has been looking for work ever since, even as other municipal bus drivers around the country are being laid off.

At 34, Mr. Buckley, his two daughters and his fiancée have moved into the basement of his mother’s house. He has had to delay his marriage, and his entire savings, $27,000, is gone. “I was the kind of person who put away for a rainy day,” he said recently. “It’s flooding now.”

Mr. Buckley is one of tens of thousands of once solidly middle-class African-American government workers — bus drivers in Chicago, police officers and firefighters in Cleveland, nurses and doctors in Florida — who have been laid off since the recession ended in June 2009. Such job losses have blunted gains made in employment and wealth during the previous decade and undermined the stability of neighborhoods where there are now fewer black professionals who own homes or who get up every morning to go to work.

Though the recession and continuing economic downturn has been devastating to the American middle class as a whole, the two and a half years since the declared end of the recession have been singularly harmful to middle-class blacks in terms of layoffs and unemployment, according to economists and recent government data. About one in five black workers have public-sector jobs, and African-American workers are one-third more likely than white ones to be employed in the public sector.

“The reliance on these jobs has provided African-Americans a path upward,” said Robert H. Zieger, emeritus professor of history at the University of Florida, and the author of a book on race and labor. “But it is also a vulnerability.”

A study by the Center for Labor Research and Education at the University of California this spring concluded, “Any analysis of the impact to society of additional layoffs in the public sector as a strategy to address the fiscal crisis should take into account the disproportionate impact the reductions in government employment have on the black community.”

Jobless rates among blacks have consistently been about double those of whites. In October, the black unemployment rate was 15.1 percent, compared with 8 percent for whites. Last summer, the black unemployment rate hit 16.7 percent, its highest level since 1984.

Economists say there are probably a variety of reasons for the racial gap, including generally lower educational levels for African-Americans, continuing discrimination and the fact that many live in areas that have been slow to recover economically.

Though the precise number of African-Americans who have lost public-sector jobs nationally since 2009 is unclear, observers say the current situation in Chicago is typical. There, nearly two-thirds of 212 city employees facing layoffs are black, according to the American Federation of State, County and Municipal Employees Union.

The central role played by government employment in black communities is hard to overstate. African-Americans in the public sector earn 25 percent more than other black workers, and the jobs have long been regarded as respectable, stable work for college graduates, allowing many to buy homes, send children to private colleges and achieve other markers of middle-class life that were otherwise closed to them.

Blacks have relied on government jobs in large numbers since at least Reconstruction, when the United States Postal Service hired freed slaves. The relationship continued through a century during which racial discrimination barred blacks from many private-sector jobs, and carried over into the 1960s when government was vastly expanded to provide more services, like bus lines to new suburbs, additional public hospitals and schools, and more.

But during the past year, while the private sector has added 1.6 million jobs, state and local governments have shed at least 142,000 positions, according to the Labor Department. Those losses are in addition to 200,000 public-sector jobs lost in 2010 and more than 500,000 since the start of the recession.

The layoffs are only the latest piece of bad news for the nation’s struggling black middle class.

A study by the Brookings Institution in 2007 found that fewer than one-third of blacks born to middle-class parents went on to earn incomes greater than their parents, compared with more than two-thirds of whites from the same income bracket. The foreclosure crisis also wiped out a large part of a generation of black homeowners.

The layoffs are not expected to end any time soon. The United States Postal Service, where about 25 percent of employees are black, is considering eliminating 220,000 positions in order to stay solvent, and areas with large black populations — from urban Detroit to rural Jefferson County, Miss. — are struggling with budget problems that could also lead to mass layoffs.

The postal cuts alone — which would amount to more than one-third of the work force — would be a blow both economically and psychologically, employees say.

Pamela Sparks, 49, a 25-year Postal Service veteran in Baltimore, has a brother who is a letter carrier and a sister who is a sales associate at the Postal Service. Her father is a retired station manager.

“With our whole family working for the Post Office, it would be hard to help each other out because we’d all be out of work,” Ms. Sparks said. “It has afforded us a lot of things we needed to survive really, but this is one of the drawbacks.”

In Michigan, Valerie Kindle, 61, who was laid off in April as a state government employee, said the loss of her $50,000-a-year job with benefits had caused her to put off retirement. Instead, she is looking for work. Two relatives have also lost state government jobs recently.

“There hasn’t been one family member who hasn’t been touched by a layoff,” Ms. Kindle said. “We are losing the bulk of our middle class. I was much better off than my parents, and I’m feeling my children will not be as well off as I was. There’s not as much government work and not as many manufacturing jobs. It’s just going down so wrong for us. When I think about it I get frightened, so I try not to think about it.”

Mr. Buckley, the unemployed Chicago bus driver who now lives in his mother’s basement, said his mother, a Postal Service employee, had grown tired of him “eating up all her food.”

“She’s ready for me to get up out of here,” he said. In the meantime, Mr. Buckley says his life has drifted into the tedium of looking for decent-paying jobs that do not exist.

“I was living the American dream — my version of the American dream,” he said of his $23.76-an-hour job. “Then it crumbled. They get you used to having things and then they take them away, and you realize how lucky you were.”

    As Public Sector Sheds Jobs, Blacks Are Hit Hardest, NYT, 28.11.2011,
    http://www.nytimes.com/2011/11/29/us/as-public-sector-sheds-jobs-black-americans-are-hit-hard.html

Crisis in Europe Tightens Credit Across the Globe

November 28, 2011
The New York Times
By ERIC DASH and NELSON D. SCHWARTZ

Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world.

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May. It also lowered its economic outlook for Europe and the rest of the world, and a credit contraction could exacerbate the slowdown.

In addition, Moody’s Investors Service, the credit-rating agency, on Monday raised the possibility of mass downgrades of European government debt if a forceful resolution to the escalating crisis was not found.

Investors have begun to treat Europe’s big banks as the weak link in the global financial chain because of their huge holdings of bonds issued by debt-laden governments like Italy and Spain.

American money market funds have been closing the spigot of money they lend to European banks, forcing them to tighten lending standards and, in some cases, even withdraw financing from longtime customers. To make matters worse, European institutions are simultaneously under pressure from their regulators to hold more capital for each dollar they lend, prompting many banks to reduce their portfolio of loans. Analysts say Europe’s banks could shed up to 3 trillion euros of loans over the next few years, equal to about 10 percent of their total assets.

“If your largest banks aren’t able to provide credit, it hinders economic development and contributes to a recession,” said Alex Roever, a fixed-income research analyst at JPMorgan Chase.

Air France, for example, typically relied on French banks like BNP Paribas and Société Générale to help it finance about 15 percent of what it spends to purchase airplanes. Now those banks are retreating from making airline loans to save capital.

As an alternative, Air France officials say that they started developing closer ties with Chinese and Japanese banks, which have not faced the same pressure as their euro zone counterparts, to help pick up the slack.

Executives of Emirates Airlines, based in Dubai, are turning to the Islamic financing system, as well as to lenders in emerging markets, to help pay for its new fleet as some of the European banks shut off lending. Emirates has ordered 243 aircraft, worth more than $84 billion, from Airbus, Boeing and other aerospace companies.

“We were kind of planning for finance from the European banks,” Tim Clark, president of Emirates, told Reuters. “It’s just a bit difficult now.”

A failure to secure financing could quickly add up to lost jobs in the United States, Latin America and elsewhere.

The airplane maker Boeing recently warned that a European pullback could affect its business next year. With some European banks out of the picture, “this leaves a difference that must be made up by other sources if airplane deliveries across the industry, already set to increase in 2012, are to occur as planned,” said John Kvasnosky, a spokesman for the company.

Embraer, a Brazilian aerospace company, tempered its growth expectations despite having a pickup in commercial and business jet sales in the third quarter.

“This whole situation in Europe again has stalled this recovery process,” said Frederico Curado, chief executive of Embraer, in a conference call with investors in early November. “The way we see the world going forward is of a moderate growth.”

It remains to be seen, though, whether even moderate growth can be achieved. Moody’s cautioned that there was an increased chance that more than one country in the euro zone could default. In spite of that warning, investors put their fears aside and sent stocks up Monday by nearly 3 percent in New York.

Investors remain hesitant about government bond offerings, though. A tepid auction in Germany last week was particularly unnerving since its economy has long been seen as Europe’s financial bulwark. In Italy, weak demand for bonds pushed yields back above the critical 7 percent threshold, a level that has prompted other government borrowers to seek bailouts.

Higher interest rates on government debt quickly translate into higher borrowing costs for European banks, and in turn, for local companies and consumers in need of loans. Meanwhile, those banks’ own costs are also rising because the dollars they need to lend are in short supply.

So the banks are tightening their lending standards, squeezing businesses like airlines, shipping companies and exporters of oil, steel and food staples — industries that are critical to the health of the world economy.

“The strains and stress are increasing,” said Dirk Schumacher, a senior European economist at Goldman Sachs. “Funding conditions for corporations will get tougher going forward.”

One sign of this strain is that European lenders are quietly withdrawing from big infrastructure projects, like power plants and water developments, especially in the Middle East. Just this month, the $10 billion Barzan gas project in Qatar secured financing from 31 lenders, but three of the biggest French banks — BNP Paribas, Société Générale and Natixis — were notably absent.

“These guys are usually very active and this is a material sign that European lenders are holding back,” said Khalid Howladar, an analyst at Moody’s.

Large shipping companies are finding fewer lenders, too. Only a few years ago, Europe’s biggest banks were clamoring to supply credit at very attractive terms. Now, as freight rates collapse amid a global slowdown, those banks are tightening their purse strings. Frontline Ltd., an oil tanker giant in financial straits, said last week that it had lined up financing for only two of the seven vessels it planned to build.

The economic fallout from a global decline in shipbuilding affects not only the workers at the dry docks but also hundreds of businesses that supply parts and raw material to the industry. In Germany, for example, more than 5,000 people have lost their jobs in major ports like Hamburg, Kiel and Rostock, according to a local trade group.

Smaller companies are also struggling to secure credit. In Ireland, a survey by the local Small and Medium Enterprises Association found that 58 percent of companies that had approached banks for loans were turned down.

“We have many, many businesses that are viable, but the banks are not lending to them in the short term,” said Mark Fielding, its chief executive.

In Eastern Europe, where Western European banks have retrenched, leaders are sounding alarms. Traian Basescu, president of Romania, accused Austrian regulators of “choking the Romanian economy” after they ordered banks to limit lending outside its borders.

In Hungary, new construction for shopping centers and other commercial developments has come to a halt. Nora Demeter, an architect in Budapest, said her 20-member firm had already laid off a handful of employees and was likely to make further cuts. “The chance of getting a major project off the ground in this country is virtually over,” Ms. Demeter said. She added that “2012 is looking even bleaker.”

Even companies as far away as China are being hurt by Europe’s economic slowdown. Jacky Xu, the sales manager of the Yongkang Wanyu Industry and Trade Company in eastern China, said European orders for its scooters, skateboards and other children’s toys were down 20 to 30 percent this fall from a year ago. Several months ago, his company stopped accepting letters of credit from Greek banks, forcing Greek retailers to put down cash deposits of around 30 percent for new orders — a move that will worsen the decline.

“There are fewer people coming by from Europe,” he said.

Reporting was contributed by Jack Ewing, Keith Bradsher, Stephen Castle

and Sara Hamdan.

    Crisis in Europe Tightens Credit Across the Globe, NYT, 28.11.2011,
http://www.nytimes.com/2011/11/29/business/businesses-scramble-as-credit-tightens-in-europe.html

Things to Tax

November 27, 2011
The New York Times
By PAUL KRUGMAN

The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. Why should 1990s taxes be considered the outer limit of revenue collection? Think about it: The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest, not just return them to pre-Bush levels: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit.

It’s instructive to compare that estimate with the savings from the kinds of proposals that are actually circulating in Washington these days. Consider, for example, proposals to raise the age of Medicare eligibility to 67, dealing a major blow to millions of Americans. How much money would that save?

Well, none from the point of view of the nation as a whole, since we would be pushing seniors out of Medicare and into private insurance, which has substantially higher costs. True, it would reduce federal spending — but not by much. The budget office estimates that outlays would fall by only $125 billion over the next decade, as the age increase phased in. And even when fully phased in, this partial dismantling of Medicare would reduce the deficit only about a third as much as could be achieved with higher taxes on the very rich.

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions, which have exploded in recent decades. The economic value of all this trading is dubious at best. In fact, there’s considerable evidence suggesting that too much trading is going on. Still, nobody is proposing a punitive tax. On the table, instead, are proposals like the one recently made by Senator Tom Harkin and Representative Peter DeFazio for a tiny fee on financial transactions.

And here’s the thing: Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything, it suggests that to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing.

And it’s instructive, too, to note that some countries already have financial transactions taxes — and that among those who do are Hong Kong and Singapore. If some conservative starts claiming that such taxes are an unwarranted government intrusion, you might want to ask him why such taxes are imposed by the two countries that score highest on the Heritage Foundation’s Index of Economic Freedom.

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

    Things to Tax, NYT, 27.11.2011,
    http://www.nytimes.com/2011/11/28/opinion/krugman-things-to-tax.html

For a Weekend, at Least, Retailers See Record Numbers

November 27, 2011
The New York Times
By STEPHANIE CLIFFORD

Spurred by aggressive promotions from retailers, American consumers opened their wallets over the holiday weekend in a way they had not since before the recession, setting records in sales and traffic.

The National Retail Federation said Sunday that spending per shopper surged 9.1 percent over last year — the biggest increase since 2006 — to an average of almost $400 a customer. In all, 6.6 percent more shoppers visited stores on the Thanksgiving weekend than last year.

“American consumers have been taking a deep breath and making a decision that it’s O.K. to go shopping again,” despite the high unemployment rate and other signs of caution, said Ellen Davis, vice president at the National Retail Federation.

Numbers from ShopperTrak, a consumer research service, showed equally strong results, with in-store sales on Friday rising by 6.6 percent over last year’s Thanksgiving Friday to $11.4 billion.

Yet there were signs the gains might not last. Analysts said that traffic to stores seemed to slow through the weekend, suggesting that the big start to the holiday season might peter out over time. And shoppers were using credit cards in large numbers, mall owners and analysts said, signaling that consumers were willing to sacrifice savings more than last year, when they paid with cash more frequently.

“With consumers, it’s emotional, so they might feel they need Christmas this year,” said Margaret Taylor, vice president and senior credit officer in the corporate finance group at Moody’s Investors Service. “They could be willing to take on more credit.”

Mark Vitner, a senior economist at Wells Fargo Securities, said in a note to clients that he expected that “consumers will dig into savings” or “temporarily tack on a little more debt” during the holidays.

Retailers hardly objected. Total spending, including online sales, reached an estimated $52.4 billion Thursday through Sunday, the National Retail Federation said. About 35 percent of that total was spent online, slightly higher than last year, the federation said, suggesting that online retailers’ attempts to attract in-store shoppers worked well.

Bill Martin, founder of ShopperTrak, noted that the day after Thanksgiving, usually the year’s biggest sales day, is “one day in a 60-day holiday season.” Still, he said, “what we do know is without a strong start to the season it’s pretty hard to have a good season.”

Given the tight budgets of customers, major retailers aggressively wooed shoppers, moving back opening hours to midnight on Thanksgiving or earlier. It seems to have worked, attracting more shoppers and giving them more hours on Friday to spend.

Almost a quarter of people who went shopping the Friday after Thanksgiving were in stores by midnight Thursday, the federation found. Among 18- to 34-year-olds who went shopping, that percentage was higher — 36.7 percent — than it was among 35- to 54-year-olds, of whom 23.5 percent were in stores by midnight.

“Early Black Friday openings and Thanksgiving-night openings are simply to get a larger share of the customer’s wallet,” Ms. Davis said, adding that research showed that customers tend to spend more at their first stop than at subsequent ones.

Though the longer Friday hours helped bump up sales, some analysts said they might have taken away from steady shopping through the weekend.

“Our perspective is that Black Friday peaked early this year and then lost some of its luster,” said Alison Jatlow Levy, a retail strategist at the consulting firm Kurt Salmon. On Saturday, “the malls felt like an average busy Saturday, but not like a Black Friday extravaganza.”

At the midnight opening of Macy’s Herald Square on Thanksgiving, about 9,000 customers were in line, up from 7,000 last year. Most looked quite young, many saying they had come for the late-night spectacle rather than for specific deals.

Kester Richards, 18, was at the front of the line and said he had waited four hours. He said he was a regular Macy’s shopper and was looking for Ralph Lauren clothes, but had never been to Black Friday before.

Kyun Il Bae, 21, and In Jung Choi, 21, South Korean students studying in New York State, said they had heard about the event and wanted to see what it was like. “I just like the atmosphere,” Mr. Bae said. “It’s a popular place, and I heard this is crazy.” Later, in the store, Mr. Bae did not seem as enthusiastic. He shrugged when asked if he had found any good deals, and looked more exhausted than invigorated.

The midnight openings also may have contributed to the unusually high number of men who were in stores. More men than women shopped throughout the weekend, and they spent more per person, according to the retail federation.

“Men really aren’t willing to pull themselves out of bed at 4 a.m. for a bargain, but they will go” late at night, Ms. Davis said. “Men are increasingly budget-focused, and like the idea of looking for good deals.”

Stores selling to people of different income levels chose different tactics on Friday, with many of the low- and middle-income retailers opening early with “door-buster” discounts, and the luxury stores moving back their opening times by just an hour or two. Still, Mr. Martin said, sales “were pretty good across all manner of retailers.”

According to the federation, department stores and discounters were the most popular destinations over the weekend, followed by electronics stores.

Shoppers interviewed Thursday night and Friday sounded as if they were on tight budgets, and that drove them to stores.

Amanda Ponce, 40, stood outside a Target in downtown Chicago, an Xbox 360 for her 8-year-old daughter on her shopping list. At $139.99, marked down from $199.99, the savings were crucial this year, she said, since she will be buying fewer presents.

“We’ve had a lot harder time living the same lifestyle that we lived,” she said, saying that her husband, a marketing consultant, had been taking on extra work. “We’re focusing more on specifically what she wants instead of an abundance of gifts. Things she’ll actually use and play with.”

At a J. C. Penney in Rancho Cucamonga, Calif., Maria Aguilar was not buying presents — she had come in for deals on a coffeepot and a griddle.

“We are definitely cutting back,” said Ms. Aguilar, 45, an instructional assistant from Norco, Calif. She said that this year, her family was buying gifts for “just the little ones, just the children.”

Rebecca Fairley Raney and Steven Yaccino contributed reporting.

    For a Weekend, at Least, Retailers See Record Numbers, NYT, 27.11.2011,
    http://www.nytimes.com/2011/11/28/business/retailers-see-surge-in-sales-at-least-early.html

Oil Rigs Bring Camps of Men to the Prairie

November 25, 2011
The New York Times
By A. G. SULZBERGER

TIOGA, N.D. — As much as the drilling rigs that tower over this once placid corner of the prairie, the two communities springing up just outside of town testify to the galloping pace of growth here in oil country.

They are called man camps — temporary housing compounds supporting the overwhelmingly male work force flooding the region in search of refuge from a stormy economy. These two, Capital Lodge and Tioga Lodge, built on opposite sides of a highway, will have up to 3,700 residents, according to current plans.

Confronted with the unusual problem of too many unfilled jobs and not enough empty beds to accommodate the new arrivals, North Dakota embraced the camps — typically made of low-slung, modular dormitory-style buildings — as the imperfect solution to keeping workers rested and oil flowing.

But now, even as the housing shortage worsens, towns like this one are denying new applications for the camps. In many places they have come to embody the danger of growing too big too fast, cluttering formerly idyllic vistas, straining utilities, overburdening emergency services and aggravating relatively novel problems like traffic jams, long lines and higher crime.

The grumbling has escalated despite the huge influx of wealth from the boom, largely because it has become clear that growth is overwhelming capacity. Indeed, local leaders note incredulously that a conference on regional infrastructure took place in Colorado last month because the region lacked the facilities to host its own event.

“We need a little time to catch our breath to figure out what resources we need in place before we keep expanding,” said Ward Heidbreder, city coordinator in nearby Stanley, which has two camps.

In recent weeks, Williams County, where thousands of previously approved camp beds have yet to be built, and Mountrail County, where one-third of the population is living in temporary housing, imposed moratoriums on man camp development. McKenzie County, where the growth had been particularly untamed thanks to the absence of any zoning rules, is even considering breaking with a century of tradition and requiring building permits.

Leaders in these communities say they will use the reprieve to draft new fees for the camps to support fire and ambulance services; write tighter rules, like background checks, for residents in these facilities; and require performance bonds to ensure that the modular buildings aren’t simply abandoned whenever the boom turns bust. But the timeout also simply reflects lost patience.

“There is a testiness that’s developed in this last year because it’s so intense,” said E. Ward Koeser, the longtime mayor of nearby Williston, with about 14,000 people, the largest city in the region.

Brian Lash, chief executive of Target Logistics, the largest operator of man camps, boasts that the company plans to house 1 percent of the state’s population within a year, and supports the moratoriums.

Target’s camps, which rent directly to the drilling, hydraulic fracturing and trucking companies that employ most workers, have strict prohibitions on alcohol, firearms and unauthorized women. Violators are evicted and, often as a consequence, fired by the companies. With the employers paying $100 and up per worker per night for housing, good behavior is ensured, Mr. Lash said.

Mr. Lash said that communities should require such strict rules for other operators, as well, to prevent future problems.

“There is a little bit of a backlash that has culminated in these moratoriums,” he said. “They’re trying to catch their breath and ask for a little more regulation, as they should.”

A few years ago, when the oil boom was in its infancy, these long-shrinking communities were doing anything to encourage development. Now the state population is growing, money is pouring into communities and the unemployment rate remains by far the lowest in the nation, even though more job seekers arrive every day.

Confident that a bust is not imminent — industry leaders insist that they will continue drilling for years, if not decades — community leaders who were once deferential to the industry are increasingly comfortable insisting that development slow down a bit.

“Five years ago, anything the industry wanted it got. Anything to move things forward. That’s changed,” said Robert Harms, the former president of an oil producers’ trade association who now works as a consultant. “The industry needs to recognize that they’re guests here. They’re operating in people’s front yards and backyards and they damn well better act that way.”

“But,” he added, “locals need to recognize that newcomers are also struggling.”

Those newcomers include Ryan Nordstrom, who rolled into town not long ago with a dozen empty cans of energy drink in his passenger seat and $11 in his pocket, the meager remainder of the fuel money his sister had given him when he left Michigan. He had no trouble finding work — one of his first jobs was building camps — but housing was elusive.

He had enough cash to dump all his clothes and buy a brand new wardrobe, but Mr. Nordstrom was forced to live in vagabond style, often sleeping in the back of his car. This month he landed a new job working on an oil rig that included free housing at a camp. He walked into his tiny room in a trailer for the first time with an air of celebration, saying he never imagined how hard it would be to find a place to sleep.

That concern, that people are still arriving despite the housing shortage, is shared by some local leaders, including law enforcement officials who warn that people could die if they try to live in vehicles or other makeshift facilities through the North Dakota winter. But the large paychecks, often totaling more than $100,000 a year, mean that some undoubtedly will take the risk.

Motel rooms in Williston are booked solid, sometimes for years. Rents have quadrupled, and building permits have increased sixfold. Many people are so pressed for a place to stay that they commute two or more hours each day. The lucky ones will get spots at the camps.

More reminiscent of a college dorm than a bunkhouse, most of the camps serve three meals a day, have their own security, and come with amenities like workout rooms, game rooms and laundry service. Typically residents work rotations of two weeks in the camp and then have one week at homes scattered around the country, getting a new room each time they return to the camp.

Dropping off a bag of oil-stained work clothes in his small but private room, Shawn Mallimo said the amenities at the camps vary dramatically — his last camp had four men and two beds per room, with people working and sleeping in shifts.

The camps are built to be temporary — concrete is rarely poured. “The idea is when the majority of the work force leaves, these can be picked up and moved,” said Jill Edson, a planning official for Williams County. “So the land can be reclaimed like they were never there.”

At Black Gold, one of a series of camps just outside Williston, interlocking modular units that will house 900 workers when completed are being trucked in and reassembled after serving the oil fields in Alaska. The company is experienced and its rules are less restrictive. The men who have moved in are allowed alcohol in rooms and a few live here with their wives.

The assistant manager, Ann Marie Nowaczyk, whose presence reflects some hard-earned wisdom that nobody keeps a bunch of men on good behavior like a woman, says that she rarely has to use her “mom voice” to stifle trouble. Mostly people come back exhausted, eat and go to bed, she said, then start another 12-hour shift. “I think a lot of people in town think of oil field workers as trash,” she said. “They’re just like anybody else, working their butts off.”

Law enforcement and building inspection officials say most camps have not been problematic, but there have been exceptions. One camp outside Williston was shut down for allowing sewage to flow freely over the property. Others have had fights. Unauthorized encampments are easy to spot along country roads.

Some companies have responded to the criticism. Capital Lodge, which is still under construction, has been drilling wells to provide its own water supply. Across the highway, Tioga Lodge has a waste treatment facility so the owner will not have to continue trucking sewage to surrounding communities. Both moves were warmly welcomed by local utilities.

As more projects to increase the capacity of local sewer, water, electric, roads and law enforcement are completed — already hundreds of millions have been spent — officials expect to lift the moratoriums on the camps.

But even then, Tom Rolfstad, who is in charge of economic development for Williston, said that he would like to see more permanent housing, which he believes would encourage more newcomers to bring their families. “There is a bit more testosterone right now than the town was used to,” he said.

    Oil Rigs Bring Camps of Men to the Prairie, NYT, 25.11.2011,
    http://www.nytimes.com/2011/11/26/us/north-dakota-oil-boom-creates-camps-of-men.html

The Death of the Fringe Suburb

November 25, 2011
The New York Times
By CHRISTOPHER B. LEINBERGER

Washington

DRIVE through any number of outer-ring suburbs in America, and you’ll see boarded-up and vacant strip malls, surrounded by vast seas of empty parking spaces. These forlorn monuments to the real estate crash are not going to come back to life, even when the economy recovers. And that’s because the demand for the housing that once supported commercial activity in many exurbs isn’t coming back, either.

By now, nearly five years after the housing crash, most Americans understand that a mortgage meltdown was the catalyst for the Great Recession, facilitated by underregulation of finance and reckless risk-taking. Less understood is the divergence between center cities and inner-ring suburbs on one hand, and the suburban fringe on the other.

It was predominantly the collapse of the car-dependent suburban fringe that caused the mortgage collapse.

In the late 1990s, high-end outer suburbs contained most of the expensive housing in the United States, as measured by price per square foot, according to data I analyzed from the Zillow real estate database. Today, the most expensive housing is in the high-density, pedestrian-friendly neighborhoods of the center city and inner suburbs. Some of the most expensive neighborhoods in their metropolitan areas are Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio, and Logan Circle in Washington. Considered slums as recently as 30 years ago, they have been transformed by gentrification.

Simply put, there has been a profound structural shift — a reversal of what took place in the 1950s, when drivable suburbs boomed and flourished as center cities emptied and withered.

The shift is durable and lasting because of a major demographic event: the convergence of the two largest generations in American history, the baby boomers (born between 1946 and 1964) and the millennials (born between 1979 and 1996), which today represent half of the total population.

Many boomers are now empty nesters and approaching retirement. Generally this means that they will downsize their housing in the near future. Boomers want to live in a walkable urban downtown, a suburban town center or a small town, according to a recent survey by the National Association of Realtors.

The millennials are just now beginning to emerge from the nest — at least those who can afford to live on their own. This coming-of-age cohort also favors urban downtowns and suburban town centers — for lifestyle reasons and the convenience of not having to own cars.

Over all, only 12 percent of future homebuyers want the drivable suburban-fringe houses that are in such oversupply, according to the Realtors survey. This lack of demand all but guarantees continued price declines. Boomers selling their fringe housing will only add to the glut. Nothing the federal government can do will reverse this.

Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.

The good news is that there is great pent-up demand for walkable, centrally located neighborhoods in cities like Portland, Denver, Philadelphia and Chattanooga, Tenn. The transformation of suburbia can be seen in places like Arlington County, Va., Bellevue, Wash., and Pasadena, Calif., where strip malls have been bulldozed and replaced by higher-density mixed-use developments with good transit connections.

Reinvesting in America’s built environment — which makes up a third of the country’s assets — and reviving the construction trades are vital for lifting our economic growth rate. (Disclosure: I am the president of Locus, a coalition of real estate developers and investors and a project of Smart Growth America, which supports walkable neighborhoods and transit-oriented development.)

Some critics will say that investment in the built environment risks repeating the mistake that caused the recession in the first place. That reasoning is as faulty as saying that technology should have been neglected after the dot-com bust, which precipitated the 2001 recession.

The cities and inner-ring suburbs that will be the foundation of the recovery require significant investment at a time of government retrenchment. Bus and light-rail systems, bike lanes and pedestrian improvements — what traffic engineers dismissively call “alternative transportation” — are vital. So is the repair of infrastructure like roads and bridges. Places as diverse as Los Angeles, Phoenix, Salt Lake City, Dallas, Charlotte, Denver and Washington have recently voted to pay for “alternative transportation,” mindful of the dividends to be reaped. As Congress works to reauthorize highway and transit legislation, it must give metropolitan areas greater flexibility for financing transportation, rather than mandating that the vast bulk of the money can be used only for roads.

For too long, we over-invested in the wrong places. Those retail centers and subdivisions will never be worth what they cost to build. We have to stop throwing good money after bad. It is time to instead build what the market wants: mixed-income, walkable cities and suburbs that will support the knowledge economy, promote environmental sustainability and create jobs.

 

Christopher B. Leinberger is a senior fellow at the Brookings Institution

and professor of practice in urban and regional planning at the University of Michigan.

    The Death of the Fringe Suburb, NYT, 25.11.2011,
    http://www.nytimes.com/2011/11/26/opinion/the-death-of-the-fringe-suburb.html

Black Friday Is Busy, but Are Holiday Shoppers Spending?

November 25, 2011
The New York Times
By STEPHANIE CLIFFORD

Some holiday shoppers were on alert Friday after hearing about an incident where a Wal-Mart customer in Los Angeles pepper-sprayed rival shoppers who were trying to grab discounted electronics.

But shopping in most of the nation was calm, if busy. Erika Endler, 42, of La Puente, Calif., was at a Bass Pro Shops outside of Los Angeles to pick up $10 Levi’s, fishing weights and ammunition, and she was grateful for the lack of frenzy there.

“You’ve got people being pepper-sprayed at Wal-Mart, and here they sell guns, and everyone is civil,” she said.

As Ms. Endler’s trip for cheap jeans suggested, the economy was a big reason shoppers headed to stores.

“We drove 70 miles and stood in 40-degree weather for $10 flannel jackets," said Steven Salkeld, a delivery driver from Castaic, Calif., who had arrived at midnight to wait in line for Bass’s 6 a.m. opening. He, his twin brother and four friends, all of them fishermen, were warming themselves with a propane heater.

In addition to discounts, several retailers were offering layaway as a new option this year, allowing people to pay for purchases over time.

At Sears and Kmart, which have long offered a layaway service, more people were using it this Thanksgiving and Black Friday versus a year ago, a spokesman Tom Aiello, said. “Layaway really picked up yesterday,” he said on Friday.

And while standard gifts like toys and electronics were selling briskly, so were some staples.

Standing at the bottom of an escalator at the Times Square Toys “R” Us at 10 p.m. Thursday, shortly after the retailer opened with its Black Friday deals, Yasmin Santiago and Dexter Valles were trying to fit several boxes into a small hand cart. But the parents of twins hadn’t come for the toys — they had come for the diapers.

“Cheap prices,” Ms. Santiago said, explaining why they had gone shopping after their Thanksgiving meal. The special on diapers, 56 for $10, was better than she had seen at competitors. “Right now I’m on a leave of absence from my job,” she said.

“We have twice the children, and half the income,” Mr. Valles said.

While the diapers sale got “a great response,” according to a Toys “R” Us spokeswoman, Jennifer Albano, some more expensive, and heavily promoted, items remained on shelves hours after retailers had opened.

Eight hours after the midnight opening, two first-time Black Friday shoppers at a Target store in East Hanover, N.J., said they were surprised by how thin the crowds were.

“We got here at 8, and the only thing that wasn’t left was a television we might have wanted,” said Lisa Berk, a consultant from Livingston, N.J., who was shopping for Hanukkah gifts with her daughter. At a little before 9 a.m., they were headed for the checkout, having secured an Xbox 360 console for $139 and a Kitchen Aid mixer for $199. “There were quite a few Xboxes still on the shelves,” Ms. Berk said. “You didn’t have to wake up early to get all of the deals.”

With many stores moving back their opening times for Black Friday to Thanksgiving night, some shoppers came for the deals and others to extend their holiday celebrations. A small protest outside of Macy’s Herald Square store in New York urging people not to shop did not seem to faze the crowd that had gathered.

For stores, the Friday after Thanksgiving can be the highest sales day of the year and is a barometer for what they need to do the rest of the season. With a strong Black Friday, they can generally keep their prices up and assume that their holiday inventory will sell; a weak Friday means they have to start marking down holiday merchandise to get enough of it out the door by Christmas.

Many first-time Black Friday shoppers in downtown Chicago, who had headed out late on Thanksgiving night, said the deals wouldn’t have been worth it if they meant waking up before sunrise on Friday.

“I would have been dead to the world at 4 a.m.,” said Lowanda Lynch, 51, who waited in her car as her daughter stood in line eyeing a Westinghouse 46-inch television. “Ain’t no way I would get up at that hour.”

Blocks away at Best Buy, where a small group of Occupy Chicago protesters heckled customers about consumerism, a neighborhood resident, Ellie Fox, 72, said the midnight start drove her to quell her years of curiosity about Black Friday.

“It was on my bucket list,” said Ms. Fox, who was had hoped to get a Samsung 15.6-inch laptop for $299.99. “I’m just a old woman looking for a good deal.”

But when she got inside the store, fought her way through the choked aisles and found that the laptop she wanted had already sold out, she immediately announced her retirement from Black Friday shopping.

“I tried it,” she said. “Why do it again?”

At Macy’s in New York Thursday night, Brianna Torres, 16, from Astoria, said she decided at the last minute to go shopping. “We did our full Thanksgiving, and when everyone was, like, ‘It’s time to go home,’ we just came out,” she said. She looked at the people around her, many wearing Santa hats that marketers had handed out. “It’s a younger group. I think everyone that’s a little bit older will come out in the morning,” she said.

Many tourists seemed to consider the midnight shopping as part of a New York tour.

Adriene Clark and Judy Leggett, sisters visiting the city, walked down to Macy’s after visiting Rockefeller Center.

“I don’t even know what to expect — we’re from Key West, Florida, and we don’t even have a mall. We have Sears,” Ms. Clark said.

In Lawrenceville, N.J., as the doors at the Best Buy opened at midnight, store workers cheered as a shopper, Jose Delgado, jogged with his cart to the rear of the store.

The employees had come to know Mr. Delgado well. He and two friends had arrived at 9 p.m. Wednesday and camped out ever since.

“I’ve always heard stories about people camping out for Black Friday, and it seemed like a fun experience,” said Mr. Delgado, 19, from East Windsor, N.J., who is a student at Mercer County Community College. “It’s been fun. But now I’m really tired. And I really have to go to the bathroom.”

Mr. Delgado and his friends — Christian Aguirre, 17, and Walter Barreto, 14 — were there to load up on electronics, games and DVDs. Each carried a map of the store in his pocket, and had a route planned out.

First, each would grab a shopping cart. Then they would all run to the rear right of the store to get in line for three 42-inch Sharp TVs, normally $500, on sale for $200. They also would get a 24-inch TV, normally $350, for $79. From there, they would move along the rear wall of the store to the home theater area, for speakers. After that, it would be on to the computer area, where Mr. Barreto would buy a Lenovo laptop, normally $400, for $179. After that, they would go for box sets of the first seven seasons of “Entourage” for $13, plus some video games.

“We’ll get the important stuff out of the way first, and then move on to the goofy stuff,” Mr. Delgado said.

As the trio waited for the doors to open, Mr. Delgado was entirely focused on the strategy: “Remember, guys: Carts. Carts. ”

Once they got all their bounty, Mr. Delgado said, “I’m just going to go home now and go to sleep. Actually, I’m not even going to lie. I’m going to go home, hook it all up and play some FIFA,” referring to the soccer video game.

Inside the Best Buy in Lawrenceville, a store clerk, Jonathan Achaibar, 19, was guarding a roomful of 42-inch TVs.

“This is ridiculous,” he said. “This is the largest crowd we’ve ever had in 14 years at this store. Usually the line goes just down to Five Below,” the store located a few doors down the strip mall. “Today it’s all the way down to Wegmans. That’s about half a mile.”

In Dawsonville, Ga., at the North Georgia Premium Outlets, there was a Disneyland feel to the mall, with customers waiting in long lines and running between stores as though they were zipping between roller-coaster rides and the cotton candy stand.

Brent Ferguson, 63, a physical therapist from Cleveland, Ga., sat in a cloth folding chair to wait for the Adidas store to open. He was hoping to get a $50 off coupon by being among the first customers, which would cover half the cost of the basketball shoes he wanted to buy for his son.

Mr. Ferguson said he disliked crowds, and could not believe so many people woke up so early for the sales. But, he said, he wanted the deal, and he didn’t blame the stores for starting early.

“At this point, anything a business owner can do to bring in customers is worth trying,” he said.

 

Christopher Maag, Julie Creswell, Steven Yaccino, Rebecca Raney

and Robbie Brown contributed reporting.

    Black Friday Is Busy, but Are Holiday Shoppers Spending?, NYT, 25.11.2011,
    http://www.nytimes.com/2011/11/26/business/black-friday-shoppers-fan-out-in-the-dark-of-night.html

Why We Spend, Why They Save

November 24, 2011
The New York Times
By SHELDON GARON

Princeton, N.J.

CHRISTMAS is nearly upon us. Americans, once again, are told that it’s our civic duty to shop. The economy demands increased consumer spending. And it’s true. The problem is that millions of lower- and middle-income households have lost their capacity to spend. They lack savings and are mired in debt. Although it would be helpful if affluent households spent more, we shouldn’t be calling upon a struggling majority to do so. In the long run, the health of the economy depends on the financial stability of our households.

What might we learn from societies that promote a more balanced approach to saving and spending? Few Americans appreciate that the prosperous economies of western and northern Europe are among the world’s greatest savers. Over the past three decades, Germany, France, Austria and Belgium have maintained household saving rates between 10 and 13 percent, and rates in Sweden recently soared to 13 percent. By contrast, saving rates in the United States dropped to nearly zero by 2005; they rose above 5 percent after the 2008 crisis but have recently fallen below 4 percent.

Unlike the United States, the thrifty societies of Europe have long histories of encouraging the broad populace to save. During the 19th century, European reformers and governments became preoccupied with creating prudent citizens. Civic groups founded hundreds of savings banks that enabled the masses to save by accepting small deposits. Central governments established accessible postal savings banks, whereby small savers could bank at any post office. To inculcate thrifty habits in the young, governments also instituted school savings banks. During the two world wars, citizens everywhere were bombarded with messages to save. Savings campaigns continued long after 1945 in Europe and Japan to finance reconstruction.

All this fostered cultures of saving that endure today in many advanced economies. The French government attracts millions of lower-income and young savers with its Livret A account available at savings banks, postal savings banks and all other banks. This small savers’ account is tax free, requires only a tiny minimum balance, and commonly pays above-market interest rates. In German cities, one cannot turn the corner without coming upon one of the immensely popular savings banks, called Sparkassen. Legally charged with encouraging the “savings mentality,” these banks offer no-fee accounts for the young and sponsor financial education in the schools.

Supported by public opinion, policy makers in European countries have also restrained the expansion of consumer and housing credit, lest citizens become “overindebted.” Home equity loans are rare in Germany, and Belgians, Italians and Germans are rarely offered an American-style credit card that allows the user to carry an unpaid balance.

How did America arrive at its widely divergent approach to saving and consumption? Seldom over the past two centuries has the federal government promoted saving; it left matters to the states or the market. In the 19th century, savings banks and building and loan associations did thrive in the Northeastern and Midwestern states; where they existed, working people saved at high rates. However, the vast majority of Americans in the Southern and Western states lacked access to any savings institution as late as 1910. Most Americans became regular savers only after the federal government decisively intervened to institute the Federal Deposit Insurance Corporation in 1934 and mass-market United States savings bonds in World War II.

The United States emerged from the war with unparalleled prosperity and hardly needed further savings campaigns. Instead politicians, businessmen and labor leaders all promoted consumption as the new driver of economic growth. Rather than democratize saving, the American system rapidly democratized credit. An array of federal housing and tax policies enabled Americans to borrow to buy homes and products as no other people could.

But from the 1980s, financial deregulation and new tax legislation spurred the growth of credit cards, home equity loans, subprime mortgages and predatory lending. Soaring home prices emboldened the financial industry to make housing and consumer loans that many Americans could no longer repay. Still, Americans wondered, why save when it is so easy to borrow? Only after housing prices collapsed in 2008 did they discover that wealth on paper is not the same as money in the bank.

As we seek to restore a balance between saving and consumption, what aspects of other nations’ experiences might we adapt to our circumstances? The new Consumer Financial Protection Bureau, while politically besieged, possesses broad powers to curb predatory lending. The bureau might also promote the creation of financial education programs in every school. Congress should consider ending costly tax incentives for wealthier savers and homebuyers while creating new incentives to encourage low- and middle-income people to save. Finally, federal intervention is needed to stop the banks from fleecing and driving away their poorest customers. If the banks cannot be encouraged to offer low-fee accounts for young and lower-income customers, the government might consider creating postal savings accounts for small savers.

To improve the balance sheets of America’s households, we must approach saving in a more forthright manner — not an easy thing to do when again and again we hear that individual prudence acts to impair the economy.

Sheldon Garon, a professor of history and East Asian studies at Princeton,

is the author of “Beyond Our Means: Why America Spends While the World Saves.”

    Why We Spend, Why They Save, NYT, 24.11.2011,
    http://www.nytimes.com/2011/11/25/opinion/why-we-spend-why-they-save.html

We Are the 99.9%

November 24, 2011
The New York Times
By PAUL KRUGMAN

“We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.

And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline.

Before I get to those policy disputes, here are a few numbers.

The recent Congressional Budget Office report on inequality didn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, did. According to that report, between 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent.

For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

Given this history, why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?

Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. In fact, it would be bad economics even if America had the idealized, perfect market economy of conservative fantasies.

After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment.

But, you say, the rich pay taxes! Indeed, they do. And they could — and should, from the point of view of the 99.9 percent — be paying substantially more in taxes, not offered even more tax breaks, despite the alleged budget crisis, because of the wonderful things they supposedly do.

Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.

Executive pay, which has skyrocketed over the past generation, is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.

Meanwhile, the economic crisis showed that much of the apparent value created by modern finance was a mirage. As the Bank of England’s director for financial stability recently put it, seemingly high returns before the crisis simply reflected increased risk-taking — risk that was mostly borne not by the wheeler-dealers themselves but either by naïve investors or by taxpayers, who ended up holding the bag when it all went wrong. And as he waspishly noted, “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”

So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes.

    We Are the 99.9%, NYT, 24.11.2011,
    http://www.nytimes.com/2011/11/25/opinion/we-are-the-99-9.html

U.S. Economic Growth Is Revised Down to 2 Percent

November 22, 2011
The New York Times
By REUTERS

The United States economy grew at a slightly slower pace than previously estimated in the third quarter, but weak inventory accumulation amid sturdy consumer spending strengthened analysts’ views that output would pick up in the current quarter.

Gross domestic product grew at a 2 percent annual rate in the third quarter, the Commerce Department said in its second estimate on Tuesday, down from the previously estimated 2.5 percent.

The revision was below economists’ expectations for a 2.5 percent growth pace. But the details of the G.D.P. report, especially data showing still-firm consumer spending and the first drop in businesses inventories since the fourth quarter of 2009, appeared to set the stage for a stronger economic performance this quarter.

Data so far suggest the fourth-quarter growth pace could exceed 3 percent, which would be the fastest in 18 months.

Despite the downward revision, last quarter’s growth is still a step up from the April-June period’s 1.3 percent pace. Part of the pick-up in output during the last quarter reflected a reversal of factors that held back growth earlier in the year.

A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan’s big earthquake and tsunami in March had curbed auto production.

The government revised third-quarter output to account for an $8.5 billion drop in business inventories, which lopped off 1.55 percentage points from G.D.P. growth. Inventories had previously been estimated to have increased $5.4 billion.

The drag from inventories was offset by strong export growth. Excluding inventories, the economy grew at an unrevised brisk 3.6 percent pace after expanding 1.6 percent in the second quarter.

Consumer spending was revised down slightly to a 2.3 percent growth pace from 2.4 percent because of adjustments to motor vehicle fuels and lubricants. It was still the quickest pace since the fourth quarter of 2010.

However, weak income growth could crimp spending. The report showed real disposable income fell 2.1 percent in the third quarter after declining 0.5 percent in the prior three months. There were also small revisions to business investment, which rose at a 14.8 percent rate instead of 16.3 percent as estimates for investment in nonresidential structures and outlays on equipment and software were lowered.

The Commerce Department also said after-tax corporate profits increased at a 3 percent rate after rising 4.3 percent in the second quarter.

Export growth was stronger than previously estimated, rising at a 4.3 percent rate instead of 4 percent. Imports increased at a much slower 0.5 percent rate rather than 1.9 percent.

Trade contributed almost half a percentage point to overall growth. Elsewhere, residential construction grew at a 1.6 percent rate instead of 2.4 percent. Government spending fell at a 0.1 percent rate instead of being flat.

The G.D.P. report also showed inflation pressures subsiding. A price index for personal spending rose at a 2.3 percent rate in the third quarter, instead of 2.4 percent.

That compared to a 3.3 percent rate in the second quarter. A core inflation measure, which strips out food and energy costs, rose at a 2.0 percent rate rather than 2.1 percent. The measure — closely watched by the Federal Reserve — grew at a 2.3 percent rate in the prior three months.

    U.S. Economic Growth Is Revised Down to 2 Percent, NYT, 22.11.2011,
    http://www.nytimes.com/2011/11/23/business/economy/us-economic-growth-is-revised-to-2-0-percent.html

Central Bankers: Stop Dithering. Do Something.

November 20, 2011
The New York Times
By ADAM S. POSEN

London

BOTH the American economy and the global economy are facing a familiar foe: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the United States in the 1930s, or in Japan in the 1990s, every major financial crisis has been followed by premature abandonment — if not reversal — of the stimulus policies that are necessary for sustained recovery. Sadly, the world appears to be repeating this mistake.

The right thing to do right now is for the Federal Reserve and the European Central Bank to engage in further monetary stimulus. Having lowered short-term interest rates, they should buy (or in the case of the Fed, resume buying) significant quantities of government securities to help push down long-term interest rates and encourage investment.

If anything, it is past time for the Fed and its European counterpart to act. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the cutbacks in government spending and the simultaneity of economic problems across the Western world. Sustained high inflation is not a threat in this environment.

As many have observed, we need to rebalance the economy from imports to exports, from private consumption to savings, from tax breaks to infrastructure rebuilding and from the financial sector to everything else. The process of rebalancing will require movement of capital from older industries and activities to newer ones — that is, investment. Moreover, a lot of what was termed “investment” during the boom years was misallocated — wasted — capital, so many productive projects were ignored.

But investment has been held back because of uncertainty over the economy’s future prospects. And the ability to attract investors is being limited by the giant burden of private-sector debt. In other words, a financing problem is inhibiting the restructuring of our economy. Alleviating generalized financing problems and low investor confidence is precisely what monetary stimulus does.

Some claim that monetary easing will impede restructuring. But this makes no sense. For all the talk that monetary austerity promotes the “creative destruction” necessary for the economy to recover, it does not work that way.

In Japan in the 1990s, a period of insufficiently aggressive monetary stimulus fed lending to “zombie companies” — unproductive borrowers on whose loans the banks could not afford to take losses. It was only when macroeconomic policy led a recovery in Japan in the first decade of this century that capital flowed out of the places it had been trapped and into new and growing businesses. Similarly, after the American savings-and-loan crisis, real reallocation of credit from bad banks and borrowers to worthwhile investment began in earnest only when monetary policy eased in the late 1980s.

Another source of policy defeatism is the widespread but false belief that our previous “unconventional” efforts to stimulate the economy either were not terribly effective or are unlikely to be effective if extended today. The fact that the American economy has not fully recovered after previous rounds of stimulus is not evidence that those failed to work at all.

We know that infusions of central bank money to the economy have been closely associated with falling long-term interest rates. We know that the relative price of riskier assets has gone up, indicating greater demand for them, when stimulus has been undertaken. And we know that banks have received increased deposits, and that investors and households have expressed increased confidence, after prior rounds of quantitative easing. That combination has had a stimulative impact, just as a cut in the interest rate would have in ordinary times.

Scientific research tells us that high blood pressure and cholesterol are associated with a higher risk of heart disease and stroke, and that certain prescription medications reduce cholesterol and blood pressure. Yes, it is difficult to prove directly that taking these medicines prevents heart disease and stroke, and taking them is no guarantee of health. But still we should take them, and our doctors should prescribe them if they are indicated. This is the same situation we are in now, with our economy’s financial circulation at risk, and quantitative easing the indicated medicine.

In my opinion, we can go further. Central banks and governments can engage in forms of coordinated action that will target the burden of past debts that is hanging over the global economy. In the United States, that means resolving the distressed mortgage debt that is weakening our financial system and reducing labor mobility, thereby constraining not only our growth but also our ability to grow. It is time for the Federal Reserve and elected officials to explore ways to jointly tackle that housing debt.

Independent central bankers tend to become very squeamish about expressing support for any particular government proposal, especially when it involves agreeing to buy government bonds. Tragedies have occurred, however, when independent central banks let worries about the perception that they were too close to the government prevent them from doing something constructive in times of crisis.

Such passivity led to the prolonged recession in Japan in the 1990s. It was only when the Bank of Japan and the Ministry of Finance abandoned their mutual distrust and worked together publicly in 2002-3 that Japan had a sustained recovery. The same kind of distrust between monetary and fiscal officials, and concerns about being perceived as too close to each other, is bringing the euro area to the brink of disaster today.

Central bank independence is not primarily a matter of reputation, but of reality. What matters is what central banks do, not whether they maintain an appearance of disdain toward the messy realities of economic and political life. The inflation-fighting credibility of central banks is not vulnerable to voluntary purchases of bonds, public or private, made with reference to clear and long-held economic goals. Therefore, if the Federal Reserve and the European Central Bank respond to the crisis with available tools, including large-scale bond purchases (as the Bank of England has already begun to do), they will enhance their credibility and independence for the future.

Almost certainly, even if we were to do everything right on monetary policy (and we certainly will not get everything right, despite the best of intentions), some economic suffering will continue. But it is the responsibility and duty of central bankers to make things better if we can.

Central bank officials have wasted too much time over the last year worrying about how their institutions would appear to markets, to politicians and to the public, were they to undertake more stimulus. Sometimes you have to do the right thing even if the benefits take time to become evident. If we do not undertake the monetary stimulus that the grim outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage.

Adam S. Posen, an American economist, is a member of the Monetary Policy Committee of the Bank of England.

    Central Bankers: Stop Dithering. Do Something., NYT, 21.11.2011,
    http://www.nytimes.com/2011/11/21/opinion/central-bankers-stop-dithering-do-something.html

John G. Smale, Procter & Gamble Chief, Dies at 84

November 20, 2011
The New York Times
By PETER LATTMAN

John G. Smale, who as chief executive led Procter & Gamble through a period of extraordinary growth, and then helped engineer a turnaround of General Motors as its chairman, died on Saturday at his home in Cincinnati. He was 84.

The cause was complications of pulmonary fibrosis, a Procter & Gamble spokesman said.

Mr. Smale ran Procter & Gamble from 1981 until 1990. During his tenure the company strengthened its position internationally, pushing aggressively into Eastern Europe and Asia. He also oversaw a series of major acquisitions, including the $1.2 billion purchase of Richardson-Vicks in 1985. The largest deal in Procter & Gamble’s history at the time, it brought the company well-known brands including Vicks cold medicine, Olay skin care products and Pantene shampoo.

He joined the company in 1952 after responding to an advertisement in a Chicago newspaper looking for brand managers. Starting in what was then called the toilet goods division, Mr. Smale earned his stripes managing Procter & Gamble’s new Crest toothpaste brand.

He persuaded the American Dental Association to endorse the toothpaste, a pioneering agreement at the time.

There were missteps, including a failed push into soft drinks and orange juice. But over his nine-year tenure, Procter & Gamble’s overall revenue doubled to more than $24 billion and profits doubled to $1.6 billion.

In 1982, while Mr. Smale was still chief executive at Procter & Gamble, General Motors named him to its board. Ten years later, Mr. Smale and the G.M. board led a coup, ousting Robert C. Stempel as chairman and chief executive. Mr. Smale became chairman, and John F. Smith Jr. the chief executive.

During his tenure as G.M.’s chairman, which lasted until his retirement in 1995, Mr. Smale helped rescue the automaker from the brink of bankruptcy and returned it to profitability. He also put in place management techniques from Procter & Gamble, streamlining G.M.’s balkanized management structure and pushing for more forceful marketing of its brands.

Mr. Smale also served on several other corporate boards, including those of J. P. Morgan and Eastman Kodak.

John Gray Smale and his twin sister, Joy, were born in Listowel, Ontario, on Aug. 1, 1927, and grew up in Elmhurst, Ill. Their father was a traveling salesman for the Marshall Field’s department store chain.

He graduated from Miami University in Oxford, Ohio, in 1949. While there, he helped pay for his education by writing two how-to books — “Party ’Em Up” and “Party ’Em Up Some More” — that he sold to fraternities and sororities around the country, according to a 2009 interview in the school alumni magazine.

His wife of 56 years, the former Phyllis Weaver, died in 2006. His twin sister died in 2000. He is survived by four children, John Gray Jr., Peter, Catherine Anne Caldemeyer and Lisa Smale Corbett; and five grandchildren.

An avid fisherman, Mr. Smale had homes in Marathon, Fla., and at McGregor Bay in Ontario. He also kept an apartment in Cincinnati.

Mr. Smale was a major figure in Cincinnati’s civic and philanthropic circles. This year he made a $20 million donation to the city in his wife’s memory for construction of the Cincinnati Riverfront Park, which was renamed the Phyllis W. Smale Riverfront Park.

He also remained committed to Procter & Gamble after leaving the company. Robert A. McDonald, the current chief executive, said that just before he assumed the top post, he flew to London with Mr. Smale for a company event. Mr. Smale pulled out seven pages of typed notes in midflight and said that he wanted to discuss the future of the company and what it should concentrate on. In capital letters across the front page, Mr. McDonald said, was “INNOVATION, INNOVATION, INNOVATION.”

Each year the John G. Smale Innovation Award, a prize financed personally by Mr. Smale, recognizes young scientists at the company.

“He represented the soul of P.& G.,” Mr. McDonald said.

A. G. Lafley, who preceded Mr. McDonald as chief executive, said that last year Mr. Smale spoke at a meeting of Procter & Gamble leaders.

His health failing, Mr. Smale took the stage carrying a machine to help him breathe. He spoke about the importance of having a long-term focus for the 174-year-old company.

“He said, we don’t want to think in quarters or even years but in terms of decades and centuries,” Mr. Lafley said. “I learned that from John.”

    John G. Smale, Procter & Gamble Chief, Dies at 84, NYT, 20.11.2011,
    http://www.nytimes.com/2011/11/21/business/john-g-smale-procter-gamble-chief-dies-at-84.html

Older, Suburban and Struggling,

‘Near Poor’ Startle the Census

November 18, 2011
The New York Times
By JASON DePARLE, ROBERT GEBELOFF and SABRINA TAVERNISE

WASHINGTON — They drive cars, but seldom new ones. They earn paychecks, but not big ones. Many own homes. Most pay taxes. Half are married, and nearly half live in the suburbs. None are poor, but many describe themselves as barely scraping by.

Down but not quite out, these Americans form a diverse group sometimes called “near poor” and sometimes simply overlooked — and a new count suggests they are far more numerous than previously understood.

When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data the government has not yet published, showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account, published in September. All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.

After a lost decade of flat wages and the worst downturn since the Great Depression, the findings can be thought of as putting numbers to the bleak national mood — quantifying the expressions of unease erupting in protests and political swings. They convey levels of economic stress sharply felt but until now hard to measure.

The Census Bureau, which published the poverty data two weeks ago, produced the analysis of those with somewhat higher income at the request of The New York Times. The size of the near-poor population took even the bureau’s number crunchers by surprise.

“These numbers are higher than we anticipated,” said Trudi J. Renwick, the bureau’s chief poverty statistician. “There are more people struggling than the official numbers show.”

Outside the bureau, skeptics of the new measure warned that the phrase “near poor” — a common term, but not one the government officially uses — may suggest more hardship than most families in this income level experience. A family of four can fall into this range, adjusted for regional living costs, with an income of up to $25,500 in rural North Dakota or $51,000 in Silicon Valley.

But most economists called the new measure better than the old, and many said the findings, while disturbing, comported with what was previously known about stagnant wages.

“It’s very consistent with everything we’ve been hearing in the last few years about families’ struggle, earnings not keeping up for the bottom half,” said Sheila Zedlewski, a researcher at the Urban Institute, a nonpartisan economic and social research group.

Patched together a half-century ago, the official poverty measure has long been seen as flawed. It ignores hundreds of billions the needy receive in food stamps, tax credits and other programs, and the similarly large sums paid in taxes, medical care and work expenses. The new method, called the Supplemental Poverty Measure, counts all those factors and adjusts for differences in the cost of living, which the official measure ignores.

The results scrambled the picture of poverty in many surprising ways. The measure shows less severe destitution, but a bit more overall poverty; fewer poor children, but more poor people over 65.

Of the 51 million who appear near poor under the fuller measure, nearly 20 percent were lifted up from poverty by benefits the official count overlooks. But more than half were pushed down from higher income levels: more than eight million by taxes, six million by medical expenses, and four million by work expenses like transportation and child care.

Demographically, they look more like “The Brady Bunch” than “The Wire.” Half live in households headed by a married couple; 49 percent live in the suburbs. Nearly half are non-Hispanic white, 18 percent are black and 26 percent are Latino.

Perhaps the most surprising finding is that 28 percent work full-time, year round. “These estimates defy the stereotypes of low-income families,” Ms. Renwick said.

Among them is Phyllis Pendleton, a social worker with Catholic Charities in Washington, who proudly displays the signs of a hard-won middle-class life. She has one BlackBerry and two cars (both Buicks from the 1990s), and a $230,000 house that she, her husband and two daughters will move into next week.

Combined, she and her husband, a janitor, make about $51,000 a year, more than 200 percent of the official poverty line. But they lose about a fifth to taxes, medical care and transportation to work — giving them a disposable income of about $40,000 a year.

Adjust the poverty threshold, as the new measure does, to $31,000 for the region’s high cost of living, and Ms. Pendleton’s income is 29 percent above the poverty line. That is to say, she is near poor.

While the phrase is new to her, the struggle it evokes is not.

“Living paycheck to paycheck,” is how she describes her survival strategy. “One bad bill will wipe you out.”

It took her three years to save $3,000 for the down payment on her house, which she got with subsidies from a nonprofit group, Capital Area Asset Builders. But even after cutting out meals at Red Lobster, movie nights and new clothes, she had to rely on government aid to get health insurance for her daughters, 11 and 13, and she is already worried about college tuition.

“I’m turning over every rock looking for scholarships,” she said. “The money’s out there, you just have to find it.”

The findings, which the Census Bureau plans to release on Monday, have already set off a contentious debate about how to describe such families: struggling, straitened, economically insecure?

Robert Rector, an analyst at the conservative Heritage Foundation, rejects the phrase “near poverty,” arguing that it conjures levels of dire need like hunger and homelessness experienced by a minority even among those actually poor.

“I don’t have any objection to this measure if you use the term ‘low-income,’ ” he said. “But the emotionally charged terms ‘poor’ or ‘near poor’ clearly suggest to most people a level of material hardship that doesn’t exist. It is deliberately used to mislead people.”

Bruce Meyer, an economist at the University of Chicago, warned that the numbers are likely to mask considerable diversity. Some households, especially the elderly, may have considerable savings. (Indeed, nearly one in five of the near poor own their homes mortgage-free.) But others may be getting help with public housing and food stamps.

“I do think this is a better measure, but I wouldn’t say that 100 million people are on the edge of starvation or anything close to that,” Mr. Meyer said.

But Ms. Zedlewski said the seeming ordinariness of these families is part of the point. “There are a lot of low-income Americans struggling to make ends meet, and we don’t pay enough attention to them,” she said.

One group likely to gain attention is older Americans. By the official count, only 22 percent of the elderly are either poor or near poor. By the alternate count, the figure rises to 34 percent.

That is still less than the share among children, 39 percent, but it erases about half the gap between the economic fortunes of the young and old recorded in the official count. The likeliest explanation is high medical costs.

Another surprising finding is that only a quarter of the near poor are insured, and 42 percent have private insurance. Indeed, the cost of paying the premiums is part of the previously uncounted expenses they bear.

Belinda Sheppard’s finances have been so battered in the past year, she finds herself wondering what storm will come next. Her adult daughter lost her job and moved in. Her adult son does not have one and cannot move out.

That leaves three adults getting by on $46,000 from her daughter’s unemployment check and the money Ms. Sheppard makes for a marketing firm, placing products in grocery stores. Take out $7,000 for taxes, transportation and medical care, and they have an income of about 130 percent of the poverty line — not poor, but close.

Ms. Sheppard pays $2,000 in rent and says her employer classifies her as part time to avoid offering her health insurance, even though she works 40 hours a week. Unable to buy it on her own, she crosses her fingers and tries to stay healthy.

“I try to work as many hours as I can, but my salary, it’s not enough for everything,” she said. “I pay my bills with very small wiggle room. Or none.”

    Older, Suburban and Struggling, ‘Near Poor’ Startle the Census, NYT, 18.11.2011,
    http://www.nytimes.com/2011/11/19/us/census-measures-those-not-quite-in-poverty-but-struggling.html

Could Every Day Be Black Friday?

November 16, 2011
The New York Times
By ADAM DAVIDSON

If an alien with an accounting degree touched down in America, it might conclude that we’re a weird cult that spends 11 months living frugally and four crazy weeks buying tons of stuff we don’t need. It wouldn’t be entirely wrong, either. Retailers make around a fifth of their sales during the holiday season — close to half a trillion dollars — when the ratio of frivolous to necessary purchases spikes. It’s not unusual for large chains to operate in the red from New Years’ Day through Thanksgiving and then make it all up in those crazy weeks.

Black Friday, the day after Thanksgiving, is the single most manic, delirious shopping day of the year and, of course, the official beginning of the holiday-buying frenzy. Holiday binge-buying has deep roots in American culture: department stores have been associating turkey gluttony with its spending equivalent since they began sponsoring Thanksgiving Day parades in the early 20th century. And to goose the numbers, they’ve always offered huge promotions too.

Black Friday relies on a few simple retail strategies that, with tons of customer data and forecasting software, have become fairly precise. One method is to sell everything as cheaply as possible and magnify a tiny profit through volume. Other stores mark down only a few high-profile items — even selling them at a loss — in hopes that customers will also throw a few full-priced items in their carts. Regardless, Black Friday is essentially a one-day economic-­stimulus plan and job-creation program. Retailers use TV commercials and deep discounts, rather than tax breaks and infrastructure spending, but the effect is the same: billions of dollars, which would otherwise never be spent, make their way into circulation.

In some years past, big sales on Black Friday have meant a good year for the retail sector, which makes up about a fifth of the U.S. economy. (This year, retailers are predicting a so-so year, with just tiny growth in sales.) But lately, the data have been much harder to read. On a spread sheet, broke people buying on deep discount look an awful lot like people who feel flush, but they’re not the same thing. In the recent recession, solid Black Fridays have been followed by lousy sales once the special offers went away. It’s another indication of how hard it is to understand the real state of our economy and what we can do to make things better.

One attractive approach to the latter would appear to be effectively having a few months of extended Black Friday discounts. In theory, it’s a way to end an economic downturn: when the economy slows, consumers stop spending. Then businesses slash prices, people buy at discounted rates, warehouses empty and business picks up. But this cycle was a lot easier to maintain before, roughly, 2001, when the United States so dominated the global markets that it also determined the cost of raw materials. When U.S. sales fell, global commodity prices followed. As a result, American companies could lower prices on consumer goods without firing a lot of workers or cutting their pay. But not any more: demand from China, India and Brazil, among others, is now sending the prices of oil, grains, metals and other commodities higher than ever. U.S. companies — stuck with a higher bill — have cut costs by laying off workers rather than by slashing prices. This holiday season, for example, retailers have the smallest number of workers per sales dollar in the last decade.

While Black Friday can be an amazing stimulus for one day, it can be destructive if it goes on too long. The main problem with an extended period of price discounts is that if companies end up with lower profits from smaller margins, they may need to fire even more people, thus raising unemployment even further and making shoppers even less likely to spend. If they go on too long, deep discounts could also lead to one of the scariest phrases in economics, “a deflationary spiral,” in which consumers and businesses are in a miserable stalemate — not spending, not hiring. When everybody expects prices to keep falling significantly, things get worse. Why shop today if everything will be cheaper tomorrow? Why build a new factory and hire workers if profits are just going to fall?

There is, however, a way to achieve a healthier, extended Black Friday. It also results in consumers shopping and businesses hiring, but, paradoxically, it’s achieved through raising prices rather than cutting them. And it is truly one of the other scariest words in economics: inflation. Like a defibrillator, inflation is a blunt tool that, used exceedingly sparingly, can sometimes save the patient. The Federal Reserve can create inflation by pushing more dollars into the economy, a huge influx of which makes every dollar we have worth a bit less.

Most of the time, the rate of inflation is so low that we barely notice it. When it’s out of control, as it is right now in Zimbabwe, it makes money effectively worth nothing. But a bit of extra inflation can work miracles. With, say, 5 percent inflation — a bit more than double the current rate — $100 today will only buy $95 worth of stuff next year. That’s frightening, which is the point. We actually want consumers to realize that prices are rising and that money in their bank accounts is losing value if they don’t start spending. The same goes for companies too, which will be compelled to build and hire rather than sit on earnings, as many are now.

These days, the inflation solution is a hot topic among policy experts and economists, both liberal and conservative. Some Democrats think of it as a sort of back-door stimulus — because Congress won’t pass President Obama’s jobs plan. For a few Republicans, it’s a way to prod the economy without increasing government spending or debt. And then there are other economists who point out the rather obvious downsides: inflation, once it starts, can get out of control. Rising prices without new hiring would make people worse off. Weimar Germany’s hyperinflation led to Hitler; some blame inflation in the United States in the ’70s for giving us disco.

Even without these memories, inflation is a tough sell. It’s nearly impossible for politicians to tell Americans that their financial problems will be solved once the money in their wallets is worth less. (This, after all, is why Rick Perry threatened violence on Ben Bernanke.) Yet the biggest advantage, and somewhat terrifying disadvantage, to inflation as a policy tool is that it can be instituted without any politicians’ involvement. The Federal Reserve Board can meet and make some decisions, and pretty soon we’ll all see prices start rising.

In our bizarro economic world, where inflation can be good and discounts can be bad, the best long-term hope for the future might be the thing that most terrifies us. If emerging-market nations in Asia and Latin America develop a strong middle-class majority — as of now, they still haven’t — the United States will have less power and influence. But it also means that if our economy slows down again (and one day it will), American companies will be able to rely on consumers in Brazil and China without having to spur shoppers with extra inflation or deep discounts. There shouldn’t be anything scary about that.

 

Adam Davidson is co-founder of NPR's Planet Money, a podcast, blog, and radio series heard on “Morning Edition,” “All Things Considered” and “This American Life.”

    Could Every Day Be Black Friday?, NYT, 16.11.2011,
    http://www.nytimes.com/2011/11/20/magazine/adam-davidson-inflation-solution.html

The Smokers’ Surcharge

November 16, 2011
The New York Times
By REED ABELSON

More and more employers are demanding that workers who smoke, are overweight or have high cholesterol shoulder a greater share of their health care costs, a shift toward penalizing employees with unhealthy lifestyles rather than rewarding good habits.

Policies that impose financial penalties on employees have doubled in the last two years to 19 percent of 248 major American employers recently surveyed. Next year, Towers Watson, the benefits consultant that conducted the survey, said the practice — among employers with at least 1,000 workers — was expected to double again.

In addition, another survey released on Wednesday by Mercer, which advises companies, showed that about a third of employers with 500 or more workers were trying to coax them into wellness programs by offering financial incentives, like discounts on their insurance. So far, companies including Home Depot, PepsiCo, Safeway, Lowe’s and General Mills have defended decisions to seek higher premiums from some workers, like Wal-Mart’s recent addition of a $2,000-a-year surcharge for some smokers. Many point to the higher health care costs associated with smoking or obesity. Some even describe the charges and discounts as a “more stick, less carrot” approach to get workers to take more responsibility for their well-being. No matter the characterizations, it means that smokers and others pay more than co-workers who meet a company’s health goals.

But some benefits specialists and health experts say programs billed as incentives for wellness, by offering discounted health insurance, can become punitive for people who suffer from health problems that are not completely under their control. Nicotine addiction, for example, may impede smokers from quitting, and severe obesity may not be easily overcome.

Earlier this year, the American Cancer Society and the American Heart Association were among groups that warned federal officials about giving companies too much latitude. They argued in a letter sent in March that the leeway afforded employers could provide “a back door” to policies that discriminate against unhealthy workers.

Kristin M. Madison, a professor of law and health sciences at Northeastern University in Boston, said, “People are definitely worried that programs will be used to drive away employees or potential employees who are unhealthy.”

Current regulations allow companies to require workers who fail to meet specific standards to pay up to 20 percent of their insurance costs. The federal health care law raises that amount to 30 percent in 2014 and, potentially, to as much as half the cost of a policy.

When Wal-Mart Stores, the nation’s largest employer, recently sought the higher payments from some smokers, its decision was considered unusual, according to benefits experts. The amount, reaching $2,000 more than for nonsmokers, was much higher than surcharges of a few hundred dollars a year imposed by other employers on their smoking workers.

And the only way for Wal-Mart employees to avoid the surcharges was to attest that their doctor said it would be medically inadvisable or impossible to quit smoking. Other employers accept enrollment in tobacco cessation programs as an automatic waiver for surcharges.

“This is another example of where it’s not trying to create healthier options for people,” said Dan Schlademan, director of Making Change at Walmart, a union-backed campaign that is sharply critical of the company’s benefits. “It looks a lot more like cost-shifting.”

Wal-Mart declined to make an official available for an interview and provided limited answers to questions through an e-mail response. “The increase in premiums in tobacco users is directly related to the fact that tobacco users generally consume about 25 percent more health care services than nontobacco users,” said Greg Rossiter, a company spokesman.

Wal-Mart requires an employee to have stopped smoking to qualify for lower premiums. The company, which has more than one million employees, started offering an antismoking program this year, and says more than 13,000 workers have enrolled.

Some labor experts contend that employers can charge workers higher fees only if they are tied to a broader wellness program, although federal rules do not define wellness programs.

Employers cannot discriminate against smokers by asking them to pay more for their insurance unless the surcharge is part of a broader effort to help them quit, said Karen L. Handorf, a lawyer who specializes in employee benefits for Cohen Milstein Sellers & Toll in Washington.

Many programs that ask employees to meet certain health targets offer rewards in the form of lower premiums. At Indiana University Health, a large health system, employees who do not smoke and achieve a certain body mass index, or B.M.I., can receive up to $720 a year off the cost of their insurance. “It’s all about the results,” said Sheriee Ladd, a senior vice president in human resources at the system.

Initially the system also rewarded employees who met cholesterol and blood glucose goals, but after workers complained that those hurdles seemed punitive, Indiana shifted its emphasis a bit.

Workers who do not meet the weight targets can be eligible for lower premiums if a doctor indicates they have a medical condition that makes the goal unreasonable, Ms. Ladd said. “There are not many of those who come forward, but it’s available,” she said, adding that workers must be nonsmoking to get the other discount. About 65 percent of roughly 16,000 workers receive a discount.

Some benefits consultants say companies may be increasingly willing to test the boundaries of the law because there has been little enforcement, even though there is a provision requiring employers to accommodate workers with medical conditions limiting their ability to meet certain standards. “They are thumbing their nose at the accommodation provision,” said Michael Wood, a consultant at Towers Watson.

Still, “The employer is going to win not by cost-shifting but by getting people to stop smoking,” said Barry Hall, an executive at Buck Consultants, which advises employers.

Some versions of tougher standards have already been abandoned. The UnitedHealth Group, for example, had introduced a health plan called Vital Measures, which allowed workers to reduce the size of their deductible by meeting various health targets, but discontinued the offering three years ago because of insufficient demand, according to a spokesman. The insurer now offers plans that allow employees to earn rewards by either achieving health targets or participating in a coaching program to improve their health.

Wal-Mart’s decision to start charging smokers more for insurance came abruptly, according to some employees who say they had no chance to quit or consult a doctor. Jerome Allen, who works for Wal-Mart in Texas, says he realized he was paying $40 a month more as a smoking surcharge only when he saw a printout of his insurance coverage.

“Forty dollars is a lot of money,” said Mr. Allen, 63, who works part time. He says he has now quit smoking.

Wal-Mart says it mailed information about benefits changes weeks in advance of the enrollment deadline.

Under Wal-Mart’s programs, employees who want to enroll in some of the company’s more generous plans, which offer lower deductibles and out-of-pocket maximums, can pay as much as $178 a month, or more than $2,000, a year more if they smoke.

Many other companies charge smokers a smaller, flat amount, and have kept any financial penalties under the 20 percent threshold set by the federal rules, according to benefits experts. Target, a Wal-Mart competitor, does not charge smokers more for insurance, while Home Depot charges a smoker $20 a month. PepsiCo requires smokers to pay $600 a year more than nonsmokers unless they complete an antismoking program.

Some critics say Wal-Mart’s surcharge may have the effect of forcing people to opt for less expensive plans or persuade them to drop coverage altogether. Dr. Kevin Volpp, the director of the Center for Health Incentives and Behavioral Economics at the Leonard Davis Institute at the University of Pennsylvania, pointed out that surcharges and stringent health targets might wind up endangering those whose health was already at high risk. “There is this potentially very significant set of unintended consequences,” he said.

    The Smokers’ Surcharge, NYT, 16.11.2011,
    http://www.nytimes.com/2011/11/17/health/policy/smokers-penalized-with-health-insurance-premiums.html

Buying Underwear, Along With the Whole Store

November 12, 2011
The New York Times
By AMY CORTESE

SARANAC LAKE, N.Y.

THE residents of Saranac Lake, a picturesque town in the Adirondacks, are a hardy lot — they have to be to withstand winter temperatures that can drop to 30 below zero. But since the local Ames department store went out of business in 2002 — a victim of its corporate parent’s bankruptcy — residents have had to drive to Plattsburgh, 50 miles away, to buy basics like underwear or bed linens. And that was simply too much.

So when Wal-Mart Stores came knocking, some here welcomed it. Others felt that the company’s plan to build a 120,000-square-foot supercenter would overwhelm their village, with its year-round population of 5,000, and put local merchants out of business.

It’s a situation familiar to many communities these days. But rather than accept their fate, residents of Saranac Lake did something unusual: they decided to raise capital to open their own department store. Shares in the store, priced at $100 each, were marketed to local residents as a way to “take control of our future and help our community,” said Melinda Little, a Saranac Lake resident who has been involved in the effort from the start. “The idea was, this is an investment in the community as well as the store.”

It took nearly five years — the recession added to the challenge — but the organizers reached their $500,000 goal last spring. By then, some 600 people had chipped in an average of $800 each. And so, on Oct. 29, as an early winter storm threatened the region, the Saranac Lake Community Store opened its doors to the public for the first time. By 9:30 in the morning, the store, in a former restaurant space on Main Street opposite the Hotel Saranac, was packed with shoppers, well-wishers and the curious.

The 4,000-square-foot space was not completely renovated — a home goods section will be ready for the grand opening on Nov. 19 — but shoppers seemed pleased with the mix of apparel, bedding and craft supplies for sale.

“Ooh, that’s nice,” said Pat Brown, as she held up a slim black skirt (price: $29.99). She and her husband, Bob, a former professor of sociology at a local community college, live in town in an early 1900s home furnished with deer heads and other mementos from Bob’s hunting trips. The couple — who were voted king and queen of the village’s annual Winter Carnival in 1999 — bought $2,000 worth of shares in the store early on, and later bought a few more during a fund-raising drive.

“It’s been a long process for all of us. We’re very proud to have it finally become a reality,” Ms. Brown said. Her husband, a vigorous-looking man who had a neatly trimmed white beard and was wearing a cowboy hat, added, “This is a small town trying to help itself.”

Think of it as the retail equivalent of the Green Bay Packers — a department store owned by its customers that will not pick up and leave when a better opportunity comes along or a corporate parent takes on too much debt.

Community-owned stores are fairly common in Britain, and not unfamiliar in the American West, where remote towns with dwindling populations find it hard to attract or keep businesses. But such stores are almost unknown on the densely populated East Coast. The Saranac Lake Community Store is the first in New York State, its organizers say, and communities in states from Maine to Vermont are watching it closely.

Indeed, community ownership seems to resonate in these days of protest and unrest, when frustration with Wall Street, corporate America and a system seemingly rigged against the little guy is running high. But rather than simply grouse, some people are creating alternatives.

“It drives me crazy when people criticize how our system works, but they don’t actually go out and try anything,” says Ed Pitts, a lawyer from Syracuse who along with his wife, Meredith Leonard, is a frequent visitor to the area and has invested in the store. “This is more authentic capitalism.”

SARANAC LAKE is known more for its natural beauty and clean air than for experimenting with new forms of commerce. Nine miles from the Olympic town of Lake Placid, it is surrounded by lakes and mountains. In the past, it drew summer residents including Albert Einstein and Theodore Roosevelt, as well as tuberculosis patients who came to the village to take “the cure” of fresh air. Today, many of the village’s onetime “cure cottages” are filled with tourists who come in the summer months to hike, canoe and unwind, swelling the population threefold.

Come winter, though, the town’s Main Street quiets down and local residents reclaim places like the Blue Moon Café, which dishes up food and gossip. So when the local Ames store closed, few major retailers were interested in taking its place, despite the town’s efforts to woo them.

Wal-Mart was the exception. But its interest in building a supercenter larger than two football fields sharply divided villagers. Signs for and against Wal-Mart sprouted on front yards. At heated town meetings, people would shout: “You can’t buy underwear in Saranac Lake!”

In the end, Wal-Mart decided not to pursue the store; a spokesman said that “no single factor” contributed to the decision. But the tensions the debate stirred up only made the lack of shopping options more glaring.

That’s when a group of residents exploring retail alternatives heard about the Powell Mercantile, a community-owned store in Powell, Wyo., that was born of a similar dilemma. The Merc, as it is known, was established in 2002 after the town’s only department store, part of a chain called Stage, shut down.

“There was a great concern that Main Street would fail if we didn’t have a store to replace the Stage,” said Sharon Earhart, who was director of the Powell chamber of commerce at the time. Ms. Earhart and a few other residents raised more than $400,000 from local residents in three months by selling $500 shares, and opened the Merc.

The Merc prospered from the start, with fashion brands sharing space with rancher-appropriate Wranglers. When space in an adjacent storefront opened up, it expanded to 14,000 square feet. Now coming up on its 10th anniversary, the Merc does about $600,000 in annual sales and has turned a profit most years, even paying investors a $75 per share dividend in one particularly good year.

Powell’s Main Street is now thriving, with a wide range of retail outlets. The store “created a very positive domino effect,” Ms. Earhart said, to the extent that it can be hard to find parking space.

When she came to speak at a town hall meeting in Saranac Lake in 2006, nearly 200 people showed up. Following the Powell model, the Saranac Lake organizers put together a business plan and assembled a volunteer board of directors made up of local professionals.

The board then approached a local lawyer, Charles Noth, who created a prospectus and filed it with New York State authorities. By limiting the offering to residents of New York, in what is called an intrastate offering, the organizers were able to avoid more complex and costly federal securities regulations. (The Powell Merc also raised money through an intrastate offering.)

“I had done a lot of investment proposals but nothing quite like this,” said Mr. Noth, whose family has roots in the area and had recently moved here full time. “The idea of a community store is pretty unique.” He became an investor, as did his brother, the actor Chris Noth (best known for his role as Mr. Big in “Sex and the City”).

“We didn’t want it to be a cooperative or nonprofit,” explained Alan Brown, a former banker and the board’s treasurer (and no relation to Pat and Bob Brown). “We wanted it to be just another business on Main Street.”

It was also important that it be widely owned, so the shares were priced at $100 and the amount any one person could buy was capped at $10,000. Shares can be bought and sold or willed to future generations. The store’s projected near-term annual revenues of $350,000 to $400,000 will most likely be eaten up by operating expenses, said Melinda Little, the store’s interim board president, but in the future, investors could receive dividends.

Getting the first $80,000 was easy, but the board found it hard to keep people’s interest and raise new funds, especially as the recession hit. Board members organized fund-raisers to keep the project in front of people. One year, the board had a float in the Winter Carnival, featuring a clothesline with underwear hanging on it. The share offering will close in December.

Many residents, and even board members, were skeptical that the store would ever open. “We had our dark hours,” said Mr. Brown, the treasurer.

THOSE have been dispelled, for now. The first day, the store rang up $7,000 in receipts. Not surprisingly, underwear was a big seller.

“This is cool,” said Diane Kelting, who was waiting in line to buy a gray poly-rayon cardigan ($36.99) and a “hard to find” bra. “I have two young daughters and I can bring them in here now rather than shopping online,” added Ms. Kelting, who is not an investor in the store.

Heidi Kretser, who also attended the opening and is an investor, said online shopping had drawbacks. “Nowadays you don’t even know if the reviews are genuine. If I can actually see it and feel it and talk to someone about it, it just makes for a nicer shopping experience.”

For Ms. Kretser, a coordinator with the Wildlife Conservation Society who grew up in the area, the store is about more than convenience: “I’ve always loved the idea of thriving hamlets throughout the Adirondacks, and part of that is healthy downtowns.” Like other residents, she would sometimes drive the 50 miles to shop at the big box stores in Plattsburgh, “which could be Anywhere, America.”

Big boxes may offer a wide variety, she said, as her daughter Leena selected some pink yarn and buttons and her son Owen ran over clutching a knit animal hat. But “the size is not compatible with communities like ours,” she said. “And money does not stay local.”

And profit? “If we end up with a profit that’s another perk, but we’re in it for the community,” Ms. Kretser said. The Saranac Lake Community Store and others like it reflect a growing shift among some communities to lessen their dependence on global businesses and invest their resources in homegrown enterprises that contribute to the welfare of the community. These efforts flow from studies showing that, dollar for dollar, locally owned companies contribute more to local economies than corporate chains. That is because more money stays local rather than leaking out to a distant headquarters.

In a recent analysis of nearly 3,000 rural and urban areas across the United States, a pair of Pennsylvania State University economists found that the areas with more small, locally owned businesses (with fewer than 100 employees) had greater per capita income growth over the period from 2000 to 2007, while the presence of larger, nonlocal firms depressed economic growth.

“There is definitely a trend towards community-rooted alternatives,” said Stacy Mitchell, a senior researcher at the Institute for Local Self Reliance, a nonprofit research and educational organization. Citing the Occupy Wall Street protests and Move Your Money campaigns, she said, “More people are interested in taking the economy back.”

Cooperatives — nonprofit businesses like food stores and credit unions owned by and run on behalf of their members — are one common manifestation of the trend. In a co-op, each member gets one vote, and excess revenue not reinvested in the business is distributed among members either as rebates or, in the case of credit unions, lower fees and better interest rates. In the United States, a University of Wisconsin study estimated, there are more than 29,000 co-ops generating $654 billion in revenue, and the number is growing.

Community-owned stores are not as well known and are structured as profit-making corporations, but the aim is the same: to keep ownership and control in the community, and to share the prosperity.

The Saranac Lake Community Store is a C corporation, the typical big business form, but the resemblance ends there. If and when there are profits that are not plowed back into the store, they will be distributed to investors — many of whom are also the store’s customers. The store’s three employees are paid a modest salary, but one that is above average for the area, and receive health benefits and paid sick days. “That was very important to us,” said Ms. Little, the board president.

THE store’s planners sought advice from residents and merchants to determine what was most needed — an effort that continues. Under the title “product offering suggestions,” on a notebook placed near the store’s checkout counter, shoppers had scrawled “larger hats and gloves,” “watchbands” and “women’s flannel-lined jeans.”

The planners also tried to avoid competing directly against local merchants, who mainly line half a dozen blocks along Main Street and Broadway. For example, the store offers a limited shoe line, since there are shoe stores in town, and sticks to brands like Minnetonka moccasins, once made in nearby Malone and not carried elsewhere in town. The strategy appears to have won over local merchants. The Coakley Ace hardware down the street offered the store discounted paint and supplies, while the nearby Rice Furniture provided carpet at cost.

“I’m of the belief that if you have more offerings in the community, more people will view it as a place to shop,” said Pete Wilson, owner of Major Plowshares, an Army-Navy store in town. “It’s giving people more reason to stay downtown, and that should benefit other retailers.” He bought a share, along with one for each of his two daughters.

But community stores are not for everyone. Even with the backing of a local bank and economic development corporation, organizers of a proposed community store in Greenfield, Mass., returned $60,000 to investors this year after concluding that it would be difficult to raise the remaining money needed.

And there is no denying the challenges of competing with mega-retailers whose scale and clout give them enormous cost advantages. Craig Waters, Saranac Lake Community Store’s general manager, has had to be creative, stocking American-made products as much as possible and paying reduced prices for merchandise that has not sold at brand-name stores. Mr. Waters, who lives in Lake Placid, also relies on longstanding connections with suppliers. He worked for decades as a buyer and manager for May Department Stores, which merged with Federated Department Stores, now Macy’s Inc., in 2005.

The prices appeared reasonable. Brightly colored rubber rain boots for children were $16.99; women’s all-cotton sleep pants and tank top (in a moose print) were $19.99 and $12.99. A waffle-knit, fleece-lined men’s hoodie was $59.99.

The Saranac Lake store is off to a strong start, although the trick will be to keep people coming back after the holiday season — and the novelty — have worn off. “We had a lot of people saying it wouldn’t work — and it might not,” said Mr. Wilson, the owner of Major Plowshares. But its existence could set an example for other disenfranchised communities and perhaps prompt shoppers and residents to think about where their dollars go.

“Most people are coming in to pick up some thread or clothing. They’re not coming in to get a political lesson,” said Mr. Pitts, the Syracuse lawyer. “But it’s nice to have a place that you can point to as an alternative.”

    Buying Underwear, Along With the Whole Store, NYT, 12.10.2011,
    http://www.nytimes.com/2011/11/13/business/a-town-in-new-york-creates-its-own-department-store.html

Nuns Who Won’t Stop Nudging

November 12, 2011
The New York Times
By KEVIN ROOSE

ASTON, Pa.

NOT long ago, an unusual visitor arrived at the sleek headquarters of Goldman Sachs in Lower Manhattan.

It wasn’t some C.E.O., or a pol from Athens or Washington, or even a sign-waving occupier from Zuccotti Park.

It was Sister Nora Nash of the Sisters of St. Francis of Philadelphia. And the slight, soft-spoken nun had a few not-so-humble suggestions for the world’s most powerful investment bank.

Way up on the 41st floor, in a conference room overlooking the World Trade Center site, Sister Nora and her team from the Interfaith Center on Corporate Responsibility laid out their advice for three Goldman executives. The Wall Street bank, they said, should protect consumers, rein in executive pay, increase its transparency and remember the poor.

In short, Goldman should do God’s work— something that its chairman and chief executive, Lloyd C. Blankfein, once remarked that he did. (The joke bombed.)

Long before Occupy Wall Street, the Sisters of St. Francis were quietly staging an occupation of their own. In recent years, this Roman Catholic order of 540 or so nuns has become one of the most surprising groups of corporate activists around.

The nuns have gone toe-to-toe with Kroger, the grocery store chain, over farm worker rights; with McDonald’s, over childhood obesity; and with Wells Fargo, over lending practices. They have tried, with mixed success, to exert some moral suasion over Fortune 500 executives, a group not always known for its piety.

”We want social returns, as well as financial ones,” Sister Nora said, strolling through the garden behind Our Lady of Angels, the convent here where she has worked for more than half a century. She paused in front of a statue of Our Lady of Lourdes. “When you look at the major financial institutions, you have to realize there is greed involved.”

The Sisters of St. Francis are an unusual example of the shareholder activism that has ripped through corporate America since the 1980s. Public pension funds led the way, flexing their financial muscles on issues from investment returns to workplace violence. Then, mutual fund managers charged in, followed by rabble-rousing hedge fund managers who tried to shame companies into replacing their C.E.O.’s, shaking up their boards — anything to bolster the value of their investments.

The nuns have something else in mind: using the investments in their retirement fund to become Wall Street’s moral minority.

A  PROFESSORIAL woman with a sculpted puff of gray hair, Sister Nora grew up in Limerick County, Ireland. She dreamed of becoming a missionary in Africa, but in 1959, she arrived in Pennsylvania to join the Sisters of St. Francis, an order founded in 1855 by Mother Francis Bachmann, a Bavarian immigrant with a passion for social justice. Sister Nora took her Franciscan vows of chastity, poverty and obedience two years later, in 1961, and has stayed put ever since.

In 1980, Sister Nora and her community formed a corporate responsibility committee to combat what they saw as troubling developments at the businesses in which they invested their retirement fund. A year later, in coordination with groups like the Philadelphia Area Coalition for Responsible Investment, they mounted their offensive. They boycotted Big Oil, took aim at Nestlé over labor policies, and urged Big Tobacco to change its ways.

Eventually, they developed a strategy combining moral philosophy and public shaming. Once they took aim at a company, they bought the minimum number of shares that would allow them to submit resolutions at that company’s annual shareholder meeting. (Securities laws require shareholders to own at least $2,000 of stock before submitting resolutions.) That gave them a nuclear option, in the event the company’s executives refused to meet with them.

Unsurprisingly, most companies decided they would rather let the nuns in the door than confront religious dissenters in public.

“You’re not going to get any sympathy for cutting off a nun at your annual meeting,” says Robert McCormick, chief policy officer of Glass, Lewis & Company, a firm that specializes in shareholder proxy votes. With their moral authority, he said, the Sisters of St. Francis “can really bring attention to issues.”

Sister Nora and her cohort have gained access to some of the most illustrious boardrooms in America. Robert J. Stevens, the chief executive of Lockheed Martin, has lent her an ear, as has Carl-Henric Svanberg, the chairman of BP. Jack Welch, the former chief executive of General Electric, was so impressed by their campaign against G.E.’s involvement in nuclear weapons development that he took a helicopter to their convent to meet with the nuns. He landed the helicopter in a field across the street.

The Sisters of St. Francis are hardly the only religious voices challenging big business. They have teamed up on shareholder resolutions with other orders, including the Sisters of Charity of St. Elizabeth and the Sisters of St. Dominic of Caldwell, both in New Jersey. The Interfaith Center on Corporate Responsibility, the umbrella group under which much of Sister Nora’s activism takes place, includes Jews, Quakers, Presbyterians and nearly 300 faith-based investing groups. The Vatican, too, has weighed in with a recent encyclical, condemning “the idolatry of the market” and calling for the establishment of a central authority that could stave off future financial crises.

“Companies have learned over time that the issues we’re bringing are not frivolous,” said the Rev. Seamus P. Finn, 61, a Washington-based priest with the Missionary Oblates of Mary Immaculate and a board member of the Interfaith Center. “At the end of every transaction, there are people that are either positively or negatively impacted, and we try to explain that to them.”

On a recent Saturday morning, 12 members of the Sisters of St. Francis shareholder advocacy committee gathered in Our Lady of Angels, a cavernous, hushed building housing 80 nuns that if not for the eerie quiet would resemble an Ivy League dorm. As three nuns talked in the foyer, their tales of nieces and nephews echoing through the halls, the advocacy group, which includes several lay people, gathered in the Assisi Room for its quarterly meeting.

After a prayer, a group recitation from Psalm 68 (“The protector of orphans and the defender of widows is God in God’s holy dwelling”) and a round of applause for a nun celebrating her 50th anniversary, or golden jubilee, as a member of the order, they settled down to business.

Sister Nora, in a gray-checked jacket and a pink blouse overlaid with a necklace bearing the Franciscan cross known as a Tau, began by updating the group on its finances. In addition to its shareholder advocacy program, the committee has a social justice fund from which it allocates low-interest loans, in amounts up to $60,000, to organizations that fit with its mission. This quarter, it lent money to the Disability Opportunity Fund, a nonprofit that helps the disabled; and the Lakota Funds, a group trying to finance a credit union on a Native American reservation in South Dakota.

LATER, over lunch in the cafeteria downstairs, the Sisters of St. Francis discussed the delicate dance they face in their shareholder advocacy program — pushing corporations to change their actions, while not needling them so much on sensitive issues like executive pay that bigwigs like Mr. Blankfein, at Goldman Sachs, are not willing to meet with them.

“We’re not here to put corporations down,” Sister Nora said, between bites of broccoli salad. “We’re here to improve their sense of responsibility.”

“People who have done well have a right to their earnings,” added Sister Marijane Hresko, when the topic of executive compensation comes up. “What we’re talking about here is excess, and how much money is enough for any human being.”

Sister Nora nodded. “I can’t exclude people like Lloyd Blankfein from my prayers, because he’s just as much human as I am,” she said. “But we like to move them along the spectrum.”

Goldman tries to maintain a polite relationship. “We have found our conversations with Sister Nora Nash and other I.C.C.R. members to be very insightful and instructive,” a spokesman said.

But change has not been speedy. Despite some successes — such as a campaign directed at Wal-Mart that the nuns say led the company to stop selling adult video games — the insider-heavy nature of corporate share structures means that the Sisters of St. Francis rarely succeed in real-world terms, even when their ideas prove popular. Most of their submissions receive less than 20 percent of the shareholder vote, and many get stuck in single digits.

“I honestly don’t know if it’s been effective or not, but they do highlight issues other shareholders don’t,” Mr. McCormick of Glass, Lewis says.

Still, Sister Nora, who would give her age only as “late 60s,” said she would keep pushing companies to do the right thing. Lately, she has been particularly interested in hydraulic fracturing, or fracking, the natural gas collection technique that has been the subject of controversy over its environmental and chemical impact. She has been attending rallies for the antifracking cause, and has submitted resolutions to oil corporations including Chevron and Exxon, encouraging them to put firmer controls in place.

“My work will never be done,” she says. “God has his ways.”

Soon, Sister Nora will go on retreat, an annual Franciscan rite in which nuns retire to solitude for a week of contemplation and prayer. There, she will gather her strength, rebuild her fighting spirit and emerge ready for the next round of resolutions and closed-door meetings.

She has even identified her next target: Family Dollar, one of the many deep-discount chains that sell cheap imported goods to Americans who generally do not know, or necessarily care, where those products come from. Sister Nora wants to make sure Family Dollar’s suppliers have fair labor policies, and she is concerned about whether its products are free of toxins.

“They just got a new president,” Sister Nora says. “I have a letter ready to go Monday.”

    Nuns Who Won’t Stop Nudging, NYT, 12.11.2011,
    http://www.nytimes.com/2011/11/13/business/sisters-of-st-francis-the-quiet-shareholder-activists.html

Stocks Stabilize After Global Sell-Off

November 9, 2011
The New York Times
By CHRISTINE HAUSER and DAVID JOLLY

Stocks recovered somewhat on Thursday in the United States and in Europe and the euro strengthened after Italy managed a successful offering of debt securities, though at a sharply higher rate than the last time it went to market.

As the trading session wore on, the major American indexes shed some of their earlier gains, with stocks in Europe turning down slightly. Still, the session was an about-face from the global sell-off that had been triggered by investors dumping Italian government bonds on Wednesday.

Italy raised 5 billion euros, or $6.8 billion, in an auction of one-year securities Thursday. The Italian Treasury sold the full allotment of bonds on offer, but it paid an average rate of 6.09 percent to do so, far above the 3.57 percent it paid for a similar offering on Oct. 3. It also marked the most Italy has paid for such debt since September 1997, when the country still used the lira.

In late afternoon trading, the Euro Stoxx 50 index, a barometer of euro zone blue chip shares, settled down 0.3 percent after a rise of 1.1 percent, while the FTSE 100 index in London was down 0.3 percent. The major index in Germany was up 0.7 percent, while France was down 0.3 percent.

At midday in the United States, the Standard & Poor’s 500-share index and the Dow Jones industrial average were each up just under 1 percent. The Nasdaq composite index was up 0.2 percent, as some shares fell sharply: Green Mountain Coffee Roasters lost 35 percent and Delta Petroleum shed nearly 65 percent on that index.

Crude oil futures in New York trading rose, adding more than 1.7 percent to $97.40 a barrel. Energy stocks were the strongest performing sector on Wall Street, ahead by more than 1.7 percent. Financials, which have taken a beating during the turmoil over the euro zone crisis, were up by about 0.6 percent.

The benchmark 10-year bond in the United States had a 2.057 percent yield in early trading, up from 1.962 percent on Wednesday.

The volatility seemed to ease from Wednesday, when the broader market as measured by the S.& P. 500 index fell 3.7 percent as the reverberations from the euro crisis grew.

Political confusion in Rome led to a sell-off in Italian debt. Yields on the country’s 10-year bonds rose sharply above 7 percent, a level that is considered unsustainable and reminiscent of the trend that precipitated bailouts in other euro zone countries.

On Thursday morning in New York, the Italian 10-year bonds were trading to yield 6.87 percent, helped, according to news agency reports, by secondary-market purchases by the European Central Bank.

Officials in Brussels added some gloom, however, with a report that said the economy of the European Union had ground to a standstill, with a prediction of 0.5 percent growth in 2012 and a return to slow growth of about 1.5 percent expected by 2013.

“Growth has stalled in Europe, and there is a risk of a new recession,” the European economic and monetary affairs commissioner, Olli Rehn, said in a statement, warning that “no real improvement is forecast in the unemployment situation in the E.U. as a whole”.

Mr. Rehn said that if growth and job creation were to return, it was essential that the 27 European Union members restore confidence in their finances and speed up reforms.

“There is a broad consensus on the necessary policy action,” he said. “What we need now is unwavering implementation. On my part, I will start using the new rules of economic governance from day one.”

There was one victory for the embattled euro zone, as Moody’s Investors Service on Thursday assigned the top-notch AAA rating to the European Financial Stability Facility’s new 10-year benchmark bond. The E.F.S.F., Europe’s main bailout vehicle, is backed by the finances of the euro zone countries, and there had been concern that the bonds would not get a top rating.

The dollar was lower against other major currencies. The euro steadied at $1.3597 on Thursday from $1.3542 on Wednesday.

In Asia, markets declined sharply Thursday, catching up with Wednesday’s action on Wall Street. The Nikkei 225 stock average in Tokyo fell 2.9 percent, while the Kospi index in Seoul tumbled 4.9 percent. The Hang Seng in Hong Kong sank 5.3 percent at the close, and the Shanghai composite index fell 1.8 percent.

Banking stocks continued to bear the brunt of the selling. Shares in HSBC, which warned Wednesday that it expected more trouble with its North American mortgage business, sank 9.1 percent in Hong Kong.

Tim Condon, chief economist for Asia at ING Group in Singapore, labeled Thursday “a terrible day.”

“This will last until the Italian government does something to show progress toward balancing its budget,” Mr. Condon said.

 

Kevin Drew and Sei Chong contributed reporting.

    Stocks Stabilize After Global Sell-Off, NYT, 9.11.2011,
    http://www.nytimes.com/2011/11/11/business/global/daily-stock-market-activity.html

Moving to U.S. and Amassing a Fortune, No English Needed

November 8, 2011
The New York Times
By KIRK SEMPLE

More than 40 years after arriving in New York from Mexico uneducated and broke, Felix Sanchez de la Vega Guzman still can barely speak English. Ask him a question, and he will respond with a few halting phrases and an apologetic smile before shifting back to the comfort of Spanish.

Yet Mr. Sanchez has lived the great American success story. He turned a business selling tortillas on the street into a $19 million food manufacturing empire that threaded together the Mexican diaspora from coast to coast and reached back into Mexico itself.

Mr. Sanchez is part of a small class of immigrants who arrived in the United States with nothing and, despite speaking little or no English, became remarkably prosperous. And while generations of immigrants have thrived despite language barriers, technology, these days, has made it easier for such entrepreneurs to attain considerable affluence.

Many have rooted their businesses in big cities with immigrant populations large enough to insulate them from everyday situations that demand English. After gaining traction in their own communities, they have used the tools of modern communication, transportation and commerce to tap far-flung resources and exploit markets in similar enclaves around the country and the world.

“The entire market is Hispanic,” Mr. Sanchez said of his business. “You don’t need English.” A deal, he said, is only a cheap long-distance phone call or a few key strokes on the computer away. “All in Spanish,” he added.

Mr. Sanchez, 66, said he always wanted to learn English but had not had time for lessons.

“I couldn’t concentrate,” he said in a recent interview, in Spanish. “In addition, all the people around me were speaking in Spanish, too.”

In New York City, successful non-English-speaking entrepreneurs like Mr. Sanchez have emerged from the largest immigrant populations, including those from China, South Korea and Spanish-speaking countries.

Among them is Zhang Yulong, 39, who emigrated from China in 1994 and now presides over a $30-million-a-year cellphone accessories empire in New York with 45 employees.

Kim Ki Chol, 59, who arrived in the United States from South Korea in 1981, opened a clothing accessories store in Brooklyn and went on to become a successful retailer, real estate investor and civic leader in the region’s Korean diaspora.

In the United States in 2010, 4.5 million income-earning adults who were heads of households spoke English “not well” or “not at all,” according to the Census Bureau; of those, about 35,500 had household incomes of more than $200,000 a year.

Nancy Foner, a sociology professor at the City University of New York who has written widely on immigration, said it was clear that modern technology had made a big difference in the ability of immigrant entrepreneurs with poor or no English skills to expand their companies nationally and globally.

“It wasn’t impossible — but much, much harder — for immigrants to operate businesses around the globe a hundred years ago, when there were no jet planes, to say nothing of cellphones and computers,” Ms. Foner said.

Advocates for the movement sometimes known as Official English have long pressed for legislation mandating English as the official language of government, arguing that a common language is essential for the country’s cohesion and for immigrant assimilation and success.

But stories like Mr. Sanchez’s, though certainly unusual, seem to suggest that an entrepreneur can do just fine without English — especially with the aid of modern technology, not to mention determination and ingenuity.

For Mr. Sanchez, who became an American citizen in 1985, one anxious moment came when he had to pass his naturalization test. The law requires that applicants be able to read, write and speak basic English.

But Mr. Sanchez and other entrepreneurs said that the test, at least at the time they took it, had been rudimentary and that they had muddled through it.

Mr. Sanchez immigrated to the United States in 1970 from the Mexican state of Puebla with only a fifth-grade education. He held a series of low-paying jobs in New York, including washing dishes in a Midtown restaurant. The Mexican population in the New York region was small back then, but it soon began growing, as did the demand for authentic Mexican products.

In 1978, Mr. Sanchez and his wife, Carmen, took $12,000 in savings, bought a tortilla press and an industrial dough mixer in Los Angeles, hauled the machinery back to the East Coast and installed it in a warehouse in Passaic, N.J. Mr. Sanchez spent his days driving a forklift at an electrical-equipment factory and spent his evenings and nights making tortillas and selling them door-to-door in Latino neighborhoods around New York City.

His company, Puebla Foods, grew with the Mexican population, and he was soon distributing his tortillas and other Mexican products, like dried chilies, to bodegas and restaurants throughout the Northeast. At its peak, his enterprise had factories in cities all across North America, including Los Angeles, Miami, Pittsburgh, Toronto and Washington. It has since been buffeted by competition and by the economy, and he has scaled back.

He has relied heavily on a bilingual staff, which at times has included his three children, born and raised in New Jersey.

Mr. Zhang, the cellphone accessories entrepreneur, said his lack of English had not been a handicap. “The only obstacle I have is if I get too tired,” said Mr. Zhang, who also owns a property development company and an online retail firm.

In 2001, Mr. Zhang set up a wholesale business in cellphone accessories in Manhattan. He then raised money from relatives and investors in China to open a manufacturing plant there to make leather cellphone cases for export to the United States, Canada and Latin America.

His business boomed, and he opened warehouses in Los Angeles, New York City and Washington, controlling his international manufacturing, supply and retail chain from his base in New York.

Mr. Zhang now lives in a big house in Little Neck, Queens, with his wife, three daughters and parents, and drives a Lexus S.U.V. He has not applied for citizenship, preferring to remain a legal permanent resident and maintain his Chinese citizenship, which spares him the bother of securing a Chinese visa when he goes to China for business.

While he can speak rudimentary English — he rates his comprehension at 30 percent — he conducts nearly his entire life in Chinese. His employees speak the languages of trading partners: English, Spanish, Creole, Korean and French, not to mention multiple Chinese dialects.

Over the course of a lengthy interview, he gamely tried on several occasions to converse in English, but each time he ran into roadblocks and, with a shrug of resignation, resumed speaking through a translator in Mandarin.

Mr. Kim, the Korean retailer, recalled that when he opened his first store in Brooklyn, nearly his entire clientele was Afro-Caribbean and African-American, and his customers spoke no Korean.

“You don’t have to have a big conversation,” he recalled. “You can make gestures.”

While his holdings have grown, he has also formed or led associations and organizations that focus on empowering the Korean population in the United States. As in business, modern communication has made it much easier for him to raise his profile throughout the Korean diaspora well beyond New York.

“The success of my life is not only that I make a lot of money,” he said, “but that I make a lot of Korean people’s lives better.”

Yet he admitted that he was embarrassed by his inability to speak English. He has gone so far as to buy some English-tutorial computer programs, but for years, they have gone mostly unused.

 

Jeffrey E. Singer contributed reporting.

    Moving to U.S. and Amassing a Fortune, No English Needed, NYT, 8.11.2011,
    http://www.nytimes.com/2011/11/09/nyregion/immigrant-entrepreneurs-succeed-without-english.html

Letting the Banks Off Easy

November 8, 2011
The New York Times

The banks want California, and the Obama administration hopes they can get it.

In September, the attorney general of California, Kamala Harris, withdrew from settlement talks between the banks and federal and state officials over mortgage abuses. Ms. Harris said California was being asked to excuse bank conduct that has not been adequately investigated and to grant the banks an unacceptably broad release from legal liability for the mortgage mess.

Those grave reservations have also been raised by other state attorneys general — including Eric Schneiderman of New York and Joseph Beau Biden III of Delaware. The administration, however, wants a deal. As pressure builds to get on board, Ms. Harris and her like-minded peers should stand their ground and avoid letting the banks off easy.

The administration says a settlement today would quickly deliver relief to needy borrowers. That’s true as far as it goes, but it doesn’t go far enough. Early word of the proposed settlement indicates that banks would reduce the balances on a million or so underwater loans by $17 billion to $20 billion. They would put up $5 billion to $8 billion to help pay for refinancings, counseling, legal services and other aid to homeowners. And they would have to adhere to tougher standards for loan servicing and foreclosures. That would be better than now but paltry compared with the potential extent of bank misconduct and with the scale of the mortgage debacle. At present, 14.5 million borrowers — and the broader economy — are drowning in some $700 billion of negative equity.

The administration also believes federal and state officials could effectively pursue investigations of unexamined issues after a settlement. We doubt that. The government’s history on challenging banks and holding them accountable does not inspire confidence. And for banks — threatened by crushing legal challenges for their conduct — the whole point of settling is to restrict legal claims.

The proposed settlement reportedly would prevent the states from pursuing claims against banks relating to fraud or abuse in the origination of loans during the bubble. (In some states, the statute of limitations has expired for bringing challenges for faulty originations but not on all loans in all states.) It would also prevent states from pursuing claims for foreclosure abuses, like improper denial of loan modifications. And it would prevent them from pursuing banks’ misconduct in their dealings with the Mortgage Electronic Registration Systems database, or MERS, a land registry system implicated in bubble-era violations of tax, trust and property law.

The proposal would not preclude the states from pursuing the banks for wrongdoing in the repackaging and marketing of loans as mortgage-backed securities. But, as a practical matter, the ability to fully press such claims — and to achieve significant redress — could be impeded or blocked by the other constraints. Once one avenue of inquiry is closed off, it can be difficult to ascertain what happened along other points in the mortgage chain.

In effect, the legal waivers being contemplated would let the banks pay up to sweep wrongdoing under the rug.

For the settlement to be fair and meaningful, the redress from the banks must be far greater than the $25 billion that has been floated, or the release from legal liability far narrower. The best outcome would be for government officials to do what they should have done all along: develop the strongest possible legal case by fully investigating the banks’ conduct during the bubble and since the crash and then — and only then — talk settlement. In the meantime, the public is being well served by attorneys general who are willing to say that the deal currently on the table is not nearly good enough.

    Letting the Banks Off Easy, NYT, 8.11.2011,
    http://www.nytimes.com/2011/11/09/opinion/letting-the-banks-off-easy.html

Deficit Panel Members Seeking to Avoid Blame

November 8, 2011
The New York Times
By ROBERT PEAR

WASHINGTON — Members of a Congressional panel on deficit reduction are no longer trying just to solve the nation’s fiscal problems. Some are desperately trying to avoid blame for the possible collapse of a process concocted by Senate leaders to break an impasse between those who want to raise taxes and those who would prefer to cut spending by focusing on entitlement programs.

After weeks of calculated silence, the two parties have begun shoving out rival versions of the same message: If the joint committee cannot reach agreement, the other side will be responsible.

Republicans, long opposed to tax increases, said Tuesday that they might allow $250 billion to $300 billion of additional tax revenue as part of a deal to shave $1.2 trillion from federal deficits over the next 10 years.

Democrats were quick to dismiss the offer because, they said, it came with a proposal that would permanently reduce individual income tax rates, including those for the most affluent Americans — a group that Democrats would like to see contribute more to deficit reduction.

Members of both parties said Tuesday that they saw a glimmer of hope that the panel could strike a deal and vote on its recommendations by the statutory deadline of Nov. 23, just two weeks off.

With Republicans resisting additional tax revenues until now, Democrats had refused to entertain significant savings in benefit programs like Medicare, Medicaid and Social Security.

Senator John Kerry, Democrat of Massachusetts and a member of the committee, said that the latest Republican overture represented a “slight change.”

“I would not characterize it as substantial yet, but it is a change,” he said. “We have some distance to travel.”

Democrats said they worried that the ideas floated by Republicans like Senator Patrick J. Toomey of Pennsylvania might be largely a public relations gesture, to deflect Democratic complaints that Republicans were responsible for the current impasse.

Some of the new revenue under the Republican proposal would come from limiting tax breaks that primarily benefit upper-income households. Some would come from other sources like fees charged for government services, higher Medicare premiums for high-income people, sales of federal lands and surplus federal property, and perhaps oil drilling in part of the Arctic National Wildlife Refuge, a proposal that has failed to win broad Democratic support over the years.

Democrats pointed to the nontax revenue as evidence that Republicans were still not serious.

“The Republicans’ insistence on no new taxes was not working,” said a Democratic senator close to the negotiations. “So Republicans have now offered a tiny bit of tax revenue. To be serious, they must offer much more.”

A Democratic aide close to the talks said the latest Republican proposal was unacceptable because it would lower the top tax rate on the most affluent Americans to 28 percent in 2013, from the current 35 percent. Under existing law, the rate is scheduled to rise to 39.6 percent in 2013.

“This plan would provide the very wealthiest Americans with one of the largest tax rate cuts ever,” the Democratic aide said. “It’s a shell game — a thinly veiled attempt to appear to put revenue on the table while simultaneously removing far more with massive tax cuts for wealthy Americans. This plan is not a solution that Democrats or middle-class Americans would ever be willing to accept.”

Another Democratic aide said the proposal would be “a windfall for millionaires.”

A Republican close to the talks said it was Democrats who had been intransigent, demanding tax increases as part of any deal.

The House will not approve a bill that raises tax revenue unless it also reduces tax rates, the aide said, adding, “We put tax revenues on the table, and Democrats don’t know what to do.”

The Republican Study Committee, a group of more than 170 conservative House Republicans, immediately circulated a letter urging the committee not to support any tax increases. “With current levels of taxation already limiting economic growth, we believe that marginal rates must be maintained or lowered and that repeal of any tax credit or deduction be offset with an equal or greater tax cut,” the letter said.

The latest Republican proposal also calls for a gradual increase in the age of eligibility for Medicare, to 67 from 65, and the use of an alternative measure of inflation that would reduce annual cost-of-living adjustments in Social Security benefits.

The new measure of inflation would also be used to adjust income tax brackets and other tax code provisions. Some people would find themselves in higher tax brackets, and more income would be subject to taxation.

The Congressional Budget Office said these changes could reduce federal spending by more than $110 billion over 10 years and could generate $70 billion of additional revenue.

Creation of the panel, the Joint Select Committee on Deficit Reduction, was originally recommended in July by the Senate majority leader, Harry Reid, Democrat of Nevada. The Senate Republican leader, Mitch McConnell of Kentucky, concurred.

In a news briefing on Tuesday, Mr. McConnell said he suspected that “folks down at the White House are pulling for failure” by the panel, because an agreement would tend to disprove President Obama’s portrayal of Congress as dysfunctional.

Mr. Reid said Republicans on the committee appeared to be under the spell of Grover G. Norquist, the president of Americans for Tax Reform, who strenuously opposes tax increases.

Mr. Norquist is so influential that it seemed as if he were “elbowing his way into all these rooms where we’re having these meetings,” Mr. Reid said.

Senator Jim DeMint, Republican of South Carolina, said he had not been impressed with the panel’s efforts to cut spending.

“It seeks only to spend the country into bankruptcy a little slower,” Mr. DeMint said. “Rather than letting the country rack up $23.4 trillion of debt by 2021, the supercommittee hopes to keep it to $21.3 trillion. It’s the difference between speeding off a cliff at 91 miles per hour versus 100 miles per hour.”

 

Jennifer Steinhauer contributed reporting.

    Deficit Panel Members Seeking to Avoid Blame, NYT, 8.11.2011,
    http://www.nytimes.com/2011/11/09/us/politics/both-sides-on-deficit-panel-seeking-to-avoid-blame.html

Occupy Movement Inspires Unions to Embrace Bold Tactics

November 8, 2011
The New York Times
By STEVEN GREENHOUSE

Organized labor’s early flirtation with Occupy Wall Street is starting to get serious.

Union leaders, who were initially cautious in embracing the Occupy movement, have in recent weeks showered the protesters with help — tents, air mattresses, propane heaters and tons of food. The protesters, for their part, have joined in union marches and picket lines across the nation. About 100 protesters from Occupy Wall Street are expected to join a Teamsters picket line at the Sotheby’s auction house in Manhattan on Wednesday night to back the union in a bitter contract fight.

Labor unions, marveling at how the protesters have fired up the public on traditional labor issues like income inequality, are also starting to embrace some of the bold tactics and social media skills of the Occupy movement.

Last Wednesday, a union transit worker and a retired Teamster were arrested for civil disobedience inside Sotheby’s after sneaking through the entrance to harangue those attending an auction — echoing the lunchtime ruckus that Occupy Wall Street protesters caused weeks earlier at two well-known Manhattan restaurants owned by Danny Meyer, a Sotheby’s board member.

Organized labor’s public relations staff is also using Twitter, Tumblr and other social media much more aggressively after seeing how the Occupy protesters have used those services to mobilize support by immediately transmitting photos and videos of marches, tear-gassing and arrests. The Teamsters, for example, have beefed up their daily blog and posted many more photos of their battles with BMW, US Foods and Sotheby’s on Facebook and Twitter.

“The Occupy movement has changed unions,” said Stuart Appelbaum, the president of the Retail, Wholesale and Department Store Union. “You’re seeing a lot more unions wanting to be aggressive in their messaging and their activity. You’ll see more unions on the street, wanting to tap into the energy of Occupy Wall Street.”

Unions have long stuck to traditional tactics like picketing. But inspired by the Occupy protests, labor leaders are talking increasingly of mobilizing the rank and file and trying to flex their muscles through large, boisterous marches, including nationwide marches planned for Nov. 17.

Organized labor is also seizing on the simplicity of the Occupy movement’s message, which criticizes the great wealth of the top 1 percent of Americans compared with the economic struggles of much of the bottom 99 percent.

A memo that the A.F.L.-C.I.O. sent out last week recommended that unions use the Occupy message about inequality and the 99 percent far more in their communications with members, employers and voters.

Indeed, as part of its contract battle with Verizon, the communications workers’ union has began asserting in its picket signs that Verizon and its highly paid chief executive are part of the 1 percent, while the Verizon workers who face demands for concessions are part of the 99 percent. A dozen Verizon workers plan to begin walking from Albany to Manhattan on Thursday in a “March for the 99 percent.”

“We think the Occupy movement has given voice to something very basic about what’s going on in our country right now,” said Damon Silvers, the A.F.L.-C.I.O.’s policy director. “The fact that they’ve figured out certain concepts and language for doing that, we think is really important and positive.”

Over the last month, unions have provided extensive support to Occupy protesters around the country, from rain ponchos to cash donations. National Nurses United is providing staff members for first-aid tables at many encampments, while the A.F.L.-C.I.O.’s headquarters two blocks from the White House is providing shower facilities for the protesters occupying McPherson Square, 300 yards to the east.

Unions have also intervened with politicians on behalf of the protesters. In Los Angeles, labor leaders have repeatedly lobbied Mayor Antonio Villaraigosa not to evict the protesters. When New York City officials were threatening to evict the Occupy Wall Street protesters from Zuccotti Park, hundreds of union members showed up before daybreak to discourage any eviction, and the city backed down.

Like any relationship, however, the one between the Occupy movement and labor is complicated.

Dozens of Occupy protesters have joined union members to picket the Hotel Bel-Air in Los Angeles and Verizon offices in Washington, Buffalo and Boston. (A Verizon spokesman said the Occupy protesters “do not have the benefit of any information about the Verizon issues except what they’ve been told by the union, which is obviously one-sided and most likely inaccurate.”)

In New York, the Occupy protesters have joined the Teamsters in their attacks on Sotheby’s. The art auction house locked out 43 Teamster art handlers on July 29, after the union balked at its demands for sizable concessions.

In addition to the lunchtime protest at the Danny Meyer restaurants, Occupy protesters also joined recent picketing against Sotheby’s outside the Museum of Modern Art in New York.

Diana Phillips, a Sotheby’s spokeswoman, said the company had offered a fair contract and “is unwilling to accept demands that virtually double the cost of their contract.”

Arthur Brown, a mental health worker who is one of the founders of Occupy Buffalo, where 50 people camp out each night, said the Occupy movement badly needed labor’s backing if it is to change the nation’s policies and politics.

“Young people started this movement, but they can’t finish it,” Mr. Brown said. “They don’t have the capacity or the experience to finish it. We really need the working class and union folks, the older folks, the activists from the ’60s. ’70s and ’80s, to help make this a full-fledged movement that will change the political landscape of America.”

But some Occupy protesters worry that organized labor might seek to co-opt them.

Jake Lowry, a 21-year-old college student and an Occupy participant, said: “We’re glad to have unions endorse us, but we can’t formally endorse them. We’re an autonomous group and it’s important to keep our autonomy.”

George Gresham, president of 1199 S.E.I.U., a union that represents more than 300,000 health care workers in the Northeast, said his union wanted to help the Occupy movement amplify its voice.

“This is a dream come true for us to have these young people speaking out about what’s been happening to working people,” Mr. Gresham said. His union has offered to provide 500 flu shots and a week’s worth of meals for the Occupy Wall Street protesters.

María Elena Durazo, executive secretary-treasurer of the Los Angeles County Federation of Labor, said it remained to be seen whether the unions and the protesters could, by working together, achieve concrete change.

“Workers are with the Occupy movement on the broader issues; they’re with them on the issue of inequality,” she said. “The question is, can the labor movement or the Occupy movement move that message down to the workplace, where workers confront low wages, low benefits and little power? Can we use it to organize workers where it really matters, in the workplace, to help their everyday life?”

    Occupy Movement Inspires Unions to Embrace Bold Tactics, NYT, 8.11.2011,
    http://www.nytimes.com/2011/11/09/business/occupy-movement-inspires-unions-to-embrace-bold-tactics.html

End Bonuses for Bankers

November 7, 2011
The New York Times
By NASSIM NICHOLAS TALEB

I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.

More than three years since the global financial crisis started, financial institutions are still blowing themselves up. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. So far, lenders and shareholders have been paying the price, not taxpayers. But it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008.

The promise of “no more bailouts,” enshrined in last year’s Wall Street reform law, is just that — a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk.

Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.

Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called “black swan” events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters.

Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.

The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi’s code specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”

This was simply the best risk-management rule ever. The Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners — in, say, the foundation. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.

Banning bonuses addresses the principal-agent problem in economics: the separation between an agent’s interests and those of the client, or principal, he is supposed to represent. The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls. Similarly, cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship. The Romans even figured out how to deter cowardice that causes the death of others with the technique called decimation: If a legion lost a battle and there was suspicion of cowardice, 10 percent of the soldiers and commanders — usually chosen at random — were put to death.

No such pain faces bailed-out, bonus-taking bankers. The period from 2000 to 2008 saw a very large accumulation of hidden exposures in the financial system. And yet the year 2010 brought the largest bank compensation in history. It has become clear that merely “clawing back” past bonuses after the fact is not enough. Supervision, regulation and other forms of monitoring are necessary, but insufficient — consider that the Federal Reserve insisted, as late as 2007, that the rapidly escalating subprime mortgage crisis was likely to be “contained.”

What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring “lifers.” Banking was bland and predictable; the chairman’s income was less than that of today’s junior trader. Investment banks, which paid bonuses and weren’t allowed to lend, were partnerships with skin in the game, not gamblers playing with other people’s money.

Hedge funds, which are loosely regulated, could take on some of the risks that banks would shed under my proposal. While we tend to hear about the successful ones, the great majority fail and their failures rarely make the front page. The principal-agent problem they have isn’t a problem for taxpayers: Typically their investors manage the governance of hedge funds by ensuring that the manager is hurt more than any of his investors in the event of a blowup.

I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.

 

Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute, is the author of “The Black Swan: The Impact of the Highly Improbable.” He is a hedge fund investor and a former Wall Street trader.

    End Bonuses for Bankers, NYT, 7.11.2011,
    http://www.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html

Staring Into the Budget’s Abyss

November 7, 2011
The New York Times

Republicans, looking for leverage to slash federal spending, created the phony debit-ceiling crisis that led to creation of the Congressional deficit-cutting “supercommittee.” But with the committee close to a deadlock — largely because Republicans will not agree to higher taxes on the rich — and the deadline for an agreement approaching, some Republicans are now talking about undoing the process.

We are no fans of the supercommittee. It is undemocratic, and the deep, automatic cuts the law would impose if the committee fails to reach agreement are gimmicky and potentially dangerous. But walking away at this point would be an embarrassment for Congress and a far-reaching blow to Washington’s financial credibility.

The committee of 12, divided between the two parties, was required by the Budget Control Act to come up with a plan to shrink the deficit by at least $1.2 trillion over the next decade through any combination of spending cuts and revenue increases. If the members fail to agree, the law would automatically “sequester” $1.2 trillion in spending cuts — heavily affecting defense programs.

Democrats have proposed a $4 trillion mix of cuts and tax increases, carving too deeply from domestic programs. But Republicans have rejected any tax increases, and Democrats are rightly refusing to agree to any package without revenues.

If the committee fails, Representative K. Michael Conaway, a Texas Republican on the House Armed Services Committee, told The Times, “most of us will move heaven and earth to find an alternative that prevents a sequester from happening.” Several Republicans are talking about finding cuts elsewhere in the budget, and that surely means social-insurance programs. Democrats, including President Obama, would probably block any law that undoes the budget act, but even talking about doing so reduces the pressure on the panel to reach agreement.

The committee should be working overtime to avoid a sequester, which would cut virtually every discretionary program at the Pentagon and the Homeland Security Department by 10 percent in 2013. (Cuts in the following nine years would be made by Congress but would still be 10 percent.) Medicare providers would be cut by 2 percent, and there would be major reductions in other domestic programs, including several necessary for health reform.

But as bad as the sequester would be, it would spare most social-insurance programs, making it better than the proposals by supercommittee Republicans to cut more than $2 trillion without raising any revenues. Those would largely spare the Pentagon but make deep cuts in programs that benefit the needy.

Simply dismissing the committee and undoing the sequester would be such a vast admission of Congressional failure that it could push down the nation’s credit rating, lead to chaos in financial markets and severely cripple hopes for an economic recovery. Republicans created the policies that forced up the deficit and then refused to compromise with President Obama. They cannot simply walk away now. Panel members have only a few days to come up with a plan that balances new revenues with spending cuts. That is the only way to wrestle down the deficit without doing huge damage to the economy and the country.

    Staring Into the Budget’s Abyss, NYT, 7.11.2011,
    http://www.nytimes.com/2011/11/08/opinion/staring-into-the-budgets-abyss.html

The Next Fight Over Jobs

November 6, 2011
The New York Times

The way the job market is going, it will never be robust enough to bring down the unemployment rate, now at 9 percent, or 13.9 million people. Monthly job growth has slowed to an average of just 90,000 new jobs a month over the past six months, a pace at which growth in the working-age population will always exceed the number of new jobs being created.

High unemployment and low job growth, which have plagued the economy all through the current “recovery,” hurt both consumer spending and economic growth. But don’t count on government to do the obvious and urgent thing — intervene to create jobs.

Tragically, the more entrenched the jobs shortage becomes, the more paralyzed Congress becomes, with Republicans committed to doing nothing in the hopes that the faltering economy will cost President Obama his job in 2012. Last week, for instance, Senate Republicans filibustered a $60 billion proposal by Mr. Obama to create jobs by repairing and upgrading the nation’s deteriorating infrastructure. They were outraged that the bill would have been paid for by a 0.7 percent surtax on people making more than $1 million.

Things may be about to get worse.

Federal unemployment benefits, which generally kick in after 26 weeks of state-provided benefits, are scheduled to expire at the end of the year. That would be a disaster for many of the estimated 3.5 million Americans who get by on extended benefits — an average of $295 a week. It would also be a blow to the economy, because it would reduce consumer spending by about $50 billion in 2012 — which would mean slower economic growth and 275,000 lost jobs. Unfortunately, given Republicans’ demonstrated willingness to ignore human needs and economic logic, it is more likely than not that jobless benefits will be a major battle in the months ahead.

There are no plausible arguments against an extension — in fact, Congress has never let federal benefits expire when the unemployment rate was higher than 7.2 percent. But there are many specious arguments, chief among them that providing benefits reduces the incentive to get a new job. The evidence says otherwise.

A recent paper by Jesse Rothstein, an economist at the National Bureau of Economic Research, shows that benefit extensions in early 2011 raised the jobless rate by about 0.1 to 0.5 percentage points, but most of that was due to benefit recipients staying in the labor force and actively looking for work during the time they are collecting benefits, rather than, say, dropping out in despair.

Unemployment benefits are the first line of defense against ruin from job loss that is beyond an individual’s control. In a time of historically elevated long-term unemployment, they are an important way to keep workers connected to the job-search market. They are also crucial to ensuring that the weak economy doesn’t weaken further.

They clearly need to be extended, though we have no illusion that it will happen without a fight.

    The Next Fight Over Jobs, NYT, 6.11.2011,
    http://www.nytimes.com/2011/11/07/opinion/the-next-fight-over-jobs.html

To Fix Housing, See the Data

November 4, 2011
The New York Times
By JOE NOCERA

In Miami recently, I met up with Laurie Goodman, a senior managing director of Amherst Securities. I’d been trying to meet her ever since I’d read an article that she had written in March entitled “The Case for Principal Reductions.” But our schedules never seemed to mesh. So when I noticed that we were both going to be at a conference in Miami, I wangled a breakfast appointment. It was one of the more illuminating breakfasts I’ve had in a while.

The idea of helping struggling homeowners by writing down some principal on their mortgages — as opposed to reducing the interest or reconfiguring the terms to lower the monthly payments — is much in the air right now. Banks loathe the idea of principal reduction; they fear that people who are current on their mortgages will start defaulting just to get their principal reduced. They also don’t want the hit to their balance sheets.

But the states’ attorneys general who sued over the robo-signing scandal have made principal reduction the central plank of the settlement they are close to completing. The settlement will force the big banks to begin a sustained program of principal reduction, and will heavily penalize banks that don’t comply. From what I hear, the goal of the states is to prove to the banks that principal reduction will not cause the sky to fall — and is, ultimately, less damaging to bank profits than foreclosures.

Housing activists love principal reduction because they tend to see it as a just solution to an unjust situation — it’s a way of making the banks pay a real price for their sins during the subprime madness while allowing people to keep their homes. Conservatives, on the other hand, hate principal reduction. They believe that borrowers who made poor decisions by taking out mortgages they could never afford have to take responsibility for those decisions. If that means foreclosure, so be it.

Enter Laurie Goodman. One of the country’s foremost authorities on mortgage-backed securities, she is also one of the most data-driven people I’ve ever met; at breakfast, she was constantly pointing me to one chart or another that backed up her claims. “She’s not into politics,” says my friend, and her client, Daniel Alpert of Westwood Capital. “She is using data to tell us the truth.”

Her truth begins with a shocking calculation: of the 55 million mortgages in America, more than 10 million are reasonably likely to default. That is a staggering number — and it is, in large part, because so many homes are worth so much less than the mortgage the homeowners are holding. That is, they’re underwater.

Her second calculation is that the supply of housing is going to drastically outstrip demand for the foreseeable future; she estimates that the glut of unneeded homes could get as high as 6.2 million over the next six years. The primary reason for this, she says, is that household formation has been very low in recent years, presumably because of the grim economy. (Young adults are living with their parents instead of moving into their own homes, etc.) What’s more, nearly 20 percent of current homeowners no longer qualify for a mortgage, as lending standards have tightened.

The implication is almost too awful to contemplate. As Goodman put it in testimony she recently gave before Congress, the supply/demand imbalance means that housing prices “are likely to decline further. This may recreate the housing death spiral — as lower housing prices mean more borrowers become underwater.” Which makes them more likely to default, which lowers prices further, and on and on.

The only way to stop the death spiral is through principal reduction. The reason is simple: “The data show that principal modifications work better” than other kinds of modifications, she says. Interest rate reductions can lower monthly payments, but the home remains just as underwater as it was before the modification. And the extent to which a home is underwater is the single best indicator of whether the homeowner will default. The only way to change the imbalance between the size of the mortgage and the value of the home is to reduce principal.

Will widespread principal reduction cause homeowners to purposely default on their mortgages? Goodman has some ideas about how to reduce that likelihood, but she is also realistic: “A borrower will make a decision to default if it is in his or her best interest.”

One wishes that the country could make economic decisions that are in its best interest, decisions that use Laurie Goodman’s data-driven approach instead of being motivated by ideology. Goodman’s case for principal reduction is powerful precisely because it is not about just or unjust, or who’s to blame and who’s at fault.

It is about cold, hard economics. Three years after the bursting of the subprime bubble, principal reduction isn’t just a nice-sounding way to help homeowners. It is our only hope of finally ending the housing crisis.

    To Fix Housing, See the Data, NYT, 4.11.2011,
    http://www.nytimes.com/2011/11/05/opinion/to-fix-the-housing-crisis-read-the-data.html

Report Shows a Mere 80,000 Jobs Added in U.S. in October

November 4, 2011
The New York Times
By CATHERINE RAMPELL

The United States had another month of mediocre job growth in October, the Labor Department reported Friday.

Employers added 80,000 jobs on net, slightly less than what economists had expected. That compares to 158,000 jobs in September, a month when the figure was helped by the return of 45,000 Verizon workers who had been on strike.

The numbers for August and September were revised upward in Friday’s report, giving economists hope that October job growth may actually have been better than this first estimate suggests.

“We’ve seen this constant pattern of upward revisions,” said John Ryding, chief economist at RDQ Economics. “The government’s initial take on jobs may be underestimating employment growth in October, too.”

While job growth is certainly better than job losses, a gain of 80,000 jobs is barely worth celebrating. That was just about enough to keep up with population growth, so it did not significantly reduce the backlog of 14 million unemployed workers.

As a result, the unemployment rate hardly budged, dropping to 9 percent from 9.1 percent in September.

The rate has not fallen below 9 percent in seven months. In the year before the recession began in December 2007, the jobless rate averaged about half that, at 4.6 percent.

Economists and politicians typically await the monthly jobs number — a key report card on the nation’s economic health — with bated breath. But with so many potential game-changers on the horizon, October’s jobs report may say little about what Americans should expect going forward.

The fate of heavily indebted Greece has been up in the air for about a year and a half now, and this week the political wrangling in Athens has been particularly contentious. Economists worry that if the deal falls through, a possible Greek default could set off a domino effect that brings down Italy and other fiscally troubled countries, potentially causing another global financial crisis.

Mitigating these worries, however, is the case of MF Global, an American financial services company that filed for bankruptcy this week after making some bad investments in European markets. The bankruptcy did not rattle markets as much as some economists had feared.

Additionally, reports from the Congressional panel on deficit reductions — the so-called “supercommittee” — indicate that talks have stalled. The committee has less than three weeks before an alternative (and more draconian) plan would automatically kick in.

If government spending cuts are put into effect too quickly, they could be a severe drag on economic growth and could potentially derail the fragile recovery, economists have said.

Even if such potential shocks do not materialize, the economic outlook is still troubling.

On Wednesday, the Federal Reserve issued a downward revision in its forecast for output growth next year. Fed officials also said they expected an average unemployment rate of 8.5 to 8.7 percent in 2012. Sustained levels of high unemployment could pose a significant challenge to President Obama’s re-election campaign.

    Report Shows a Mere 80,000 Jobs Added in U.S. in October, NYT, 4.11.2011,
    http://www.nytimes.com/2011/11/05/business/economy/us-added-80000-jobs-in-october.html

Can Anyone Really Create Jobs?

November 3, 2011
The New York Times
By ADAM DAVIDSON

The current economic downturn has been called a housing crisis, a financial crisis and a debt crisis, but the simplifying logic of the political season has settled on what is really more a result than a cause. We are now, according to nearly everyone running for office, in a jobs crisis. Every politician currently has a “jobs plan,” very often a list of vague proposals filled with serious-sounding phrases like “budget framework” and “regulatory cap” that are designed, for the most part, to mean both everything and nothing at all.

Starting this week, I’ll be writing a regular column in the magazine that tries to demystify complicated economic issues — like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs. The fact is that creating them in a far-too-sluggish economy is practically impossible in our current capitalist democracy. No corporate leader is rewarded for hiring people who aren’t absolutely required. Most companies hire only when its workforce can no longer keep up with the demand for its products.

Even with all the attention on hiring, the government’s ability to create jobs is pretty dispiriting, no matter who is in charge. The most popular types of jobs programs involve state tax breaks or subsidies that seek to seduce a company from one state to another. While this can mean good news for “business-friendly” states like Texas, such policies don’t add to overall employment so much as they just shuffle jobs around. This helps explain Rick Perry’s claim that more than one million jobs were created under his watch in Texas while the rest of the country lost more than two million.

The federal government does something similar when it decides, for instance, to regulate oil drillers and subsidize windmill makers. Such a policy might help the environment but it just moves jobs from one sector to another without adding any. And while both Perry and Mitt Romney propose that further oil and gas drilling in the U.S. will transform the jobs picture, only 30,000 Americans work in oil and gas extraction, and about another 125,000 in support occupations. With more than 25 million Americans unemployed or underemployed, it’s unlikely that any changes in that part of the energy sector would make a real dent.

One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it. (They’re trying to make up for it now. See this chart.) With no new theories, Democrats dusted off the big idea from the Great Depression, John Maynard Keynes’s view that government can create jobs by spending a lot of money. The stimulus, however, has to be borrowed, and it has to be really, truly huge — probably something like $1.5 or $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels. The goal is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them.

Many Republicans follow the more fiscally conservative University of Chicago School, which argues that Keynesian stimulus can’t heal a sick economy — only time can. Chicagoans believe that economies can only truly recover on their own and that policy interventions only slow the recovery. It’s a puzzle of modern politics that Republicans have had electoral success with a policy that fundamentally asserts there is nothing the government can do to create jobs any time soon.

Of course, Romney, Perry, Herman Cain and the rest won’t come out and say, “If elected, I will tell you to wait this thing out.” Instead, Republican candidates fill their jobs plans with Chicagoan ideas that have nothing to do with the current crisis, like permanent cuts in taxes and regulation. These policies may (or may not) make the economy healthier in 5 years or 10, but the immediate impact would require firing a large number of America’s roughly 23 million government workers.

How bad might that be? The U.K., as part of its austerity measures, is in the process of firing about a half-million government workers under the notion that the private sector would be so thrilled by low taxes and less regulation that it will expand and snatch up all those laid-off public servants. But this plainly isn’t happening. The British economy continues to grow slowly, if at all, and few former government workers have found new jobs in the private sector.

Keynesians and Chicagoans, however, do agree on two important points. First, in economics, unlike politics, there’s no middle ground: You can’t simultaneously cut and increase government budgets. The only shot we have at truly transforming our economy is a one-party sweep in the 2012 elections that would lead to radical legislative changes. Still, either path — lots more debt or lots of fired government workers — will only inflame more Americans.

The second area of agreement is the most important: an economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs, in other words, are not the cause of a healthy economy; they’re the byproduct. And that’s another thing most national politicians know but will never say.

So perhaps instead of (or, at least, in addition to) arguing over plans that aren’t going to happen, we should focus on what almost certainly will come true. The economy that emerges from this recession is going to be different. Without the distortion of a credit bubble, it is clear that far too many Americans don’t know how to do anything that the world is willing to pay them a living wage for. No economic theory offers them easy salvation.

We don’t need to become a nation of app designers. An economic downturn is a great time to learn things — carpentry, say, or aerospace engineering — that others will eventually pay for: high-school dropouts should get their degrees and a year of specialized training; high-school grads who can’t afford a four-year school should get a community-college degree. Life will be tougher for liberal-arts majors if they don’t get training in how to apply a humanities education. Those who can’t find a job where they live should consider moving to places where there are more jobs than applicants — the Dakotas, Nebraska, Wyoming.

When this crisis ends, we’ll also be faced with other deep problems. Our tax code is a complex mess; we need a more effective education system; it’s hard to picture a healthy United States in 2050 without some major change in health care. Unlike the short-term jobs crisis, these are areas where we can find compromise. Let’s not do what we usually do by spending the bad times arguing over things that won’t happen and the good times ignoring the things that should.

 

Adam Davidson is the cofounder of Planet Money, a podcast, blog, and radio series heard on NPR’s Morning Edition, All Things Considered and on This American Life.

    Can Anyone Really Create Jobs?, NYT, 3.11.2011,
    http://www.nytimes.com/2011/11/06/magazine/job-creation-campaign-promises.html

Putting Millionaires Before Jobs

November 3, 2011
The New York Times

There’s nothing partisan about a road or a bridge or an airport; Democrats and Republicans have voted to spend billions on them for decades and long supported rebuilding plans in their own states. On Thursday, though, when President Obama’s plan to spend $60 billion on infrastructure repairs came up for a vote in the Senate, not a single Republican agreed to break the party’s filibuster.

That’s because the bill would pay for itself with a 0.7 percent surtax on people making more than $1 million. That would affect about 345,000 taxpayers, according to Citizens for Tax Justice, adding an average of $13,457 to their annual tax bills. Protecting that elite group — and hewing to their rigid antitax vows — was more important to Senate Republicans than the thousands of construction jobs the bill would have helped create, or the millions of people who would have used the rebuilt roads, bridges and airports.

Senate Republicans filibustered the president’s full jobs act last month for the same reasons. And they have vowed to block the individual pieces of that bill that Democrats are now bringing to the floor. Senate Democrats have also accused them of opposing any good idea that might put people back to work and rev the economy a bit before next year’s presidential election.

There is no question that the infrastructure bill would be good for the flagging economy — and good for the country’s future development. It would directly spend $50 billion on roads, bridges, airports and mass transit systems, and it would then provide another $10 billion to an infrastructure bank to encourage private-sector investment in big public works projects.

Senator Kay Bailey Hutchison, a Republican of Texas, co-sponsored an infrastructure-bank bill in March, and other Republicans have supported similar efforts over the years. But the Republicans’ determination to stick to an antitax pledge clearly trumps even their own good ideas.

A competing Republican bill, which also failed on Thursday, was cobbled together in an attempt to make it appear as if the party has equally valid ideas on job creation and rebuilding. It would have extended the existing highway and public transportation financing for two years, paying for it with a $40 billion cut to other domestic programs. Republican senators also threw in a provision that would block the Environmental Protection Agency from issuing new clean air rules. Only in the fevered dreams of corporate polluters could that help create jobs.

Mitch McConnell, the Senate Republican leader, bitterly accused Democrats of designing their infrastructure bill to fail by paying for it with a millionaire’s tax, as if his party’s intransigence was so indomitable that daring to challenge it is somehow underhanded.

The only good news is that the Democrats aren’t going to stop. There are many more jobs bills to come, including extension of unemployment insurance and the payroll-tax cut. If Republicans are so proud of blocking all progress, they will have to keep doing it over and over again, testing the patience of American voters.

    Putting Millionaires Before Jobs, NYT, 3.11.2011,
    http://www.nytimes.com/2011/11/04/opinion/the-senate-puts-millionaires-before-jobs.html

Oligarchy, American Style

November 3, 2011
The New York Times
By PAUL KRUGMAN

Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office. And you know what that means: It’s time to roll out the obfuscators!

Anyone who has tracked this issue over time knows what I mean. Whenever growing income disparities threaten to come into focus, a reliable set of defenders tries to bring back the blur. Think tanks put out reports claiming that inequality isn’t really rising, or that it doesn’t matter. Pundits try to put a more benign face on the phenomenon, claiming that it’s not really the wealthy few versus the rest, it’s the educated versus the less educated.

So what you need to know is that all of these claims are basically attempts to obscure the stark reality: We have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only.

The budget office laid out some of that stark reality in a recent report, which documented a sharp decline in the share of total income going to lower- and middle-income Americans. We still like to think of ourselves as a middle-class country. But with the bottom 80 percent of households now receiving less than half of total income, that’s a vision increasingly at odds with reality.

In response, the usual suspects have rolled out some familiar arguments: the data are flawed (they aren’t); the rich are an ever-changing group (not so); and so on. The most popular argument right now seems, however, to be the claim that we may not be a middle-class society, but we’re still an upper-middle-class society, in which a broad class of highly educated workers, who have the skills to compete in the modern world, is doing very well.

It’s a nice story, and a lot less disturbing than the picture of a nation in which a much smaller group of rich people is becoming increasingly dominant. But it’s not true.

Workers with college degrees have indeed, on average, done better than workers without, and the gap has generally widened over time. But highly educated Americans have by no means been immune to income stagnation and growing economic insecurity. Wage gains for most college-educated workers have been unimpressive (and nonexistent since 2000), while even the well-educated can no longer count on getting jobs with good benefits. In particular, these days workers with a college degree but no further degrees are less likely to get workplace health coverage than workers with only a high school degree were in 1979.

So who is getting the big gains? A very small, wealthy minority.

The budget office report tells us that essentially all of the upward redistribution of income away from the bottom 80 percent has gone to the highest-income 1 percent of Americans. That is, the protesters who portray themselves as representing the interests of the 99 percent have it basically right, and the pundits solemnly assuring them that it’s really about education, not the gains of a small elite, have it completely wrong.

If anything, the protesters are setting the cutoff too low. The recent budget office report doesn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, found that almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent — the richest thousandth of Americans, who saw their real incomes rise more than 400 percent over the period from 1979 to 2005.

Who’s in that top 0.1 percent? Are they heroic entrepreneurs creating jobs? No, for the most part, they’re corporate executives. Recent research shows that around 60 percent of the top 0.1 percent either are executives in nonfinancial companies or make their money in finance, i.e., Wall Street broadly defined. Add in lawyers and people in real estate, and we’re talking about more than 70 percent of the lucky one-thousandth.

But why does this growing concentration of income and wealth in a few hands matter? Part of the answer is that rising inequality has meant a nation in which most families don’t share fully in economic growth. Another part of the answer is that once you realize just how much richer the rich have become, the argument that higher taxes on high incomes should be part of any long-run budget deal becomes a lot more compelling.

The larger answer, however, is that extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?

Some pundits are still trying to dismiss concerns about rising inequality as somehow foolish. But the truth is that the whole nature of our society is at stake.

    Oligarchy, American Style, NYT, 3.11.2011,
    http://www.nytimes.com/2011/11/04/opinion/oligarchy-american-style.html

Yvonne McCain,

Plaintiff in Suit on Shelter for Homeless Families, Dies at 63

November 2, 2011
The New York Times
By DENNIS HEVESI

Yvonne McCain, a once-homeless mother of four whose years of living in a fetid, ramshackle welfare hotel in Midtown Manhattan led to a landmark court ruling requiring the city to provide decent shelter for homeless families, died Saturday in her rent-subsidized, middle-income apartment on Staten Island. She was 63.

The cause was cancer, her daughter Tameika McCain said.

Ms. McCain was the lead plaintiff in a lawsuit originally called McCain v. Koch. Except for hers, the names on the class-action suit changed three times as new mayors took office. The case, filed in 1983, was finally settled by the city and the Legal Aid Society in 2008.

But the primary issue was settled in 1986, when the Appellate Division of State Supreme Court in Manhattan ruled that New York City could not deny emergency shelter for homeless families with children. Previous cases had established the right of single homeless men and women to shelter.

In that ruling, the appellate court said that thousands of children were subject “to inevitable emotional scarring because of the failure of city and state officials to provide emergency shelter.”

Nearly 40 more proceedings would wind through trial and appeals courts over the next 22 years, as both sides wrestled over issues like whether the city was meeting basic standards of habitability. When the final settlement was reached, Mayor Michael R. Bloomberg said it marked “the beginning of a new era” in which “we can all move forward in our shared commitment to effectively meet the needs of homeless families.”

On Monday, Steven Banks, the chief lawyer of the Legal Aid Society, who had led the McCain case, said, “The import of the settlement, and in a sense Ms. McCain’s life, is that no matter who the mayor is now or in the future, tens of thousands of homeless children and their families are entitled to a roof over their heads.”

That was certainly not always so for Ms. McCain.

She and her children were evicted from their Brooklyn apartment in 1982 after she withheld rent because her landlord refused to make repairs. They ended up in a filthy, dilapidated hotel in Herald Square.

“They put us in a room on the 11th floor,” she said in 1992, adding that both sides of the mattresses were stained with urine. “I remember calling my mother and asking if she could bring me newspapers to put over the mattresses. I stayed up worrying that the kids didn’t climb out the windows, because there were no bars.”

Ms. McCain, a battered woman, spent four years in that hotel. As the case crawled through the courts, she bounced from shelter to city-supported apartment and back. Her estranged husband once found her and broke her nose.

In 1996 she and the children moved into the subsidized two-bedroom apartment on Staten Island, where she was living when she died.

“My mom loved this apartment,” Tameika McCain said. “She said she was never going to leave it, never going to be homeless again.”

Ms. McCain worked as a nurse’s aide and, in 2005, received an associate’s degree in human services from the Borough of Manhattan Community College. In recent years she worked in the college’s health service office.

Born in Harlem on Oct. 25, 1948, Ms. McCain was the only child of Lillie McCain and John Henry Bonds. Besides her daughter Tameika, she is survived by another daughter, Tyeast Fullerton; four sons, Darryl Jones, Phillip McCain, Robert McCain and Jonathan McCain; 19 grandchildren; and three great-grandchildren.

When the lawsuit was first filed, Ms. McCain recalled in 2003, “I thought we were going to get new mattresses and guardrails on the windows and that’s it. I never imagined that this suit would end up being so helpful to so many people.”

    Yvonne McCain, Plaintiff in Suit on Shelter for Homeless Families, Dies at 63, NYT, 2.11.2011,
    http://www.nytimes.com/2011/11/03/nyregion/yvonne-mccain-plaintiff-in-suit-on-homeless-families-dies-at-63.html

Recovery Will Be Slower, Fed Says, but Takes No Action

November 2, 2011
The New York Times
By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve significantly reduced its forecast of economic growth in the United States over the next two years Wednesday, the latest in a long series of acknowledgements that pace of recovery continues to disappoint its expectations.

The Fed predicted that the economy would expand between 2.5 percent and 2.9 percent in 2012, and between 3 percent and 3.5 percent in 2013. Both ranges are significantly lower than its last projections, made in June.

The Fed also predicted that the rate of unemployment would remain above 8.5 percent at the end of 2012, and above 7.8 percent at the end of 2013.

These forecasts, published four times a year, do not have a particularly good track record, but they do offer a window on the state of the policy makers’ minds. In a word: Glum.

Nevertheless, the Fed announced no new measures to stimulate growth Wednesday following a two-day a meeting of its policy-making committee, although it said that it remained concerned about the fragile health of the economy.

The Fed’s assessment was somewhat brighter than after its last meeting in September. Growth has “strengthened somewhat,” it said, thanks in part to stronger consumer spending. But the central bank continued to note “significant downside risks to the economic outlook, including strains in global financial markets.”

“The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually,” the Fed said in a statement released after the meeting, held every six weeks.

Charles Evans, the president of the Federal Reserve Bank of Chicago, dissented from the decision to do nothing. He argued for new measures to spur growth, echoing recent speeches in which he has criticized the Fed for caring more about inflation than unemployment. It was the first time since 2007 that a board member has dissented in favor of doing more.

The Fed had announced new efforts to spur the economy after each of the last two meetings of the Federal Open Market Committee.

In August, the Fed announced its intention to maintain short-term interest rates near zero for at least two more years, provided that inflation remained low — a decision left unchanged Wednesday. In September, it decided to further reduce long-term interest rates by shifting $400 billion from investments in short-term Treasury securities to longer-term Treasuries.

The 9-1 decision to pause now comes as the economy has shown signs of improving health in recent weeks, highlighted by the government’s estimate that growth rose to an annual pace of 2.5 percent in the third quarter. At the same time, the rate of inflation continues to decelerate more slowly than the Fed had expected, although markets continue to show little concern about it.

Fed officials also have doubts about their ability to increase the pace of growth, arguing that the lack of demand that is holding back the economy must be addressed by fiscal policy, meaning changes in taxation or government spending.

The combination of factors has postponed for now any movement toward a new round of stimulus, like the proposal by a Fed governor, Daniel K. Tarullo last month that the Fed should consider buying large quantities of mortgage-backed securities to spur the housing market.

Fed officials have been careful to say that they remain willing to expand the central bank’s huge investment portfolio if economic conditions deteriorate. The statement repeated the Fed’s boilerplate promise that it “is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”

But this meeting was more of a test of what the Fed was willing to do when the economy is merely muddling. The answer is nothing new.

    Recovery Will Be Slower, Fed Says, but Takes No Action, NYT, 2.11.2011,
    http://www.nytimes.com/2011/11/03/business/economy/fed-holds-rates-and-strategy-steady.html

Stock Slide Extends to Wall Street

November 1, 2011
The New York Times
By CHRISTINE HAUSER

Financial stocks took a beating Tuesday, pushing down global equities markets along with the euro, after developments in the euro zone once again raised fears of more financial turmoil.

Declines that started in Asia accelerated in Europe after the announcement from the Greek prime minister, George A. Papandreou, late on Monday that his government would hold a referendum on a new aid package for his country. That prospect raised doubt about the austerity measures Greece had agreed to adopt and potentially even Greece’s continued membership in the euro zone.

As they have repeatedly in recent months, bank stocks took a beating, leading the broader markets dramatically lower. In Europe, the Euro Stoxx 50 index was down 5 percent, the German DAX and the French CAC 40 were each down more than 4 percent lower. In Britain, which is not a member of the euro zone but trades heavily with its Continental neighbors, the FTSE 100 index was down by more than 2.6 percent.

The negative sentiment was exported to Wall Street, where at midday, the Standard & Poor’s 500-stock index was down around 2.8 percent and the Dow Jones industrial average was down 2.5 percent. The Nasdaq composite index was down more than 2.9 percent, with the early declines pushing the Nasdaq back down for the year and the S.&P. further into negative territory.

Financial stocks in the United States were down by more than 4 percent, while in Europe they were down more than 9 percent.

The benchmark 10-year United States bond yield dipped to 1.9 percent from 2.12 percent on Monday.

“This is certainly a high-risk move on the part of the Papandreou administration,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company, noting the recent Greek protests against the austerity measures.

“The unanswerable question is, what happens if Greece votes against the bailouts? My guess is that the referendum will be immediately followed by new elections, but will the string that holds the E.U. together finally break?”

Currencies and bonds were also slammed. The euro was 1.6 percent lower at $1.3637, while yields on 10-year Italian bonds climbed further above 6 percent — an unsustainable level that prompted the European Central Bank to intervene last summer.

Mark T. Lamkin, the chief executive officer and chief investment strategist for Lamkin Wealth Management, compared the Greek referendum to the doomed Titanic: “They are taking a vote whether to abandon ship.”

“This is basically a vote for the European citizens to decide whether they want to exit the euro or not,” said Mr. Lamkin, adding that the risks were accentuated by whether the outcome of the Greek vote could affect Italy and Spain.

Stocks also fell in Asia, with major indices down around 1 or 2 percent.

The mood in the markets was a sharp contrast to the euphoria of late last week, when the European leaders announced their plan to address the euro zone’s entrenched sovereign debt crisis. That development led the broader market in the United States to its best monthly rally in decades. The Dow recorded the best monthly points gain in its history, adding more than 1,000 points in October.

“We will give every bit of it back,” said Mr. Lamkin. While European debt troubles have unsettled the United States market for more than a year, analysts noted that in recent weeks corporate results have provided some steadying ballast and United States economic data has managed to suggest a picture of a country in slow, rather than stalling, recovery.

About 74 percent of companies in the S.&P. have reported third-quarter earnings so far, and of those, 67 percent have beaten their estimates, according to data compiled by Howard Silverblatt, the index analyst.

Noting that personal spending data was up and that national output figures for the third quarter were also up, Mr. Lamkin said his firm was buying small and mid-cap companies that are less likely to be tied to Europe for earnings.

    Stock Slide Extends to Wall Street, NYT, 1.11.2011,
    http://www.nytimes.com/2011/11/02/business/daily-stock-market-activity.html

Bank of America Drops Plan for Debit Card Fee

November 1, 2011
The New York Times
By TARA SIEGEL BERNARD

Bank of America said Tuesday that it was abandoning its plan to charge its customers a $5 fee to use their debit cards, just a month after announcing the new fee.

The reversal follows a huge backlash from customers, one of whom collected more than 200,000 signatures urging the bank to rethink its plan.

The bank listened, but only after other large banks had indicated that they would not impose similar fees. Wells Fargo, JPMorgan Chase, SunTrust and Regions Financial have all pulled back on their plans.

“We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” David Darnell, co-chief operating officer at Bank of America, said in a statement. “As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so.”

Wells Fargo said Friday that it was canceling a test that would have imposed a $3-a-month charge on debit card holders in Georgia, Nevada, New Mexico, Washington and Oregon. JPMorgan Chase, which was testing a $3-a-month charge, decided it would not impose a stand-alone debit card use fee. And SunTrust and Regions have both said they would no longer charge the fees.

But Bank of America, the nation’s second-largest bank after JPMorgan Chase, took the brunt of the criticism, which came from all corners, including Capitol Hill and the White House. Days after the bank announced that it would charge the fee, President Obama said customers should not be “mistreated” in pursuit of profit, while Vice President Joseph R. Biden Jr. called the move “incredibly tone deaf.”

The debit card fee was supposed to have gone into effect in January.

The new fees were part of efforts by the banks to raise revenue lost elsewhere.

In October, a new rule went into effect that limits the fees banks can levy on merchants every time a consumer uses a debit card to make a purchase. The new limit is expected to cost the banks about $6.6 billion in revenue a year, beginning in 2012, according to Javelin Strategy and Research. That comes on top of another loss, of $5.6 billion, from new rules restricting overdraft fees, which went into effect in July 2010.

But consumers have little sympathy for the banks’ loss of revenue. In fact, consumer groups have called for Saturday to be “Bank Transfer Day,” where customers of big banks move their accounts to community banks and credit unions.

“Bank of America’s new debit card fee was the last straw for many consumers who are tired of banks that got bailed out that are now turning around and hiking fees,” Norma Garcia, manager of Consumer Union’s financial services program, said in a statement.

This article has been revised to reflect the following correction:

Correction: November 1, 2011

Because of an editing error, an earlier version of this article incorrectly referred to Bank of America as the nation’s largest bank. JPMorgan Chase has overtaken Bank of America in assets, according to third-quarter results released in October.

    Bank of America Drops Plan for Debit Card Fee, NYT, 1.11.2011,
    http://www.nytimes.com/2011/11/02/business/bank-of-america-drops-plan-for-debit-card-fee.html

Feds Sue Mortgage Broker, Alleging Lending Fraud

November 1, 2011
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) — The federal government sued one of the nation's largest privately held mortgage brokers on Tuesday, saying its decade-long fraudulent lending practices cost the government hundreds of millions of dollars and forced thousands of American homeowners to lose their homes.

The lawsuit in U.S. District Court in Manhattan sought unspecified damages and civil penalties and named as defendants Houston-based Allied Home Mortgage Corp., founder Jim Hodge and Jeanne Stell, the company's executive vice president and director of compliance.

Joe James, a company spokesman, said he was aware of the lawsuit but had not yet seen it. He declined immediate comment.

At a news conference, U.S. Attorney Preet Bharara said Allied had carried out its fraud through its authority to originate mortgage loans insured by the U.S. Department of Housing and Urban Development, or HUD.

"The losers here were American taxpayers and the thousands of families who faced foreclosure because they were could not ultimately fulfill their obligations on mortgages that were doomed to fail," he said.

The prosecutor said the investigation continues and "if and when we have sufficient evidence for a criminal case, we'll bring it."

Helen Kanovsky, HUD's general counsel, said the agency had stopped insuring loans for Allied and was seeking to prevent Hodge from participating in any government programs again after seeing the destruction that the fraud had caused in communities across the country.

"Mortgage fraud has very real human victims," she said.

According to the lawsuit, nearly 32 percent of the 112,324 home loans originated by Allied between Jan. 1, 2001, and the end of 2010 have defaulted, resulting in more than $834 million in insurance claims paid by HUD.

The lawsuit said the default rate climbed to "a staggering 55 percent" in 2006 and 2007, at the height of the housing boom, when the government paid $170 million to settle Allied's failed loans. It said an additional 2,509 loans are now in default and HUD could face $363 million more in claims.

The government said Allied made substantial profits through the loans while it violated rules meant to protect HUD's insurance fund and deceived the agency by originating loans for years out of hundreds of "shadow" branches that were not approved by HUD.

The deceitful practice was continued under Hodge's direction even after several senior managers voiced concerns, the lawsuit said.

"Allied operated with impunity for many years due a culture of corruption created by Hodge, who eliminated the position of chief financial officer and other senior management positions, intimidated employees by spontaneous terminations and aggressive email monitoring, and silenced former employees by actual and threatened litigation against them," the lawsuit said. "As a result, Allied was able to conceal its dysfunctional operations and maintain its profitable position in the mortgage industry."

Allied operated 600 or more branches at once but only maintained two quality control employees in its corporate office, requiring branch managers to assume financial responsibility for their branches, the lawsuit said.

"Allied thus operated its branches like franchises, collecting revenue while the branches were profitable, then closing them without notice when they were not, leaving the branch managers liable for the branch's financial obligations," the lawsuit said.

The government said Allied failed to implement its internal quality control plan, "effectively allowing its shadow branches to operate independently of any scrutiny whatsoever," the lawsuit said. "Allied utterly failed to conduct audits of its branches or review its early payment defaults as it was required to do by HUD."

The lawsuit accused Stell of instructing branch managers how to answer questions from HUD auditors and said she acknowledged in an email that she instructed someone else to sign certifications that its branches met federal requirements because she knew they were false.

Bharara said Allied was playing a "lending industry equivalent of heads-I-win, tails-you-lose."

He added: "Allied never played by the rules."

    Feds Sue Mortgage Broker, Alleging Lending Fraud, NYT, 1.11.2011,
    http://www.nytimes.com/aponline/2011/11/01/business/AP-US-Allied-Home-Mortgage.html

Mr. Corzine’s Big Bet

November 1, 2011
The New York Times


Why did Jon S. Corzine make the risky bets that have now plunged MF Global Holdings into bankruptcy court? We don’t know, but the likely explanations are disturbing.

Over the past year, most investors have been fleeing the sovereign debt of Spain, Italy and other euro-zone basket cases. Not Mr. Corzine. The onetime chief executive of Goldman Sachs and former New Jersey senator and governor who has run MF Global since early 2010, was all in, buying up $6.3 billion worth of discounted euro-zone debt.

As Azam Ahmed reported in The Times on Tuesday, Mr. Corzine appeared to be wagering that the European Union would come to the rescue of Europe’s troubled economies, averting a default. In other words, Mr. Corzine was betting on a bailout.

A euro-zone bailout may well come, but not in time for Mr. Corzine and MF Global. Concerns about Mr. Corzine’s big bet led two ratings agencies to downgrade the firm to junk last week, draining investor confidence — and cash — from the firm, and sending it spiraling into bankruptcy proceedings. The fact that Mr. Corzine built a strategy betting on a government (in this case, European) rescue should be a chilling reminder of how far the world has not come since the darkest days of the financial crisis. Europe is trying to bail out Greece, in part, to protect its big banks.

In fact, the financial system, on both sides of the Atlantic, is still dominated by too-big-to-fail banks and regulations intended to ensure that their collapse won’t bring down the financial system are still a work in progress.

It is progress that in Europe, at least, creditors are being asked to bear some of the burden. But the need for bailouts is clearly still very much with us.

Another reason that Mr. Corzine’s bets may have gone so wrong — and another echo of the financial crisis — is that American regulators did not rein in the firm. MF Global was highly leveraged, with liabilities at the end of June of $44.4 billion and equity of only $1.4 billion.

In a research note published on Tuesday, Steve Blitz, a senior economist with ITG Investment Research, pointed out that MF Global was one of the firms designated by the Federal Reserve as a primary dealer in United States Treasuries. After the havoc of high leverage in the financial crisis, how is it possible that the Fed allowed MF Global to operate with so much leverage? Are the Fed, the Securities and Exchange Commission and other relevant regulators fully monitoring the risks at other broker dealers?

Meanwhile, self-regulation is clearly not the answer. The Wall Street Journal reported on Monday that the Financial Industry Regulatory Authority, a self-regulatory agency for brokerages, recently warned MF Global to shore up its capital to cushion against its increasingly risky positions. Whatever the firm did, if anything, clearly wasn’t enough.

In the end, the American people are lucky that MF Global was small enough to fail, its riskiness and recklessness absorbed by the bankruptcy process. But with the devastating damage from the crisis still hobbling the economy, relying on luck is not enough.

MF Global is a warning that the system is still far too vulnerable and the work of regulatory reform far from finished.

    Mr. Corzine’s Big Bet, NYT, 1.11.2011,
    http://www.nytimes.com/2011/11/02/opinion/mr-corzines-big-bet-on-mf-global.html