History > 2006 > USA > Economy (I)

John Sherffius

St Louis, MO        Cagle        27.1.2006

http://cagle.msnbc.com/politicalcartoons/PCcartoons/sherffius.asp

Related

Ford to Cut Up to 30,000 Jobs and 14 Plants by 2012        NYT        23.1.2006

http://www.nytimes.com/aponline/business/AP-Ford-Restructuring.html

The Nation

The Other Legacy of Enron

May 28, 2006
The New York Times
By ALEX BERENSON

WITH Thursday's conviction of Kenneth L. Lay and Jeffrey Skilling, the books have finally closed on Enron, almost five years after the company's collapse. The guilty verdict is a resounding repudiation of the accounting gimmickry that swept through corporate America during the 1990's. With the former top executives of a half-dozen big public companies in, or headed for, prison for financial fraud, executives today appear more cautious about pushing accounting limits.

Yet in another, more fundamental way, Enron lives on.

Mr. Lay and Mr. Skilling built and championed a culture of trading, a belief that markets could and should price every product and service. Despite its notorious swagger, Enron failed repeatedly as it tried to build these new markets.

Even so, the company came to symbolize the transition to a world where practically anything can be traded, from weather predictions to broadband Internet connections to forecasts involving the housing market. Enron's vision played out disastrously in California in spring 2001, when manipulation in the state's newly deregulated electricity market helped cause recurring blackouts and soaring power costs. Nine months later, for reasons largely unrelated to the crisis in California, Enron had collapsed, leaving thousands of employees out of work and setting off a wave of prosecutions that culminated in Thursday's verdicts.

But just as junk bonds have thrived in the 16 years after the collapse of Drexel Burnham Lambert and Michael Milken's guilty plea for securities fraud, the culture of trading has only become more important since the California blackouts and Enron's bankruptcy.

For many Americans, the growth of these new markets, with their potential for manipulation and abuse, can seem alarming. Yet many economists and financial experts say that when markets work as they should, they can give individuals protection against the risks of the modern economy — at a price.

For better or worse, the trend toward deregulation and freer markets is not likely to reverse anytime soon in the United States.

"Enron did pioneer a lot of concepts that will be here with us for a long time to come — the trading of commodities that had never been traded before," said James Chanos, a hedge-fund manager. Mr. Chanos was among the first investors to say publicly that Enron was a house of cards propped up by fraudulent accounting. "There won't be any going back to saying we won't trade electricity."

Wholesale markets for oil, power and other commodities are bigger and more vigorous than ever. Companies and financiers continue to search for new ways to protect themselves from, or take advantage of, the risk of unexpected variations in price.

"It has been forgotten, because of the unfortunate things that happened at the top, that Enron had a good group of people who were very innovative," said Robert Shiller, an economics professor at Yale University whose 2000 book "Irrational Exuberance" predicted the stock market crash.

Just last week, in fact, a company co-created by Mr. Shiller began trading contracts that reflect the value of housing markets in 10 major American cities. Homes make up all or almost all of the net worth of most American families, and their value has soared in recent years. But average Americans cannot easily protect themselves from broad downturns in housing markets.

The contracts offered by Mr. Shiller's company, which are traded on the Chicago Mercantile Exchange, aim to allow homeowners to protect themselves from regional downturns without having to sell their homes and moving into rentals. In essence, the contracts are a way to move the risk of housing markets away from individual homeowners and onto people or companies willing to take it on.

For example, investors could buy a contract that will gain value if the local market skids, but be worthless if the market rises. In essence, the buyer would be giving up some potential appreciation in return for protection against a falling market.

At their best, new markets can provide efficient new forms of insurance, enabling people or businesses to transfer risks they cannot control — for a fee, of course.

A contract whose value fluctuates with the weather may seem farfetched. But it could have practical use. A farmer might buy a contract that would only pay off in a year of below-normal rainfall, protecting him from the crop damage produced by a drought.

"The advent of insurance made all kinds of businesses possible," Mr. Shiller said. "The idea that you can manage these risks can make all kinds of businesses possible that wouldn't happen otherwise."

Of course, for markets to work, every buyer must be matched with a seller, and sometimes one side gains too much market power. In the California electricity crisis, power producers were able to bring the state to its knees when they realized that they could cause prices to soar by withholding only small amounts of electricity, said Dr. Frank Wolak, a professor at Stanford.

For markets to be successful, both sides must be able to adjust to changing conditions, Dr. Wolak said. A lingering imbalance still hampers electricity markets in California and nationally, he said.

No matter what, Mr. Lay and Mr. Skilling won't be lionized even by the most fervent believers in the free market , as Mr. Milken is, because the executives were widely viewed as venal and unwilling to accept responsibility for Enron's collapse.

Mr. Milken has had many supporters, who say he did nothing wrong other than upset sleepy corporate managers by enabling outsiders to launch takeover bids for big companies.

"There was a real free market view back then that he was an innovator," Mr. Chanos said of Mr. Milken. "There was a sense that he had unleashed this form of capitalism that heretofore hadn't been available to people."

By contrast, said William Hogan, professor of global energy policy at the Kennedy School of Government at Harvard, and a supporter of electricity deregulation, history would not be kind to Enron, Mr. Lay and Mr. Skilling.

The California electricity crisis and Enron's subsequent collapse set the cause of electricity deregulation back a decade or more, Mr. Hogan said.

While Enron was only marginally responsible for California's problems, the company generally bent rules wherever it could, trying to create markets where it controlled prices, rather than competing fairly in independently regulated exchanges, he said. Markets work only when they are carefully designed and regulated, not controlled by private companies, Mr. Hogan said.

"It's not that you can trade anything for anything with anybody under any circumstances," he said, "though I think Skilling believed that."

    The Other Legacy of Enron, NYT, 28.5.2006, http://www.nytimes.com/2006/05/28/weekinreview/28berenson.html?hp&ex=1148875200&en=613e3be57912253f&ei=5094&partner=homepage

Atop Hedge Funds,

Richest of the Rich Get Even More So

May 26, 2006
The New York Times
By JENNY ANDERSON

Talk about minting money. In 2001 and 2002, hedge fund managers had to make $30 million to gain entry to a survey of the best paid in hedge funds that is closely followed by people in the business. In 2004, the threshold had soared to $100 million.

Last year, managers had to take home — yes, take home — $130 million to make it into the ranks of the top 25. And there was a tie for 25th place, so there were actually 26 hedge fund managers who made $130 million or more.

Just when it seems as if things cannot get any better for the titans of investing, they get better — a lot better.

James Simons, a math whiz who founded Renaissance Technologies, made $1.5 billion in 2005, according to the survey by Alpha, a magazine published by Institutional Investor. That trumps the more than $1 billion that Edward S. Lampert, known for last year's acquisition of Sears, Roebuck, took home in 2004. (Don't fret for Mr. Lampert; he earned $425 million in 2005.) Mr. Simons's $5.3 billion flagship Medallion fund returned 29.5 percent, net of fees.

No. 2 on Alpha's list is T. Boone Pickens Jr., 78, the oilman who gained attention in the 1980's going after Gulf Oil, among other companies. He earned $1.4 billion in 2005, largely from startling returns on his two energy-focused hedge funds: 650 percent on the BP Capital Commodity Fund and 89 percent on the BP Capital Energy Equity Fund.

A representative for Mr. Simons declined to comment. Calls to Mr. Pickens's company were not returned.

The magic behind the money is the compensation structure of a hedge fund. Hedge funds, lightly regulated private investment pools for institutions and wealthy individuals, typically charge investors 2 percent of the money under management and a performance fee that generally starts at 20 percent of gains.

The stars often make a lot more than this "2 and 20" compensation setup. According to Alpha's list, Mr. Simons charges a 5 percent management fee and takes 44 percent of gains; Steven A. Cohen, of SAC Capital Advisors, charges a management fee of 1 to 3 percent and 44 percent of gains; and Paul Tudor Jones II, whose Tudor Investment Corporation has never had a down year since its founding in 1980, charges 4 percent of assets under management and a 23 percent fee.

They may charge such amounts because they can. "In the end, what people want is the risk-adjusted performance," said Gordon C. Haave, director of the investing and consulting group at Asset Services Company, a $4 billion institutional advisory business. "As long as the performance is up there, in the end the investors do not care about the high fees."

If there is a downside to being so rich, it is that the money is flooding in at a time when hedge fund performance, even for some of the greats, has been less than stellar over all. Six managers made the top 25 even while posting returns in the single digits.

"You would think someone would be a little embarrassed taking all that money for humdrum returns," said John C. Bogle, founder of the Vanguard Group. "I guess people don't get embarrassed when it comes to money."

Many of the funds have gotten so big that the management fees alone are the source of much wealth, perhaps leaving some managers without the fire to try to outdo the broad market. Institutions like pension funds and endowments, whose money is fueling a significant part of the hedge fund boom, continue to flock to these managers for their track records and name recognition.

Bruce Kovner's Caxton Global Offshore fund returned 8 percent last year while his Gamut Investments, an offshore fund he runs for GAM Fund Management, returned 6.4 percent. The survey said 2005 was the third year that he had posted single-digit returns. Still, Mr. Kovner took home $400 million, according to the list. He did not return calls to his office.

The average take-home pay for the 26 managers in 2005 was $363 million, a 45 percent increase over the top 25 the previous year. Median earnings surged by a third, to $205 million last year, from $153 million in 2004.

Included on the list were both familiar names and new stars. Mr. Cohen of SAC Capital, who while shunning publicity has become known as an avid art collector, landed in fourth place in 2005, taking home $550 million. For the year, his various funds were up 18 percent on average. A spokesman for Mr. Cohen declined to comment.

New to the list are two managers from Atticus Capital, a fund that was among the investor activists that opposed Deutsche Börse's attempted takeover of the London Stock Exchange for $2.5 billion. That campaign led to the ouster last year of the Deutsche Börse chief executive. Atticus is also a major participant in the battle for Euronext, the pan-European stock and derivatives exchange, which is being courted by the New York Stock Exchange and by Deutsche Börse.

Making his debut at 14th place, Timothy Barakett made $200 million in 2005. His Atticus Global Fund was up 22 percent net of fees, while the European Fund, managed by 33-year old David Slager (No. 20 on the list with $150 million), soared 62 percent. Atticus officials did not respond to requests for comment.

A fellow investor activist, Daniel Loeb of Third Point, made $150 million in 2005. According to Alpha, only 10 percent of the firm's $3.8 billion is dedicated to activism, an unexpectedly small slice considering his reputation as management's worst nightmare.

A value- and event-driven manager, Mr. Loeb posted returns of 18 percent, largely from bets in energy, including a 140 percent gain on McDermott International. Mr. Loeb's spokesman declined to comment.

Another debut on the list was by William F. Browder, founder and chief of Hermitage Capital Management and the largest foreign investor in the Russian stock market. He tied for 25th place by taking home $130 million.

Mr. Browder, 42, grandson of Earl Browder, onetime leader of the Communist Party of the United States, has been barred from returning to post-Communist Russia since November, when immigration officials revoked his visa. The fund had $4.3 billion under management and in 2005, his flagship Hermitage Fund was up 81.5 percent.

A shareholder activist, he has challenged management at Russian state giants including Gazprom and Lukoil. Mr. Browder could not be reached for comment.

    Atop Hedge Funds, Richest of the Rich Get Even More So, NYT, 26.5.2006, http://www.nytimes.com/2006/05/26/business/26hedge.html

Phone Tax Laid to Rest at Age 108

May 26, 2006
The New York Times
By KEN BELSON

Bowing to changes in technology and pressure from taxpayers and phone companies, the Treasury Department said yesterday that it would scrap the 108-year-old federal excise tax on long-distance phone calls. The move will bring consumers and businesses about $15 billion in refunds on next year's tax returns.

The decision, which applies to cellphones and Internet phone services and some landlines, follows a series of court reversals for the government. Large businesses had successfully sued the Internal Revenue Service to recoup the taxes they paid. Phone companies also wanted the tax abolished to relieve them of having to collect it.

Originally a luxury tax to help pay for the Spanish-American War, the 3 percent surcharge was calculated based on the length of the call and the distance of the connection. But as unlimited long-distance calling plans became commonplace, and the tax was applied to a flat monthly fee, some taxpayers argued that the tax no longer applied to them because the duration and distance of a call were irrelevant.

Though the tax will still be imposed on local phone service, the government will reimburse three years' worth of taxes on long-distance calls, including any plans that combine local and long-distance calling. Consumers, who pay about 40 percent of the taxes collected, typically pay about $18 a year in excise taxes if they have a long-distance service and a cellphone.

They will be able to file for a refund on their 2006 federal income tax returns.

"It's time to disconnect this tax and put it on the permanent do-not-call list," Treasury Secretary John W. Snow said. Yesterday's decision, he added, "marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history."

The abolition of the tax, effective July 31, will cost the Treasury $5 billion annually in lost revenues in the next few years.

With budget deficits soaring, the Treasury had been slow to scrap the tax. But several federal courts ruled in recent years that it was no longer applicable to customers with unlimited long-distance plans. The Internal Revenue Service has refunded hundreds of thousands of dollars in taxes to companies including OfficeMax and the American Bankers Insurance Group based on the court decisions.

While the courts said some businesses should get refunds, Congress had not repealed the tax, so the I.R.S. was compelled to continue collecting it. This created a peculiar dynamic in which taxpayers who won refunds still had to pay the tax in subsequent years and then reapply for another refund.

Companies in districts where courts had ruled against the tax could get refunds, while companies elsewhere still had to pay it.

Now, the hundreds of companies that applied for refunds before yesterday's decision will not have their claims processed, according to some tax lawyers. That means companies that could have won refunds through the courts might have to wait far longer for their refunds to arrive after they file their income tax returns.

"The Treasury wants to standardize the process, but it's grotesquely unfair to the people who got this started," said Hank Levine, a partner at Levine, Blaszak, Block & Boothby, a Washington law firm that has represented business plaintiffs in most of the successful cases to date. "The I.R.S. didn't want to give up the money, and now that they have been forced to, they are doing so grudgingly."

Congress was close to abolishing the tax in 2000, but it was attached to a larger tax bill that President Bill Clinton vetoed. Congressmen are again calling for its repeal.

Senators Charles E. Grassley, Republican of Iowa, and Max Baucus, Democrat of Montana, asked the Senate Finance Committee yesterday to look also at eliminating the tax on local phone service.

For now, the Treasury said that consumers and businesses would get refunds, including interest, on their 2006 income tax returns filed in 2007. The I.R.S. has not decided the size of the standard refund for individuals. But taxpayers who use a lot of phone services will be able to apply for a larger refund if they can document how much they paid in excise taxes.

The average household spends $10 a month on long-distance calls and $41 a month on wireless service, or $612 a year, according to figures from the Federal Communications Commission. Since those services are taxed at 3 percent, the typical household pays $18.36 a year in federal excise taxes, or $55 over three years.

Consumers, of course, can still expect plenty of taxes and fees on their phone bills. Phone companies are obligated to collect an array of state and local taxes as well as fees that pay for emergency response groups and public services provided by the Universal Service Fund and others.

Phone companies have opposed some of these taxes because of the expense of collecting them, and because it drives up the cost of their services, making them less attractive to consumers.

" Wireless consumers can now turn their attention and efforts to repealing discriminatory wireless taxes on the state and local level," said Steve Largent, the president of CTIA, a trade group that represents cellular companies.

Mr. Largent said 17 percent of the typical monthly cellular bill was made up of taxes and fees.

Carriers, however, are partly to blame for that burden because they charge their customers a range of discretionary fees to recoup their business costs. For instance, some customers are charged "property tax allotment" fees that are meant to pay for a company's real estate taxes. Other companies charge "carrier cost recovery fees" to pay for the administrative costs of collecting taxes.

These fees generate billions of dollars in revenue for the companies.

That is a far cry from 1898, when the tax was first levied and there were 681,000 phone subscribers in the United States, according to James Katz, a telecommunications historian at Rutgers University. Though relatively small in numbers, those subscribers paid a considerable amount in taxes to help finance the government's battle against Spain.

The annual basic charge for a home phone in the 1890's was about $100, or more than $2,200 in today's dollars. A three-minute call from New York to Chicago in 1902 cost $5.45 — about $120 today.

    Phone Tax Laid to Rest at Age 108, NYT, 26.5.2006, http://www.nytimes.com/2006/05/26/business/26excise.html?hp&ex=1148702400&en=5db7f90ce470ba29&ei=5094&partner=homepage

New Signs of a Slowing Economy in 2 Federal Reports

May 25, 2006
The New York Times
By JEREMY W. PETERS

New-home sales rose last month, but failed to keep up the robust growth pace of March. The home sales numbers, along with a second government report yesterday that showed a steep decline in orders for durable goods, were seen as pointing to a softening economy.

But the numbers did little to reassure investors hoping that the economic data would encourage the Federal Reserve not to raise interest rates when it meets next month.

The Commerce Department reported yesterday that sales of new homes were up 4.9 percent in April, while orders for durable goods — relatively costly items that are expected to last at least three years, including aircraft and home appliances — fell 4.8 percent.

Since the Fed increased its benchmark short-term interest rate earlier this month to 5 percent, investors have been scrutinizing every economic indicator to determine what it might do at its next meeting in late June. With consumer prices on the rise and fears of inflation growing, many investors worry the Fed may raise rates for the 17th consecutive time in two years.

Investors' attention will now turn to the Commerce Department's announcement today of the revised gross domestic product figure for the first quarter, which is expected to be above the already strong 4.8 percent reported in February.

Because growth was so torrid in the first quarter, most economists expect the economy to slow as the year goes on. But it is unclear whether that will be enough to encourage central bankers that they do not need to worry about inflation.

"We came ripping right out of the box in January," said Brian Jones, an economist with Citigroup. "Going forward it would be very difficult to keep that pace of spending up."

Indeed, investors appeared unsure how to digest yesterday's economic news. After a day in which the major United States stock indexes swung in and out of the red, stocks ended on an up note. The Dow Jones industrial average gained 18.97 points, to close at 11,117.32. The Standard & Poor's 500-stock index climbed 1.99 points, to 1,258.57. The Nasdaq rose 10.41 points, to 2,169.17. [Page C12.]

Gold futures fell nearly 5.4 percent, or $36.20, to $637.50 an ounce.

Typically, new housing sales and durable goods are two highly volatile measures of economic growth. This year, they have been even more volatile than usual. New-home sales were down in the first two months of 2006 but up 12 percent in March.

Durable goods orders plunged in January but were up for the next two months.

Despite all the ups and downs in recent months, Wall Street analysts were still surprised by the numbers released yesterday.

"These are two of the most volatile series that we have," said Dean Maki, chief United States economist at Barclays Capital. "And they displayed volatility in the most recent data."

While much of the drop in the durable goods figure can be attributed to fewer orders for aircraft last month, the home sales numbers are more of a reason for concern. The new housing data appear to confirm what many economists have already said: as real estate speculators bow out of a peaking market and mortgage rates rise, the torrid pace of home sales is cooling. Compared with last April, sales of new homes fell 5.7 percent.

"It does look like things seem to be steadying," said Stephen Stanley, chief economist with RBS Greenwich Capital. "Now, we're more or less just back to the fundamental demand that was there all along of people who actually want to buy and live in a home — the family with two kids and a dog."

Inventories are also rising, yet another sign of weakness in the latest housing data. At the end of April, the number of homes for sale reached a record 565,000.

The median sale price of new homes nationwide rose to $238,500 in April, up from $232,000 in March, but little changed from a year earlier.

Sales of new homes in April were at a seasonally adjusted annual rate of 1.2 million compared with the annual rate for March of 1.1 million homes. The largest gains last month were in the Northeast and the South, which both had increases of about 8 percent.

With mortgage rates climbing, many economists believe home sales will decline this month.

"We did get this quirky increase in April," said Mr. Jones of Citigroup. "But what we will see probably is a nice, gradual, orderly decline in activity."

    New Signs of a Slowing Economy in 2 Federal Reports, NYT, 25.5.2006, http://www.nytimes.com/2006/05/25/business/25econ.html

Market Place

Bulls Retreat Worldwide as May Rally Turns to Rout

May 23, 2006
The New York Times
By VIKAS BAJAJ

A three-year bull run in stocks has been losing strength in the last few weeks as concerns mount about higher inflation and slower growth.

Stocks fell again yesterday, with sharp declines in Asia and Europe, especially in emerging markets. The Dow Jones industrial average, which had been flirting with a record high on May 10, is down 4 percent since then. The Standard & Poor's 500-stock index is down 5 percent from its May 5 high, while the Nasdaq composite index is down 8 percent since its most recent high in April.

Yet to many investors, this slump only confirms that the earlier rally in stocks may have been hollow to begin with.

"I am shocked that the market is where it is at," said Ron N. DeCook, 65, a retired newspaper ad salesman who lives north of San Francisco. "I think business has improved, but I don't think it's through the rough. I wonder about the wars, the deficit — I wonder if we are in a false economy."

"The way I look at it the economy is based on consumer confidence, and if consumer confidence goes down, the market will follow."

Even as the American economy picked up speed, to an annual growth rate of 4.8 percent, and stocks were climbing, there was little sign of investor confidence in the market.

Half the people questioned in April by the Gallup organization said that if they had an extra thousand dollars to spend, they would consider it a bad idea to invest it in the stock market; 43 percent said it would be a good idea. By contrast, 67 percent of those polled in early 2000, when the market was in its last frenzied run, said it would be a good idea and only 28 percent said it would be a bad idea.

"People are surprised that our economy is doing as well as it has been doing," said Richard Sylla, a market historian and a professor at the Stern School of Business at New York University.

The retreat in stocks gained momentum after the Federal Reserve left open the possibility of another increase in short-term interest rates and signs mounted that inflationary pressures were growing. Concerns that a campaign of higher rates might hurt growth has weighed on stocks around the world.

Yesterday, stocks in Tokyo fell 1.8 percent, and Hong Kong stocks fell 3.1 percent. The selling continued in Europe: London closed down 2.2 percent; Frankfurt, down 2.2 percent; and Paris, down 2.7 percent.

Emerging markets, which have been popular with American investors recently, also fell sharply. Brazilian stocks were down 3.3 percent yesterday, while Mexico fell 4 percent.

In Russia, stocks posted their largest one-day fall since October 2003, when the authorities arrested Mikhail Khodorkovsky, the chief executive of Yukos, who is now serving a sentence for tax evasion in a Siberian prison. The Russian RTS index denominated in dollars fell 9 percent.

There was frenzied trading in India. A 10 percent plunge in the benchmark Sensex stock index led to a suspension of trading at midday, though share prices rebounded in the afternoon after the finance minister urged calm, and the government pledged to help cover margin calls. The index closed at 10,481.77 points, down 4.2 percent for the day and down nearly 17 percent from a peak of 12,612 reached May 11.

In the United States, the Dow Jones industrial average closed down 18.73 points, or 0.2 percent, to 11,125.33. The S.& P. 500 fell 4.96 points, or 0.4 percent, to 1,262.07, while the Nasdaq slumped 21.02, or 1 percent, to 2,172.86, its lowest level since November. Treasury prices rose yesterday. The price of the benchmark 10-year Treasury note rose 4/32, to 10021/32, driving its yield down to 5.04 percent from 5.06 percent on Friday.

The downturn in stocks over the last eight sessions is a sharp turnaround given that the Dow was near a record high as recently as May 10. But some say the weakness in the market was already there.

"This hype wasn't justified by everything else that was going on in the market," said Liz Ann Sonders, the chief investment officer at Charles Schwab & Company, who describes herself as neutral on American stocks. "It was only a couple of generals that were leading the charge and the rest of the soldiers were falling behind."

The market has been led by a handful of energy and industrial companies and a cadre of smaller issues, while much of the domestic market, including most of the technology sector, is still some distance from making up its losses from 2001 and 2002, Ms. Sonders noted.

Take the Dow's 30 blue-chip stocks, for instance. On May 10, 21 of the companies in the index had not made it back to the prices they were trading at when the index peaked in early 2000.

Since January 2000, General Electric is down 33 percent, and two technology heavyweights that led the market during its last great bull run — Microsoft and Intel — are in the rearguard of the index. (The worst- performing stock is, perhaps not surprisingly, General Motors, which is down about 66 percent.)

Who is on top? Five of the index's top six performers — Caterpillar, United Technologies, Boeing, 3M and Exxon Mobil — are benefiting from either a steep rise in commodity prices or strong demand for capital goods from the military and developing nations like China, or both.

Despite the recent downturn, not everyone is pessimistic about the market and the economy. Indeed, stocks recovered late in the day yesterday to show a gain before falling back in the final minutes of trading.

Inflation may be inching upward and the housing market is losing momentum, but neither appears to pose a fundamental or grave threat to the economy, these experts say.

"It is not Jimmy Carter time," said Howard Silverblatt, senior index analyst at Standard & Poor's in New York, referring to the late 1970's when the economy was hamstrung by high inflation and unemployment.

Mr. Silverblatt adds that corporate profits, though slowing, are still setting records, and companies have so much cash they are stepping up stock repurchases, a phenomenon that could help lift the market. And stocks of smaller companies have performed better than the blue chips. The Russell 2000 index, for example, is up 6.24 percent so far this year, outpacing the major stock indexes, though it fell 1 percent yesterday.

Still, it appears, many investors burned by the technology bust and accounting scandals at former market darlings like Enron and WorldCom have yet to regain their optimism and faith in the market.

History suggests we should expect just that, Mr. Sylla said. After the market crashed in 1929, the Dow and the S.& P. indexes did not return to the peaks they established in September of that year until a quarter- century later, in 1954, long after the Depression and World War II ended.

Michael S. Garfield, a technology consultant in Houston who is saving for retirement and for three pre-teenage sons who "all want to go to college," sums up his primary investing goal: "We are trying not to lose it."

Instead of making big bets on individual stocks as he often did in the 1990's, Mr. Garfield, who has a local radio show about technology, said he kept about three-fourths of his portfolio in college savings funds and other long-term investments. He keeps a smaller sum, $25,000 to $50,000, in online brokerage accounts and some of that has been invested, with success, in energy stocks.

"We are now more realistic," said Mr. Garfield, 41, who admitted that he and his wife used to joke during the technology boom that they might be able to retire in their 40's.

Today, he said, "If we can get just single-digit growth, year over year, that's great."

The following are the results of yesterday's auction of three-month and six-month Treasury bills:

Marjorie Connelly and CarterDougherty contributed reporting for this article.

    Bulls Retreat Worldwide as May Rally Turns to Rout, NYT, 23.5.2006, http://www.nytimes.com/2006/05/23/business/23stox.html

Home Insurers Embrace the Heartland

May 20, 2006
The New York Times
By JOSEPH B. TREASTER

Homeowners in Michigan have been getting some surprising news lately from their insurance companies — their premiums are going down as insurers fight for their business.

Not so for the owners of homes on the coast from Texas as far north as Cape Cod — their premiums are going up, if they are lucky enough to keep their policies.

Call it the Katrina effect. As the nation's home insurers prepare for an expected onslaught of powerful hurricanes over the next decade or so, they are trying to woo new customers in the heartland of America, where hurricanes rarely if ever tread, to make up for lost revenue from the tens of thousands of customers they are abandoning on the coasts.

Rates have begun to drop in the Midwest and West, and insurance experts say they expect the trend to spread across most of the interior of the country. Allstate, for example, has cut rates in Michigan by an average of 16.5 percent in the last six months and lowered rates in Montana by 14.8 percent.

But in places like Long Island and Cape Cod as well as the coasts in the Southeast, insurers are doubling prices for some customers and refusing to sell new policies or renew old ones. Recently, State Farm, the largest home insurer, sought an increase averaging 71 percent for home insurance in Florida.

The insurers have been raising prices and cutting back coverage for homes in Florida and the Gulf Coast for years. But now, they have begun to apply the same measures in coastal areas that have not experienced a devastating storm in decades.

"The insurers simply can't bet the entire farm on insuring the coastal areas," said Robert P. Hartwig, the chief economist for the Insurance Information Institute, a trade group in New York. They "are looking to the rest of the country as an opportunity for profitability."

The changes are the most sweeping in the home insurance business in decades. For the first time, the insurers are effectively creating a two-zone system, with homeowners along the coast struggling to get coverage at any price while those inland choose the least expensive among competing offers. The insurers' measures are infuriating consumer advocates, who say the cutbacks and price increases are unnecessary. "They're overreacting," said J. Robert Hunter, the director of insurance at the Consumer Federation of America. The risk suddenly seems greater to the insurers, Mr. Hunter said, partly because they have begun to base their calculations on short-term projections rather than long-range weather patterns.

"They're supposed to bring stability, but that's not happening," Mr. Hunter said. "They're putting short-term profits ahead of people. It's because of hurricanes. But some people haven't had a hurricane for years and they're being dumped. That's not right."

Until recently, it would not have occurred to the insurers to look inland for profits because they were losing money on home insurance everywhere. In fact, home insurance used to be sold as a loss-leader to attract customers for more lucrative auto insurance. But after a surge in fraudulent claims pushed auto insurance into the red, the insurers decided to overhaul the two lines of coverage.

So, in the last few years, the home insurers raised rates and reduced benefits all across the country.

Claims fell in many places, according to Jeff Rieder, the president of the Ward Group, a national insurance consulting company in Cincinnati, as some customers chose policies with higher deductibles to offset the increased prices. Also, he said, some homeowners decided not to file claims for routine damage, worried that their policies might not be renewed.

Now, home insurers are making money everywhere but in hurricane territory. Auto insurance is also doing well. So strong has the home insurance business become that the insurers ended 2004 with a profit, even after $15 billion in hurricane losses. The losses from Hurricane Katrina and other storms in 2005 were almost double, $28 billion, and still, insurance experts say, the business is expected to show a profit. Mr. Hartwig of the Insurance Information Institute said about half the hurricane losses were covered by reinsurance that insurers bought to protect themselves.

Now, the strategy on home insurance is to stanch the coastal losses and stoke the inland profits. From the insurers' perspective, even though tornadoes and hailstorms are common in the Midwest, the damage pales in comparison with that from a major hurricane.

Mr. Rieder said he found in an informal survey that home insurers were reducing rates in a dozen states, including Missouri, Wisconsin, Minnesota, Iowa, Nebraska and the Dakotas.

Nationwide Insurance said it had dropped its rates an average of 3.9 percent in Indiana and 3.15 percent in Michigan.

Michael Trevino, a spokesman for Allstate, said his company, saw "good opportunities to grow our homeowners' business in the central part of the United States."

Himanshu I. Patel, a senior vice president dealing with home insurance at the Liberty Mutual Insurance Group in Boston, said in an interview, "In Illinois, we want as much business as we can write."

For 25 years, from 1970 to 1995, few big hurricanes hit the United States. During that time the coastal economies boomed with new houses, apartment buildings and office towers. Now, meteorologists say, the country is in the midst of a 20- to 40-year cycle of more and stronger hurricanes that puts all those buildings, and insurance company finances, in jeopardy.

Storm experts are debating whether the increase in hurricane activity is a result of global warming or a shift in warm ocean currents that have historically alternated in the Atlantic Ocean over at least the last century. But they are unanimous that the country is in for a long run of powerful storms.

This season, from June to November, nine hurricanes are expected, five of them major, compared with a historical average of two major hurricanes in a season going back to 1950.

When insurance companies refuse to provide coverage, the states offer bare-bones policies through insurance pools or state-run companies. But in Florida and Louisiana, the state-run companies are on the verge of collapse. In Mississippi, the officials who run the state insurance agency have told regulators they need to raise rates fivefold to remain in operation.

Edward Liddy, the chief executive of Allstate, and Florida officials have been campaigning for a federal program to take the strain off insurers and provide guarantees that home insurance will remain available to everyone.

The insurers are taking the toughest measures in Florida, which has been hit by more hurricanes than any state. On May 12, in addition to requesting a sharp increase in rates, State Farm said it was eliminating hurricane coverage for 39,000 customers near the beaches and getting out of the business of insuring condominium and co-op complexes in the state. At the same time, Allstate said it was cutting back on its exposure in the state by transferring 215,000 customers to two other, smaller companies.

Even before Hurricane Katrina, the insurers had been cutting back on coverage on Cape Cod, the nearby islands of Martha's Vineyard and Nantucket and the rest of the Massachusetts shore. This spring, they began pulling back from Long Island and New York City.

Even though New York rarely gets hurricanes, the upturn in hurricane activity and the recent heavy losses have reminded insurers of a 1938 storm known as the Long Island Express, which leveled stretches of Long Island and went on to hit several New England states.

Mr. Trevino, the Allstate spokesman, said his company believed that the chances of a major hurricane hitting Long Island in the next few years have greatly increased. "We're the largest insurer in the state," he said, "and our exposure to catastrophic loss in New York is higher than we'd like it to be."

As a result, Allstate is refusing to renew 28,000 policies in Long Island, Westchester County and the five boroughs of New York City and is no longer taking on new home insurance customers there.

Beginning in June, said Joe Case, a spokesman for Nationwide, "we are not writing new policies in eastern Long Island or on any property within 2,500 feet of the coast" in the rest of the state. Other companies are pulling back on their coverage in New York, too. Mr. Case said Nationwide was also cutting back on sales of new policies to residents near the coasts in Maryland and Virginia.

The cutbacks are disruptive for customers, and some say the insurers may be hurting themselves. Jeffrey A. Hornstein, an investment banker at Peter J. Solomon, said that when Allstate told him it was not renewing coverage on his home in Sagaponack on Long Island, he called another insurance agent and three days later shifted coverage on the house plus his two cars and his apartment in the city to the American International Group.

"I don't think this was a good business decision for Allstate," he said. "They're going to lose a lot of other business. They didn't lose one policy in my case, they lost four. I'm a mile from the beach. What's the potential for loss out here if the last big hurricane was in 1938? This isn't South Florida."

For the insurers, which rely on computer models of likely hurricane strikes, the danger is very real.

But a broad swath of the United States will never see a hurricane. "You can have bad years in the Midwest," said Mr. Patel of Liberty Mutual. "But they will not bring you to the brink of catastrophe. The risk is different, an order of magnitude different."

    Home Insurers Embrace the Heartland, NYT, 20.5.2006, http://www.nytimes.com/2006/05/20/business/20insure.html

After Century, Room and Board in City Still Stings

May 20, 2006
The New York times
By PATRICK McGEEHAN

A century ago, New Yorkers blew a lot more of their pay on drinks and smokes. They had their reasons.

Their families were often packed into tenements with boarders and lodgers. Their children were sent out to work to help pay for the bare necessities. And even then, they borrowed more than Americans elsewhere to cover their expenses.

From that bleak state at the start of the 20th century, New York City's economy has been transformed in almost every measurable way, a new federal study shows. Over the course of a hundred years, the city's families, on average, became smaller, wealthier and better fed. They also stopped devoting so much of their income to alcohol and tobacco.

The study, the first of its kind by the Bureau of Labor Statistics, presents a series of snapshots, sort of a flipbook, of earning and spending in the city compared with the rest of the nation from 1901 to 2003.

Over all, the century report, scheduled to be released on Monday, recounts a march toward prosperity, illustrating how New Yorkers — who earned less than other Americans at the start of the last century — became wealthier as their incomes grew faster than those of other Americans and much faster than the cost of living.

But one fact of life has not changed for New York families: More than half of their spending still goes toward housing and feeding themselves, in contrast to Americans elsewhere who allocate more than half of their spending to discretionary items like cars, entertainment and health care.

By 2003, food alone cost New York families more than $7,000 a year, on average, compared with an average of $5,350 for all American households. But it was New York's housing boom of the last two decades that widened the spending gap.

Rent and other housing expenses cost New York households $18,919 a year, on average in 2003, or about 38 percent of their total spending. The typical American family allocated just $13,359, or slightly less than one-third of its total spending, to housing, the report states.

During the century, the income of the typical New York household, adjusted for inflation, more than quadrupled, while annual expenditures did not quite triple. Nationally, household incomes tripled, while spending increased by a factor of 2.4.

"There has been a tremendous increase in the standard of living in the country as a whole and in New York," said Michael L. Dolfman, the bureau's regional commissioner and a report author. "The only thing that today's New York has in common with New York City at the beginning of the 20th century is its location."

To demonstrate that transformation, Mr. Dolfman and his co-author, Dennis M. McSweeney, the bureau's regional commissioner in Boston, compared the makeup, income and spending patterns of families in New York and Boston against a national benchmark in nine periods in the century.

Over all, Boston fell between New York and the rest of the nation in both income growth and the amount its families had to spend for housing and food. Incomes there quadrupled during the century, while total household spending rose by a factor of 2.2.

Compared with the typical American household, New York families in 1901 were slightly smaller, earned less but spent more. Indeed, Mr. Dolfman said, New Yorkers back then spent 20 percent more than they reported earning, even though nearly one-quarter of the families sent children out to work.

And they drank nearly twice as much as other Americans, allocating almost $3 of every $100 spent to alcohol, in addition to $1.40 on tobacco.

"Many of these men would stop off at grog shops on the way home and by the time they got home, they'd spent too much of what little they were able to make drinking," said Thomas Kessner, a professor of history at the Graduate Center of the City University of New York who has studied the city's immigrants.

For a gauge of a family's affluence, the report's authors looked at how much of income was consumed by basic necessities — defined as food, housing and clothing — and how much was left over to obtain other goods and services like health care, entertainment and education.

At the start of the 20th century, the necessities accounted for 80 percent of the typical family's spending in New York and across America. Food alone took up nearly half of that, costing a New York family $356 annually. (By 2003, food consumed about 14 cents of every dollar spent by families in New York, compared with about 13 cents for the rest of the country.)

Housing in 1901 cost an additional $191 a year and clothing $106 more. That left the 1901 New York household with just $22 a year to spend on other things. But discretionary spending averaged about $160, which meant families rang up bills that exceeded their $675 annual income by about 20 percent. To bridge the financial gap, Mr. Dolfman said, they relied far more on credit than other Americans.

"The good ol' times weren't good," he said. "Life was hard."

Mr. Kessner, like some other historians interviewed, questioned whether the typical New York family could have borrowed as much as 20 percent of its income long before the advent of credit cards. Still, he said, there is no doubt that finding steady work was a big challenge and more than half of the heads of New York households in 1901 were immigrants who had arrived with little or no cash.

"You had a whole population of individuals who were making money off of rag-picking, begging in the streets," Mr. Kessner said. "It was a very different kind of city, certainly, for the lower class."

Since then, though, the lot of New Yorkers has improved steadily, interrupted only during the years surrounding the Great Depression, according to the report, which will be available on Monday on the bureau's Web site, at www.bls.gov/opub/uscs. The data show that 1934-36 was the only other period examined in which New York families could not make ends meet. In those years, their expenses exceeded their incomes by about 5 percent.

Even back then, housing costs were a problem. A 1934 spending survey, cited in the century report, found that "competition for living space in this area not duplicated in any other part of the United States. The result is a level of rents which taxes the expenditures of families" for "relatively small dwellings."

The spending changes accelerated with the economic expansion that followed World War II. By 1960, housing had surpassed food as the biggest category of spending and the mass marketing of cars pushed transportation past clothing as an expense for American families, though not for New Yorkers. In the 1970's and 1980's, cities like Buffalo and Detroit that had been hubs of manufacturing fell into a downward spiral.

But New York fought off that fate as it capitalized on its status as a world capital of finance, said Edward L. Glaeser, a professor of economics at Harvard University. "That's really been the reason for New York's turnaround," he said.

In the last two decades, the disparity between the incomes of New Yorkers and other Americans has widened. Twenty years ago, the average New York household income, which was just shy of $30,000, was about 25 percent higher than the typical American family's, the report states. By 2003, New York households were earning more than $66,000, on average, 33 percent more than the typical American family.

The New York family's expenses in 2003 were about 25 percent higher, at $50,319, than the national average. The bulk of that money went toward housing, transportation and food, in that order. And, by 2003, New York families may have been healthier too. Of every $100 they spent, less than $1 went toward alcohol and only 50 cents to cigarettes.

The trend over the century for alcohol was the opposite for Boston. Spending on alcohol there, as a share of all expenditures, nearly doubled. In 2003, the typical household there spent more on liquor than their counterparts in New York.

Of course, over 100 years, the notion of basic needs had been redefined, said Kenneth T. Jackson, a professor of history at Columbia University. Whole new categories of everyday goods and services, like computers and telecommunications, have become indispensable. Meanwhile, the advent of luxury housing and luxury food has made much of the spending in those staple categories discretionary.

"We've made something that used to be a necessity into an event, a production," said Mr. Jackson, who referred to his own occasional visits to a high-scale grocery. "I remember buying two steaks for $34 at Balducci's. Now, does that make me rich or poor?"

    After Century, Room and Board in City Still Stings, NYT, 20.5.2006, http://www.nytimes.com/2006/05/20/nyregion/20century.html?hp&ex=1148184000&en=44fb5cb720964870&ei=5094&partner=homepage

Starbucks aims beyond lattes to extend brand

Updated 5/19/2006 2:51 AM ET
USA Today
By Bruce Horovitz

SEATTLE — Starbucks is changing what we eat and drink. It's altering where and when we work and play. It's shaping how we spend time and money. That's just for appetizers.

Starbucks has an even glitzier goal: to help rewrite society's pop culture menu. The company that sells 4 million coffee drinks daily in the USA is hot to extend its brand beyond the espresso machine to influence the films we see, CDs we hear and books we read. In the process, it aims to grow into a global empire rivaling McDonald's.

"It amazes all of us — how we've become part of popular culture," says Chairman Howard Schultz, sitting casually in his office near a photo of him arm-in-arm with Mick Jagger. "Our customers have given us permission to extend the experience."

The kingpin of pricey coffee is intent on ranking among the top trendmeisters before the decade is out. Something like: If you love the taste of our coffee, you'll love our taste in pop culture, too. "Call it the Starbuckization of society," says George Ritzer, sociology professor at the University of Maryland. "Starbucks has created the image that they're cutting edge."

Schultz is dead serious about taking his company Hollywood — and beyond. Starbucks Entertainment, formed two years ago, has 100 employees and is relocating to Santa Monica, Calif. It retained the William Morris Agency to help link the brand, via marketing ventures, with films, music and books. In some cases, Starbucks will have a financial stake.

"We are engaged every day in discussions with the highest levels of people in the entertainment business," Schultz says.

Starbucks has had talks with musicians Jagger, Bono, Prince and Chris Martin about promotional links with CDs, division president Ken Lombard says. He says he hears from record labels, film studios and publishers daily about possible tie-ins.

They might need Starbucks more than it needs them. Its stock is up about 5,775% since it went public in 1992. It's had 172 straight months of same-store sales growth.

Music was Starbucks' first foray into pop culture. It shared in eight Grammy Awards in 2004 for backing the Ray Charles Genius Loves Company CD. Its stores sold about 835,000 copies, about 25% of sales. In 2005, Starbucks sold 3.5 million CDs of all kinds.

"We are in a unique position to transform the way music is discovered and delivered," Lombard says.

Starbucks' film effort was less commercial, but Schultz says the plan is to back films that fit the brand. "We would not do the next Spider-Man." Its first deal has been to promote Lionsgate's Akeelah and the Bee for an undisclosed equity stake. Since opening April 28, the movie has earned mostly positive reviews but posted modest sales of $14 million through May 14.

Next up, Starbucks will sell, and might publish, books. "The search is on for the right one," Lombard says.

It also is testing in a few sites a plan to make stores what Schultz calls "digital fill-up" stations for entertainment downloads. By ramping up Wi-Fi networks already in more than half its stores, Starbucks could offer not only a place to check e-mail on a laptop but also load an MP3 player. "People are using our stores in ways we never imagined," he says.

Like Oprah Winfrey, Starbucks is emerging as a self-appointed culture guru. It's drawing folks who want a jolt of what's "in" with their java.

"People promote their own brands — even promote themselves — by being Starbucks consumers," says Jeff Swystun, global director at brand-savvy Interbrand.

Starbucks manages to project itself as both hero and renegade. As a brand, says Watts Wacker, futurist at FirstMatter, it's a lot like Bono: a good man and bad boy.

Starbucks is also ubiquitous. It has 7,950 U.S. stores — plus 3,275 elsewhere — and an average of five opening every day worldwide. Its long-term goal is 15,000 U.S. stores, 30,000 globally. By contrast, McDonald's has 13,700 U.S. stores, 31,000 globally. "Starbucks has found a way to reach every demographic," says Barry Glassner, author of The Culture of Fear. "It's hard to be an American without stepping in one."

Some do every day. And 24% of Starbucks' customers visit 16 times per month. No other fast-food chain posts numbers even close.

Sun Cunningham plans her days around Starbucks. "I guess it's a little crazy," says the consultant from Silverthorne, Colo. "But whenever I run errands, I map it out so I can stop at a Starbucks in between."

Manhattan resident Eve Epstein goes to Starbucks daily. Three mornings a week, she also takes her son, Asher, 2, and meets her best friend — with her toddler. "Our kids will spend their childhoods there," she jokes. For parents, she says, "Starbucks is the new McDonald's."

While Starbucks is just getting into the pop culture business, it has already touched us all by:

•Changing what we'll pay for coffee. In its less costly markets, a "tall" (small, 12 oz.) cup of regular coffee still costs about $1.40. In its priciest market, New York City, a "venti" (large, 20 oz.) Frappuccino will set you back $4.90.

"We live in a society where people think $5 is $1 because of Starbucks," says Marian Salzman, trends guru at JWT Worldwide.

Washington, D.C., lawyer Lisa Terry, who goes four times a week, gives Starbucks a nickname based on her average tab: FourBucks.

Starbucks not only made four bucks a cup acceptable, it opened the door for others. "I got into the business because of what they created," says Michael Coles, CEO of 500-store Caribou Coffee.

Not everyone has bought in. Some 1,829 consumers were asked by Marketing Evaluations, The Q Scores Co., last year to rate 170 major brands for "value." On a scale of 1 to 100, the average score was 26. Starbucks came in at just 10. "The consumer is saying, 'Man, look what I'm paying for this!' " says Steven Levitt, president of the firm.

•Changing coffee tastes. Like it or not, Starbucks has changed expectations of how coffee should taste. "They've done a great job of raising coffee standards," says Bryant Simon, author of the upcoming book Consuming Starbucks.

Starbucks coffee buyers, tasters and its quality control team taste an average 1,000 cups per day. It's forced McDonald's and Burger King to upgrade their brews.

•Changing what we eat. "It's hard to eat healthy at Starbucks," says Marion Nestle, author of What to Eat. "Portions are too big, and the drinks are full of calories."

It's about to get easier. This year, Starbucks has started a menu revamp with more better-for-you foods. Fruit and yogurt parfaits and warm breakfast sandwiches have rolled out in many markets. New salads are under review. Even Starbucks trail mix is on tap. Healthier food "is part of every conversation we have," says CEO Jim Donald. But coffee is the focus, he adds.

•Changing how we order. Starbucks made custom ordering chic, says Brad Blum, former CEO of Burger King, now a restaurant industry consultant. "People take a sense of ownership when their order is personalized," he says.

•Changing how people meet. "There's a sense of security when you go there," psychologist Joyce Brothers says. It has given people a "safe" place to socialize, she says.

Terry, the D.C. attorney, says Starbucks is the only place she feels comfortable meeting guys on first dates. "It's cornered the market on meeting places," she says.

•Changing cities. Starbucks is influencing urban streetscapes. In brochures for high-end apartments near New York City, it's not uncommon to see "near Starbucks" as a selling point. A Starbucks in the neighborhood is "definitely an indication that an area has arrived," says Doug Yearley, a regional president with builder Toll Brothers, now putting up luxury condos near a Starbucks in Hoboken, N.J.

•Changing social consciousness. Starbucks has added more than a teaspoon of social responsibility to its premium coffee.

No other retailer in North America sells more Fair Trade coffee — marketed by co-ops that guarantee living wages to coffee growers. It has 87 urban locations co-owned by Earvin "Magic" Johnson. It's begun rolling out paper cups made with 10% recycled materials.

Many of its part-time "baristas" are eligible for health and 401(k) benefits, something that Schultz is proud of and that has had an impact on the industry. But some employees push for more. A union recently formed in Manhattan to seek more pay and "to make Starbucks more socially responsible to workers," barista Daniel Gross says.

Despite recent moves to become a cultural curator, Schultz says Starbucks still has to earn its stripes as tastemaker. Much as it would like to become an "editor" of culture, he says, "one of the great strengths of Starbucks is our humility."

    Starbucks aims beyond lattes to extend brand, UT, 19.5.2006, http://www.usatoday.com/money/industries/food/2006-05-18-starbucks-usat_x.htm

Inflation Rising, Markets Tumble

May 18, 2006
The New York Times
By LOUIS UCHITELLE

Only a week ago, the Dow Jones industrial average was on the verge of a record high. Without much fanfare, the Dow — the best-known indicator of the stock market's performance — seemed about to regain all that had been lost since the spectacular 1990's boom came to an end.

But nearly every trading day since last week's high-water mark, stocks have fallen, and yesterday they really tumbled on a government report that showed consumer prices rising more than expected.

The Dow industrials fell 214.28 points, or 1.88 percent for the day, closing yesterday at 11,205.61, for the biggest point decline in more than three years. That left the index down 437 points since its close last Wednesday. The Standard & Poor's 500-stock index and the Nasdaq fell as well, with the Nasdaq composite index hitting a new low for the year.

Behind the market's reversal is a growing concern among investors that inflation may not be as firmly under control as they had hoped. Even as most economic signals continue to point to a growing economy, the prospect that the Federal Reserve might still feel compelled to keep raising interest rates has unnerved many on Wall Street.

"Many investors have taken large positions in stocks and they are getting spooked," said James Glassman, senior United States economist for J. P. Morgan Chase & Company. "These investors are often hedge funds and foreigners, and if the Fed is going to raise rates more than they thought, that makes it less attractive for them to hold onto their big positions."

Indeed, the sudden unwinding in the market began on May 11, the day after Fed policy makers raised interest rates another quarter-point, to 5 percent, and left open the prospect that more interest rate increases "might yet be needed to address inflation risks."

Higher interest rates, by raising the cost of borrowing, curb spending by consumers and companies. That helps to prevent bottlenecks in the economy and takes the pressure off prices.

Many investors had been counting on the Fed to finally take a breather after nearly two years of predictably raising rates at every meeting. But Fed officials, by signaling that they would henceforth be driven by fresh economic data, turned Wall Street's attention to scrutinizing every new statistic for clues to their next move.

Yesterday's government report was seen as the worst omen yet. The Bureau of Labor Statistics announced a jump of 0.6 percent in the Consumer Price Index for April, mostly because of gasoline prices, but also because, as the government calculates it, the cost of owning a house and renting an apartment was up smartly. The latest increase in consumer prices came on top of a 0.4 percent increase in March.

Many economists, however, are not as alarmed by the inflation figures as the market reaction suggests. Because of a quirk in the way the C.P.I. is calculated, they explained, the latest reading may actually be signaling a slowing economy and, eventually, less inflation.

Those subtleties are not always immediately apparent to market participants. Traders have also been whipsawed by conflicting data lately. Earlier this month, a government report showing relatively weak job gains encouraged the view the Fed would stop raising rates after this month, setting off a four-day rally that sent the Dow up close to its record last week.

"If you are trading in the market, you have to put a lot of weight on each new bit of information, even if you know the data is perhaps not significant," said Bill Cheney, chief economist for John Hancock Financial Services. "It is, after all, the latest information and so you have to react to it, and almost always it is an overreaction."

If there was an overreaction, it may be because many traders do not take into account how the Consumer Price Index measures the cost of housing, which gets more weight than any other item.

The bureau, relying on data that is relatively easy to compile monthly, uses the cost of renting as a proxy for the cost of owning a house or an apartment as well as the cost of renting one.

Now that home sales are leveling off, the demand for rental properties has risen and so have rents.

Rising rents, more than any other item, explain why the core C.P.I. — which excludes volatile food and energy prices — jumped 0.3 percent last month. For the first four months of this year, the core C.P.I. rose at an annual rate of 3 percent, up from 2.2 percent for all of last year.

For the overall C.P.I., including food and energy, the annualized increase this year through April was 5.1 percent, up from 3.4 percent last year.

The Fed's focus, however, is on the core rate — and so is the market's. That may be leading to a perverse reaction to the Fed's efforts to keep inflation under control.

"In a way you could argue that the rental phenomenon is a result of rising mortgage rates, which in turn reflect the Fed's rate increases," said Nigel Gault, the United States economist for Global Insights. But "as the housing market slows, so will the economy, and that will bring down inflation. Pursuing this line of reasoning, you can also argue that the Fed's rate increases so far are enough."

That was not the view yesterday from the stock market, which fears that the Fed is now more likely to raise rates at its next meeting in June. The big drop in the Dow yesterday followed two earlier declines of more than 100 points last Thursday and again on Friday.

The index closed last Wednesday at 11,642.65, or just 80.28 points shy of its record 11,722.98 on Jan. 14, 2000.

While the S.& P. 500 and the Nasdaq were also down sharply yesterday, they never regained as much ground as the Dow since their peaks in 2000 and have generally been less volatile.

For investors, the biggest concern is that rising oil prices will feed into the cost of goods and services dependent on oil. So far, the main impact is on gasoline pump prices, which averaged $2.79 a gallon in April and $2.97 a gallon in May, according to Energy Department surveys.

An indirect effect is evident in rising air fares, in surcharges on overnight air freight, and in a few chemical products made from petroleum. But those increases are still isolated.

"You are really not seeing much pass through yet," said Jan Hatzius, chief United States economist at Goldman Sachs. "What worries me is that the markets' reaction to the inflation numbers will push the Fed into tightening more than is necessary."

    Inflation Rising, Markets Tumble, NYT, 18.5.2006, http://www.nytimes.com/2006/05/18/business/18econ.html?hp&ex=1148011200&en=7bc9afb69740a9ac&ei=5094&partner=homepage

Fractured phone system consolidating once again

Updated 5/11/2006 12:30 AM ET
USA Today
By Leslie Cauley

AT&T's relationship with the federal government has been a century in the making. The company was founded in 1885 and over the next century became the nation's de facto phone monopoly. At its peak in the early 1980s, it employed 1 million people.

In 1984, the Bell Telephone System was broken up by a court decree. AT&T's local operating companies — there were 22 in all — were grouped into seven "regional Bells" and spun off as separate companies. Each had monopoly control over local phone service in a specific region of the country.

The parent company, AT&T — originally called the American Telephone & Telegraph Co. — was also spun off. Its business was exclusively long-distance service.

Since then, Ma Bell has been largely reconstituted. Today's AT&T is an amalgam of three Bells: Ameritech, Southwestern Bell and Pacific Telesis, plus AT&T, which is essentially the long-distance arm of the company. The carrier recently announced plans to buy BellSouth, another of the original seven regional Bells, for $67 billion.

Once the BellSouth deal closes, AT&T will cement its position as the nation's biggest communications company. It will also assume control of Cingular, the nation's biggest cellphone carrier with more than 45 million customers.

Verizon isn't far behind. The carrier, based in New York, is the result of mergers of two Bells — Nynex and Bell Atlantic — plus GTE and MCI. Verizon also controls the No. 2 wireless carrier, Verizon Wireless.

BellSouth is the smallest of the lot. But its local phone territory covers the sprawling Southeast — nine states in one of the fastest-growing regions in the USA today.

That leaves Qwest. The carrier, based in Denver, is the product of a merger between one of the seven regional Bells, US West, plus Qwest, a long-distance carrier. Qwest provides service in a 14-state region in the West and Northwest.

    Fractured phone system consolidating once again, UT, 11.5.2006, http://www.usatoday.com/news/washington/2006-05-10-phone-history_x.htm

Detroit Grapples With a New Era: The Not-So-Big 3

May 11, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, May 10 — Fans of the Detroit Red Wings hockey team have booed plenty of opposing teams over the years at Joe Louis Arena, but last month they let loose at another traditional Detroit opponent: Toyota. What set them off was a new Toyota FJ sport utility vehicle that circled the ice during the second intermission of an April 11 game between Detroit and Edmonton.

The outburst showed how the Motor City is still having trouble adjusting to a new reality here: the Asian car companies that Detroit once vowed to vanquish have moved squarely into the front yard of the capital of American automotive dominance.

Toyota and Nissan and Hyundai of South Korea have opened gleaming technology centers and are hiring some of Detroit's most talented engineers and designers. They are also becoming more a part of the city's social fabric by supporting local charities, sponsoring teams like the Red Wings, and lending a distinctly Asian flavor to previously homogeneous suburban neighborhoods.

There are signs the city is making progress adjusting to the transition. Gone are the days when fans of the Big Three companies angrily vented their frustrations, as they did 25 years ago, by taking sledgehammers to foreign cars at special events. Nor does anyone still talk seriously, as Henry Ford II did in the 1970's, about pushing Toyota and Honda "back to the shores" of Japan.

Still, old attitudes die hard, and it does not take much for them to flare up. In a town where the United Automobile Workers union has long banned foreign cars from its lots, union members at Ford's local plants decided last winter to kick everything but Ford vehicles out of the choicest spots. Now, "non-Ford-family" cars and trucks are relegated to far-off parking spaces.

Workers at Ford, as well as G.M., have been badly shaken by their companies' slumps. The two automakers collectively plan to cut 60,000 jobs and close more than two dozen plants over the next few years. They have lost billions of dollars in North America in recent years, and their share of the market has dipped to its lowest point ever because of gains by Japanese and Korean automakers.

Just last week, for the first time, Toyota beat DaimlerChrysler in monthly car sales. It has already overtaken Ford in worldwide sales and, if current trends hold, it will overtake G.M. in the not too distant future. On Wednesday, Toyota reported a net profit of $12.1 billion for the fiscal year ended March 31, making it the most profitable manufacturing company in the world.

That may be why no less than Ford's chief executive, William Clay Ford Jr., great-grandson of the company's founder, is now warning that blind patriotism to Detroit's old ways is dangerous.

"If we are invested in that even 1 percent, we are going to lose," Mr. Ford said in an interview late last month. But he also acknowledged the difficulty in changing those attitudes.

"This is an insular industry and an insular town," he said.

Indeed, there are still signs that Detroit is trying to circle the wagons. The troubles at G.M., which lost $10.6 billion last year, have generated enormous sympathy here for the company and its embattled chief executive, Rick Wagoner, who has become something of a symbol of Detroit's fight against outside forces.

Those include the billionaire Kirk Kerkorian, the company's biggest shareholder, whose representative, Jerome B. York, has publicly pushed for change at G.M. and recently joined the company's board.

"We Almost Lost Rick!" read the headline on a story last month in Automotive News, the trade publication that covers the global industry. In it, the paper detailed how Mr. Wagoner threatened to quit if his board did not back him in the face of a media storm that declared his job to be in jeopardy. (The board did issue a statement of support.)

But statewide, the support for the homegrown companies is beginning to wane in one essential way, if ever so slightly. Five years ago, Detroit's Big Three took 90.8 percent of auto sales in Michigan, according to J. D. Power. Lately, that has slipped to 88.3 percent — compared with about 55 percent nationwide.

One reason is that the makeup of the state and especially its wealthiest areas has simply changed. Though still a fraction of the whites in the suburbs and the blacks in Detroit, the number of Asians living in the four counties surrounding Detroit has more than doubled since 1990, to over 120,000. Nearly half live in upscale Oakland County, helping to further diversify an area that includes a sizable Arab population, centered in Dearborn, where Ford has its headquarters.

The public school that Mr. Ford's son attends in Ann Arbor, home to the Toyota Technical Center, is more than 40 percent Asian, he said. Hiller's Markets, a six-store chain of upscale grocery stores across the metropolitan area, features entire refrigerator and frozen-food cases with a selection of products that rivals a Tokyo shop, including pickled plums, Japanese brands of energy drinks and fermented soybeans.

In suburbs like Novi, about 35 miles northwest of Detroit, some real estate agents do 90 percent of their business with Japanese customers. Spots in the city's English as a Second Language program, offered twice a year, fill up as soon as classes are made available.

"In an hour and a half, we're done," said Bob Steeh, director of community education for the Novi Public Schools.

One popular class features field trips to Home Depot, a funeral home and a local hospital, meant to show newcomers how life is lived differently from back home. But others stick to what they know best.

Yoko Watanabe, 50, who moved to Novi 10 years ago to join her husband, Yasue, an interpreter, edits a local Japanese business newsletter and teaches Japanese to schoolchildren and businessmen.

"My husband sometimes reprimands me for not trying to blend enough or know Americans more," she said, speaking through her husband, who interpreted for her.

The new environment traps Detroit between its traditional identity and whatever new role it may play in a global automotive world, said William Pelfrey, a former G.M. speechwriter and the author of the book, "Billy, Alfred and General Motors," about two former G.M. leaders: William C. Durant and Alfred P. Sloan.

"Clearly the old Detroit as the Motor City is history," Mr. Pelfrey said. "But the jury is still out on what Detroit is going to become."

Michigan's governor, Jennifer M. Granholm, is trying to provide one answer. Facing the loss of thousands of traditional auto jobs, and with a tough re-election race looming this fall, she is zealously competing for an engine plant that Toyota has indicated it wants to build in a Midwestern state.

Ms. Granholm, who has already visited Japan once to lobby for the factory, plans another trip soon— as does Indiana's governor, Mitch Daniels, who wants the plant for his state.

The changing complexion of the city is one reason a Detroit radio personality, Paul W. Smith, now regularly interviews executives like Carlos Ghosn of Nissan and James Press of Toyota on his morning show, long a platform for the city's auto figures.

"Anybody who is paying attention and who is making a difference is not booing Toyota and Nissan," said Mr. Smith, who has a show on the Detroit radio station WJR and occasionally sits in for Rush Limbaugh on his national show.

At his invitation, Toyota has become a sponsor of Mr. Smith's annual golf tournament benefiting Detroit's Police Athletic League — something that would have been "impossible" a decade ago, he said. Mr. Smith said he believed that the region would come through the industry's crisis, but not without some re-examination. "Things are not going to be the way they were," Mr. Smith said.

For his part, Mr. Ford does not think everything about the old Detroit needs to be discarded. Despite recent efforts by Toyota and other foreign companies, Detroit automakers still lead in backing the city's vast array of charities, he said.

What he wants to see, both for his city and for his employees, is a more realistic attitude about their place in a global industry. "I see what's happening to this world — how it's shrinking, how immigration is changing, and I think it's fascinating and invigorating," Mr. Ford said.

Instead of booing the Japanese competition, Detroiters may want to recall the counsel of Mr. Ford's great-grandfather, the original Henry Ford, who once said: "Don't find fault — find a remedy. Anybody can complain."

Jeremy W. Peters contributed reporting from Novi, Mich.for this article.

    Detroit Grapples With a New Era: The Not-So-Big 3, NYT, 11.5.2006, http://www.nytimes.com/2006/05/11/business/11detroit.html?hp&ex=1147406400&en=41a90b57ad698b83&ei=5094&partner=homepage

States aim to raise minimum wage

Updated 5/10/2006 12:24 AM ET
USA Today
By Charisse Jones

Campaigns to raise the minimum wage are gaining ground in a dozen states during an election year in which some political activists say the issue could help swell Democratic voter turnout.

Seven state legislatures have raised the wage this year, and efforts are underway in six states to put similar proposals on the November ballot.

States are using legislation and ballot initiatives to do what Congress has not done since 1997, when it last increased the federal minimum wage to $5.15 an hour.

Twenty-one states have minimum wages above $5.15. Joining the list this year are Maryland, Rhode Island, Michigan, Arkansas and Maine. West Virginia hiked wages, but only for a limited set of workers. Ohio raised its minimum to match the federal wage.

Nevada voters will decide in November whether to raise the state wage to $6.15 an hour. Drives for similar initiatives are taking place in Arizona, Ohio, Colorado, Missouri and Montana.

As campaigns for governorships and congressional seats heat up, the issue could attract liberal voters in November, just as measures outlawing gay marriage galvanized conservative voters in 2004.

"That kind of effort can really draw voters out to not only support the minimum wage but to support the candidates who support the minimum wage," says Oliver Griswold of the liberal Ballot Initiative Strategy Center, an advocacy group based in Washington.

House Minority Leader Nancy Pelosi, D-Calif., says raising the federal minimum wage will be a top priority for Democrats if they regain control of the House of Representatives in November.

Last year, 1.9 million workers — 2.5% of hourly earners — earned $5.15 or less, according to the Bureau of Labor Statistics. Pay for millions of others is influenced by the wage.

Some opponents of a wage hike say it would force up wages for all workers, straining businesses. "I think it will cause some people to actually lose their jobs," says Thom Coffman, vice president of the Ohio Restaurant Association.

Michigan lawmakers increased the state's minimum wage in March to $7.40 over the next two years. The idea that Democrats might use the issue to mobilize their constituents influenced Republican state senators, who unanimously approved the hike, says Ari Adler, spokesman for Senate Republican leader Ken Sikkema.

    States aim to raise minimum wage, UT, 10.5.2006, http://www.usatoday.com/news/washington/2006-05-09-minimum-wage_x.htm

Price of Gold Surges to New Height

May 9, 2006
The New York Times
By VIKAS BAJAJ

Prices for gold, platinum and other precious metals surged to new heights today as investors weighed an assortment of worries about geopolitics and energy and sought to claim a piece of the exuberant rally in commodity prices.

Gold futures, which have risen 36 percent so far this year, jumped 3 percent, to $708.3 per troy ounce, and platinum rose 3.4 percent, to $1,235.50 per ounce. Prices for crude oil, which metals prices are said to track, for June delivery rose $1.03, or 1.5 percent, to $70.80 a barrel on the New York Mercantile Exchange.

No single factor seems to be triggering the latest jump, but gold, traditionally seen as a hedge against inflation and rising energy prices, appears to be enjoying a run that is attracting other investors who are eager to get in on the action, analysts said.

"The way these things work is solid returns tend to build on themselves, and they don't slow down until they breakdown," said Daniel C. Pierce, a portfolio manager at State Street Global Advisors.

On the political front, the nuclear standoff between Iran and the West and the ongoing demands by Western officials that China allow its currency to appreciate against the dollar and euro are among a host of concerns being cited as explanations for, and perhaps justifications, for the recent run up. Unlike stocks and bonds, commodity prices thrive on financial and political uncertainty, because they are considered to have intrinsic value unlike companies and governments, which can go out of business or default on their debts.

"The environment of geopolitical tensions, growing inflationary fears and uncertainty over currency issues between the U.S. and China remains extremely supportive for gold," analysts with Barclays Capital wrote in a research note.

Gold last traded above $700 an ounce in 1980 during the Iran hostage crisis, after which prices began a long and generally downward slide for more than 20 years. The metal established an all-time record of $834 an ounce on Jan. 21, 1980. Adjusted for inflation, however, the record would be $2,022.25 an ounce in today's dollars, a fact that many gold investors say suggests the metal remains a relative bargain.

The latest increases in the commodity prices comes on the eve of two highly-anticipated policy and political developments on Wednesday:

The Federal Reserve is expected to raise short-term interest rates to 5 percent, from 4.75 percent and give investors an indication on whether it will raise rates further. While Fed officials have indicated that they may pause or stop their nearly two-year campaign to raise rates because inflation appears to be under control, many investors in gold say inflation is and should be considered a significant threat.

At the Treasury Department, meanwhile, an annual report is expected to brand China a "currency manipulator," a gesture that could increase calls for protectionist legislation in Washington and inflame festering tension between the two countries over the rising American trade deficit with China, which totaled more than $200 billion in 2005. Both outcomes would be viewed as increasing political and economic uncertainty, which would bolster metal prices.

    Price of Gold Surges to New Height, NYT, 10.5.2006, http://www.nytimes.com/2006/05/09/business/09cnd-gold.html

On a Fault Line, a Divide Opens Between Editors

May 10, 2006
The New York Times
By PATRICIA LEIGH BROWN

POINT REYES STATION, Calif. — When David V. Mitchell sold the local newspaper here last year to Robert I. Plotkin, some friends predicted the passing of the paper's ceremonial golden muck rake would not be easy.

But even on this isolated agricultural peninsula aptly situated on the San Andreas fault, no one could have predicted the bizarre imbroglio that has ensued, complete with accusations of assault and temper tantrums.

The two men are scheduled to appear in court on May 12 for a hearing related to a temporary restraining order Mr. Plotkin received in February against Mr. Mitchell, which requires he stay away from Mr. Plotkin and the offices of The Point Reyes Light, a weekly. And a lawyer for Mr. Mitchell says he will seek arbitration over Mr. Plotkin's decision to pull the plug on a regular column written by Mr. Mitchell.

The nasty public feud between the past and present owners of The Light — Mr. Mitchell, a gangly, corncob-pipe-smoking 62-year-old who looks like an aging folk singer and won a Pulitzer Prize, and Mr. Plotkin, a 36-year-old onetime prosecutor with a GQ fashion sense who describes himself as "a man of action, like James Bond" — has captivated the 14 far-flung villages here on the western tilt of Marin County.

Some residents say the feud has become a sideshow more riveting than even recent front-page stories on illegal poaching of elk horns for aphrodisiacs and mushroom hunters discovering bodies in the forest.

Kathyrn LeMieux, a former cartoonist for the paper, said it was perhaps predictable that two intense, brainy editors would dust it up in West Marin.

"Life on the fault line is fraught with drama," Ms. LeMieux said.

Along with oysters, pristine coastal scenery and mildly pungent organic cheeses, idiosyncrasy is part of the culture here.

It has been this way since the early 1970's, when an oil spill cleanup first drew environmentally minded hippies, artists and opinionated Berkeley eggheads, who turned this area a short drive northwest of San Francisco into a spirited bastion of the rural left. It is a place where local news can just as easily run to skinny-dippers' rights as agricultural land conservation.

Under Mr. Mitchell, The Light acquired an outsized reputation, with hard reporting on the pepper-spraying of two local teenagers by a ranger at Point Reyes National Seashore, for instance, as well as popular features like a comic strip by Ms. LeMieux, whose cast of characters included an organic dairy cow with a secret junk food habit.

But last November, burned out and weary of the financial pressures to keep the paper afloat, Mr. Mitchell sold it for $500,000 to Mr. Plotkin, a newcomer to West Marin who turned to newspapers as a second career. After journalism school and several self-financed reporting trips abroad, Mr. Plotkin interned briefly at The Miami Herald, where he quickly became frustrated.

"I wanted the control," Mr. Plotkin said. "So I had to have my own paper."

Mr. Plotkin, who still carries a litigator's briefcase, swept into town with big city literary ambitions and an appreciation for the symbolic.

In The Light's entrance, he replaced a historic photograph of the former creamery now housing the paper with images of Che Guevara and Joan of Arc, representations, he said in a recent interview in his office, of "a messianic quest for quality journalism." Mr. Plotkin also hired a money manager from New York in a perhaps never-before-seen-here pin-striped suit.

The terms of the sale transformed the relationship between Mr. Plotkin and Mr. Mitchell into a tenuous one of employer and employee, in which Mr. Mitchell was to continue to write his column, "Sparsely, Sage & Timely," while Mr. Plotkin started an overhaul of the paper that Mr. Mitchell had made a personal mission for 30 years.

Though its origins run deeper than any single event, Mr. Plotkin and Mr. Mitchell agree, their disagreements spilled into public view after a conversation in Mr. Mitchell's car on Feb. 16 about a quintessential local controversy: a proposed land swap involving the park service and a ranch that would bring development close to the heart of town.

Mr. Mitchell said he cautioned his successor that if he did not consider the ranchers' views, they would want to wring his neck.

"I then parodied a rancher getting ready to strangle him," Mr. Mitchell explained. "This was in the context of satirically telling a story."

Mr. Mitchell added: "Plotkin said I choked him without squeezing. Now, I think that's an oxymoron."

Mr. Plotkin, however, alleges in legal documents that Mr. Mitchell grabbed him by the throat and also tried to assault him with the car.

In the documents, Mr. Plotkin said that Mr. Mitchell grew "visibly, shakingly angry." Then, he wrote, "he started shaking his hands in the air and got a crazed look in his eyes — and grabbed my throat and began to shake his clenched hands."

In a sheriff's report, witnesses said the two men had a heated argument in the car and that after Mr. Plotkin got out, Mr. Mitchell rapidly accelerated his red Acura (license plate: LIGHT).

The recent sale was the second time that Mr. Mitchell relinquished The Light, which he initially bought in 1975 with his second wife, Cathy. They shared a Pulitzer in 1979 for an expose of Synanon, a drug rehabilitation center, and sold the paper three years later.

A walking repository of local history, as well as the paper's, Mr. Mitchell resumed ownership in 1984 after an interim owner defaulted on payments. But in a column last May, he wrote openly about burnout, the paper's struggling finances and his irritability brought on by depression, which prompted him to work from home.

Recent events have "taken a lot of mental fortitude," Mr. Mitchell said, sitting in his redwood-planked cabin with a wood stove he built with a friend in the 1970's.

The drama has the community, already divided over the new direction of the newspaper, reeling. In a sense, the friction reflects profound shifts in the culture of West Marin, a place where the smell of manure from dairy farms now hangs over lace-curtained bed-and-breakfasts.

Lately, the area has experienced real estate pressures, with the median price of a single-family home in Marin County now up to $927,000. Despite their 1960's contrarian roots, older residents are not embracing the new ones.

"They've become quite comfortable, so they view even the smallest change as significant and unacceptable," said Steve Kinsey, the county supervisor representing the district.

Among the new arrivals is Mr. Plotkin, who comes across a bit like Jerry Seinfeld with a Granta subscription and a trust fund. He lives with his family in Bolinas, a reclusive town of "genius hermits trying to escape the dominant paradigm," Mr. Plotkin said. "I feel a great kinship with the people," he added.

But his damn-the-torpedoes style has rubbed many longtime residents the wrong way.

"He thinks it's fun to buy a paper and be on stage," said Dave Evans, a fourth-generation rancher and owner of Marin Sun Farms, known for its grass-fed beef. "But is he serving the community?"

Steve Costa, a co-owner of Point Reyes Books, however, said sales of the paper — which has a circulation just under 4,000 — were up 20 percent since Mr. Plotkin took over.

"He has an urban set of values," Mr. Costa said. "He wants to create this world newspaper."

For better or worse, the brouhaha remains a major distraction, but Jeanette Pontacq, a writer who recently founded an Internet forum for residents, said the tale was a fitting one for West Marin.

"It's the island attached to this side of California," Ms. Pontacq said. "Boring people don't come here."

    On a Fault Line, a Divide Opens Between Editors, NYT, 10.5.2006, http://www.nytimes.com/2006/05/10/us/10light.html

At E3 Video Game Convention, New Generation Bows

May 8, 2006
The New York Times
By SETH SCHIESEL and MATT RICHTEL

LOS ANGELES, May 7 — The video game industry embraces its inner Barnum here this week at E3, the almost phantasmagoric annual convention that is a bit like New Year's Eve in Times Square inside a football game inside a Metallica concert.

Yet despite the show's sensory overload and frenetic intensity, the game makers are gathering at a moment of deep uncertainty and concern over the industry's transition to the next generation of high-end game systems.

Almost across the board, growth in the industry's bedrock sector — sales of new games for consoles that plug into a TV — has slowed recently, and in some cases has stopped altogether. Just last week, Electronic Arts, the world's No. 1 game maker, warned that overall game sales this year would be flat to down 5 percent from 2005.

The main culprit has been the industry's difficulty in making the transition from the currently dominant group of home game machines — PlayStation 2 from Sony, Xbox from Microsoft and GameCube from Nintendo — to the next, inevitably more powerful generation. The Microsoft Xbox 360 was introduced last November, while the Sony PlayStation 3 and Nintendo Wii are expected this fall.

Microsoft's new machine received favorable reviews last year, but the company fell far short of meeting worldwide demand, which held down sales during the holiday buying season. Then Sony, which originally promised to deliver the PlayStation 3 this spring, delayed its arrival until just before Thanksgiving.

That made life even tougher for big American game companies like Electronic Arts, Activision and Take-Two; European publishers like Ubisoft of France; and Japanese game makers like Capcom, Namco, Sega and Square Enix.

Yet even while the traditional home console market has become at best choppy, nontraditional game sectors are thriving. Around the world, sales of games for mobile platforms like cellphones are booming, and the success of the Nintendo DS, a dual-screen hand-held game machine, has become the company's brightest spot.

In addition, PC gaming is resurgent, thanks mostly to the popularity of richly detailed online games like World of Warcraft, which is on pace to generate more than $1 billion in subscription revenue this year from its more than six million members.

So the main challenge for game companies and the industry as a whole at this week's convention, known formally as the Electronic Entertainment Expo, is to demonstrate to gamers, retailers, Wall Street and journalists that they have realistic plans to capitalize on next-generation consoles and to take advantage of the emerging opportunities.

For hardware makers, that means revealing more about their systems' technical specifications (particularly Internet capabilities) and other details like pricing and packaging. Just as important, it means demonstrating and generating excitement about games that are expected to be available later this year and in early 2007.

"Across the industry, the big question at E3 obviously is how companies will continue to try to manage the transition to the next generation, and in particular people will want to get more details from Sony and Nintendo about the PS3 and the Wii," said John Davison, editorial director for Ziff-Davis's network of gaming magazines and Web sites.

Even major publishers that do business with Sony and Nintendo go to E3 to find out what the Japanese companies have to say.

"Once we hear more about date, price, quantities and connectivity, those are sort of the last pieces that fall into place so everyone in the industry can finalize their plans," said Frank Gibeau, an executive vice president at Electronic Arts and general manager of the company's core North American publishing operation. "Once people really understand PlayStation 3 and Wii, that's really what drives your development and marketing and branding strategies over the next five years."

Clearly, the company with the most to prove is Sony. The company's PlayStation 2 is the world's dominant game machine, with more than 100 million sold. Microsoft says it expects to have sold around 5.5 million Xbox 360's by the end of next month and wants to have moved 10 million 360's by the time the PlayStation 3 sells its first unit. So now Sony is in the position of having to defend its lead.

Sony dazzled E3 attendees last year with gorgeous but canned videos supposedly from the PlayStation 3. That will not be enough this year. Instead, if attendees are to be convinced that the system is on track, they must be allowed to actually play the new console's games.

Last year, a half-dozen Xbox 360 games were freely playable at kiosks on the show floor (companies also show some of their best work behind closed doors to select groups). Jack Tretton, chief operating officer of Sony's United States game operations, said there would be more playable PlayStation 3 games than that on the show floor this year.

"The challenge that we face is to remind everyone that ultimately if you're going to be successful in this industry, you have to execute on our platforms," he said. Sony's sense of inevitability is also facing a challenge from Nintendo. More than 20 Wii games are expected to be publicly available at the show, and Nintendo has been making every effort to schedule hands-on time for attendees.

Nintendo's apparent lead in development reflects a fundamental difference in how the company is approaching this next generation of systems. While Microsoft and Sony have been pushing to give their systems as much sheer graphics and computing power as possible, Nintendo has focused more on developing innovative games.

So while Wii games may be a bit less graphically dazzling than those for the Xbox 360 and PlayStation 3, they will be more individually distinctive. Just as important, while the Xbox 360 costs around $400 and the PS3 is expected to be priced in that same range, the Wii is expected to cost less than $300 and potentially less than $200. And because the Wii is less technically ambitious, it has been easier for outside companies to make games for Wii than for the more complicated systems.

"We think that a lot of people don't necessarily want to play a game that takes 40 hours to finish, or a game where you have to spend an hour reading a manual," said George Harrison, senior vice president for marketing at Nintendo of America. "Maybe they just want to have fun for 20 minutes or a half-hour at a time, and we are trying to broaden the gaming market again by appealing to that person. So instead of focusing on getting the absolute most powerful technology into our products, we want to focus on making that basic game experience as attractive and compelling as possible."

To accomplish that, Nintendo is trying to redefine the basic console game experience through the introduction of a new sort of gyroscopic controller. Rather than having to figure out complicated sequences and combinations of buttons and triggers, a Wii player can merely wave the controller to produce action on the screen. To swing a sword, for instance, a player is supposed to be able to simply swing the controller, which resembles a TV remote.

"Nintendo is talking about changing the way we play games, and people want to see if that's really the case," said Sam Kennedy, editor in chief of 1up.com, a video game news and information Web site. "They're very much taking cues from Apple. They want this to be the iPod" of consoles.

While Sony and Nintendo have their work cut out for them in generating excitement around their new machines, Microsoft has the easier task of merely demonstrating momentum.

"I'm under no illusions; certainly the spotlight falls on Sony and Nintendo at this E3," said Peter Moore, head of Microsoft's game business. "We will be quietly explaining not what we're going to do, but how we're going to continue doing what we're already doing."

Still, Microsoft will certainly be doing all it can to steal attention away from its rivals. Most gamers expect that to take the form of an announcement about Halo 3, the next installment in Microsoft's most popular game franchise. In addition, Microsoft appears set to announce new features and new downloadable games available over its Xbox Live Internet service. Mr. Moore said the company would also be highlighting Windows as a gaming platform.

    At E3 Video Game Convention, New Generation Bows, NYT, 8.5.2006, http://www.nytimes.com/2006/05/08/technology/08expo.html

Video Games Struggle to Find the Next Level

May 8, 2006
The New York Times
By ROBERT LEVINE

MONTREAL — Video games have used dialogue from movie stars, rappers and athletes, but Army of Two may be the first to incorporate a presidential speech.

The game, which is being produced here in a downtown loft by EA Montreal, a development studio for Electronic Arts, will prominently feature a recording of President Dwight D. Eisenhower's farewell address, in which he warned about the influence of the military-industrial complex.

If Army of Two, which is set in the moral gray zone of private military contractors, is something of an artistic stretch for video games, it also represents a large strategic shift for Electronic Arts, which has invested in a two-year development process that employs a team of 115 programmers and designers.

Over the last few years, many video game publishers have come to rely increasingly on sequels and licenses as a way to offset the risk of a development process that can cost more than $10 million, not including a substantial budget for marketing. Electronic Arts, the world's No. 1 game maker, has published titles based on licenses from the National Football League and the National Basketball Association, as well as film franchises such as James Bond, Harry Potter and "Lord of the Rings."

It can be an expensive habit. In general, movie studios typically get between 10 percent and 15 percent of net sales from a licensed video game, according to Anita Frazier, an entertainment industry analyst at the NPD Group, a market research firm. That would mean that for a successful game, the cost of the license can run to the high seven figures. And at a time when games tied to movies, such as "The Fantastic Four" last summer, have failed to sell, many game publishers are questioning whether the expense is worth it. Now Electronic Arts, like other game makers, is trying to develop more of its own game concepts from scratch.

"It's a huge priority," said V. Paul Lee, the president of the Worldwide Studios of Electronic Arts. About 40 percent of the company's revenue now comes from its own properties. "We want to get it over 50 percent," Mr. Lee said. According to Ms. Frazier, "Coming up with original intellectual property is something everyone wants to do, but it's difficult."

Successful video game properties like Halo and Grand Theft Auto also offer other benefits: the possibility of a franchise, as well as the opportunity to get on the other side of license deals. For example, Halo from Microsoft has spawned a best-selling sequel, a series of novels and a movie deal. And game developers need not worry about offending the artistic sensibilities of a film's director or producer.

Aside from Army of Two, Electronic Arts is working on Spore, a new PC game that is expected to be released in 2007. Furthermore, the company has announced a deal with Steven Spielberg, the movie director, to work on original concepts for games. And, the company decided not to renew its license for the James Bond series, which has now gone to a rival, Activision.

EA Montreal also represents a less corporate approach to development.

The staff of 150, whose members tend to be young and favor T-shirts and jeans, is made up of engineers, artists and level designers; they work in pods on specific aspects of the game, such as lighting and weapons behavior.

"People here need a passion to develop games and a belief that this is a true medium to express ideas," said Alain Tascan, the vice president and general manager of EA Montreal. "What we want to do is focus on quality."

The idea is to harness the creative spirit of an independent company within the infrastructure of a large one, not unlike the way movie companies have established divisions to focus on art-house fare.

In this case, however, the stakes are considerably higher. Electronic Arts does not comment on the budgets of specific games, but analysts and executives have estimated that development costs for next-generation titles could initially run as much $15 million.

"We have something to prove," Mr. Tascan said. If his team delivers, however, Army of Two could become a franchise in its own right. The game, for Microsoft's Xbox 360 and the forthcoming PlayStation 3 from Sony, is scheduled to be released in the first half of next year.

Electronic Arts, of course, isn't the only company trying to establish new properties. "That's our whole strategy for next-generation consoles," said David F. Zucker, president and chief executive of Midway Games.

But that isn't always easy. Last year, of the 10 top-selling video games, 5 were sequels in the Electronic Arts sports franchises, 3 were licensed Star Wars titles and another was based on Pokémon, according to the NPD Group. The only video game property was Gran Turismo 4, a sequel in Sony's racing franchise. The best-selling new property was God of War, which came in at No. 13.

To succeed, Army of Two will need to impress hard-core gamers, and it is made to show off the processing power and advanced graphics of the Xbox 360 and PlayStation 3. Video game publishers consider it easier to introduce new properties along with new consoles, because those who buy them first are more willing to take a chance on new properties.

"They just paid all this money for a machine and they want to see what it can do," said Dan Hsu, the editor in chief of Electronic Gaming Monthly.

Army of Two uses what the development team calls "high dynamic range lighting," meaning players will have to adjust to very dark or light spaces, just as the human eye does in real life. As the title indicates, players can get help from an onscreen partner, controlled by a friend or by the computer, which can respond to verbal orders issued through a headset and can learn to adapt to the player (the processing power of the new consoles enables impressive artificial intelligence).

In contrast to the usual development process, the concept behind this cooperative play was developed before the game's story.

"We looked at different settings for that technology — cops, thieves, stuff like that," Mr. Tascan, said. The team decided to make the characters private military contractors after Reid Schneider, the game's senior producer, read a magazine article about some of the companies operating in Iraq. That setting allows the developers a range of options for missions, and the levels now being developed take place in Afghanistan, the Kowloon district of Hong Kong, and aboard an aircraft carrier players must sink.

As the use of the Eisenhower speech might indicate, the military contractor characters are not portrayed as wholly heroic, although Mr. Tascan said that the plot would not be finished until the development team decided which levels best showed off the game's capabilities.

"If we're going to stand out, we have to do something that's never been seen before," Mr. Schneider said. "People are hungry for new ideas."

    Video Games Struggle to Find the Next Level, NYT, 8.5.2006, http://www.nytimes.com/2006/05/08/technology/08game.html

Dow closing in on record high

Posted 5/8/2006 12:10 AM ET
USA Today
By Adam Shell

NEW YORK — On Oct. 9, 2002, the Dow Jones industrial average, battered by the worst stock market meltdown since the 1929 crash, hit bottom. It closed 4,437 points below its January 2000 all-time high.

A day later, the first signs of a comeback emerged with a confidence-boosting gain of 248 points.

Three years, seven months and 4,291 points since the Dow's low, the comeback is almost complete. A rousing rally Friday — sparked by a weaker-than-expected jobs report that renewed hope that the Federal Reserve might soon stop raising interest rates — lifted the Dow 139 points to 11,578 — its highest close since its Jan. 14, 2000, peak.

As a result, the venerable index, home to blue-chip names such as Caterpillar, McDonald's, IBM, Boeing and Home Depot, is just 145 points shy of topping its 11,722.98 record close. "There is a ton of mojo in the market right now," says Jonathan Golub, U.S. equity strategist at JPMorgan Asset Management.

If the Dow can set a record, despite a dizzying array of roadblocks ranging from $70-a-barrel oil to rising interest rates to ongoing instability in the Middle East, it's likely to provide a huge psychological boost to Wall Street.

It could happen soon, perhaps as early as midweek, if the Fed reiterates after its Wednesday meeting that it is leaning toward a pause in its almost 2-year-old rate-tightening campaign. Stock investors like lower interest rates because they reduce borrowing costs, which helps the economy and corporate profits.

"Investors are becoming more confident that the Fed may be done," says Jason Trennert, chief investment strategist at ISI Group. But, he cautions, "If the market doesn't get what it wants, it could be a tough week for stocks."

The Dow could be the first of the three major U.S. stock indexes to recoup all its bear market losses. The Standard & Poor's 500 and the Nasdaq composite are still a way from breaking even. However, a host of other U.S. indexes, including some that track small-company stocks and those traded on the New York Stock Exchange, have been hitting fresh peaks for a while.

For weeks now, there has been a tug of war on Wall Street: on one side, good news on the economy and corporate profits; on the other, uncertainty surrounding rates and the Fed.

Jim Paulsen, chief investment strategist at Wells Capital Management, thinks there's more upside for stocks. Why? Companies are churning out double-digit profit growth, the 10-year Treasury note is hovering around 5%, and the odds are good that the Fed will pause because of softer jobs data. "That is a powerful combination for stocks," he says.

The key to the Dow's run at a record, at least in the short term, will be what the Fed says in its statement Wednesday, Golub says. "Will the Fed tell us they plan to skip a rate hike, or will they tell us they have more work to do?" If more rate increases are on the way, the Dow's bid for a historic high might be delayed.

    Dow closing in on record high, UT, 8.5.2006, http://www.usatoday.com/money/markets/us/2006-05-08-mart-usat_x.htm

Boeing Bets the House on Its 787 Dreamliner

May 7, 2006
The New York Times
By LESLIE WAYNE
SEATTLE

ALL work had stopped at the cavernous Boeing assembly plant in Everett, Wash., just north of here. Five thousand rank-and-file workers and others stood idly, some eating airplane-shaped cookies, as they awaited the guest of honor, President Hu Jintao of China.

On a screen above their heads, images of Boeing planes painted in the colors of various Chinese airlines soared to uplifting music that swelled in the background. Then, a series of inspirational words flashed on the screen — Exploration! Optimism! Brilliant! Vision! — as Chinese pilots, speaking in Mandarin (with English subtitles), said how much they loved to fly Boeing planes.

As the testimonials ended, Mr. Hu made his entrance, and he did not disappoint. Donning a Boeing baseball cap, he became the best salesman the company could have asked for. He talked about how many Boeing planes China has bought since 1972 — 678, for a total of $37 billion. He noted that he had flown to the United States on a Boeing 747 and said that the Chinese people love Boeing.

"Boeing is a household name in my country," he said, as the crowed cheered. "When Chinese people fly, it is mostly with Boeing."

Caught up in the spirit of Mr. Hu's enthusiasm, the chief executive of Boeing's commercial aviation division, Alan R. Mulally, ended the event by pumping his fist into the air and shouting: "China rocks!"

As a public relations spectacle and customer-flattering exercise, the event was a smashing success for Boeing. Now the trick is to keep the lovefest going — and not just with China, but with customers all over the world.

In recent years, Boeing has stumbled badly, ceding its decades-long-dominance in commercial aviation to Airbus and becoming mired in a string of scandals over Pentagon contracts. The terrorist attacks of 2001 depressed demand at a time when the company's product line paled against appealing new planes from Airbus. In one year alone, from 2001 to 2002, Boeing's profits dropped 80 percent.

Boeing's executive suite also became a revolving door, as ethical failures forced the resignations of two chief executives in little more than a year. The first, Philip M. Condit, departed in December 2003 amid a Pentagon contract scandal; the other, Harry C. Stonecipher, stepped down in March 2005 over his adulterous affair with a subordinate. The Pentagon scandal also led to a prison sentence for Boeing's former chief financial officer, Michael M. Sears.

Boeing's ethical woes are still not over, so the company is not ready to declare a turnaround. It may have to pay more than $1 billion in fines to settle matters, and its top lawyer, Douglas G. Bain, recently warned that some people in the government believe that Boeing is "rotten to the core."

But the view from Seattle, the headquarters of Boeing's commercial jet operations, has more of that Chinese pep-rally spirit than such gloomy talk might indicate.

With revenue having grown for the second consecutive year, to $54.8 billion in 2005, and a record number of orders on its books, Boeing has had a huge gain in its stock price — to more than $80 a share, more than three times its nadir of $25 in 2003. Boeing's 1,002 orders last year fell short of Airbus's 1,055. But Boeing's orders included more wide-body planes, which analysts valued at $10 billion to $15 billion more than Airbus's.

But what is really driving the high spirits at Boeing — and the high stock price — is a plane that has not yet taken to the skies: the 787. It is Boeing's first new commercial airplane in a decade. Even though it will not go into service until 2008, its first three years of production are already sold out — with 60 of the 345 planes on order going to China, a $7.2 billion deal that Mr. Hu cited in his presentation. Other big orders have come from Qantas Airways, All Nippon Airways, Japan Airlines and Northwest Airlines.

Big orders mean big money, of course — and that is good, because analysts estimate that Boeing and its partners will invest $8 billion to develop the 787. Boeing is also risking a new way of doing business and a new way of building airplanes: farming out production of most major components to other companies, many outside the United States, and using a carbon-fiber composite material in place of aluminum for about half of each plane.

IF it works, Boeing could vault back in front of Airbus, perhaps decisively. If it fails, Boeing could be relegated to the status of a permanent also-ran, having badly miscalculated the future of commercial aviation and unable to meet the changing needs of its customers.

"The entire company is riding on the wings of the 787 Dreamliner," said Loren B. Thompson, an aviation expert at the Lexington Institute, a research and lobbying group in Arlington, Va., that focuses on the aerospace and military industries. "It's the most complicated plane ever."

Boeing calls the 787 Dreamliner a "game changer," with a radically different approach to aircraft design that it says will transform aviation. A lightweight one-piece carbon-fiber fuselage, for instance, replaces 1,200 sheets of aluminum and 40,000 rivets, and is about 15 percent lighter. The extensive use of composites, already used to a lesser extent in many other jets, helps to improve fuel efficiency.

To convince potential customers of the benefits of composite — similar to the material used to make golf clubs and tennis rackets — Boeing gives them hammers to bang against an aluminum panel, which dents, and against a composite one, which does not.

At the same time, the 787 has new engines with bigger fans that are expected to let the plane sip 20 percent less fuel per mile than similarly sized twin-engine planes, like Boeing's own 767 and many from Airbus.

This is no small sales point, with oil fetching around $70 a barrel and many airlines struggling to make a profit even as they pack more passengers into their planes.

"The 787 is the most successful new launch of a plane — ever," said Howard A. Rubel, an aerospace analyst at Jeffries & Company, an investment bank that has advised a Boeing subsidiary. "But," he added, "the burden is that their engineering is as good as they say it is."

Mr. Thompson of the Lexington Institute says the risks are great with a program this ambitious. "Right now, Boeing is perceived to have a world-beating product with the 787," he said. "But if something went wrong, it would overnight change the perception of the company."

The 787 is designed to carry 220 to 300 people on routes from North America to Europe and Asia. Boeing is counting on it to replace the workhorse 767, which is being phased out, and, it hopes, a few Airbus models as well. Its advantages go beyond fuel efficiency: Boeing designed the 787 to fly long distances while keeping passengers relatively comfortable.

That approach grows out of another gamble by Boeing — that the future of the airline business will be in point-to-point nonstop flights with medium-size planes rather than the current hub-and-spoke model favored by Airbus, which is developing the 550-seat A380 superjumbo as its premier long-haul jetliner. Flying point to point eliminates the need for most passengers to change planes, a competitive advantage so long as the Dreamliner is as comfortable and as fast as a bigger aircraft.

Unlike the 767 and other planes designed and built in the 1980's and even the 90's, which were made to be pressurized to simulate the thin air found at 8,000 feet, the 787 will allow pressurization to be set for conditions at 6,000 feet. After putting some frequent-flier volunteers into a pressure chamber in Oklahoma to simulate flights of 9 to 15 hours, Boeing concluded that 6,000 feet was well below the level where most people experience the headaches and other symptoms of altitude sickness.

And after talking with passengers around the world, Boeing designed the 787 to have higher humidity and more headroom than other airplanes, and to provide the largest windows of any commercial plane flying today.

"We are trying to reconnect passengers to the flying experience," said Kenneth G. Price, a Boeing fleet revenue analyst. With airlines squeezing every last cent and cutting back service, "flying is not enjoyable," Mr. Price said. "Every culture fantasizes about flying," he added. "All superheroes fly. But we were taking a magical experience and beating the magic out."

Even more innovative for Boeing is the way it makes the 787. Most of the design and construction, along with up to 40 percent of the estimated $8 billion in development costs, is being outsourced to subcontractors in six other countries and hundreds of suppliers around the world. Mitsubishi of Japan, for example, is making the wings, a particularly complex task that Boeing always reserved for itself. Messier-Dowty of France is making the landing gear and Latecoere the doors. Alenia Aeronautica of Italy was given parts of the fuselage and tail.

Nor are these foreign suppliers simply building to Boeing specifications. Instead, they are being given the freedom, and the responsibility, to design the components and to raise billions of dollars in development costs that are usually shouldered by Boeing.

This transformation did not come overnight, of course, nor did it begin spontaneously. Boeing changed because it had to, analysts said.

"Starting in 2000, Airbus was doing well," said Richard L. Aboulafia, an aerospace analyst with the Teal Group, an aviation research firm in Fairfax, Va. "Boeing had to reconsider how it did business. That led to the framework for the 787 — getting the development risk off the books of Boeing and coming up with a killer application."

BOEING plans to bring the 787 to market in four and a half years, which is 16 to 18 months faster than most other models. All of that is good, Mr. Aboulafia added, if it works. It is a tall order for a wholly new plane being built with new materials, many from new suppliers and assembled in a new way. "The 787 is operating on an aggressive timetable and with aggressive performance goals," he said. "It leaves no margin for error."

Never before has Boeing farmed out so much work to so many partners — and in so many countries. The outsourcing is so extensive that Boeing acknowledges it has no idea how many people around the world are working on the 787 project.

Airbus, Boeing's sole rival in making big commercial airliners, is also making a big bet on the future, but in a different direction. The companies agree that in 20 years, the commercial aviation market may double, with today's big orders from China, India and the Middle East to be followed by increased sales to American and European carriers as they reorganize and reduce costs.

By 2024, Boeing estimates, 35,000 commercial planes will be flying, more than twice the number now aloft, and 26,000 new planes will be needed to satisfy additional demand and replace aging ones. But how passengers will get from place to place, and in what planes, will depend on whether Boeing or Airbus has correctly forecast the future.

Boeing believes that passengers will want more frequent nonstop flights between major destinations — what the industry calls "city pairs." That is what led to the big bet on the Dreamliner, a midsize wide-body plane that can fly nonstop between almost any two global cities — say, Boston to Athens, or Seattle to Osaka — and go such long distances at a lower cost than other aircraft.

Boeing focused on the 787 after it dropped plans in late 2001 to build the "Sonic Cruiser," a nearly supersonic aircraft, when its customers said they wanted a plane that was cheaper to operate, not faster.

Airbus believes that airplane size is more important than frequent nonstop flights and that passengers will stick with a hub-and-spoke system in which a passenger in, say, Seattle, will fly to Los Angeles and transfer to an Airbus 380 to go to Tokyo before catching a smaller plane to Osaka. That view has led it to spend $12 billion to develop the double-deck A380, the largest passenger jet ever — a bet that is as crucial to its future as the 787 is to Boeing's.

"We have a fundamental difference with Airbus on how airlines will accommodate growth," said Randolph S. Baseler, Boeing's vice president for marketing. "They are predicting flat growth in city pairs. We are saying that people want more frequent nonstop flights. They believe airplane size will increase, and we believe that airplanes will not increase in size that much. Those two different market scenarios lead to two different product strategies."

The market, of course, will determine the winner, but given the industry's long lead times, that may not be clear for 10 to 20 years. For now, airlines have ordered 159 copies of the A380 — which has a list price of $295 million and is scheduled to enter service this year — and more than twice as many 787's, which list for $130 million and are scheduled to enter service in two years.

Both sides are hedging their bets somewhat. To compete with Airbus in superjumbos — a market that Airbus estimates at 1,250 planes in the next 20 years, and Boeing at only 300 — Boeing is offering an upgrade of its 747, called a 747-8, which will have 450 seats and will use the fuel-efficient engines developed for the 787. The 747-8 has 18 orders so far.

To take on the 787, Airbus is offering the midsize A350, a retooled version of its A330. But it is having little success so far. Vagn Soerensen, the chairman of Austrian Airlines, has complained that the A350's operating economies did not match those of the 787, a view shared by Singapore Airlines and other big potential customers. Steven F. Udvar-Hazy, the chairman of the International Lease Finance Corporation, a major airline leasing company, stunned a trade meeting last month by saying that Airbus should scrap the A350 and come up with an entirely new design — a move that could cost Airbus billions in development costs when it is already paying the multibillion-dollar bill for the A380.

Mr. Aboulafia of the Teal Group said: "There is no proof that the market is endorsing the A350. They don't have a single blue-chip customer."

Boeing's recent rebound in commercial aviation would have been difficult to predict in the early part of the decade. Back then, Airbus's popular A330's and A320's were hammering Boeing's twin-aisle 767 and single-aisle 737. During that period Boeing lost more than 20 percentage points of market share — and 60,000 employees in the frantic cost-cutting that resulted.

To fight back, Boeing encouraged the United States government to turn to the World Trade Organization to attack what Washington says are government subsidies to Airbus. Despite Boeing's improving fortunes, the case is still pending — on the theory that any settlement would compensate for the past and make it harder for Airbus to get government aid if it wants to redesign the A350. It is expected to be decided in 2007.

Since the filing of the case, however, the picture has brightened for nearly every Boeing plane. For instance, the 777, a long-haul twin-engine plane, has outsold Airbus's A340 because the Airbus plane has four engines — a decided disadvantage in an era of high fuel prices.

Airlines placed orders for 154 of the 777's last year, a record, while Airbus booked only 15 orders for the A340. The 777 has captured about 70 percent of all orders in its market since the A340 made its debut in 1997.

"The A340 is dying slowly and horribly," Mr. Aboulafia said. "It is one of the more colossal failures in aviation. With higher fuel prices, no one wants four engines."

In the highly competitive market for single-aisle planes — the workhorses that are used on most short-haul domestic flights and are the backbone of low-cost airlines — the two companies have brisk sellers in the Boeing 737 and the Airbus 320. To compete, Boeing recently overhauled its 737 production line to cut final assembly to 11 days from 28.

The 737 is considered the best-selling commercial jet in history. The 5,000th 737 was just put into service, and the current backlog is 1,000 orders. A big buyer of the 737 is now China, which placed an order for 150 to coincide with Mr. Hu's trip. Boeing's next big project will be to come up with a replacement for the 737; the new plane is expected to draw on Dreamliner technology.

Yet as rosy as things seem to be at Boeing's commercial operations here, the company in general has still not emerged from the cloud of scandal. Boeing is working with federal prosecutors to settle a high-profile investigation into the theft of proprietary documents from Lockheed Martin.

Three midlevel Boeing employees were charged by the federal government with stealing the documents, which could have been used to help Boeing rig bids for government rocket-launching contracts. The government also stripped Boeing of $1 billion in rocket business.

ON top of that, Boeing was found to have illegally recruited a former Air Force procurement official, Darleen A. Druyun, who had overseen Boeing contracts with the Pentagon and steered business to the company. Ms. Druyun ended up in prison, as did Mr. Sears, the company's former chief financial officer, who had recruited her. The scandal also caused the Pentagon to pull back from a $20 billion contract to use Boeing 767's as aerial refueling tankers and to open the program to competition from Airbus.

Settling both these investigations could cost Boeing another $1 billion.

In addition, Boeing just paid $15 million to settle federal accusations that it violated the Arms Control Export Act by exporting an electronic navigation chip that could have been used for military purposes. The chips, which have been used in the guidance system of Maverick air-to-ground missiles, were built into the navigation systems of 94 commercial jets Boeing sold to China from 2000 to 2003.

Still, the Boeing chief executives who were on watch during these scandals have benefited handsomely from the rise in Boeing's stock. Recent company filings show that Mr. Stonecipher got $11 million from his Boeing performance shares and Mr. Condit got an additional $9 million from his holdings.

Back in Mr. Mulally's office in Seattle, where the commercial aircraft headquarters stayed after the corporate office moved to Chicago in 2001, these scandals seem a million miles away. Rarely, he said, does the topic of scandal come up in conversation with potential customers. Most of the scandals, he noted, were in Boeing's military business.

"No impact," Mr. Mulally said, waving his hand as if to brush away the very idea. "We haven't been in violation, and our commercial customers care about us."

Mr. Mulally's operation hasn't dwelled on these scandals but kept focused on the 787. "It's a really big deal," he said. "It's not like we bring out a new model each year."

    Boeing Bets the House on Its 787 Dreamliner, NYT, 7.5.2006, http://www.nytimes.com/2006/05/07/business/yourmoney/07boeing.html

Job Growth Was Weak in April, but Hourly Wages Increased

May 6, 2006
The New York Times
By LOUIS UCHITELLE

Job growth slackened in April, the government reported yesterday, but the hourly wages of ordinary workers jumped, and their pay is finally rising faster than inflation.

The nation's employers added only 138,000 jobs, well below the average of 210,000 a month since last November. The unemployment rate, however, held at a low 4.7 percent. The contradictory numbers left economists unsure whether the weaker April job growth was a hiccup or early evidence of a slowdown in the economy.

"I am inclined to say that the weak April report is noise in the numbers," said Ian C. Shepherdson, chief United States economist for High Frequency Economics, "but I'm not certain. We may be getting an early, ambiguous signal that the economy is weakening. Turning points sometimes start this way."

Wall Street saw in the April jobs report a justification for policy makers at the Federal Reserve to stop raising interest rates after doing so one more time at their next meeting, on Tuesday. Reflecting this sentiment, the Dow Jones industrial average soared, as it often does when stocks seem to promise a better payoff than interest-bearing securities.

The Dow closed at 11,577.74, up 138.88 points for the day. That was its highest level since January 2000, the month in which the bubble market of the late 1990's finally ended, peaking at 11,722.98. Some interest rates fell yesterday for the same reason that stock prices rose.

"There is still a substantial minority on Wall Street who say there is a reasonable chance that the Fed will raise rates in June," Mr. Shepherdson said, "but stock market investors focused on what they view as the reduced risk that the employment numbers suggest."

Speaking for the Bush administration, Treasury Secretary John W. Snow made no mention of the weak April employment number. In a statement, he focused instead on "32 straight months of job growth" and average hourly earnings "that have risen 3.8 percent over the past 12 months — their largest increase in nearly five years."

The Bureau of Labor Statistics, in its monthly employment report, measures the average hourly wage of white-collar and blue-collar workers below the rank of supervisor. These hourly workers represent about 80 percent of the nation's jobholders. Although the recovery is now nearly four and a half years old, the average wage had lost ground to inflation until last fall, when the unemployment rate finally fell below 5 percent and stayed there.

"The labor markets are reasonably snug — I wouldn't say tight, but snug — and as a result we are seeing some acceleration in wages," said Chris Varvares, president of Macroeconomic Advisers.

With workers more in demand, wage growth gradually accelerated, and in April the hourly average jumped 9 cents, to $16.61, after having risen 5 cents in March. Over the 12-month period ended in April, the hourly wage was up 3.8 percent. The increase was 3.6 percent in March, just enough to exceed the annual rise in the Consumer Price Index by two-tenths of 1 percent.

Some economists argued that the accelerating wage growth might produce a wage-price spiral in which companies raised prices to cover rising labor costs and workers countered by demanding higher wages — unless the Fed cut off this dynamic by continuing to raise interest rates until the rising cost of credit finally slowed the economy and cut back hiring.

The April rise in hourly wages "assuredly has some Fed members shaking in their boots," Richard Yamarone, director of economic research for the Argus Research Corporation, said in a newsletter yesterday. He argued that the surge in hourly earnings "will shelve any notion of a Fed pause" in rate increases.

Mr. Yamarone's concern is a frequent one on Wall Street, but a growing number of forecasters who usually share Mr. Yamarone's view now argue that profit margins are unusually strong today, and that dilutes the pressure on corporate managers to raise prices to protect profits.

"If you think that rising wages are squeezing profit margins and pushing companies to raise prices, you are thinking something for which there is no evidence," said James Glassman, senior United States economist at J. P. Morgan Chase & Company. "If companies are more profitable, they are able to pay workers more generously without being inflationary."

Rising productivity has also taken the pressure off wages. When workers produce more each hour, the additional revenue from this output can feed into raises without shrinking profits. Productivity grew in the first quarter at a brisk annual rate of 3.2 percent, the bureau reported Thursday. That was almost enough to cover the 3.8 percent rise in the hourly wage.

The bureau yesterday also revised its earlier estimates of job growth in February and March, subtracting a total of 36,000 jobs.

Job growth in April was spread widely, with financial services, health care and education among the leaders. There were two surprises: in manufacturing and in retailing.

Manufacturing employment, which has fallen most of the time during this recovery, jumped by 19,000 last month, with most of that rise taking place in the auto industry. That seemed to reflect stepped-up hiring among foreign-owned manufacturers, while Ford and General Motors as well as Delphi, G.M.'s chief parts supplier, have not yet carried out their announced layoffs.

Retailers, in contrast, shed 36,000 jobs, despite strong consumer demand. The 36,000, like all the numbers in the monthly report, was adjusted for seasonal variations, and the seasonal impact of retail hiring during the month that includes Easter is famously difficult to pin down.

The swing in retail hiring, from a rise of 24,000 in March to a loss of 36,000 in April suggested to Jared Bernstein, a senior economist at the labor-oriented Economic Policy Institute, that the unexpectedly weak employment report was not likely to be repeated in May.

"The April numbers certainly do not comport with economic growth of just under 5 percent in the first quarter," Mr. Bernstein said. "So let's hope it was a hiccup."

    Job Growth Was Weak in April, but Hourly Wages Increased, NYT, 6.5.2006, http://www.nytimes.com/2006/05/06/business/06econ.html

Statistics Aside, Many Feel Pinch of Daily Costs

May 6, 2006
The New York Times
By JENNIFER STEINHAUER

BRANDON, Fla., May 2 — As a rule, when Americans feel financially pinched, the causes are clear: high unemployment, soaring interest rates, depressed home values and a wilting stock market.

But many Americans now say they are feeling squeezed in the absence of these factors. Their concerns are instead centered on a combination of high gasoline prices, creeping insurance costs and the pressure of a large number of adjustable-rate mortgages, now jumping to market rates, that helped to fuel one of the largest housing booms in American history.

Though they may not fear for their jobs or worry about long-range financial health — national polls show a general satisfaction with the economy — their kitchen-counter economy is an increasing source of everyday anxiety.

In Brandon and other suburbs of Tampa, where gas prices are among the highest in the nation and home insurance rates have risen since last summer's hurricanes, residents say they have had all they can take.

"We're really worried about a lot of things," said Nancy Tuttle, co-owner of a vending machine business in the suburbs here. "The cost of gas, the cost of house insurance, the cost of medical insurance, it's just everything."

The increase in prices, particularly of gasoline, is taking a political toll on President Bush, even in a Republican area like these suburbs. A recent nationwide CBS News poll found that only 33 percent of those surveyed approved of Mr. Bush's job performance and that 74 percent disapproved of his handling of the gasoline issue.

"We went from totally believing in Bush to really having our doubts," said Wayne Toomey, who owns a house with Ms. Tuttle in the nearby suburb of Parrish. "It comes down to his lack of care about gas prices."

Ms. Tuttle, 51, and Mr. Toomey, 58, have each gotten smaller cars and have cut some household costs. "It's a total struggle," said Mr. Toomey, who owns the vending machine business with Ms. Tuttle. "You would have to have your head in the sand to think things are going well in the United States."

Further, millions of Americans who have financed their homes with adjustable-rate short-term mortgages — some of which require interest-only payments — are starting to see their monthly payments rise as low introductory rates expire and market rates kick in.

"I just cringe every time I get that bill," said Mindi Davis, 35, who took out an adjustable-rate second mortgage two years ago for the home she shares with her husband and two children here. The bill, which was $100 a month in May 2004, is now $219 a month and climbing. "I anticipated an increase," Mrs. Davis said, "just not this much that quickly."

Brian Wrage, who lives in Tampa, said he had begun to unload his investment properties in part because of the adjustable-rate mortgages attached to them. "My second mortgage on one property started at 5.7, and by the time we sold it three years later it was 9.9," Mr. Wrage said. "It was eye-opening: adjustable rate means up."

The rising costs have contributed to a 38 percent increase nationally in home foreclosures in the first quarter of this year over the same period in 2005. Florida had the second-largest number of foreclosures in the nation during that period — 29,636 — behind Texas, which had 40,236. Of the Florida foreclosures, 195 were in Brandon.

"Normally, nothing is a better predictor of foreclosures than high unemployment and credit card delinquencies," said Rick Sharga, a vice president of RealtyTrac Inc., an online foreclosure marketplace, which tracked the foreclosure data. "But what most people are talking about isn't any of that now. We think adjustable-rate increases coupled with a slowdown in the price appreciation and the demand of houses is why we are starting to see a fairly significant increase in the foreclosure rates generally now."

Foreclosure rates have been at historic lows since 2002 because of low interest rates and high housing demand. But soaring home prices and flat wages are now causing trouble for many families, especially those who took out below-market introductory mortgages a few years ago and are now paying the piper.

This is true even in a place like Hillsborough County, which includes Tampa and most of its suburbs, where the unemployment rate trails the national average, job growth remains strong and business costs are among the lowest in the nation.

Further, following a requirement three years ago by the federal comptroller of the currency to raise minimum monthly payments on credit cards, some banks have recently gone as far as to double those payments.

"People who are living beyond their means are going to have a harder time making ends meet than ever in history," Mr. Sharga said.

[Economic data released Friday showed that hourly wages had risen slightly faster than inflation over the last year, though they have basically matched the inflation rate since 2002. Although the consumer confidence index compiled by the Conference Board reached a four-year high last week, other polls, including one released by Ipsos on Friday, showed confidence sinking.]

And then there is the story of gasoline, which in Florida now averages $3 to $3.45 a gallon.

"I don't even like my job, but I can't face lowering my pay" because of rising gas costs, said Nia Baker, 37, who sells home health products. "I used to fill my car up once a week for $25, and now I fill up twice a week for $40. I feel like the economy is pretty bad, the way these gas prices are going up. "

Denise Meicher, 50, gets by on her pension from a former career and her job as a customer service specialist. But high gasoline prices have caused her to curtail her activities and close her pocketbook a bit more.

"It is 60 miles round trip to visit my family," Ms. Meicher said. "It costs me a half a tank of gas and maybe $15 when it used to be $8. I give it a second thought now when the family says, 'Let's do this or that.' We are real close, but now I feel like I am saying 'yes' maybe two out of every three times these days."

Gasoline prices also have a ripple effect. Debi Martinez said her husband's homebuilding business had been hurt as contractors passed on costs.

"The guy who does his septic tank wants $500 more because of gas prices," said Ms. Martinez, 49. "There was a $75 increase on the man who does the wallboard. We are no longer a seller's market."

In Florida, insurance companies have increased rates as much as 40 percent in coastal areas, after a bruising hurricane season in 2005 left many insurers liable for billions of dollars in claims. Residents in other states have also been affected; in New York, Allstate recently said it would drop 28,000 policyholders in eight counties, citing risk.

"Our homeowner's insurance went up $400 a year within the last year due to the hurricanes," Ms. Baker said.

Not everyone, however, sees the same shadow over their personal economy. Steve Adams was a rare bird in the strip mall here, a person who thinks people should stop complaining about gasoline prices, which have been high in other countries for years, and about mortgages that are attached to homes that have soared in value.

"The key thing about this area is there is a lot of opportunity," said Mr. Adams, who is a project manager in an accounting firm and lives with his wife and two small children. "The job market here is great, the costs are relatively low, and my property value has gone up $100,000. Compared to the European economy, where gas prices have also been sky high, well, welcome to the whole world."

    Statistics Aside, Many Feel Pinch of Daily Costs, NYT, 6.5.2006, http://www.nytimes.com/2006/05/06/us/06prices.html?hp&ex=1146974400&en=eb472415911ded25&ei=5094&partner=homepage

Spending Pushes Up Inflation

May 2, 2006
The New York Times
By VIKAS BAJAJ

Robust spending on homes, cars and other consumer goods kept the economy moving at a brisk pace and sent a critical measure of inflation higher in March, the Commerce Department reported yesterday, renewing concerns that the Federal Reserve will have to raise interest rates further.

Prices paid for consumer items excluding food and energy — a gauge closely watched by policy makers — rose at an annual pace of 2 percent in March, up from 1.8 percent in February, as personal spending, income and home construction all increased. Economists had expected prices to rise 1.9 percent. Including food and energy, prices rose 2.9 percent, the same pace as the month before.

Analysts and investors are carefully monitoring the latest economic data in an effort to divine whether the Fed will raise rates once, twice, or even three more times before stopping.

The latest increase in prices, though modest, will concern policy makers because it could set the stage for higher inflation later, said Nigel Gault, an economist at Global Insight, a research firm. If gasoline and oil prices stay at current levels or move higher, businesses may be forced to raise the prices of other goods and services. Inflation excluding food and energy may then surpass 2 percent, the top end of the range Fed officials consider ideal.

"There is a risk that we will push up above 2 percent, not necessarily over the next month, but sometime over the next few months," Mr. Gault said. "That will be a concern to the Fed."

In deciding whether to raise its short-term rate, now at 4.75 percent, the Fed will have to weigh inflation concerns and signs of growth against evidence that the economy may lose some of its vigor. Ben S. Bernanke, chairman of the Federal Reserve, told a Congressional committee last week that the Fed may pause in its rate increases later this year to give policy makers more time to weigh competing signals from different statistics. Some economists contend that the Fed should stop after one more increase, at its meeting on May 10, because strong growth in March and in the first quarter would probably not be sustained.

Those experts say that higher gasoline prices, now about $3 a gallon in many areas, are more worrisome as a threat to spending and growth than as a source of inflation. At the same time, rising interest rates have led to a 20 percent drop in mortgage applications in the last 12 months and have cooled real estate prices in many once-hot coastal markets.

Gregory L. Miller, chief economist at SunTrust Banks in Atlanta, said that the Fed's top concern should be to make sure the economy did not stall from the burden of too many rate increases. One reason for the Fed to stop and take stock, Mr. Miller said, is that the economy has not yet felt the full dampening impact of recent rate increases.

"Policy takes time to resonate through the economy," he said.

Growth does not appear to be stalling yet. For the first quarter, the economy grew at a 4.8 percent annual pace after an anemic 1.7 percent growth rate in the fourth quarter, the Commerce Department reported last week.

The quarter ended on an upswing, as the data released yesterday showed. Personal spending rose 0.6 percent in March after rising 0.2 percent in February and 0.9 percent in January. The biggest jump was seen in services, up 0.7 percent, and durable goods, up 0.5 percent. Economists had expected spending to rise by 0.4 percent, according to a survey by Bloomberg News.

Personal incomes jumped 0.8 percent, with about half the increase, or $40.9 billion, coming from the federal government's new Medicare prescription drug plan; analysts had expected incomes to increase 0.4 percent. Wages, salaries and other forms of compensation increased by 0.5 percent.

In a separate report yesterday, the Institute for Supply Management, an industry group, said that its manufacturing index rose to 57.3 in April, from 55. A reading greater than 50 indicates that managers are generally optimistic about their businesses' prospects for growth. The survey indicated that manufacturers had stepped up hiring and were paying more for raw materials.

Anticipating more interest rate increases, investors pushed bond prices down yesterday. The yield on the 10-year Treasury note, which moves in the opposite direction of the price, rose to 5.14 percent, up from 5.06 percent on Friday.

    Spending Pushes Up Inflation, NYT, 2.5.2006, http://www.nytimes.com/2006/05/02/business/02econ.html

John Kenneth Galbraith, 97, Dies; Economist Held a Mirror to Society

April 30, 2006
The New York Times
By HOLCOMB B. NOBLE and DOUGLAS MARTIN

John Kenneth Galbraith, the iconoclastic economist, teacher and diplomat and an unapologetically liberal member of the political and academic establishment that he needled in prolific writings for more than half a century, died yesterday at a hospital in Cambridge, Mass. He was 97.

Mr. Galbraith lived in Cambridge and at an "unfarmed farm" near Newfane, Vt. His death was confirmed by his son J. Alan Galbraith.

Mr. Galbraith was one of the most widely read authors in the history of economics; among his 33 books was "The Affluent Society" (1958), one of those rare works that forces a nation to re-examine its values. He wrote fluidly, even on complex topics, and many of his compelling phrases — among them "the affluent society," "conventional wisdom" and "countervailing power" — became part of the language.

An imposing presence, lanky and angular at 6 feet 8 inches tall, Mr. Galbraith was consulted frequently by national leaders, and he gave advice freely, though it may have been ignored as often as it was taken. Mr. Galbraith clearly preferred taking issue with the conventional wisdom he distrusted.

He strived to change the very texture of the national conversation about power and its nature in the modern world by explaining how the planning of giant corporations superseded market mechanisms. His sweeping ideas, which might have gained even greater traction had he developed disciples willing and able to prove them with mathematical models, came to strike some as almost quaint in today's harsh, interconnected world where corporations devour one another.

"The distinctiveness of his contribution appears to be slipping from view," Stephen P. Dunn wrote in The Journal of Post-Keynesian Economics in 2002.

Mr. Galbraith, a revered lecturer for generations of Harvard students, nonetheless always commanded attention.

Robert Lekachman, a liberal economist who shared many of Mr. Galbraith's views on an affluent society that they both thought not generous enough to its poor or sufficiently attendant to its public needs, once described the quality of his discourse as "witty, supple, eloquent, and edged with that sheen of malice which the fallen sons of Adam always find attractive when it is directed at targets other than themselves."

From the 1930's to the 1990's, Mr. Galbraith helped define the terms of the national political debate, influencing the direction of the Democratic Party and the thinking of its leaders.

He tutored Adlai E. Stevenson, the Democratic nominee for president in 1952 and 1956, on Keynesian economics. He advised President John F. Kennedy (often over lobster stew at the Locke-Ober restaurant in their beloved Boston) and served as his ambassador to India.

Though he eventually broke with President Lyndon B. Johnson over the war in Vietnam, he helped conceive Mr. Johnson's Great Society program and wrote a major presidential address that outlined its purposes. In 1968, pursuing his opposition to the war, he helped Senator Eugene J. McCarthy seek the Democratic nomination for president.

In the course of his long career, he undertook a number of government assignments, including the organization of price controls in World War II and speechwriting for Franklin D. Roosevelt, Kennedy and Johnson.

He drew on his experiences in government to write three satirical novels. One in 1968, "The Triumph," a best seller, was an assault on the State Department's slapstick attempts to assist a mythical banana republic, Puerto Santos. In 1990, he took on the Harvard economics department with "A Tenured Professor," ridiculing, among others, a certain outspoken character who bore no small resemblance to himself.

At his death Mr. Galbraith was the Paul M. Warburg emeritus professor of economics at Harvard, where he had taught for most of his career. A popular lecturer, he treated economics as an aspect of society and culture rather than as an arcane discipline of numbers.

Keeping It Simple

Mr. Galbraith was admired, envied and sometimes scorned for his eloquence and wit and his ability to make complicated, dry issues understandable to any educated reader. He enjoyed his international reputation as a slayer of sacred cows and a maverick among economists whose pronouncements became known as "classic Galbraithian heresies."

But other economists, even many of his fellow liberals, did not generally share his views on production and consumption, and he was not regarded by his peers as among the top-ranked theorists and scholars. Such criticism did not sit well with Mr. Galbraith, a man no one ever called modest, and he would respond that his critics had rightly recognized that his ideas were "deeply subversive of the established orthodoxy."

"As a matter of vested interest, if not of truth," he added, "they were compelled to resist." He once said, "Economists are economical, among other things, of ideas; most make those of their graduate days last a lifetime."

Nearly 40 years after writing "The Affluent Society," Mr. Galbraith updated it in 1996 as "The Good Society." In it, he said that his earlier concerns had only worsened: that if anything, America had become even more a "democracy of the fortunate," with the poor increasingly excluded from a fair place at the table.

Mr. Galbraith gave broad thought to how America changed from a nation of small farms and workshops to one of big factories and superstores, and judgments of this legacy are as broad as his ambition. Beginning with "American Capitalism" in 1952, he laid out a detailed critique of an increasingly oligopolistic economy. Combined with works in the 1950's by writers like David Reisman, Vance Packard and William H. Whyte, the book changed people's views of the postwar world.

Mr. Galbraith argued that technology mandated long-term contracts to diminish high-stakes uncertainty. He said companies used advertising to induce consumers to buy things they had never dreamed they needed.

Other economists, like Gary S. Becker and George J. Stigler, both Nobel Prize winners, countered with proofs showing that advertising is essentially informative rather than manipulative.

Many viewed Mr. Galbraith as the leading scion of the American institutionalist school of economics, commonly associated with Thorstein Veblen and his idea of "conspicuous consumption." This school deplored the universal pretensions of economic theory, and stressed the importance of historical and social factors in shaping "economic laws."

Some, therefore, said Mr. Galbraith might best be called an "economic sociologist." This view was reinforced by Mr. Galbraith's nontechnical phrasing, called glibness by the envious and antagonistic.

Mr. Galbraith's pride in following in the tradition of Veblen was challenged by the emergence of what came to be called the new institutionalist school. This approach, associated with the University of Chicago, claimed to prove that economics determines historical and political change, not vice versa.

Some suggested that Mr. Galbraith's liberalism crippled his influence. In a review of "John Kenneth Galbraith: His Life, His Politics, His Economics" by Richard Parker (Farrar, 2005), J. Bradford DeLong wrote in Foreign Affairs that Mr. Galbraith's lifelong sermon of social democracy was destined to fail in a land of "rugged individualism." He compared Mr. Galbraith to Sisyphus, endlessly pushing the same rock up a hill that always turns out to be too steep.

Amartya Sen, a Nobel Prize-winning economist, maintains that Mr. Galbraith not only reached but also defined the summit of his field. In the 2000 commencement address at Harvard, Mr. Parker's book recounts, Mr. Sen said the influence of "The Affluent Society" was so pervasive that its many piercing insights were taken for granted.

"It's like reading 'Hamlet' and deciding it's full of quotations," he said.

John Kenneth Galbraith was born Oct. 15, 1908, on a 150-acre farm in Dunwich Township in southern Ontario, Canada, the only son of William Archibald and Catherine Kendall Galbraith. His forebears had left Scotland years before.

His father was a farmer and schoolteacher, the head of a farm-cooperative insurance company, an organizer of the township telephone company, and a town and county auditor. His mother, whom he described as beautiful but decidedly firm, died when he was 14.

The Farming Life

Mr. Galbraith said in his memoir "A Life in Our Times" (1981) that no one could understand farming without knowing two things about it: a farmer's sense of inferiority and his appreciation of manual labor. His own sense of inferiority, he said, was coupled with his belief that the Galbraith clan was more intelligent, knowledgeable and affluent than its neighbors.

"My legacy was the inherent insecurity of the farm-reared boy in combination with the aggressive feeling that I owed to all I encountered to make them better informed," he said.

Mr. Galbraith said he inherited his liberalism, his interest in politics and his wit from his father. When he was about 8, he once recalled, he would join his father at political rallies. At one event, he wrote in his 1964 memoir "The Scotch," his father mounted a large pile of manure to address the crowd.

"He apologized with ill-concealed sincerity for speaking from the Tory platform," Mr. Galbraith related. "The effect on this agrarian audience was electric. Afterward I congratulated him on the brilliance of the sally. He said, 'It was good but it didn't change any votes.' "

At age 18 he enrolled at Ontario Agricultural College, where he took practical farming courses like poultry husbandry and basic plumbing. But as the Depression dragged down Canadian farmers, the questions of the way farm products were sold and at what prices became more urgent to him than how they were produced. He completed his undergraduate work at the University of Toronto and enrolled at the University of California, Berkeley, where he received his master's degree in 1933 and his doctorate in agricultural economics in 1934.

A major influence on him was the caustic social commentary he found in Veblen's "Theory of the Leisure Class." Mr. Galbraith called Veblen one of American history's most astute social scientists, but also acknowledged that he tended to be overcritical.

"I've thought to resist this tendency," Mr. Galbraith said, "but in other respects Veblen's influence on me has lasted long. One of my greatest pleasures in my writing has come from the thought that perhaps my work might annoy someone of comfortably pretentious position. Then comes the realization that such people rarely read."

While at Berkeley, he began contributing to The Journal of Farm Economics and other publications. His writings came to the attention of Harvard, where he became an instructor and tutor from 1934 to 1939. In those years the theories of John Maynard Keynes were exciting economists everywhere because they promised solutions to the most urgent problems of the time: the Depression and unemployment. The government must intervene in moments of crisis, Lord Keynes maintained, and unbalance the budget if necessary to prime the pump and get the nation's economic machinery running again.

Keynesianism gave economic validation to what President Roosevelt was doing, Mr. Galbraith thought, and he resolved in 1937 "to go to the temple" — Cambridge University — on a fellowship grant for a year of study with the disciples of Lord Keynes.

In 1937 Mr. Galbraith married Catherine Merriam Atwater, the daughter of a prominent New York lawyer and a linguist, whom he met when she was a graduate student at Radcliffe.

In addition to his wife and his son J. Alan, of Washington, a lawyer, he is survived by two other sons, Peter, a former United States ambassador to Croatia and a senior fellow at the Center for Arms Control and Nonproliferation in Washington, and James, an economist at the University of Texas; a sister, Catherine Denholm of Toronto; and six grandchildren.

Mr. Galbraith became an American citizen, and taught economics at Princeton in 1939. But after the fall of France in 1940, Mr. Galbraith joined the Roosevelt administration to help manage an economy being prepared for war. He rose to become the administrator of wage and price controls in the Office of Price Administration. Prices remained stable, but he grew controversial, drawing the constant fire of industry complaints. "I reached the point that all price fixers reach," he said, "My enemies outnumbered my friends."

He was forced to resign in 1943 and was rejected by the Army as too tall when he sought to enlist. He then held a variety of government and private jobs, including director of the United States Strategic Bombing Survey in 1945, director of the Office of Economic Security Policy in the State Department in 1946, and a member of the board of editors of Fortune magazine from 1943 to 1948. It was at Fortune, he said, that he became addicted to writing.

In 1949 he returned to Harvard as a professor of economics; his lectures were delivered before standing-room-only audiences. And he began to write with intensity, rising early and writing at least two or three hours a day, before his normally full schedule of other duties began, for most of the rest of his life.

He completed two books in 1952, "American Capitalism: The Concept of Countervailing Power" and "A Theory of Price Control." In "American Capitalism," he set out to debunk myths about the free market economy and explore concentrations of economic power. He described the pressures that corporations and unions exerted on each other for increased profits and increased wages, and said these countervailing forces kept those giant groups in equilibrium and the nation's economy prosperous and stable.

In his 1981 memoir, he said that though the basic idea was still sound, he had been "a bit carried away" by his notion of countervailing power. "I made it far more inevitable and rather more equalizing than, in practice, it ever is," he wrote, adding that often it does not emerge, with the result that "numerous groups — the ghetto young, the rural poor, textile workers, many consumers — remain weak or helpless."

He summarized the lessons of his days at the Office of Price Administration in "A Theory of Price Control," later calling it the best book he ever wrote. He said: "The only difficulty is that five people read it. Maybe 10. I made up my mind that I would never again place myself at the mercy of the technical economists who had the enormous power to ignore what I had written. I set out to involve a larger community."

He wrote two more major books in the 50's dealing with economics, but both were aimed at a large general audience. Both were best sellers.

In "The Great Crash 1929," he rattled the complacent, recalled the mistakes of an earlier day and suggested that some were being repeated as the book appeared, in 1955. Mr. Galbraith testified at a Senate hearing and said that another crash was inevitable. The stock market dropped sharply that day, and he was widely blamed.

"The Affluent Society" appeared in 1958, making Mr. Galbraith known around the world. In it, he depicted a consumer culture gone wild, rich in goods but poor in the social services that make for community. He argued that America had become so obsessed with overproducing consumer goods that it had increased the perils of both inflation and recession by creating an artificial demand for frivolous or useless products, by encouraging overextension of consumer credit and by emphasizing the private sector at the expense of the public sector. He declared that this obsession with products like the biggest and fastest automobile damaged the quality of life in America by creating "private opulence and public squalor."

Anticipating the environmental movement by nearly a decade, he asked, "Is the added production or the added efficiency in production worth its effect on ambient air, water and space — the countryside?" Mr. Galbraith called for a change in values that would shun the seductions of advertising and champion clean air, good housing and aid for the arts.

Later, in "The New Industrial State" (1967), he tried to trace the shift of power from the landed aristocracy through the great industrialists to the technical and managerial experts of modern corporations. He called for a new class of intellectuals and professionals to determine policy. While critics, as usual, praised his ability to write compellingly, they also continued to complain that he oversimplified economic matters and either ignored or failed to keep up with corporate changes. Mr. Galbraith conceded some errors and revised his book in 1971.

A Move Into Politics

One of his early readers was Adlai Stevenson, the governor of Illinois, who twice ran unsuccessfully for president against Dwight D. Eisenhower. Mr. Galbraith often wrote to Mr. Stevenson, introducing him to Keynesian taxation and unemployment policies. In 1953, Mr. Galbraith and Thomas K. Finletter, the former secretary of the Air Force and later ambassador to NATO, formed a sort of brain trust for Mr. Stevenson that included Ambassador W. Averell Harriman, the historian Arthur M. Schlesinger Jr. and the foreign policy specialist George W. Ball.

Although Mr. Galbraith did not at first regard Kennedy, a former student of his at Harvard, as a serious member of Congress, he began to change his view after Kennedy was elected to the Senate in 1952 and began calling him for advice. The senator's conversations became increasingly wide-ranging and well informed, Mr. Galbraith said, and his respect and affection grew.

After Mr. Kennedy won the presidency in 1960, he appointed Mr. Galbraith the United States ambassador to India. There were those, Mr. Galbraith among them, who believed that the president had done this to get a potential loose cannon out of Washington.

He said in his memoir: "Kennedy, I always believed, was pleased to have me in his administration, but at a suitable distance such as in India." Mr. Galbraith was fascinated with India; he had spent a year there in 1956 advising its government and was eager to return.

He spent 27 months as ambassador, clashed with the State Department and was more favorably regarded as a diplomat by those outside the government. He fought for increased American military and economic aid for India and acted as a sort of informal adviser to the Indian government on economic policy. Known by his staff as "the Great Mogul," he achieved an excellent rapport with Prime Minister Jawaharlal Nehru and other senior officials in the Indian government.

When India became embroiled in a border war with China in the Himalayas in 1962, Ambassador Galbraith effectively took charge of both the American military and the diplomatic response during what was a brief but potentially explosive crisis. He saw to it that India received restrained American help and took it upon himself to announce that the United States recognized India's disputed northern borders.

The reason he had so much control over the American response, he said, was that the border fighting occurred during the far more consequential Cuban missile crisis, and no one at the highest levels at the White House, the State Department or the Pentagon was readily responding to his cables.

Mr. Galbraith published "Ambassador's Journal: A Personal Account of the Kennedy Years," a book based on the diary he kept during his time in India, in 1969. A year earlier he published "Indian Painting: The Scenes, Themes and Legends," which he wrote with Mohinder Singh Randhawa. An avid champion of Indian art, he donated much of his collection to the Harvard University Art Museums.

In 1963, Mr. Galbraith added fiction to his repertory for the first time with "The McLandress Dimension," a novel he wrote under the pseudonym Mark Epernay.

After Kennedy was assassinated, Mr. Galbraith served as an adviser to President Johnson, meeting with him often at the White House or on trips to the president's ranch in Texas to talk about what could be accomplished with the Great Society programs. Mr. Galbraith said that Johnson had summoned him to write the final draft of his speech outlining the purposes of the Great Society, and that when the writing was done, said: "I'm not going to change a word. That's great."

The relationship between the two men soon broke apart over their differences over the war in Vietnam. Nevertheless, when Adlai Stevenson died in 1965, the ambassadorship to the United Nations became vacant, and word reached Mr. Galbraith that the president was considering him as Mr. Stevenson's successor.

A Job Declined

Not wanting to be placed in the position of having to defend administration positions he strongly opposed, Mr. Galbraith suggested Justice Arthur J. Goldberg of the Supreme Court. The president named Mr. Goldberg, and Mr. Galbraith later blamed himself for a "poisonous" mistake that "cost the court a good and liberal jurist." Others said he took too much credit for what happened.

In 1973 he published "Economics and the Public Purpose," in which he sought to extend the planning system already used by the industrial core of the economy to the market economy, to small-business owners and to entrepreneurs. Mr. Galbraith called for a "new socialism," with more steeply progressive taxes; public support of the arts; public ownership of housing, medical and transportation facilities; and the conversion of some corporations and military contractors into public corporations.

He continued to rise early and, despite the seeming effortlessness of his prose, revised each day's work at least five times. "It was usually on about the fourth day that I put in that note of spontaneity for which I am known," he said.

He served as president of the American Economic Association, the profession's highest honor, and was elected to membership in the National Institute of Arts and Letters. He continued to pour out magazine articles, book reviews, op-ed essays, letters to editors; he lectured everywhere, sometimes debating William F. Buckley Jr., his friend and Gstaad skiing partner. He was so prolific that Art Buchwald, the humorist, once introduced him by citing his literary production: "Since 1959 alone, he has written 12 books, 135 articles, 61 book reviews, 16 book introductions, 312 book blurbs and 105,876 letters to The New York Times, of which all but 3 have been printed."

In 1977 he wrote and narrated "The Age of Uncertainty," a 13-part television series surveying 200 years of economic theory and practice. In 1990 he wrote "A Tenured Professor," about a Harvard professor who devised a legal, foolproof and computer-assisted system for playing the stock market and used his billions of dollars in profits on programs for education and peace — only to be investigated by Congress for un-American activities and forced to shut down his operations.

In 1996, as Mr. Galbraith approached his 90th year, he wrote "The Good Society." Matthew Miller wrote in The New York Times Book Review, "We're not likely to find as elegant a little restatement of the liberal creed, or its call to conscience."

Mr. Galbraith said Republicans out to roll back the welfare state made a fundamental error in thinking that politicians and their actions drive history. In fact, he argued, it is the reverse. Liberals did not create big government; history did.

Mr. Galbraith, who received the Medal of Freedom from President Bill Clinton in 2000, continued to make his views known. Some were surprising, like his speech in 1999 praising Johnson's presidency, which he had helped to bring down by working with McCarthy.

There always seemed to be one more book. One, "The Essential Galbraith" (2001), was a collection of essays and excerpts that a reviewer in Business Week said remained very timely. Another, "Name-Dropping from F.D.R. On" (1999), recounted encounters with the powerful, including President Kennedy's response when Mr. Galbraith complained that an article in The New York Times had described him as arrogant.

Kennedy retorted that he didn't see why it shouldn't: "Everybody else does."

In 2004, Mr. Galbraith, who was then 95, published "The Economics of Innocent Fraud," a short book that questioned much of the standard economic wisdom by questioning the ability of markets to regulate themselves, the usefulness of monetary policy and the effectiveness of corporate governance.

He remained optimistic about the ability of government to improve the lot of the less fortunate. "Let there be a coalition of the concerned," he urged. "The affluent would still be affluent, the comfortable still comfortable, but the poor would be part of the political system."

John Kenneth Galbraith, 97, Dies; Economist Held a Mirror to Society, NYT, 30.4.2006,
http://www.nytimes.com/2006/04/30/obituaries/30galbraith.html

 As Gas Prices Go Up, Impact Trickles Down        NYT        30.4.2006
http://www.nytimes.com/2006/04/30/us/30gas.html?hp&ex=1146456000&en=056f6b82523461b2&ei=5094&partner=homepage

As Gas Prices Go Up, Impact Trickles Down

April 30, 2006
The New York Times
By THE NEW YORK TIMES

It is hard to watch the numbers flutter ever upward on the gas pump these days. A look at the ripple effect of rising gas prices across the country:

The End of Fun and Games

Gas prices are not doing much for the love life of Fernanda Tapia.

A student at Brandeis University in Waltham, Mass., Ms. Tapia, 21, is among the untold number of money-strapped college students who have been grounded by the pumps.

Ms. Tapia's red 2004 Dodge Neon was supposed to be a ticket to freedom when her brother passed it down to her in January. She had planned to drive to Manhattan each weekend to visit her boyfriend at New York University, and also dreamed of going out to restaurants and making day trips with friends.

But the car has been nothing but a money-guzzler, she said, leaving her so short of cash that the car often sits in the parking lot outside her apartment.

"When I first got the car it was all fun and games, but I found out it's pretty expensive to fill the tank," Ms. Tapia said. "I don't even want to put gas in my car right now."

Unexpectedly high gas prices are also putting a crimp in the summer plans.

J. R. Cowan, a history major at Quinnipiac University in Hamden, Conn., said he decided against a cross-country summer trip because "gas would cost double what I budgeted for when I started dreaming about California last year."

When Amanda Early, a junior at Seton Hall University in South Orange, N.J., accepted a four-day-a-week summer job in public relations near the campus, she did not realize it would amount to a sentence of spending an entire summer in New Jersey. Ms. Early had planned to drive home to Connecticut every weekend, but she said gas prices would force her to remain in New Jersey in the house she shares with four other girls.

"This is a college town," Ms. Early said, "and it is nowhere near as much fun in the summer."

A sophomore at Northwestern University in Evanston, Ill., who declined to give his name because he did not want to risk angering a prospective employer, said he might turn down a summer job delivering prescriptions for a pharmacy in a Boston suburb. The $10 hourly wage was acceptable, he said, but not the requirement that he drive his own car and pay for gas.

KATIE ZEZIMA

Defending Big Oil

John C. Felmy, the chief economist of the American Petroleum Institute in Washington, the main trade association for the oil business, sounds frustrated.

As an undergraduate at Pennsylvania State University, he said, he drove to Boston with his debate team during the Arab oil embargo. More than 30 years later, he can recite the topic for 1973-74 without hesitation: "Resolved, the federal government should control the supply and utilization of energy in the United States."

On the drive back, Mr. Felmy recalled, his group was almost stranded in Connecticut because no gas was available, a result, he said, of government misallocation. Government, Mr. Felmy said, can make energy problems worse.

"I thought we'd learned from bad energy policy by now," he said, although there are days when he is not so sure. Those are the days when his computer flashes with hate e-mail from people who blame the American oil industry for the rise in oil prices.

"People just simply don't know the facts," he said, "but they accuse you of everything you can imagine."

Mr. Felmy's organization has been arguing to anyone who will listen that over the long haul, oil company profits are almost identical to the average for manufacturers in the United States, and that since 1982, the price of petroleum products is up less than the price of pulp and paper or lumber, and only about one-third as much as drugs and pharmaceuticals. But it has been tough going, with the public and with legislators, he said.

"The politicians are reading all the polls, they know how concerned consumers are, and they are trying to figure out what to do about it," he said. "Some are lashing out, attacking the industry, using information that is simply inaccurate."

Mr. Felmy said he was proud of what he did for a living, and he called institute members "honorable companies."

"They're doing what they should do, what is legally required for their shareholders, unlike other companies you've heard about in the news," he said. "They are managing their business properly, keeping fuels flowing to consumers, even though we're operating in places where sometimes people are shooting at us."

His industry, Mr. Felmy said, is "1.4 million Americans working to keep your gas tank full 24 hours a day."

MATTHEW L. WALD


Driving Guzzlers for a Living

Few drivers feel the pain of soaring gas prices as acutely as the New York City cabbie stuck behind the wheel of a Crown Victoria sedan with a thirsty, overworked eight-cylinder engine.

At the entrance to the Checker Management taxi depot in the Long Island City section of Queens is a trio of old, battered pumps where returning cabbies refill their bottomless tanks after their 12-hour shifts.

The old pumps offer only regular unleaded, and for the very modern price of $3.15 and nine-tenths of a cent per gallon. It is still lower than prices in Manhattan, where most of these cabbies go through a full tank of gas lurching and screeching around traffic-clogged streets for 12 hours.

Back at the depot, they replenish their tanks, shaking their heads in disgust as the pumps' rusty digit counters spin.

"We drive 12 hours a day, so we feel it more than anyone," said one driver, Peter Lee, 54, who began driving cabs in New York in 1972. He pointed to the depot's fleet of Fords, mostly Crown Victoria sedans.

"These things get about 10 miles per gallon in the city, 8 miles if the customer wants the air-conditioner on," he said, adding that gas mileage was made worse by the choppy gas-brake-gas-brake driving style required in New York City. "New York people are always late and telling you to drive fast, so you have to keep gunning the engine and then braking, which uses more gas."

The drivers at the depot, just across the East River from Midtown, are almost all immigrants, and all kinds of languages, dialects and accents can be heard in the tight locker room. They wolf down home-cooked meals — whether couscous, curry or rice and beans — before their shifts. With the Manhattan skyline looming to the west, they gather in the parking lot and grouse about gas prices.

Drivers often log 150 miles a shift and spend almost $50 in gas, Mr. Lee said, about $20 more per day than a year ago. He recommended that the city order a 50-cent surcharge for each fare to compensate cabbies for price increases.

Most drivers at the depot rent their cabs for 12 hours at a time, usually paying more than $100. They pay up front in cash and get a key to a cab with a full tank of gas; they must refill it when they return the cab.

"Compared to a year ago, I pay $15 more a day in gas," said Miguel Gonzalez, 67, of Queens. "I only take home $100 a day, so that's my lunch and dinner right there."

Lesly Richardson, 50, a Haitian immigrant from Brooklyn, nodded in agreement.

"That's $100 a week," he said. "That's your grocery bill."

COREY KILGANNON

New Hope for Ethanol

These are happy days for an ethanol man.

The price of grain-alcohol fuel is up sharply as demand has surged, and Colorado's newest ethanol plant is almost ready to open after four years of preparation and sweat by Dan R. Sanders and his family.

"It's great for us," said Mr. Sanders, 28, as he watched one of the first loads of corn — ethanol's main ingredient — arrive on Friday morning from a farm in northeastern Colorado.

When Mr. Sanders's company, Front Range Energy, begins shipping next month from this $60 million factory in Windsor, Colo., an hour north of Denver, it will just about double Colorado's ethanol production, adding 40 million gallons a year to the pipeline. And at least two other plants around the state are in planning.

Ethanol, which is essentially identical to the old corn liquor of moonshine fame, is increasingly blended with gas to reduce emissions and replace other additives like MTBE, or methyl tertiary butyl ether, which is a suspected carcinogen.

But more and more vehicles are also able to burn commercially available ethanol fuels like E85 — 85 percent grain alcohol — and kits can also be bought that allow cars to burn an even higher percentage of ethanol. All this has further increased the demand, and the price. In most parts of the country, E85 sells for 30 cents to 60 cents a gallon less than regular unleaded gasoline, but most cars get fewer miles to the gallon burning ethanol.

Ethanol has its critics. Some economists say that farm subsidies blur the fuel's real cost, making it a less than perfect long-term alternative in thinking about the world after oil.

But here in Colorado, people like Mr. Sanders say the economics make more sense than ever. Until recently, ethanol could only make money if distilled close to its fuel source, he said. That is why corn-country Iowa dominates the nation's production.

Increasing demand is shattering that boundary, making factories feasible closer to where the product gets sold. About half of Front Range's output, Mr. Sanders said, will go no further than Denver.

The Sanderses have also lined up local buyers for the waste. The left-over corn mash will be sold as cattle feed, while the carbon dioxide produced by fermentation will be made into dry ice and sold in the Denver market.

But operations like this are still small potatoes by the scale of big oil. On a day when the Chevron Corporation was announcing $4 billion in profits, Mr. Sanders and his wife, Jana, and their 2-year-old daughter, Ellie, were watching the corn arrive. And Ellie was not even very interested.

KIRK JOHNSON

Cutting Into Travel and Food

Jeremy Cole looks at the black numbers on the blue Marathon Gas sign in Kirtland, Ohio — $2.87 for a gallon of regular — and thinks of his broken vow.

For two years, Mr. Cole, 19, had given his girlfriend a gift on the 25th of each month, to commemorate the day they met — Jan. 25, 2002 — at Willow Hill Baptist Church in Willoughby, Ohio.

But for the past three months he has missed the date as gas prices have risen.

This month, Mr. Cole bought her a rose and a pink wind chime, because she loves to hang pink things from the ceiling of her bedroom.

The fuel warning light in his 1993 Honda Accord was glowing. It was a 25-mile drive to her house in Chardon, and Mr. Cole, who studies computers at Lakeland Community College and earns $8.18 an hour working in a factory that heat-treats metal, did not have money for gas. So he stayed home.

"I won't be able to see her till I get paid," he said. "Ever since gas prices went up, it's like I'm barely able to see her."

Until this year, Mr. Cole said, he always filled his tank. On one recent day, though, he bought only five gallons for $14.35, barely enough to drive to school, work and straight back home.

A guitar lies across his back seat, and his trunk is filled with amplifiers. Mr. Cole plays in a band called In All His Ruin. Before gas prices jumped, band members drove separately to practice at the drummer's house in Chesterland, 15 miles away. Now they all meet at Mr. Cole's house and carpool, squeezing themselves and their equipment into a different member's car every week.

On the way home, Mr. Cole used to stop at Wendy's and order the No. 6 combo meal: spicy chicken sandwich, medium Dr. Pepper, medium fries. Now he orders junior hamburgers from the dollar menu.

"It's not a gourmet meal anymore," he says. "French fries are an extravagance now. It makes me angry that I have to change my whole life because of gas prices."

CHRISTOPHER MAAG

At $2.39 a Gallon, a Bargain

Cheap gas prices are in the eye of the beholder.

At the Flying J Travel Plaza in Casper, Wyo., a gallon of regular unleaded gas sold this week for $2.39, about as low as anywhere in the country and more than $1 less than some places in California and Hawaii.

But gratitude at the pumps? Forget it.

"Gas prices don't seem low to me," said Dick Gilbert, a tow truck operator, who was out $170 filling his vehicle's two tanks. "And they just keep going higher."

Mr. Gilbert was preparing to burn most of the gas on a 250-mile round trip to retrieve a broken-down truck. He will charge his customer $2.50 a mile, but even so, he said rising gas prices were eating into his profits.

In an adjoining gas lane, Cindy Wright spoke of the pain high gas prices cause the single mothers who make up many of the clients at the public health clinic in Torrington, where she is a nurse.

"They can't afford to drive," she said. In another sign of the times, Ms. Wright said, a relative who owns an auto repair shop arrived at work one morning recently to find that thieves had siphoned gas from vehicles left there overnight.

DOUG MCINNIS

Caught in the Middle

Pity the people who sell gas in San Francisco or lease franchise stations from the oil companies. No, really. As if working around fumes and grime were not enough, now customers are rude — even hostile — about the sudden escalation in gas prices, which in San Francisco are among the highest in the country.

"Someone today threw the money down, and said, 'This is ridiculous,' " said Stella Liu, 51, who leases a 76 gas station from Conoco and runs an adjacent automotive repair business. Other customers scream at her cashier before jumping into their cars and tearing away from the station.

Ms. Liu, though, is sympathetic. She too has to buy gas to fuel her 50-minute commute (one way) from the suburbs. "If I were making the money, I wouldn't be here," she said, "We are all in the same boat."

Prices may fluctuate, Ms. Liu said, but even when gas is $3.36 for a gallon of regular, as it was on Friday at her station in the Potrero Hill neighborhood, her profit is unchanged because she is paying more to her supplier.

"It's the same for me as it is for the customer, maybe worse," she said. Business is down because people are buying less gas — choosing a quarter or a half a tank — and then paying by credit card. "We have to pay insurance and workers compensation, the rent," she said. "We are making the same money we did years ago. Only now, it barely covers the cost of our overhead."

Many customers understand the dealers are not at fault, but others simply rage at the nearest target.

She advises angry customers to contact Conoco.

"I tell people, I'm just the dealer. I have no control over the price. I don't even know why the price is going up."

CAROLYN MARSHALL

Trying to Share the Pain

In a region where buses advertise that "Gas isn't expensive if you don't buy any," Matt Mulholland of Lynwood, Wash., assumed it would be easy to arrange a carpool for his daily commute, especially as gas approached — and passed — $3 a gallon.

"Let's save time and gas!! yes yes YES please," Mr. Mulholland wrote on the Craigslist Web site.

A month later, Mr. Mulholland, 32, still drives alone. No one responded to repeated pleas to share the 40-mile round trip from his home north of Seattle to Bellevue, a city east of Lake Washington. He is disappointed, not least because, with a passenger, he could zip into Interstate 405's high-occupancy vehicle lanes and prune his hourlong commute.

"I look at cars around me and they always have one person," said Mr. Mulholland, who works as an estimator for an auto body company. "I thought I'd probably have more chance of getting somebody interested now, when they're talking about prices peaking at $4 by the end of the summer."

But so far, the shock of $3 gas has not persuaded many commuters to change their behavior.

There has been no increase in registration for the Rideshare program, which arranges carpools and vanpools for the county that includes Seattle and Bellevue, said Cathy Blumenthal, the program's coordinator for King County Metro Transit.

By contrast, 5,000 people — a 62 percent increase over the previous year — signed up to share rides last fall after Hurricanes Katrina and Rita drove local gas prices toward $3.

While Mrs. Blumenthal wonders if people are waiting — either for prices to surge or recede — before they alter their driving habits, Mr. Mulholland is more pessimistic.

Complaints about gas prices are "hype, a hot button," he said. "People talk without doing anything."

JESSICA KOWAL

This article was written and reported by Kirk Johnson in Windsor, Colo.; Corey Kilgannon in New York; Jessica Kowal in Lynwood, Wash.; Christopher Maag in Kirtland, Ohio; Carolyn Marshall in San Francisco; Doug McInnis in Casper, Wyo.; Matthew L. Wald in Washington; and Katie Zezima in Boston.

    As Gas Prices Go Up, Impact Trickles Down, NYT, 30.4.2006, http://www.nytimes.com/2006/04/30/us/30gas.html?hp&ex=1146456000&en=056f6b82523461b2&ei=5094&partner=homepage

Trading Frenzy Adding to Rise in Price of Oil

April 29, 2006
The New York Times
By JAD MOUAWAD and HEATHER TIMMONS

A global economic boom, sharply higher demand, extraordinarily tight supplies and domestic instability in many of the world's top oil-producing countries — in that environment higher oil prices were inevitable.

But crude oil is not merely a physical commodity that fuels the world economy; powers planes, trains and automobiles; heats cities; and provides fuel for electricity. It has also become a valuable financial asset, bought and sold in electronic exchanges by traders around the world. And they, too, have helped push prices higher.

In the latest round of furious buying, hedge funds and other investors have helped propel crude oil prices from around $50 a barrel at the end of 2005 to a record of $75.17 on the New York Mercantile Exchange last week. Back in January 2002, oil was at $18 a barrel.

With gasoline in the United States now costing more than $3 a gallon, high energy prices may be a political liability for the Bush administration. But for outside investors — hedge funds, investment banks, mutual funds and pension funds and the like — the resurgence in the oil market has been a golden opportunity.

"Gold prices don't go up just because jewelers need more gold, they go up because gold is an investment," said Roger Diwan, a partner with PFC Energy, a Washington-based consultant. "The same has happened to oil."

Changes in the way oil is traded have contributed their part as well. On Nymex, oil contracts held mostly by hedge funds — essentially private investment vehicles for the wealthy and institutions, run by traders who share the risks and rewards with their partners — rose above one billion barrels this month, twice the amount held five years ago.

Beyond that, trading has also increased outside official exchanges, including swaps or over-the-counter trades conducted directly between, say, a bank and an airline. And that comes on top of the normal trading long conducted by oil companies, commercial oil brokers or funds held by investment banks.

"Five years ago, our futures exchange was a small group of physical oil players," said Jeffrey Sprecher, the chief executive of Intercontinental Exchange, the Atlanta-based electronic exchange where about half of all oil futures are traded. "Now there are all sorts of new investors in trading commodity futures, much of which is backed by pension fund money."

Such trading is a 24-hour business. And more sophisticated electronic technology allows more money to pour into oil, quicker than ever before, from anywhere in the world.

In the Canary Wharf business district of London, for example, the trading room of Barclays Capital is filled with mostly young men in identical button-down blue shirts, staring intently at banks of computer screens where the prices of petroleum products — crude oil, gasoline, fuel oil, napthene and more — flicker by.

Occasionally a trader breaks from his trance to bark instructions to a floor broker a couple of miles away, delivering the message through a black speaker box. Above them is a television screen, where President Bush this week was telling America to "get off oil."

Experienced oil traders are in heavy demand, and average salary and bonus packages are close to $1 million a year, with top traders earning as much as $10 million.

The rush of new investors into commodities has meant a rash of new clients for banks like Barclays.

Lehman Brothers and Credit Suisse have recently beefed up their oil trading teams to compete with market leaders like Goldman Sachs and Morgan Stanley.

"Clearly the big attraction of commodity markets like oil is that they've been going up," said Marc Stern, the chief investment officer at Bessemer Trust, a New York wealth manager with $45 billion in assets. "Rising prices create interest."

This year alone, oil prices have gained 18 percent; they were up 45 percent in 2005 and 28 percent in 2004, a performance far superior to the Standard & Poor's 500-stock index, whose gains in these years have been in the single digits. And to some extent, the rising price of oil feeds on itself, by encouraging many investors to bet that it is likely to continue doing so.

"The hedge funds have come roaring into the commodities market, and they are willing to take risks," said Brad Hintz, an analyst with Sanford C. Bernstein & Company, an investment firm in New York.

Energy funds make up 5 percent of the global hedge fund business, with about $60 billion in assets, according to Peter C. Fusaro, principal at the Energy Hedge Fund Center, an online research community.

The gains on the oil market have attracted a fresh class of investors: pension funds and mutual funds seeking to diversify their holdings. Their investments have been mostly channeled through a handful of commodity indexes, which have ballooned to $85 billion in a few years, according to Goldman Sachs. Goldman's own index holds more than $55 billion, triple what it was in 2002.

Pension funds have been particularly active in the last year, said Frédéric Lasserre, the head of commodity research at Société Générale in Paris. These investors, seeking to diversify their portfolio, have added to the buying pressure on limited commodity markets.

While all this new money has contributed to higher prices, by some estimates perhaps as much as 10 percent to 20 percent, the frantic trading ensures that even the biggest players — including the major oil companies — cannot significantly distort the market or tilt it artificially in their favor. It also makes oil markets more liquid, meaning a buyer can always find a seller.

"The oil market has been driven by speculators, by hedge funds, by pension funds and by commodity indexes, but the fact of the matter is that it's mostly been driven by the fundamentals," said Craig Pennington, the director of the global energy group at Schroders in London. "Prices are supported by the fact that there is no spare capacity."

The inability to increase output fast enough to keep up with global demand accounts for most of the oil price rise over the last three years, analysts say. And until more investments are completed in oil production and refining, markets will remain on edge, with the slightest bit of bad news likely to push prices up further.

"The reality is that the world has no supply cushion left," said Edward L. Morse, an executive adviser at the Hess Energy Trading Company, a New York oil trading firm.

Political strife and circumstance played major parts as well. A crippling strike in Venezuela's oil industry in 2002, the invasion of Iraq, civil unrest in Nigeria, and last summer's hurricanes in the Gulf of Mexico, among other things, have all contributed to pinching supplies.

"If we didn't have politics," said William Wallace, a trader on the Nymex for Man Financial, "we'd be like corn."

According to Cambridge Energy Research Associates, an energy consulting firm owned by IHS, Iraq is 900,000 barrels a day below its prewar output; Nigeria has shut 530,000 barrels a day; Venezuela is still 400,000 barrels below its prestrike production; and the Gulf of Mexico remains down by 330,000 barrels a day. In all, this amounts to more than two million barrels of disrupted oil, Cambridge Energy estimates.

The latest reason for gains on energy markets is the growing fear that the diplomatic standoff between the Western powers and Iran over nuclear technology will get out of hand.

"All the risk," said Eric Bolling, an independent trader on Nymex, "has been on the upside."

One characteristic of today's futures market is the sharp increase in volatility, which industry insiders largely attribute to hedge funds and other speculators looking for a quick profit.

"It is the case," complained BP's chief executive, Lord Browne, "that the price of oil has gone up while nothing has changed physically."

In the end, supply and demand call the tune.

"The idea that speculators can systematically push the price up or down is wrong," said Robert J. Weiner, a professor of international business at George Washington University and a fellow at Resources for the Future, a nonpartisan think tank. "But they can make it more volatile. They can't raise water levels but they can create waves."

Not all bets have turned out to be profitable. Veteran commodity market traders have been stymied by the high prices of oil, which have exceeded their expectations, and many now predict a steep decline in prices is ahead. But they have been wrong so far.

"We found the last 18 months difficult," said Russell Newton, director of Global Advisors, a New York and London hedge fund with $400 million in assets under management that had a down year in 2005.

In one often cited example, the Citadel Investment Group, a Chicago-based hedge fund, lost tens of millions of dollars after betting oil prices would fall just before Hurricane Katrina struck.

"Everybody is jumping into commodities, and there is a log of cash chasing oil," said Philip K. Verleger Jr., a consultant and a former senior adviser on energy policy at the Treasury Department.

"The question is when does the thing stop. Eventually they will get burned."

    Trading Frenzy Adding to Rise in Price of Oil, NYT, 29.4.2006, http://www.nytimes.com/2006/04/29/business/29traders.html?hp&ex=1146369600&en=220ffd972c207abc&ei=5094&partner=homepage

U.S. Economy Still Expanding at Rapid Pace
 

April 28, 2006
The New York Times
By DAVID LEONHARDT and VIKAS BAJAJ

Gas prices are rising, as are mortgage rates. House prices in many once-hot markets have started slipping. The American automobile industry shows no sign of recovery. And the paychecks of most workers have not even kept up with inflation over the last four years.

Yet the national economy continues to speed ahead, with families and businesses spending money at an impressive pace. Forecasters expect the Commerce Department to report this morning that the economy grew at a rate of around 5 percent in the first quarter, the biggest increase since 2003.

The industries leading the way are ones that have been receiving far less attention than cars or real estate, though they have been adding thousands of new workers each month. In the last year, hospitals, doctors' offices and other health care employers have created almost 300,000 jobs; restaurants have added 230,000; and local governments — including schools — have added 170,000.

"The good news for the U.S. is that growth has diversified," said Nariman Behravesh, chief economist at Global Insight, an economic research firm. "We aren't just relying on the consumer and housing."

Testifying before Congress yesterday, Ben S. Bernanke, the chairman of the Federal Reserve, suggested that the Fed would soon take time out from steadily raising its benchmark short-term interest rate to weigh the impact of its two-year money-tightening campaign.

While he is counting on growth to slow to a more moderate rate, Mr. Bernanke said, "The economy has been performing well and the near-term prospects look good." [Page C1.]

Even building contractors and real estate agencies have been hiring more workers, a sign that higher interest rates are not yet really hurting the construction industry. "Our biggest challenge is managing cost increases that are sweeping the industry, and labor shortages," said Alan Torvie, a senior director at Opus West Construction who oversees projects in the West and Southwest.

Americans seem to have noticed the boom, too. Although polling suggests that they are deeply unhappy with the war in Iraq and worried about the price of gas, they report being generally pleased with the state of the economy.

A well-known index of consumer confidence has risen to its highest level in four years, according to the Conference Board, a research company in New York. In the most recent CBS News poll, conducted last month, 55 percent of respondents rated the economy as good, even though 66 percent of Americans said the country was on the wrong track.

In 23 years of polling by CBS, only once — in late 2005 — did a higher percentage of people say the country was on the wrong track.

R. Michael Welborn, the chief administrative officer of P. F. Chang's China Bistro, a fast-growing restaurant chain based in Scottsdale, Ariz., said he could sense the gap between economic growth and overall unease. "All of the indicators look pretty positive, with the exception of gas prices," he said. "But there seems to be a level of discomfort."

Like Mr. Bernanke, many professional economists and ordinary Americans expect economic growth to slow in the rest of the year, surveys show. Higher oil prices will effectively shift some money from the United States to the Middle East and elsewhere, and higher interest rates will make it more expensive for businesses and households to borrow. But for now, the economy is on a fast track. The fact that interest rates remain low, despite the Fed's rate increases of the last two years, is a big reason. The average rate on a 30-year conventional mortgage was 6.3 percent last month, lower than at any point in the 1970's, 1980's or 1990's, according to the Fed.

In parts of California, Florida and the Northeast — places where home prices soared in recent years — houses are no longer being snapped up, and many appeared to be selling for less than they would have last summer. But the housing market is still healthy in much of the country.

In two new high-end developments built by Toll Brothers in Chicago and Phoenix, lotteries were used to allocate homes because demand exceeded supply. "If you had an overall depressed market, you could not have that kind of phenomenon," said Robert I. Toll, chief executive of the company, which is the nation's biggest builder of luxury homes.

Spending by upper-income families appears to be driving much of the economy's growth. The average hourly wage for rank-and-file workers — who make up roughly 80 percent of the work force — has fallen by 5 cents in the last four years, to $16.49, after inflation is taken into account. Yet most well-paid workers have continued to receive raises.

Somerset Collection, an upscale mall near Detroit, will be undergoing renovations in coming months to make room for more stores, including a Barneys Co-Op, an outlet store for Barneys New York, the high-end clothing retailer, and for Stuart Weitzman, which sells designer shoes and handbags. Restaurants around the country are also benefiting as Americans spend an ever-larger portion of their food budgets on prepared meals.

P. F. Chang's now owns 230 restaurants — including about 100 Pei Wei Asian Diners, which are less expensive than the chain's main restaurant — up from 208 at the start of the year. It employs 21,000 workers; Mr. Welborn said the company had recently had to raise wages to attract workers.

"It's becoming increasingly challenging for us to find talent in the markets we're opening up in," he said.

Healthy economic growth in other countries, including China and India, is also playing a role. Although this country buys far more from those countries than it sells to them, strong global growth is lifting American exports, economists say.

Last week, the International Monetary Fund predicted that the world economy would grow at 4.9 percent this year, up from 4.8 percent in 2005.

The Boeing Corporation, for instance, plans to deliver 395 commercial planes in 2006, up 36 percent from a year ago, many of them to foreign airlines. The company has already sold all the planes it will build this year and 98 percent of the planes it will build in 2007.

In his testimony yesterday, Mr. Bernanke emphasized that the economy still faced serious long-term issues, chiefly the budget deficit and the trade deficit. Logic suggests that both will have to shrink at some point, curtailing economic growth when they do. But there seems to be little chance that taxes will rise, that government spending will be cut or that the trade deficit will close anytime soon.

In the short term, the bigger economic risks may be that interest rates or gas prices reach a tipping point that damages growth.

James W. Paulsen, chief investment strategist for Wells Capital Management, noted that in past decades the economy often continued to flourish even as interest rates were increasing — until long-term borrowing costs jumped above 6 percent. At that level, companies often struggle to make a large enough profit to cover their costs, so they stop expanding.

"There's no magic number," Mr. Paulsen. "But it does seem like the relationship changes around that 5½ or 6½ area."

The rate on 10-year Treasury notes closed at 5.07 percent yesterday, up from 4.55 percent at the end of February.

    U.S. Economy Still Expanding at Rapid Pace, 28.4.2006, http://www.nytimes.com/2006/04/28/business/28econ.html?hp&ex=1146283200&en=de2215ef6fb631ab&ei=5094&partner=homepage

Key Economic Measures Jumped in March

By VIKAS BAJAJ
The New York Times
April 26, 2006

Two key measures of housing and manufacturing activity jumped sharply in March, the Commerce Department reported today, indicating that the economy ended the first three months of the year with a roar.

A 13.8 percent increase in the sales of new homes and a 6.1 percent jump in orders for durable good signals that the economy, which had built up momentum in the first two months of the year, picked up even more speed last month.

Investors were pleased by the reports; stocks were modestly higher in morning trading and bonds fell. The Standard & Poor's 500 stock index was up 0.5 percent, the Dow Jones industrial average rose 0.6 percent and the Nasdaq composite index was up 0.3 percent.

New home sales rose to an annual pace of 1.21 million, up from 1.07 million the month before and 1.2 million in January. Sales were strongest in the West, where they jumped 35.7 percent, and weakest in the Northeast where they rose 4.7 percent.

Compared to last year, however, the housing market has weakened noticeably — sales were running at a pace of 1.31 million in March 2005 — and there are signs that sales and prices could lag further later this year. The median price — half the homes sold for more and half for less — slipped 2.2 percent from a year ago, to $224,200. And the number of homes on the market increased by 24.4 percent over the last 12 months, to 555,000; at the current sales pace it would take five and a half months to sell those properties.

The increase in inventories is the biggest in 33 years, and the drop in prices is the worst since January 2003, noted Ian Shepherdson, chief United States economist at High Frequency Economics. "The problem is the huge surge in supply," he wrote in a note to clients.

The new homes data are also subject to frequent revisions because they are based on a small sample size — the report has a margin of error of plus or minus 14.9 percentage points. Economists caution that a one-month surge should not be viewed as a trend.

Orders for durable goods, big-ticket products that are meant to last for more than three years, increased to $230.6 billion, following a rise of 3.4 percent in February and a 8.9 percent decline in January.

A 71.1 increase in orders for civilian airplanes and related parts accounted for a big portion of the gain, but the increase in orders was a robust 2.8 percent excluding the transportation sector, which can be heavily influenced by when customers place orders for planes with Boeing. Other areas of growth were capital goods, up 12.2 percent, machinery, up 7.5 percent, and communications equipment, up 5.9 percent.

    Key Economic Measures Jumped in March, NYT, 26.4.2006, http://www.nytimes.com/2006/04/26/business/26cnd-econ.html?hp&ex=1146110400&en=cf798ebc463f7582&ei=5094&partner=homepage

Google Posts 60% Gain in Earnings

April 21, 2006
The New York Times
By SAUL HANSELL

Google returned to favor among investors yesterday as its profit for the first quarter increased 60 percent, well above expectations.

Three months ago, the company disappointed investors, even though its profit grew 82 percent, and its stock sagged. This time, Google's ascent was enough to satisfy.

"Investors, surprisingly, acted rationally this quarter and had low expectations," said Safa Rashtchy, an analyst at Piper Jaffray & Company. Google's stock rose about 8 percent in after-hours trading after the announcement, recouping its losses since the last earnings report.

Pointing to particulars behind its successful quarter, the company said its share of the search market continued to grow around the world, as did the money it earned from advertising for each search result displayed.

Eric E. Schmidt, Google's chief executive, said the market share increase might be related to the use of some of the company's new products, like Google Video, Google Earth and Google Maps, as well as the introduction of Google News in several countries.

These services attract people to Google's site, where they may also conduct searches, he said in an interview. "All of a sudden Google is top of mind again, over and over again."

Google continued to make substantial capital investments, mainly in computer servers, networking equipment and space for its data centers. It spent $345 million on these items in the first quarter, more than double the level of last year. Yahoo, its closest rival, spent $142 million on capital expenses in the first quarter.

Google has an enormous volume of Web site information, video and e-mail on its servers, Mr. Schmidt said. "Those machines are full. We have a huge machine crisis."

Jordan Rohan, an analyst for RBC Capital Markets, called Google's capital spending "unfathomably high," noting that it spent the same percentage of its revenue on equipment as a company in the telephone business, an industry traditionally seen as far more capital-intensive than the Internet.

He said investors would tolerate this high spending level as long as Google's results continued to be so strong.

"If Google's market share continues to increase, and its position as the central hub of the Internet is reinforced, an extra $1 billion is a worthwhile investment," Mr. Rohan said. "The day market share peaks, we have a problem."

Investors saw little problem in the latest numbers. Google earned $592 million in the first quarter, compared with $369 million in the year-earlier period.

Excluding charges for stock-based compensation and payments to the plaintiffs' lawyers in the settlement of a class-action lawsuit, earnings were $2.29 a share, well ahead of the $1.97 that analysts had anticipated.

Gross revenue was $2.25 billion, up 79 percent. Analysts prefer to look at Google's revenue after deducting the payments it makes to services like America Online, which display its advertisements and keep most of the money from them. Using this measure, Google's revenue was $1.53 billion, compared with the $1.44 billion that analysts had estimated.

The company's stock, which ended regular trading at $415, up $4.50, rose after hours to $448.31 It reached a high of $475.11 in January and was at $432.66 before its last earnings report, then fell back as far as $337.06 in March.

Google saw faster growth on the Web sites it owns, which are far more profitable because it does not have to share advertising money. Google's sites posted revenue of $1.3 billion, up 97 percent.

Revenue from partner sites was $928 million, up 59 percent. Google kept 22 percent of the revenue for ads shown on partner sites, compared with 21 percent a year ago.

Revenue is growing faster overseas. Revenue from outside the United States was 42 percent of total revenue, compared with 39 percent a year ago. The company said that it noted particular growth in Britain, France and elsewhere in Northern Europe.

Mr. Rohan said that in the first quarter, Google's search revenue in the United States grew 10 percent from the fourth quarter of 2005, about the same growth as Yahoo. Google has long grown substantially faster than Yahoo, and it is still increasing its share of user searches, he said. That means Yahoo is starting to catch up on technology to generate more advertising revenue for each search, he said.

Google added $825 million to its cash hoard, giving it $8.4 billion in cash at the end of the quarter. In April, it raised another $2.1 billion by selling shares to the public and spent $1 billion to buy 5 percent of AOL.

The company also continued to hire at a breakneck pace. It added 1,110 workers in the quarter for a total of 6,790 full-time employees.

In a conference call with investors, Mr. Schmidt highlighted several areas for future growth.

One was advertising from local businesses on the company's main search service, as well on its local search and maps products. The delivery of such advertising is based on an inference of the user's location from the search query or Internet protocol address.

"Locally targeted ads are an increasingly meaningful contributor to revenue, and much more is coming," Mr. Schmidt told the investors.

Mr. Rashtchy, the Piper Jaffray analyst, estimated that 10 percent of Google's advertising was local.

Mr. Schmidt also said the company saw great opportunity in developing services for mobile phones. It has developed a system called a transcoder that will reformat Web pages for display on the small screens of cellphones.

The company has started delivering advertising on its mobile service in Japan and it is negotiating with wireless carriers to put advertising on its services in other countries as well, Mr. Schmidt said in an interview.

    Google Posts 60% Gain in Earnings, NYT, 21.4.2006, http://www.nytimes.com/2006/04/21/technology/21google.html

Intel Posts Sharp Fall in Profit

April 20, 2006
The New York Times
By LAURIE J. FLYNN

SAN FRANCISCO, April 19 — Intel, accustomed to riding high, is getting more practice in delivering bad news.

Intel, the world's largest chip maker, reported a 38 percent decline in quarterly profit Wednesday in the face of stiff competition from Advanced Micro Devices and a general slowdown in the personal computer market that caused inventories to swell.

The downturn included a decline in revenue for the first quarter and lower-than-expected revenue forecasts for the current quarter and full year.

But investors' expectations seem to have been so diminished that Intel's stock price, driven down more than 20 percent since the start of the year, actually rose after the announcement, to $19.77, up from $19.56 at the end of regular trading.

Apjit Walia, an analyst with RBC Capital Markets, called the quarter "a disaster," though certainly not a surprise. The slowdown in PC growth rates and the resulting inventory problems have analysts concerned that the road to recovery could be bumpier than Intel is predicting.

Paul S. Otellini, Intel president and chief executive, acknowledged in a conference call with analysts that PC growth had "moderated somewhat" from the double-digit rates of recent years.

Intel executives, however, insisted the company would work down its inventory by the end of the second quarter. "The first half of 2006 has been a time to reset our business," Mr. Otellini said.

He added that he expected Intel to return to "normal seasonal patterns" in the second half of the year.

In lowering its revenue forecast for the full year, Intel said it now expected revenue to decline 3 percent from last year's revenue of $38.8 billion, rather than increase 6 percent to 9 percent, as the company had said in January. It said revenue for the second quarter would be $8 billion to $8.6 billion, below Wall Street's forecast of $8.85 billion.

To help address the problem, Mr. Otellini said Intel was cutting its costs by more than $1 billion for the year, while maintaining its current product plans.

In the third quarter, Intel is expected to roll out a new chip design, the "core microarchitecture," which the company hopes will help it gain back market share. Intel has lost some ground as Advanced Micro ramped up its new dual-processor server line faster than Intel, giving it an early-lead advantage.

But perhaps just as significant for investors is that Intel's gross profit margin has shrunk to 55.1 percent, substantially below the 59 percent the company forecast in January. Intel executives said margins were hurt by lower microprocessor revenue and higher inventory write-downs.

Andy D. Bryant, Intel's chief financial officer, defended the company's performance against Advanced Micro during the quarter, asserting that Intel did not lose any additional market share after conceding last month that it had experienced a "slight" loss in the fourth quarter.

In the fourth quarter of 2005, Intel's share of the overall microprocessor market was 76.9 percent, compared with 82.2 percent a year earlier, while Advanced Micro rose to 21.4 percent, from 16.6 percent, according to Mercury Research.

Intel's net income declined 38 percent during the first quarter, which ended April 1, to $1.35 billion, or 23 cents a share, compared with $2.18 billion, or 35 cents a share, a year earlier. Without a change in accounting to reflect stock options, Intel said the first-quarter earnings would have been 27 cents a share.

First-quarter revenue fell 5.2 percent, to $8.94 billion, roughly the midpoint of the revised guidance the company issued in March. Analysts surveyed by Thomson First Call had forecast earnings of 23 cents a share on revenue of $8.91 billion.

In March, the company lowered its revenue forecast to a range of $8.7 billion to $9.1 billion, down from a previous estimate of $9.1 billion to $9.7 billion, citing a "slight" loss of market share and weaker sales of microprocessors.

Mr. Walia, the RBC analyst, said he wished that Intel would be more realistic in its assessment of how long its turnaround was going to take, adding that the worst might not yet be over. "For all the things Intel needs to work out, you've got to have a perfect scenario," he said. "They're being hit from all sides."

    Intel Posts Sharp Fall in Profit, NYT, 20.4.2006, http://www.nytimes.com/2006/04/20/business/20chip.html

Hu stands firm on Chinese currency

Thu Apr 20, 2006 1:01 AM ET
Reuters
By Daisuke Wakabayashi and Scott Hillis

EVERETT, Washington (Reuters) - Chinese President Hu Jintao on Wednesday stood firm against U.S. demands to significantly revalue China's currency as a way of reducing his country's vast trade surplus with the United States.

Speaking at a Boeing Co. facility north of Seattle on the eve of a White House summit with President George W. Bush, Hu said he wanted to make foreign-exchange markets more efficient. But he said China was not ready for a drastic change in the value of renminbi currency, also known as the yuan.

"Our goal is to keep the renminbi exchange rate basically stable at adaptive and equilibrium levels," Hu said.

"China will continue to firmly promote financial reforms, improve the renminbi exchange rate-setting mechanism, develop the foreign exchange market, and increase the flexibility of the renminbi exchange rate," he said.

Revaluing the yuan is a key U.S. demand which officials say is vital to make American exports more competitive, erase an advantage Chinese manufacturers currently enjoy and reduce China's bilateral trade surplus, which last year reached $202 billion.

Hu arrived in Washington late on Wednesday.

A top U.S. official said this week China's progress on the currency issue had been "agonizingly slow" and Bush was certain to raise it when the two leaders met at the White House.

U.S. experts said they did not expect a breakthrough on the exchange rate. Rather, they were hoping for slow, steady progress in the months ahead.

Hu said China did not seek a large surplus. "China takes the trade imbalance between our two countries seriously and works hard to address this issue," he said.

On the other hand, the fault did not all lie on China's side, he said. The United States also needed to act to ease export controls and reduce protectionist measures.

CHEERED BY BUSINESS

Hu's whirlwind 27-hour tour around Seattle included visits at Boeing and Microsoft Corp. and a lavish dinner with 100 business and government leaders at the lakeside estate of Microsoft co-founder and world's richest man, Bill Gates.

The Chinese leader encountered crowds of protesters unhappy about China's policy on Taiwan, Tibet and the Falun Gong spiritual movement, which is banned in China, but business and political leaders welcomed him with open arms.

"By doing business in China, U.S. companies have made substantial profits, enhanced their competitiveness and strengthened their position in the U.S. market," Hu said.

After a tour of Boeing's assembly factory, Hu told about 6,000 employees of the aircraft maker that China would need to buy 600 new planes in the next five years and 2,000 in the next 15. Beijing recently signed a deal with the company to buy 80 jets worth about $4 billion.

"This clearly points to a bright tomorrow for future cooperation between China and Boeing," he said, noting that the U.S. company currently had two-thirds of the Chinese commercial aviation market.

China sought to quell U.S. trade complaints before Hu's visit by signing contracts worth $16.2 billion while Vice Premier Wu Yi visited the United States last week.

Hu went out of his way to display charm, accepting a baseball hat with the company logo from an employee and then hugging the surprised worker. Chinese reporters said they had never seen anything similar from Hu.

The Chinese president also surprised reporters when he fielded questions about software piracy during Tuesday's Microsoft visit, pledging to enforce laws to protect intellectual property.

U.S. industry groups estimate 90 percent of DVDs, music CDs and software sold in China are pirated. The intellectual- property issue is expected to figure prominently when Hu meets Bush.

Bush has also said he would bring up Iran's nuclear program. He wants China to cooperate in putting more pressure on Tehran through the U.N. Security Council.

    Hu stands firm on Chinese currency, R, 19.4.2006, http://today.reuters.com/news/articlenews.aspx?type=newsOne&storyid=2006-04-20T050140Z_01_N17283159_RTRUKOC_0_US-CHINA-USA.xml

Salads or No,

Cheap Burgers Revive McDonald's

April 19, 2006
The New York Times
By MELANIE WARNER

On a recent afternoon at McDonald's in Union Square in Manhattan, Chris Rivera and Shamell Jackson reviewed the menu, which includes a variety of healthy options, including salad and fruit. Then they each ordered the usual: two McChicken sandwiches from the Dollar Menu, fries and a McFlurry shake.

The two 15-year-olds, like many of their classmates at the nearby Washington Irving High School, go to McDonald's often. And it is customers like Mr. Jackson and Ms. Rivera, consistently ordering the cheaper and more fattening items on the menu, who have fueled a remarkable resurgence at McDonald's.

"When I was younger, my mom never used to let me come here," said Mr. Jackson, standing in a register line 15 deep and filled with teenagers. "She thought it was nasty. But I've got my own money now."

The enormous success of the Dollar Menu, where all items cost $1, has helped stimulate 36 consecutive months of sales growth at stores open at least a year. In three years, revenue has increased by 33 percent and its shares have rocketed 170 percent, a remarkable turnaround for a company that only four years ago seemed to be going nowhere.

McDonald's has attracted considerable attention in the last few years for introducing to its menu healthy food items like salads and fruit. Yet its turnaround has come not from greater sales of healthy foods but from selling more fast-food basics, like double cheeseburgers and fried chicken sandwiches, from the Dollar Menu.

While that may have helped many low-income customers save money, there could be a heavy health cost. McDonald's has marketed the Dollar Menu to teenagers, young adults and minorities who are already plagued with an especially high incidence of obesity and related health problems like diabetes.

Many nutritionists say fast food is one of the worst things in the American diet, because of its calories, trans fats, lack of fiber and added sugars and processed carbohydrates. "If you're looking at the Dollar Menu in terms of how much food you get it really appears as a good bargain," said Connie Schneider, a nutrition adviser for Fresno County in California. "But if you're looking at it as how many nutrients are you getting for a dollar, it's the least economical."

McDonald's says it seeks to provide options for its customers, at both low and higher prices. "We're proud of the choices we offer customers," said Bill Lamar, chief marketing officer for McDonald's United States business. "You can come in and order Apple Dippers, salads with low-fat dressing, yogurt, or you can order an Egg McMuffin, which is a very nutritious sandwich. People can make the decisions about how to eat for themselves."

True, McDonald's has persuaded millions of mostly female customers to buy its healthier, higher-priced salads. "We are improving our relevance with products like salads, which cast a favorable glow over our brand and the rest of our menu," boasted McDonald's chief financial officer, Matthew Paul, in a conference call with analysts in July 2004.

In 2005, salad sales totaled 173 million units, about even with salad sales in 2004. Per month, however, sales have slipped from 14.7 million salads in 2003 to 9.6 million in 2006.

And every day, McDonald's moves a lot more double cheeseburgers than either salads or the new Premium Chicken Sandwich — most versions of the sandwich have more calories and more sodium than a double cheeseburger. Richard Adams, a former McDonald's executive who now works as a consultant for franchisees, says the average store sells roughly 50 salads a day and 50 to 60 Premium Chicken Sandwiches, compared with 300 to 400 double cheeseburgers from the Dollar Menu.

Reacting to the success of McDonald's Dollar Menu, Wendy's and Burger King both started promoting their versions of low-priced deals. Wendy's, which in 1989 was the first burger chain to experiment with menu items for $1, lowered prices on its Super Value Menu to 99 cents in January. And in February, Burger King started offering its own version of a dollar menu, including the Whopper Jr. and cheeseburgers.

The Dollar Menu became a permanent part of McDonald's menu in the United States in late 2002. It offers items like a double cheeseburger, the fried McChicken sandwich, French fries, a hot fudge sundae, pies, a side salad, a yogurt parfait and a 16-ounce soda.

Since McDonald's started advertising the Dollar Menu nationally, the double cheeseburger has become the chain's most ordered item. Even priced at $1, double cheeseburgers bring in more revenue than salads or the chicken sandwiches, which cost $3.19 to $4.29.

McDonald's executives say the Dollar Menu has driven enormous additional traffic into the stores, primarily young men and women aged 18 to 24. "The Dollar Menu appeals to lower-income, ethnic consumers," said Steve Levigne, vice president for United States business research at McDonald's. "It's people who don't always have $6 in their pocket."

Just three and a half years ago, McDonald's was struggling mightily. Its stock had tumbled 56 percent in 10 months and the company had reported its first quarterly loss. Sales at existing stores in the United States, by far McDonald's biggest market, were not growing and in many instances were declining.

Stung by obesity lawsuits and criticism from books like "Fast Food Nation," the company's brand seemed passé and the high-calorie, high-fat, high-sodium cuisine appeared poised for a long decline.

But that did not happen. Today, McDonald's business, both in the United States and globally, is growing; the chain gets some one million more American visitors a day than it did just a year ago.

Other factors have contributed to this turnaround, which has been surprisingly speedy for such a large company. McDonald's has been opening fewer stores and sprucing up restaurants and improving service. The chain has placed a greater emphasis on breakfast and introduced a successful global marketing campaign with the "I'm Lovin' It" tagline. But McDonald's says one of the most important factors in its newfound success has been its low-priced staples.

Dollar Menu ads aimed at young blacks and Hispanics often focus on how much hearty food can be bought for just $1, a message many young consumers are eager to hear.

"The problem here is that you're dealing with a segment where you have these huge obesity issues and you're making eating Big Macs and double cheeseburgers look like it's fun and exciting," said Jerome Williams, a professor of advertising at the University of Texas, Austin, and one author of an Institute of Medicine report last year on the marketing of junk food to children and teenagers.

David Ludwig, director of the obesity program at Children's Hospital in Boston, calls marketing fast food to blacks and Hispanics a "recipe for disaster."

"Fast-food consumption has been shown to increase calorie intake, promote weight gain and elevate risk for diabetes," Dr. Ludwig said. "Because African Americans and Hispanics are inherently at higher risk for obesity and diabetes, fast food will only fuel the problem."

According to an analysis of government data published this month in The Journal of the American Medical Association, 45 percent of non-Hispanic blacks and 36.8 percent of Mexican-Americans aged 20 and over are obese, as opposed to 30.6 percent of non-Hispanic white adults.

Blacks and Hispanics are also more likely to suffer from obesity-related diseases. Blacks are 1.8 times as likely to have Type 2 diabetes than whites, according to the Centers for Disease Control. Mexican-Americans, the largest Hispanic subgroup, are 1.7 times as likely. And 42.9 percent of blacks have cardiovascular disease, while 33.3 percent of whites do, according to the American Heart Association.

Obesity and related diseases also carry a high financial cost. Problems created by obesity increase the nation's health care costs by $93 billion a year, mostly from Type 2 diabetes and heart disease, according to a 2003 study done by RTI International in North Carolina.

McDonald's agrees that Hispanics and blacks are core customers. The company gets 17 to 18 percent of its sales from each group. In the overall United States population, blacks represent 12 percent and Hispanics 14 percent, according to the Census Bureau.

Mr. Lamar, McDonald's marketing executive, points out that the company has worked with Dr. Rovenia Brock, a popular African-American fitness guru, to promote physical activity. Mr. Lamar also says the company market its salads to black women, who have the highest rates of obesity of any segment of the population.

Last May, the company ran a commercial featuring four African-American women talking about the McDonald's fruit and walnut salad and getting their "fruit buzz." The ad ran on BET, the Black Family Network and "Girlfriends" on UPN.

But Professor Williams at the University of Texas says the majority of McDonald's ads aimed at blacks feature Quarter Pounders With Cheese, Big Macs and French fries. McDonald's says that it advertises all its products equally across all markets and that over the last three years the most advertised menu items were Premium Chicken Sandwiches, McGriddles breakfast sandwiches and premium salads.

Marketing experts say McDonald's, which has long been proud of its inclusive advertising, is among the most shrewd when it comes to reaching blacks and Hispanics. The company's ads aimed at black consumers tend to be stylish and use hip contemporary language and music.

"Look who's trying to add some flavor to her life," says a young black man wearing an earring, silver chain and baseball hat that match his sweatsuit as he eyes a black woman dressed in a business suit ordering a Spicy Chicken Sandwich. The ad, which ran on BET, the TV One cable network and "The Bernie Mac Show" on Fox, was created by Burrell Communications, the Chicago-based agency that does most of McDonald's advertising for black consumers.

Rick Mariquen, director of Hispanic consumer marketing at McDonald's, says ads aimed at Hispanics in both Spanish and English often feature groups of friends or families gathering at McDonald's. "They come to the stores in large groups, often families, and see the experience as a social one," said Mr. Mariquen, whose parents are from Guatemala.

In the last four years, McDonald's has increased its advertising spending on Spanish-language television by 60 percent, to $57.4 million a year, according to Nielsen Monitor-Plus.

But to people like Ms. Schneider, the nutrition adviser in Fresno County, all those ads only make her job more challenging. Through a federally funded program run with the University of California, Davis, she offers free nutrition education classes in heavily Latino communities. Many of the classes, she says, are attended by people who are overweight with a host of health problems.

Ms. Schneider says she does not think it is realistic to instruct people to stop going to fast-food restaurants. But she says the program encourages students to go less frequently or make different menu choices.

"Restaurant advertising looks very fun and social," Ms. Schneider said. "But fast-food ads don't show you what happens when you're in your 40's and your cholesterol's high and your heart has to work really hard to pump."

    Salads or No, Cheap Burgers Revive McDonald's, NYT, 19.4.2006, http://www.nytimes.com/2006/04/19/business/19mcdonalds.html

With Tax Break Expired,

Middle Class Faces a Greater Burden

for 2006

April 16, 2006
The New York Times
By DAVID CAY JOHNSTON

As millions of Americans rush to meet the Monday deadline for reporting how much tax they owe on last year's income, a stealth tax increase has begun eating into the 2006 income of nearly 19 million households.

Unless Congress takes action, one in four families with children — up from one in 22 last year — will owe up to $3,640 in additional federal income tax come next April.

Few of them realize that their taxes have increased, because Congress has not voted to raise taxes. Instead, Congress let a tax break expire. That break limited the alternative minimum tax, which takes back part of the tax cuts sponsored by President Bush.

Mr. Bush has asked Congress to temporarily restore the tax break, known as the A.M.T. patch. He has also asked Congress to extend another break that lowered the tax rate on most investment income to 15 percent.

Leading Republicans and Democrats agree that there is simply not enough money to do both. Congress was unable to reach an agreement on tax breaks before adjourning for vacation earlier this month.

The expiration of the A.M.T. patch and the tax break for investment income almost balance each other out this year, according to the Tax Policy Center, a nonprofit organization whose computer model of the tax system has been deemed reasonable and reliable by the Bush administration. The impact will be felt primarily among taxpayers of two different income levels.

The A.M.T. will cost Americans who earn $50,000 to $200,000 nearly $13 billion more next April. That is about how much people who earn more than $1 million will save because of the break on investment income like dividends and capital gains. Both figures were provided by the Tax Policy Center, which is a joint project of the Brookings Institution and the Urban Institute.

Taking action on either measure will require more government borrowing, adding to the federal budget deficit, which is projected to reach $423 billion this year.

The question of how to deal with the alternative minimum tax is central to the negotiations between the House and the Senate over a $70 billion package of tax cuts. Republicans had hoped to reach an agreement before the Easter recess and reap some political benefit at tax time. But one of the sticking points was the A.M.T. patch.

House negotiators proposed extending the tax break, but Senator Charles E. Grassley, an Iowa Republican and chairman of the Finance Committee, pushed for a more generous plan that would also expand it and give more relief to middle-class taxpayers. Negotiations are expected to resume when Congress returns later this month, and Republicans say they are determined to reach a deal in this election year.

Those favoring an extension of the investment tax break, including House Republican leaders, say it encourages investment and leads to more jobs. Two recent studies by the Congressional Research Service, which examines issues for Congress, have raised the possibility of unintended and perverse effects, such as reducing savings and creating more jobs offshore.

Proponents of lower tax rates on investment income also warn that ending the break will hurt stock prices. A number of economists have cast doubt on this assertion.

Representative Dave Camp, a Michigan Republican who was chosen by his party to advocate for extending the investment tax break, pointed out that it affected more people than the increase in the alternative minimum tax. About 30 million taxpayers get dividends, while nearly 19 million are expected to pay the A.M.T. on 2006 income.

But many of the dividend checks are quite small. The investment tax savings in 2006 will be heavily concentrated on about 234,000 households, generally headed by someone 50 or older, with an average income of $2.6 million, more than most Americans earn in a lifetime. By comparison, most of the increase in the alternative tax is being paid by about 12 million families with children.

Leonard Burman, a co-director of the Tax Policy Center, said he had not noticed the similarity in the amount that the middle class will pay and that the rich will save until The New York Times sent him a comparison of the separate estimates produced by the center.

Mr. Burman said the comparison "puts in context claims made by some that this is a tug of war between" what Mr. Bush has dubbed the haves and the have-mores.

He added that once Americans realized their taxes had increased, he expected more pressure on Congress to restore the A.M.T. patch.

Tom Minnery, vice president of public policy for Focus on the Family, a politically influential Christian ministry based in Colorado Springs, said his organization was just beginning to study the effective taxes on families.

"This is a new one on the horizon, and I am very concerned about it," Mr. Minnery said of the A.M.T. increase, adding that "any policy that punishes the nuclear family is foolish."

The tax break that expired at the end of 2005 limited the alternative minimum tax to 3.6 million taxpayers, of which 2.1 million were families with children.

This year 18.9 million taxpayers are facing the alternative levy, with 11.8 million representing families with children. Without Congressional action, those affected will pay $26.6 billion more in federal income taxes for this year. Almost the same amount, $24.1 billion, will be saved by all investors, the Tax Policy Center estimated. Actual savings for investors are likely to be higher if recent stock market growth continues.

The alternative tax was originally adopted in 1969 to ensure that people who earned the equivalent of more than $1 million in today's dollars did not live tax free. It has not been fully adjusted for inflation and was not integrated into the Bush tax cuts. In addition, Congress in 1986 made basic changes in what kind of deductions are counted in determining whether one has to pay the alternative levy, causing it to become a tax on the middle class.

In the beginning it took away exotic breaks to high-income taxpayers who paid little or no tax. Now it denies people exemptions for themselves and their children and deductions for state income taxes and local property taxes.

Just one-tenth of 1 percent of the increased alternative tax is being paid this year by those making $1 million or more, the Tax Policy Center estimates, even though this is the only group affected by the original version of the levy.

Carl Hulse contributed reporting for this article.

    With Tax Break Expired, Middle Class Faces a Greater Burden for 2006, NYT, 16.4.2006, http://www.nytimes.com/2006/04/16/us/16tax.html

Bush urges Congress

to make tax cuts permanent

Sat Apr 15, 2006 10:37 AM ET
Reuters

WASHINGTON (Reuters) - As Americans face a deadline for filing taxes, President George W. Bush on Saturday pressed Congress to extend tax cuts, saying they create jobs and economic growth.

A push by House and Senate Republicans for $70 billion in tax cuts was derailed earlier this month before lawmakers went on a two-week spring recess.

The tax cuts would have extended the maximum 15 percent tax rate on capital gains and dividends beyond 2008. Without congressional action, capital gains taxes would jump to 20 percent and dividends would be taxed as regular income.

"Tax relief has done exactly what it was designed to do: It has created jobs and growth for the American people," Bush said in his weekly radio address.

"Yet some here in Washington are now proposing that we raise taxes, either by repealing the tax cuts or letting them expire," he said. "To keep our economy creating jobs and opportunity, Congress needs to make the tax relief permanent."

Democrats have criticized the Republican tax proposals as mainly benefiting the wealthy.

    Bush urges Congress to make tax cuts permanent, R, 15.4.2006, http://today.reuters.com/news/articlenews.aspx?type=topNews&storyid=2006-04-15T143732Z_01_N14182417_RTRUKOC_0_US-BUSH-TAXES.xml

  For Leading Exxon to Its Riches, $144,573 a Day        NYT        15.4.2006
http://www.nytimes.com/2006/04/15/business/15pay.html?hp&ex=
1145160000&en=a1bc7978beba066b&ei=5094&partner=homepage

For Leading Exxon to Its Riches, $144,573 a Day

April 15, 2006
The New York Times
By JAD MOUAWAD

For 13 years as chairman and chief executive, Lee R. Raymond propelled Exxon, the successor to John D. Rockefeller's Standard Oil Trust, to the pinnacle of the oil world.

Under Mr. Raymond, the company's market value increased fourfold to $375 billion, overtaking BP as the largest oil company and General Electric as the largest American corporation. Net income soared from $4.8 billion in 1992 to last year's record-setting $36.13 billion.

Shareholders benefited handsomely on Mr. Raymond's watch. The price of Exxon's shares rose an average of 13 percent a year. The company, now known as Exxon Mobil, paid $67 billion in total dividends.

For his efforts, Mr. Raymond, who retired in December, was compensated more than $686 million from 1993 to 2005, according to an analysis done for The New York Times by Brian Foley, an independent compensation consultant. That is $144,573 for each day he spent leading Exxon's "God pod," as the executive suite at the company's headquarters in Irving, Tex., is known.

Despite the company's performance, some Exxon shareholders, academics, corporate governance experts and consumer groups were taken aback this week when they learned the details of Mr. Raymond's total compensation package, including the more than $400 million he received in his final year at the company.

Shareholder advocates point to what they describe as stealth compensation arranged for Mr. Raymond but not disclosed in proxy filings. Consumer groups complain that while last year's rise in global oil prices left many consumers feeling less prosperous, oil executives have become a lot richer from the higher prices. And some corporate governance experts argue that much of Mr. Raymond's pay came from easy profits generated by skyrocketing oil prices.

"It's entrepreneurial returns for managerial conduct," said Charles M. Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "Exxon was there long before Mr. Raymond was there and will be there long after he leaves. Yet he received Rockefeller returns without taking the Rockefeller risk."

Exxon says that Mr. Raymond's compensation and retirement package was tied to the company's stellar performance. According to the company proxy statement, filed Wednesday, the package recognized his "outstanding leadership of the business, continued strengthening of our worldwide competitive position, and continuing progress toward achieving long-range strategic goals."

Through an Exxon spokesman, Mr. Raymond declined to comment.

Mr. Raymond certainly distinguished himself as an oil executive. Exxon is known in the business as a disciplined and tightly focused company with an obsessive attention to the bottom line. In 1999, Mr. Raymond pulled his biggest coup by taking advantage of a slump in oil prices to acquire Mobil in an $81 billion merger, at the time the largest ever.

Thanks to his strategy, the company each day produces 2.5 million barrels of oil — more than Kuwait — and 9.2 billion cubic feet of natural gas. It is the world's top refiner and controls 22 billion barrels of oil reserves, the most among its publicly traded peers.

Other oil executives have also benefited from the doubling of oil prices over the last two years. For example, Ray R. Irani, the chief executive of Occidental Petroleum, received about $63 million in total compensation last year, an increase of more than 50 percent over 2004. Over the last three years, Mr. Irani has reaped more than $135 million, mostly in options and restricted stock.

David J. O'Reilly, the chief executive of Chevron, received nearly $37 million in salary, bonus, stock and stock options last year. The stock and options vest over multiple years. Mr. O'Reilly already owns stock options valued at $34 million.

Still, Mr. Raymond's package for 2005 stands out, even stripping the $98 million lump-sum value of his pension plan. He received $19.9 million in salary, bonus and other incentives for 2005. He made $21.2 million on options he exercised last year. And he was awarded 550,000 restricted shares, bringing the total he owns to 3.26 million, with a value of $199 million, at $61 a share, an average of Exxon's share price since March 1. Some of the restricted shares vest in 5 and 10 years. He owns more options that hold a value of $69.6 million.

While generous, the other major oil companies have been much more restrained with their top executives.

At BP, Lord Browne received $14.8 million in 2005, a mix of salary, bonus and the value of restricted shares that vested in February 2005 and 2006. Jeroen van der Veer, the head of Royal Dutch Shell, received $4.33 million in base pay, bonus and other benefits, a 33 percent increase from the previous year, and received shares worth another $4.5 million.

Still, the record for total compensation in one year goes to Steven P. Jobs, who received $775 million, mostly from stock options, in 2000 from Apple Computer. Michael D. Eisner, the former head of the Walt Disney Company, took home $577 million in 1997, also largely from stock option exercises.

Mr. Raymond, who is 67, has spent 43 years at Exxon. Born in Watertown, S.D., he joined Exxon in 1963 and became chairman and chief executive in 1993. At the board's request, he deferred his departure past 2003, the year he reached the company's retirement age of 65, to oversee the merged operations and pick a successor.

He agreed to stay on through 2006 as a consultant to help with high-level government contacts between oil executives and heads of state. He will receive $1 million for his services.

Pearl Meyer, a senior managing partner at Steven Hall & Partners, a New York-based company that advises corporate boards on executive compensation, said Mr. Raymond's package was fair.

"Lee Raymond is reaping the results of a 43-year career during which he led the organization through difficult times as well as some good years," Ms. Meyer said. Her previous firm provided consulting services to Exxon's board but was not involved in Mr. Raymond's retirement compensation.

"Exxon has grown and prospered," she said.

But given the recent increases in gasoline prices, to a national average of $2.60 a gallon, the public and politicians are particularly attuned to the fortunes of the oil industry these days. Congress has been considering imposing a windfall tax as well as new legislation to restrict future mergers in the industry.

"He served his stockholders well and the American public poorly," said Mark Cooper, the research director at the Consumer Federation of America.

Mr. Elson of the University of Delaware said that Mr. Raymond just happened to be at the right place to benefit from high oil prices.

"Exxon's performance has more to do with commodity prices than any strategy vis-à-vis its competitors," he said. "Everyone had a good year in the oil business."

But for most experts, the most problematic aspect of Mr. Raymond's package was his $98.4 million pension, which he elected to take as a lump-sum payment instead of annualized returns that would last through his retirement years. Also, the value of the pension rose in 2005 by about 20 percent, in large part because it was based on his final year of income. The final amount was not disclosed until the last proxy statement.

"It's a funny thing to call it a pension; basically it's a check of nearly $100 million," said Lucian Bebchuk, director of the corporate governance program at Harvard Law School and the co-author of "Pay Without Performance: The Unfulfilled Promise of Executive Compensation" (Harvard University Press, November 2004).

"That's another illustration of the huge problems that arise from the fact that pensions have not been transparent in the past and companies have used them to provide compensation under the radar screen," he said.

The Securities and Exchange Commission is considering new rules for the 2007 proxy season, which may require disclosure of far more detail about how compensation committees set pay for top corporate officers. The agency also would force companies to provide more information about the perks, retirement packages and post-employment compensation they award the most senior employees.

For Lynn Turner, a managing director of Glass, Lewis & Company, a shareholder advisory firm, and a former chief accountant at the S.E.C., shareholders should weigh in more forcefully in the choice of corporate directors.

"As long as investors continue to vote for directors who have granted large pay and benefit packages as well as oppose any reasonable limitations on compensation, management and their boards will continue to act and behave as they have without real change," Mr. Turner said.

The board of Exxon Mobil includes Hank McKinnell, the chairman of Pfizer. When he retires in 2008, Mr. McKinnell will receive a pension benefit now worth $83 million, according to the company's proxy filing. That was the largest for a chief executive at any of the companies in the Standard & Poor's 500-stock index until Mr. Raymond's pension was made public.

    For Leading Exxon to Its Riches, $144,573 a Day, NYT, 15.4.2006, http://www.nytimes.com/2006/04/15/business/15pay.html?hp&ex=1145160000&en=a1bc7978beba066b&ei=5094&partner=homepage

U.S. Trade Deficit Improved in February

April 12, 2006
The New York Times
By VIKAS BAJAJ

The nation's trade deficit surprisingly narrowed in February, the Commerce Department reported today, as imports of cars, household goods and capital goods fell.

American imports of goods and services exceeded exports by $65.7 billion last month. The trade deficit was about 4.1 percent less than the $68.6 billion posted in January, a record, but up only slightly from $65.1 billion in December and about 9 percent higher than the average monthly trade gap in 2005.

Exports and imports both fell, but imports turned down more sharply as fewer foreign cars, furniture and electronics were shipped into the country.

"This is a positive blip in an overall deteriorating trend in the U.S. trade picture," said Ashraf Laidi, chief currency analyst for MG Financial Group, a currency trading firm based in New York.

The country's trade deficit with China, the source of much concern in Washington, dropped a sharp 23 percent, to $13.8 billion, in the month, but analysts suggested that the decline was temporary and caused by the Chinese New Year, when many factories and businesses shut down to allow workers to celebrate the holidays in late January and early February. Indeed, the trade figures lend support to that idea, exports to China rose 17 percent and imports from the country fell by about 16 percent in the month.

The smaller trade gap with China is likely to do little to alleviate the increased calls in Congress for the Bush administration to label Beijing a "currency manipulator" in a coming Treasury Department report. Trade is also expected feature prominently during the visit of the Chinese president, Hu Jintao, to Washington next week.

The nation's bill for petroleum-based imports was little changed at $24.6 billion, or about 14 percent of all imports, in February even though the country imported fewer barrels of crude oil and other energy products. The average price for imported crude oil rose to $53.72 a barrel from $51.93 in February, according to the Commerce Department.

The price for oil on futures markets has climbed much higher since then on worries about the nuclear standoff with Iran and production disruptions in Nigeria, an indication that the United States' trade deficit could climb much higher in the coming months.

Crude oil for May delivery was trading down 38 cents, to $68.60 a barrel, late this morning on the New York Mercantile Exchange. Still, oil prices remain near their highs after Hurricane Katrina disrupted energy supplies on the Gulf Coast in August.

Over all, exports fell by 1.1 percent, to $113 billion, with the biggest decline coming in industrial supplies and foods like corn and soybeans while exports of planes, artwork and metals increased.

Imports fell by 2.3 percent, to $178 billion, including a 6 percent drop in automobile imports and decreases in furniture, stereo equipment and other household items. Increases were seen in a handful of categories like royalties, drugs and some industrial materials.

    U.S. Trade Deficit Improved in February, NYT, 12.4.2006, http://www.nytimes.com/2006/04/12/business/12cnd-econ.html?hp&ex=1144900800&en=9df2fa87e1e7cdab&ei=5094&partner=homepage

The Long-Distance Journey of a Fast-Food Order

April 11, 2006
The New York Times
By MATT RICHTEL

SANTA MARIA, Calif. — Like many American teenagers, Julissa Vargas, 17, has a minimum-wage job in the fast-food industry — but hers has an unusual geographic reach.

"Would you like your Coke and orange juice medium or large?" Ms. Vargas said into her headset to an unseen woman who was ordering breakfast from a drive-through line. She did not neglect the small details —"You Must Ask for Condiments," a sign next to her computer terminal instructs — and wished the woman a wonderful day.

What made the $12.08 transaction remarkable was that the customer was not just outside Ms. Vargas's workplace here on California's central coast. She was at a McDonald's in Honolulu. And within a two-minute span Ms. Vargas had also taken orders from drive-through windows in Gulfport, Miss., and Gillette, Wyo.

Ms. Vargas works not in a restaurant but in a busy call center in this town, 150 miles from Los Angeles. She and as many as 35 others take orders remotely from 40 McDonald's outlets around the country. The orders are then sent back to the restaurants by Internet, to be filled a few yards from where they were placed.

The people behind this setup expect it to save just a few seconds on each order. But that can add up to extra sales over the course of a busy day at the drive-through.

While the call-center idea has received some attention since a scattered sampling of McDonald's franchises began testing it 18 months ago, most customers are still in the dark. For Meredith Mejia, a regular at a McDonald's in Pleasant Hill, Calif., near San Francisco, it meant that her lunch came with a small helping of the surreal. When told that she had just ordered her double cheeseburger and small fries from a call center 250 miles away, she said the concept was "bizarre."

And the order-taking is not always seamless. Often customers' voices are faint, forcing the workers to ask for things to be repeated. During recent rainstorms in Hawaii, it was particularly hard to hear orders from there over the din.

Ms. Vargas seems unfazed by her job, even though it involves being subjected to constant electronic scrutiny. Software tracks her productivity and speed, and every so often a red box pops up on her screen to test whether she is paying attention. She is expected to click on it within 1.75 seconds. In the break room, a computer screen lets employees know just how many minutes have elapsed since they left their workstations.

The pay may be the same, but this is a long way from flipping burgers.

"Their job is to be fast on the mouse — that's their job," said Douglas King, chief executive of Bronco Communications, which operates the call center.

The center in Santa Maria has been in operation for 18 months; a print-out tacked to a wall declares, "Over 2,540,000 served." McDonald's says it is still experimental, but it puts an unusual twist on an idea that is gaining traction: taking advantage of ever-cheaper communications technology, companies are creating centralized staffs of specially trained order-takers, even for situations where old-fashioned physical proximity has been the norm.

The goals of such centers are not just to cut labor costs but also to provide more focused customer service — improving the level of personal attention by sending Happy Meal orders on a thousand-mile round trip.

"It's really centralizing the function of not only taking the order but advising the customer on getting more out of the product, which can sell more — at least in theory," said Joseph Fleischer, chief technical editor for Call Center Magazine, an industry trade publication.

McDonald's is joined by the owner of Hardee's and Carl's Jr., CKE Restaurants, which plans to deploy a similar system later this year in restaurants in California.

Not everyone is sold on the idea. Denny Lynch, a spokesman for Wendy's Restaurants, said that the approach had not yet proved itself to be cost-effective. "Speed is incredibly important," he said, but "we haven't given this solution any serious thought."

Mr. Lynch said that Wendy's would need concrete evidence that call centers worked. For example, could remote order-takers increase sales by asking customers to order dessert?

Then there is the question of whether combining burgers, shakes and cyberspace is an example of the drive for efficiency run amok — introducing a mouse where the essential technology is a spatula.

"This is a case of 'if it ain't broke, don't fix it,' " said Sherri Daye Scott, editor of QSR Magazine, a trade journal covering fast-food outlets, which refer to themselves as quick-service restaurants.

But the backers of the technology are looking to expand into new industries. The operator of one of the McDonald's centers is developing a related system that would allow big stores like Home Depot to equip carts with speakers that customers could use to contact a call center wirelessly for shopping advice.

Jon Anton, a founder of Bronco, says that the goal is "saving seconds to make millions," because more efficient service can lead to more sales and lower labor costs. With a wireless system in a Home Depot, for example, a call-center operator might tell a customer, "You're at Aisle D6. Let me walk you over to where you can find the 16-penny nails," Mr. Anton said.

Efficiency is certainly the mantra at the Bronco call center, which has grown from 15 workers six months ago to 125 today. Its workers are experts in the McDonald's menu; they are trained to be polite, to urge customers to add items to their order and, above all, to be fast. Each worker takes up to 95 orders an hour during peak times.

Customers pulling up to the drive-through menu are connected to the computer of a call-center employee using Internet calling technology. The first thing the McDonald's customer hears is a prerecorded greeting in the voice of the employee. The order-takers' screens include the menu and an indication of the whether it is time for breakfast or lunch at the local restaurant. A "notes" section shows if that restaurant has called in to say that it is out of a particular item.

When the customer pulls away from the menu to pay for the food and pick it up, it takes around 10 seconds for another car to pull forward. During that time, Mr. King said, his order-takers can be answering a call from a different McDonald's where someone has already pulled up.

The remote order-takers at Bronco earn the minimum wage ($6.75 an hour in California), do not get health benefits and do not wear uniforms. Ms. Vargas, who recently finished high school, wore jeans and a baggy white sweatshirt as she took orders last week.

The call-center system allows employees to be monitored and tracked much more closely than would be possible if they were in restaurants. Mr. King's computer screen gives him constant updates as to which workers are not meeting standards. "You've got to measure everything," he said. "When fractions of seconds count, the environment needs to be controlled."

Speed and sales volume are not the only factors driving remote order-taking. CKE Restaurants, for instance, wants to improve customer service. It plans to start taking remote orders in September at five Carl's Jr.'s restaurants in California, with a broader deployment after that.

CKE said its workers were strained doing numerous tasks at once — taking orders, helping to fill them, accepting cash and keeping the restaurants clean.

Accuracy problems at the drive-through "are a result of the fact that the people working them are multitasking to the point they forget details," said Jeff Chasney, head of technology operations for CKE.

Mr. Chasney said the new system could help lower barriers in language and communication. Often, in California in particular, he said, the employee may primarily speak Spanish, while the customer speaks only English — a problem that can be eliminated with a specialized call-center crew.

"We believe we raise the customer-service bar by having people who are very articulate, have a good command of the English language, and some who are bilingual," he said.

Some 50 McDonald's franchises are testing remote order-taking, some using Bronco Communications. Others are using Verety, a company based in Oak Brook, Ill. (also the home of McDonald's), that has taken the concept further by contracting workers in rural North Dakota to take drive-through orders from their homes.

A spokesman for McDonald's, Bill Whitman, said that the results of the test runs had been positive so far, but that it had not yet decided whether to expand its use of the technology.

The system does sometimes lead to mix-ups and customer confusion. The surprised customer will say to the cashier, "You didn't take my order," said Bertha Aleman, manager of the McDonald's in Pleasant Hill. For the last seven months the franchise has used the Bronco system to help manage its two drive-through lanes at lunch.

Ms. Aleman said that, over all, the system had improved accuracy and helped her cut costs. She said that now she did not need an employee dedicated to taking orders or, during the lunch rush, an assistant for the order-taker to handle cash when things backed up. "We've cut labor," she said.

The call-center workers do have some advantages over their on-the-scene counterparts. Ms. Vargas said it was strange to be so far from the actual food. But after work, she said, "I don't smell like hamburgers."

    The Long-Distance Journey of a Fast-Food Order, NYT, 11.4.2006, http://www.nytimes.com/2006/04/11/technology/11fast.html?hp&ex=1144814400&en=ad12af5ee011af1e&ei=5094&partner=homepage

Outside Advice on Boss's Pay May Not Be So Independent

April 10, 2006
The New York Times
By GRETCHEN MORGENSON

For Ivan G. Seidenberg, chief executive of Verizon Communications, 2005 was a very good year. As head of the telecommunications giant, Mr. Seidenberg received $19.4 million in salary, bonus, restricted stock and other compensation, 48 percent more than in the previous year.

Others with a stake in Verizon did not fare so well. Shareholders watched their stock fall 26 percent, bondholders lost value as credit agencies downgraded the company's debt and pensions for 50,000 managers were frozen at year-end. When Verizon closed the books last year, it reported an earnings decline of 5.5 percent.

And yet, according to the committee of Verizon's board that determines his compensation, Mr. Seidenberg earned his pay last year as the company exceeded "challenging" performance benchmarks. Mr. Seidenberg's package was competitive with that of other companies in Verizon's industry, shareholders were told, and was devised with the help of an "outside consultant" who reports to the committee.

The independence of this "outside consultant" is open to question. Although neither Verizon officials nor its directors identify its compensation consultant, people briefed on the relationship say it is Hewitt Associates of Lincolnshire, Ill., a provider of employee benefits management and consulting services with $2.8 billion in revenue last year.

Hewitt does much more for Verizon than advise it on compensation matters. Verizon is one of Hewitt's biggest customers in the far more profitable businesses of running the company's employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. According to a former executive of the firm who declined to be identified out of concern about affecting his business, Hewitt has received more than half a billion dollars in revenue from Verizon and its predecessor companies since 1997.

In other words, the very firm that helps Verizon's directors decide what to pay its executives has a long and lucrative relationship with the company, maintained at the behest of the executives whose pay it recommends.

This is the secretive, prosperous and often conflicted world of compensation consultants, who are charged with helping corporate boards determine executive pay that is appropriate and fair, and who are often cited as the unbiased advisers whenever shareholders criticize a company's pay as excessive.

It is a world where consulting fees can reach $950 an hour, rivaling those of the nation's top lawyers. And it has grown into a substantial industry where there is little disclosure about how executive pay is determined.

Marc C. Reed, executive vice president for human resources at Verizon, declined to identify the company's compensation consultant, noting that the Securities and Exchange Commission did not require it. "We understand the potential perception issue," he said in an e-mail message, "but we think it's important to honor the confidentiality of our advisers, and we have always ensured there have been no conflicts of interest."

Suzanne Zagata-Meraz, a spokeswoman for Hewitt, said in a statement: "Hewitt Associates has strict policies in place to ensure the independence and objectivity of all our consultants, including executive compensation consultants. In addition, Hewitt adheres to strict confidentiality requirements and a strong Hewitt code of conduct."

Because much of what goes on in compensation consulting stays in the hushed confines of corporate boardrooms, the roles of these advisers in determining executive pay have been hidden from investors' view. Nevertheless, corporate governance experts say, the conflicts bedeviling some of the large consulting firms help explain why in good times or bad, executive pay in America reaches dizzying heights each year.

Warren E. Buffett, the chief executive of Berkshire Hathaway and an accomplished investor, has noted the troubling contributions that compensation consultants have made to executive pay in recent years.

"Too often, executive compensation in the U.S. is ridiculously out of line with performance," he wrote in his most recent annual report. "The upshot is that a mediocre-or-worse C.E.O. — aided by his handpicked V.P. of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet & Bingo — all too often receives gobs of money from an ill-designed compensation arrangement."

How Much Is Too Much?

Executive pay has been a subject of criticism for decades. Even though last year's pay figures showed slower growth than in previous years, the fact that executive compensation often has little relationship to the performance of the company has contributed to a growing sense among investors that pay is diminishing shareholder returns. "Everybody should have an interest in controlling this explosion in executive pay," said Frederick E. Rowe Jr., chairman of the Texas Pension Review Board who is also chairman of Greenbrier Partners, a money management firm in Dallas. "The wealth of America has been built through the returns of our public corporations, and if those returns are being redirected to company managements, then the people who get the short end of the stick are the people who hope to retire someday."

The median compensation for chief executives at roughly 200 large companies rose modestly to $8.4 million last year, from $8.2 million in 2004, according to Equilar Inc., a compensation analysis firm in San Mateo, Calif. The median was $7.2 million in 2003.

There are those who defend the current levels of executive pay, saying that the packages are set by the market and reflect the rising value of executives in an increasingly complex and competitive arena.

In an interview with The Wall Street Journal on March 20, John W. Snow, secretary of the Treasury, characterized executive pay this way: "In an aggregate sense, it reflects the marginal productivity of C.E.O.'s." Mr. Snow added that he trusted the marketplace to reward executives. Mr. Snow was a member of the Verizon board from 2000 to 2002 and on its compensation committee in 2001.

But defenders of executive pay are increasingly being drowned out by investors and workers who see some packages not only as an unjustified cost but also as a potentially divisive social issue.

Any discussion of executive pay quickly leads to compensation consultants, because they are the experts relied upon by company directors trying to balance their fiduciary duties to shareholders and their desire to keep management happy. Directors look to consultants for their knowledge about prevailing pay practices as well as the tax and legal implications of different types of compensation. Yet the consultants' practices have received little scrutiny.

Consultants help select the companies to be used in peer groups for comparison purposes in judging an executive's performance. Picking a group of companies that will be easy to outperform is one way to ensure that executives can clear performance hurdles. Another is to structure an executive's pay so that it is always at or near the top of those in his industry regardless of his company's performance. This pushes up pay simply when others in the industry do well.

Consultant creativity is behind some of the pay practices that have generated huge windfalls for executives in recent years. Some of the most costly practices involving stock options, like mega-grants and automatic reloads of options when others are cashed in, have vanished under pressure as accounting rules have changed. But innovative practices continue to crop up and spread quickly because comparisons with what other executives receive is a central factor driving executive pay.

An increasingly common practice of consultants is to use the same performance benchmark to generate both short-term and long-term pay. This arrangement rewards executives twice for a single achievement, noted Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm in Portland, Me.

A recent study by the Corporate Library, "Pay for Failure: The Compensation Committees Responsible," identified 11 major companies whose shareholder returns had been negative for five years, but whose chief executives' pay had exceeded $15 million during the last two years combined. "The disconnect between pay and performance is particularly stark" at these companies, the study noted. They include AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner and Wal-Mart.

Directors Help Each Other

Verizon is the other company on the list. Mr. Seidenberg's $75 million total pay for five years looked especially high against a total shareholder loss of more than 26 percent in the period, the study said. Verizon's board received a grade of D in effectiveness from the Corporate Library.

Robert A. Varettoni, a Verizon spokesman, pointed out that Mr. Seidenberg had received the first increase in base salary last year since the company was formed in 2000. "During this particularly tumultuous time in the telecom industry," Mr. Varettoni said in an e-mail message, "Verizon has maintained its financial health and infrastructure investments, increased its dividends, lowered its debt, transformed its revenue growth profile, and provided customers with a steady stream of product innovations, such as wireless broadband services and fiber-optic-based TV services."

Doreen A. Toben, chief financial officer of Verizon, sits on the board of The New York Times Company and on its audit committee. Hewitt Associates is the compensation consultant for The New York Times, said Catherine Mathis, a spokeswoman for the Times, but does not handle other business for the company.

Consultants are not alone in driving executive pay. Corporate boards are often composed of other chief executives with an interest in keeping executive pay high. Even though stock exchange regulations require compensation committee members to be independent of the executives whose remuneration they oversee, their connections with those people can run deep.

Verizon's compensation committee, for example, consists entirely of chief executives or former chief executives. Three of the four members sit on other boards with Mr. Seidenberg. When he was on Wyeth's board, Mr. Seidenberg helped set the pay of one member of Verizon's compensation committee, John L. Stafford, previously the chairman and chief executive of Wyeth.

Human resources officials often work closely with the compensation consultants and report directly to the chief executives. Then there are the executives themselves, who have been known to make quiet suggestions to their directors about their pay, according to board members and compensation experts who spoke about their experiences but said they feared retribution if they were identified.

Mutual fund and pension fund managers, too, regularly vote their shares in favor of large grants of stock options or restricted stock.

The potential for conflicts in consulting arrangements can be difficult for outsiders to spot. Even if the consultant is identified, the other work that a consultant's company performs for the compensation client is hard to plumb.

"I wish we could figure out how to flesh out the conflicts that pay consultants have in the same way we were successful in fleshing out the conflicts in Wall Street research," said Richard H. Moore, who as treasurer of North Carolina oversees $70 billion. "This is one of the last pieces that are pure unadulterated conflicts that neither the board nor the shareholder is well served by."

Room for Potential Conflicts

The only reference to Hewitt Associates in any Verizon filing, for instance, is a letter sent by the company to institutional shareholders and attached to a 2004 proxy filing. The letter, written by a Hewitt official, details the supplemental executive retirement plan in response to a shareholder proposal that would have required stockholder approval of any "extraordinary benefits for senior executives" at Verizon.

Last year, Verizon's directors described the compensation adviser as an "independent, outside consultant." In this year's proxy, the word "independent" is missing.

The Securities and Exchange Commission has proposed rules on compensation disclosure that would require compensation consultants to be identified. But the rules would not force companies to disclose details of other services provided by the consulting firm or its affiliates.

The potential for conflict is reminiscent of that among auditing firms that were performing lucrative consulting services related to information technology and tax issues for the same companies whose financial results they were certifying. When the S.E.C. required companies to disclose how much they were paying in consulting as well as audit fees, the industry was compelled to separate these businesses.

"Auditors' giving companies tax advice while acting as their independent auditors was clearly crossing the line into bad corporate governance in the cases of Enron and Hollinger," said Mr. Hodgson of the Corporate Library. Referring to pay consultants, he added: "The perception has been growing that it is better that there be a clear line of distinction between the people the board hires and the people hired by the corporation."

The Conference Board, a nonprofit organization that conducts research and conferences for business leaders, issued a report in January suggesting, among other practices, that boards hire their own compensation consultants, who have not done work for the company or its current management. The report quoted a former chief justice of Delaware, E. Norman Veasey: "Compensation committees should have their own advisers and lawyers. Directors who are supposed to be independent should have the guts to be a pain in the neck."

But according to consultants and directors, compensation committees typically employ a consultant who also works with a human resources executive, the company's chief executive and the chief financial officer. In many cases, a company's chief executive is present at meetings where the compensation consultant and the human resources executive hash out the terms of a package.

Some compensation committees have started hiring their own pay consultants who do no other work for their companies. James F. Reda & Associates, a small pay consultant in New York, founded in 2004, works with some of the nation's largest companies on executive compensation issues. But such independence is uncommon.

In a comment letter to the S.E.C. on its proposed disclosure rules, Mr. Reda noted that all but one of the nation's large compensation consultants offered other services. "Most diversified H.R. consulting firms earn more on selling other services than on performing compensation consulting services," he wrote.

Hewitt; Watson Wyatt; Towers Perrin; Pearl Meyer & Partners, a unit of Clark Consulting; and Mercer Human Resources Consulting, a unit of Marsh & McLennan, all provide a vast array of services to corporate clients.

Hewitt, for example, conducted mostly actuarial work when it was founded in 1940. Now, it is much more diversified, operating in 31 countries and providing things like investment services. Of the $2.8 billion in revenues at Hewitt in 2005, 71 percent came from its outsourcing business; 29 percent came from its human resources consulting unit.

Typically, only a fraction of a firm's sales come from compensation consulting. Mr. Reda estimates that compensation consulting generates less than 2 percent of a diversified firm's revenues.

Verizon is not the only Hewitt compensation client that uses the firm for actuarial, administrative, investment advice or other services. According to filings with the Labor Department, Hewitt has worn two hats in its work for Boeing, Maytag, Genuine Parts, Procter & Gamble, Toro, Morgan Stanley and Nortel Networks.

Because few companies identify their compensation consultant, this list is by no means comprehensive.

At Verizon, Hewitt is ubiquitous. The company operates Verizon's employee benefits Web sites, where its workers get information about their pay, health and retirement benefits, college savings plans and the like. Labor Department filings show that Hewitt is actuary for three of Verizon's pension plans. Hewitt also performed extensive work for the two companies — Bell Atlantic and GTE — that merged to become Verizon in 2000. Immediately after the merger, Verizon employed Hewitt to help it assess overall human resources costs. Over the years, Hewitt's Web site has offered testimonials from Verizon officials about its services.

These multiple relationships are no accident. Hewitt calls its offerings "total human resources solutions" that help clients manage the costs of their work force efficiently.

Towers Perrin, Watson Wyatt and Mercer Human Resources make the same pitch. They contend, as Wall Street firms once did about stock analysts and investment bankers, that potential conflicts can be managed properly. In a working group report written by corporations and consultants last year for the Conference Board, they argued that companies and boards are best served by using a single compensation consultant — less adversarial and lower cost — and that the consultant should work closely with the company's management in devising executive pay. This argument was rejected in the Conference Board's subsequent report.

A 'One-Two Punch'

Brian Foley, an executive compensation expert who operates his own independent consulting firm in White Plains and who does not work for Verizon, analyzed Mr. Seidenberg's pay for this article. "If you were a shareholder looking at how Ivan did financially, in terms of new stuff, if you didn't know the facts, you would have sworn they had a really good year," Mr. Foley said. "Bonus up 23 percent and a 40 percent salary increase — that's a one-two punch in a year when stockholders are down."

According to Verizon's proxy, Mr. Seidenberg received his raises last year in part because the company expanded "its customer base through innovative products in wireless, broadband, data, video and long-distance services," according to the company's proxy statement. In addition, Verizon made significant investments in its network and enlarged its market share. Verizon's annual consolidated operating revenue increased 6 percent, driven by 16.8 percent revenue growth at Verizon Wireless and 10.5 percent revenue growth in wireline data revenues.

Mr. Reed noted that last year Verizon's board canceled 209,660 restricted shares Mr. Seidenberg was to receive. "Ivan and the board have made a series of strategic business choices that are designed to create sustainable long-term shareholder value," he said in an e-mail message. "In 2006, these plans have begun to take root, and our shareholders have begun to benefit accordingly."

But Mr. Foley pointed to several aspects of Mr. Seidenberg's pay that seem out of sync. One is the low level of performance — beginning at the 21st percentile of other companies — that generates an incentive stock payout. "If you have 100 companies in the sample, as long as you beat 20 of them you start making money," Mr. Foley said. "That hurdle is so low it's almost embedded in the ground."

Another surprise, Mr. Foley said, was Verizon's contributions to Mr. Seidenberg's retirement plan in recent years. "They've put in almost $6 million in four years in new contributions — that goes beyond holy cow," he said. "I look at this in the context of all the retrenchment Verizon has made in retiree benefits and medical for the rank-and-file guys." Verizon has frozen future benefits to be paid under Mr. Seidenberg's retirement plan, which had grown to $15.2 million by the end of last year.

Each year that Mr. Seidenberg has been Verizon's chief executive, a shareholder proposal has appeared on the company's proxy that is critical of its executive pay. At this year's meeting, scheduled for May 4, shareholders will vote on a proposal that would require that at least three-quarters of stock option and restricted share grants to executives be "truly performance-based, with the performance criteria disclosed to shareholders."

The company's directors say its incentive pay plans already "provide aggressive and competitive performance objectives that serve both to motivate and retain executives and to align their interests with those of the company's shareholders."

But the Corporate Library study concurred with Mr. Foley in questioning Verizon's practice of paying bonuses even when the company's performance lags well behind that of most companies in its comparison groups. "This is not even logical," the study asserted.

Mr. Reed of Verizon noted that the consultant used by the compensation committee did not certify board actions, "but its perspective — which board members may or may not agree with — is one of many inputs considered before the board reaches its independent decision."

On the matter of disclosing the consultant's identity, "We'll continue to look at this issue," he said, "even if the S.E.C. does not adopt new guidelines."

Gary Lutin, an investment banker at Lutin & Company in New York and an adviser in corporate control contests, said: "Paying some friendly consultant $100 million to help you justify the diversion of shareholder wealth to managers is just adding another $100 million to the diversion. If you're really trying to be a responsible director, you'd never rely on an expert who can't be considered objective."

Shareholders Speak Up

Verizon's compensation committee is led by Walter V. Shipley, former chief executive of the Chase Manhattan Corporation, and is made up of Richard L. Carrión, chief executive of Banco Popular de Puerto Rico; Robert W. Lane, chief executive of Deere & Company; and Mr. Stafford, formerly of Wyeth.

None of Verizon's directors agreed to be interviewed for this article.

Many of the Verizon directors who are on its compensation committee have also met Mr. Seidenberg at board meetings of other public companies. At Wyeth meetings, Mr. Seidenberg encounters Mr. Shipley, who is the chairman of Verizon's compensation committee and who is a member of Wyeth's committee, sitting with Mr. Carrión, at least until 2006.

Mr. Seidenberg sees Mr. Stafford when the board of Honeywell International meets. Mr. Stafford is chairman of Honeywell's compensation committee, which includes Mr. Seidenberg.

C. William Jones, the president and executive director of BellTel Retirees, a group of 111,500 people, has had many meetings with Verizon executives to discuss pay.

BellTel Retirees have placed four shareholder proposals relating to executive compensation on Verizon proxies in recent years; the organization has won significant concessions from the company after the proposals attracted shareholder support.

Mr. Jones said Verizon executives had always treated him with respect. But the dialogue stops on the subject of Verizon's consultant. "I spoke to a senior vice president of human resources and said, 'Who is it?' " recalled Mr. Jones, who retired in 1990 with 30 years' service. "He said, 'We have a policy that we do not disclose that information.' I don't know what the secret is."

    Outside Advice on Boss's Pay May Not Be So Independent, NYT, 10.4.2006, http://www.nytimes.com/2006/04/10/business/10pay.html?hp&ex=1144728000&en=cc338320a3133b0d&ei=5094&partner=homepage

Economic View

Seizing Intangibles for the G.D.P.

April 9, 2006
The New York Times
By LOUIS UCHITELLE

THE plain fact is that when it comes to measuring how much the American economy produces and who gets what share of the pie, the federal government's most celebrated statistic — the gross domestic product — leaves something to be desired.

The G.D.P. is useful, as far as it goes. It tells us how much value — often called national income — is generated each year from the production of goods and services in the United States. The G.D.P. also breaks out how much of that income goes into profits and how much into wages and salaries.

This is where the trouble is. The numbers show that the profit portion of the gross domestic product has risen mildly in recent years, while the wage-and-salary share has shrunk slightly. There is evidence, however, that because of the way the G.D.P. is calculated, the actual shift is much more pronounced.

"We know that income inequality is quite substantial," said Harry J. Holzer, a labor economist at Georgetown University, "and this new evidence suggests that it is worse than we thought."

The Bureau of Economic Analysis, which issues the G.D.P. reports each quarter, is on the case. So are two prominent economists at the Federal Reserve. They all seem to be finding that the current methods for calculating G.D.P. undercount the dollar returns from research and development. What's more, this payoff is not showing up in workers' paychecks.

The approximately $300 billion spent each year on R & D is a big concern of the bureau's economists. Until now, it has been counted as an expense, reducing the profit total within the G.D.P. Starting in September, however, the bureau will publish an experimental G.D.P. account that parallels the standard quarterly report, except for one change: R & D will be counted as capital investment rather than as an expense.

There is logic in this change. Consider the process of making and selling a dress. The cloth and thread — the raw materials — that go into the dress are an expense that must be subtracted from the sales price of the dress, once it is sold, to arrive at a profit. The automated sewing machine that makes the dress, on the other hand, is counted in the G.D.P. accounts as a capital investment because, once installed, it makes dress after dress, generating a stream of revenue. It is an investment drawn from retained earnings to generate more earnings.

Similarly, the research and development that made Prozac possible generates revenue for years, just as the sewing machine does for the dressmaker. Successful research and development yields long-term returns, and the bureau's experimental G.D.P. acknowledges as much, by classifying R & D as capital investment in the satellite account. Capital investment, in turn, counts as a contribution to profit in the G.D.P.

This reclassification leaves no doubt that workers are being left behind as the G.D.P. expands. When R & D is counted as profit, the employee compensation share of national income drops by more than one percentage point. In a $12.5 trillion economy, that's big money.

Measured in dollars, wages aren't actually falling, but workers are losing ground. "If capital income is going up and wages stay the same, then the share of total national income that goes to labor goes down," said Sumiye Okubo, an associate director of the bureau, who is directing the experimental project.

The two Fed economists — Carol A. Corrado and Daniel E. Sichel — along with an outside collaborator, Charles R. Hulten, a University of Maryland economist, go much further than Ms. Okubo and her team in arguing that the G.D.P. data should be revised. They would do more than just reclassify R & D.

In a recent research paper, "Intangible Capital and Economic Growth," they agree with Ms. Okubo's team that formal, scientific research and development should be categorized as capital investment rather than as ordinary expenses. But they say that this treatment should be extended to a host of other investments that generate revenue streams over a period of years.

They would include various intangibles, like advertising when it is used to establish a brand name that permanently lifts sales, and a retail chain's outlays to adapt existing technology to the chain's needs, as Wal-Mart did in designing a superefficient inventory control system.

SUCH intangibles now approach $250 billion a year, up from only $11 billion in the 1970's, the three economists calculate. If these intangibles, along with R & D, were incorporated into G.D.P. on the profit side as capital investment, labor's share of national income would decline from a fairly steady 65 percent in the 1950's, 60's and 70's to less than 60 percent today.

The long decline doesn't show up in the standard G.D.P. accounts, which ascribe nearly 65 percent of national income to labor. "The hidden earnings from these knowledge investments have not been shared equally with workers," Mr. Hulten said.

Two reasons seem likely. Some of the profit is probably going to the wealthiest Americans — the upper 1 percent whose incomes have risen sharply, in part from dividends and other forms of corporate earnings.

Then, too, most of the nation's workers are bereft of bargaining power. Unless that returns, labor's share of national income seems likely to continue its decline.

    Seizing Intangibles for the G.D.P., NYT, 9.4.2006, http://www.nytimes.com/2006/04/09/business/yourmoney/09view.html



 

Off to the Races Again, Leaving Many Behind        NYT        9.4.2006
http://www.nytimes.com/2006/04/09/business/businessspecial/09pay.html

Executive Pay: A Special Report

Off to the Races Again, Leaving Many Behind

April 9, 2006
The New York Times
By ERIC DASH
OMAHA

IN 1977, James P. Smith, a shaggy-haired 21-year-old known as Skinny, took a job as a meat grinder at what is now a ConAgra Foods pepperoni plant. At $6.40 an hour, it was among the best-paying jobs in town for a high school graduate.

Nearly three decades later, Mr. Smith still arrives at the same factory, shortly before his 3:30 a.m. shift. His hair has thinned; he has put on weight. Today, his union job pays him $13.25 an hour to operate the giant blenders that crush 3,600-pound blocks of pork and beef.

His earnings, which total about $28,000 a year, have not kept pace even with Omaha's low cost of living. The company eliminated bonuses about a decade ago. And now, almost 50, Mr. Smith is concerned that his $80,000 retirement nest egg will not be enough — especially since his plant is on a list of ones ConAgra wants to sell.

"I will probably have to work until I die," Mr. Smith said in his Nebraskan baritone.

Not so for Bruce C. Rohde, ConAgra's former chairman and chief executive, who stepped down last September amid investor pressure. He is set for life.

All told, Mr. Rohde, 57, received more than $45 million during his eight years at the helm, and was given an estimated $20 million retirement package as he walked out the door.

Each year from 1997 to 2005, when Mr. Rohde led ConAgra, he was awarded either a large cash bonus, a generous grant of stock or options, or valuable benefits, such as extra years' credit toward his guaranteed pension.

But the company, one of the nation's largest food companies with more than 100 brands, struggled under his watch. ConAgra routinely missed earnings targets and underperformed its peers. Its share price fell 28 percent. The company cut more than 9,000 jobs. Accounting problems surfaced in every one of Mr. Rohde's eight years.

Even when ConAgra restated its financial results, which lowered earnings in 2003 and 2004, Mr. Rohde's $16.4 million in bonuses for those two years stayed the same.

Mr. Rohde turned down repeated requests for an interview. Chris Kircher, a ConAgra spokesman, said that Mr. Rohde received no bonuses in 2001 and 2005, evidence that his compensation was based in part on performance. He added that Mr. Rohde's severance was negotiated 10 years ago, when he was first hired, not as he left. The whole package was "negotiated under a different board, a different point in the company's history, and in a different environment," Mr. Kircher said.

The disparity between Mr. Rohde's and Mr. Smith's pay packages may be striking, but it is not unusual. Instead, it is the norm.

Even here in the heartland, where corporate chieftains do not take home pay packages that are anywhere near those of Hollywood moguls or Wall Street bankers, the pay gap between the boss and the rank-and-file is wide.

New technology and low-cost labor in places like China and India have put downward pressure on the wages and benefits of the average American worker. Executive pay, meanwhile, continues to rise at an astonishing rate.

The average pay for a chief executive increased 27 percent last year, to $11.3 million, according to a survey of 200 large companies by Pearl Meyer & Partners, the compensation practice of Clark Consulting. The median chief executive's pay was somewhat lower, at $8.4 million, for an increase of 10.3 percent over 2004. By contrast, the average wage-earner took home $43,480 in 2004, according to Commerce Department data. And recent wage data from the Labor Department suggest that workers' weekly pay, up 2.9 percent in 2005, failed to keep pace with inflation of 3.3 percent.

Many forces are pushing executive pay into the stratosphere. Huge gains from stock options during the 1990's bull market are one major reason. So is the recruitment of celebrity C.E.O.'s, which has bid up the compensation of all top executives.

Compensation consultants, who are hired to advise boards, are often motivated to produce big paydays for managers. After all, the boss can hand their company lucrative contracts down the road.

Compensation committees, meanwhile, are often reluctant to withhold a bonus or stock award for poor performance. Many big shareholders, such as mutual funds and pension plans, have chosen not to cast votes critical of management. The results have been a growing gap between chief executives and ordinary employees, and often between the boss and managers one layer below.

The average top executive's salary at a big company was more than 170 times the average worker's earnings in 2004, up from a multiple of 68 in 1940, according to a study last year by Carola Frydman, a doctoral candidate at Harvard, and Raven E. Saks, an economist at the Federal Reserve.

"We need to bring some reality back," said John C. Bogle Sr., the founder and former chairman of the Vanguard Group, the mutual fund company, and an outspoken critic of executive compensation practices. "That is something that in the long run is not good for society. We have the haves and the have-nots."

Supersized salaries, bonuses and benefits, long controversial, are now drawing scrutiny from the Securities and Exchange Commission and have become part of the national political debate. About 81 percent of Americans say they think that the chief executives of large companies are overpaid, a percentage that changes little with income level or political party affiliation, according to a Los Angeles Times/Bloomberg survey in February. Many shareholders, moreover, are just plain angry.

"It's not just ConAgra — it is really in most corporations that executives are paid too much," said Don D. Hudgens, a small investor in Omaha who has submitted shareholder proposals to rein in executive pay at ConAgra and other companies. "I am a conservative Republican. I believe in the free market. But sometimes the payment of the chief executive isn't involved in that free market."

The divide between executives and ordinary workers was not always so great. From the mid-1940's through the 1970's, the pay of both groups grew at about the same rate, 1.3 percent, according to the study by Ms. Frydman and Ms. Saks. They analyzed the compensation of top executives at 102 large companies from 1936 to 2003.

But starting in the 1980's, executive compensation began to accelerate. In 1980, the average chief executive made about $1.6 million in today's dollars. By 1990, the figure had risen to $2.7 million; by 2004, it was about $7.6 million, after peaking at almost twice that amount in 2000. In other words, executive pay rose an average of 6.8 percent a year.

At the same time, the growth rate slowed for the average worker's pay. That figure rose to about $43,000 in 2004 from about $36,000 in 1980, an increase of 0.8 percent a year in inflation-adjusted terms.

CORPORATIONS, meanwhile, projected that their own earnings would grow by an average of 11.5 percent a year during that 24-year stretch, by Mr. Bogle's calculations. In reality, he said, they delivered growth of 6 percent a year, slightly less than the growth rate of the entire economy, as measured by gross domestic product.

Chief executives "aren't creating any exceptional value, so you would think that the average compensation of the C.E.O. would grow at the rate of the average worker," Mr. Bogle said. "When you look at it in that way, it is a real problem."

The problem was certainly real at ConAgra. Mr. Rohde's arrival there in 1996 coincided with three of the most powerful forces propelling executive pay and hourly workers' wages in opposite directions. Stock options were being used to reward managers richly, the food industry's rapid consolidation pushed down workers' pay and the introduction of new machinery improved productivity but cost many jobs.

Today, ConAgra, whose products include Chef Boyardee canned goods, Hunt's ketchup and Healthy Choice dinners, began in 1919 as a small food processor, grew rapidly under Charles M. Harper, a former Pillsbury executive who went by the name Mike. In the mid-1970's, he drew up an ambitious expansion strategy to establish ConAgra as a major player from "dirt to dinner," as a corporate slogan later put it. ConAgra would snap up more than 280 businesses in the next two decades. From 1980 to 1993, investors saw total returns of over 1,000 percent, or 22 percent a year.

Wall Street fell in love with Con-Agra's growth story. And the pay of Mr. Harper, who consistently hit the board's performance targets, reflected the admiration. In 1976, his pay was $1.3 million in today's dollars. By the end of his tenure, in the early 1990's, it was about $6 million a year.

"Under Mike Harper, they were a company that paid very little cash and a lot of long-term" stock, said Frederic W. Cook, who was a compensation consultant to ConAgra's board until 2002. "There were rules you could never sell the stock. They lived poor and they died rich."

By the mid-1990's, though, Con-Agra's growth strategy was running out of steam. Its market share and sales were flat. And its decentralized approach — essentially letting its 90 subsidiaries operate like independent companies — no longer worked in an industry dominated by Wal-Mart and other large supermarket buyers.

Mr. Rohde — who had been Con-Agra's chief outside lawyer, advising Mr. Harper on more than 200 deals — was hired in 1996 to help the company reorganize. He became chief executive the next year.

ConAgra's stock price was near a record high, and Mr. Rohde was paid handsomely. His first year's total compensation was $7.9 million, including an initial $4.3 million restricted stock grant, vested over 10 years, and a $500,000 long-term performance payout.

Mr. Rohde tried to centralize many of ConAgra's main operations and integrate dozens of its businesses. But analysts said he let the company's brands stagnate and struggled to execute his plans.

From mid-1999 to mid-2001, Con-Agra struggled amid a sweeping overhaul. The company incurred $1.1 billion in restructuring charges. It terminated more than 8,450 employees and closed 31 plants. And analysts began complaining that ConAgra did not invest enough in its brands to keep profits up.

Mr. Rohde continued to be well-compensated. During that two-year period, he received cash and stock option grants of more than $8.7 million, even as ConAgra's board withheld his annual bonus and all long-term equity awards for 2001 because of weak results.

But what the board took away with one hand, it gave back with the other. In July 2001, it granted Mr. Rohde 300,000 stock options. The reason, according to proxy filings, was that an unnamed independent consultant's compensation report indicated that his equity-based pay was not competitive. "There's nothing wrong at all conceptually with giving someone options after a bad year," said Mr. Cook, who was the unnamed consultant. "An option is an incentive for the future. It is not a reward for the past."

Still, Mr. Cook said he recognized that people say "they rewarded him for failure."

"Financially," he added, "it's hard to argue with that."

TWO months later, ConAgra's compensation committee piled on 750,000 more stock options. Based on a review of option grants, a proxy filing said, Mr. Rohde's option position had been "below competitive levels for a number of years." And the board wanted to recognize "the results achieved in repositioning the company for the future."

Then Mr. Rohde hit the jackpot in 2003 and 2004, with the board awarding him $16.4 million in bonus money and the part of his long-term incentive plan he had earned. The payments were based largely on earnings targets. But in March 2005, ConAgra announced that it would have to restate earnings for 2003 and 2004, reducing them by a total of up to $200 million for the two years after poor internal controls led to income tax errors.

"That works out to nearly 20 cents per share annually, or between 10 percent and 15 percent of earnings," John M. McMillin, an analyst at Prudential Equity Group, wrote at the time. ConAgra "is in the process of restating earnings for both years and we ask, why not restate the bonus for the C.E.O.?"

Mr. Kircher, the ConAgra spokesman, said the restatement did not have a material impact on the way Mr. Rohde's bonuses were calculated.

With the accounting issues clouding the company's future and more layoffs and financial challenges ahead, Mr. Rohde announced last May that he planned to step down. In 2005, the board gave him only his $1.2 million salary.

But through it all, Mr. Rohde managed to take home more than $45 million in pay, including salary, bonuses and restricted stock grants. He did not sell any of his stock while chief executive but stands to benefit if he sells his shares now.

Carl E. Reichardt, the former head of Wells Fargo, led the compensation committee that approved Mr. Rohde's pay every year of his tenure, and continues in that role today. Mr. Reichardt also declined to comment.

One former member of the compensation committee found it difficult to explain the pay-for-performance link. Looking back, said Clayton K. Yeutter, a former United States trade representative who served on the compensation committee from 1997 to 2001, "I can understand what you are getting to, because the compensation became pretty generous, because the stock did not perform very well." He said he could not recall any meeting details.

MR. SMITH, the meat grinder, can only dream about such generosity. His wages have grown at a pace of 2.7 percent a year for the last 28 years. But, adjusted for inflation, his $13.25 an hour salary today is roughly two-thirds his $6.40-an-hour starting wage.

Mr. Rohde's salary alone rose at 8 percent a year, and he collected more than $22 million in cash compensation during almost nine years at the company. Since stepping down in September, he started collecting $2.4 million in severance pay, twice his most recent salary, as well as full health benefits, which he will have through 2009. ConAgra shareholders are footing the bill for a secretary and an office near his home. And that $984,000 annual pension? It reflects 20 years of service, even though he was a ConAgra executive for not quite nine. In July, Mr. Rohde told The Omaha World-Herald that he hoped to spend part of his retirement flying his helicopter between his home and his family's Minnesota getaway home.

Mr. Smith, on the other hand, envisions spending his golden years hunting mallards and casting for catfish at a nearby riverfront cabin. He will have to make do on the $80,000 in his 401(k) plan, as well as his Social Security checks and a pension of $106 a month that was frozen almost a decade ago. But to hear Mr. Smith tell it, he is not angry at Mr. Rohde or, more broadly, at the widening gap between executive and worker pay. Instead, his feelings are somewhere between disappointment and disbelief.

"If the stock keeps going up, maybe they deserve it. If the stock is going down to the bottom, they should get nothing," Mr. Smith said. "My opinion."

Last May, ConAgra directors began looking for a new chief executive. In a few months, they identified their man: Gary M. Rodkin, a 53-year-old PepsiCo executive with 25 years of food-industry experience, including more than a decade overseeing PepsiCo's core brands. But he did not come cheap.

Even before his first day of work, Mr. Rodkin was given a $1 million salary and a guaranteed $2 million bonus for this year, according to his employment contract. He was granted 1.48 million stock options, with a projected value of $5.8 million today, exercisable over the next three years. "We wanted to get him aligned with the interests of shareholders of the company," Steven F. Goldstone, ConAgra's chairman and the former chief executive of RJR Nabisco, told Bloomberg News at the time. "The idea is to increase shareholder value. If he increases shareholder value, he makes money, too."

If Mr. Rodkin does not increase shareholder returns, his stock options will decline in value, as will the $1.6 million in ConAgra stock he recently bought with his own cash.

Still, ConAgra has already agreed to take care of Mr. Rodkin when he leaves. Based on his employment agreement, he will walk away with at least $6 million in severance, a prorated bonus and a $129,000 pension supercharged with three years of credit for each year he worked.

And though he took the job at ConAgra, PepsiCo is still honoring a $4.5 million, two-year consulting contract it gave him when he left. "If the new guy is the right guy, he is worth his weight in gold," said Brian Foley, an independent compensation consultant in White Plains, who reviewed Mr. Rohde's and Mr. Rodkin's employment agreements and other compensation documents. "If he is the wrong guy, you have a severance package that is substantially more expensive."

ConAgra's board, in the meantime, agreed to ease Mr. Rodkin's transition by flying him each week, for up to two years, from his home in White Plains to its Omaha headquarters.

Mr. Smith commutes to work in his green 1998 Chevy pickup truck.

Amanda Cox contributed reporting for this article.

    Off to the Races Again, Leaving Many Behind, NYT, 9.4.2006, http://www.nytimes.com/2006/04/09/business/businessspecial/09pay.html

Employers Added 211,000 Jobs in March

April 7, 2006
The New York Times
By VIKAS BAJAJ

The economy added jobs at a strong clip, the unemployment rate fell and wages rose last month, the Labor Department reported today.

Businesses added 211,000 jobs in March, and the unemployment rate fell to 4.7 percent from 4.8 percent in February, with the gains dispersed broadly across the economy with the exception of the manufacturing sector. After the government revised down hiring in January and February by 34,000 jobs, the economy has added an average of 193,000 in the first three months of the year, up from an average of 165,000 for 2005.

Experts estimate that the economy needs to create about 150,000 jobs a month to keep up with population growth.

Workers, the report indicates, are finally sharing in the economic growth in a more direct way than they did last year. Average hourly wages, which had trailed inflation for much of 2005, kept up the much faster pace set earlier this year, increasing 3.4 percent from a year ago, to $16.49, after a 3.5 percent increase in February.

"The economy has begun 2006 with plenty of momentum," said Nigel Gault, an economist at Global Insight, a research firm.

Stocks were up slightly after the report was released and bonds fell, indicating that investors were betting the strong hiring would prompt the Federal Reserve to raise interest rates at their next two meetings in an effort to head off inflation and slow the economy down. The yield on the 10-year Treasury note, which moves in the opposite direction as the price, rose to 4.93 percent from 4.9 percent Thursday evening.

"The Fed has never taken its foot off the brake" when the unemployment rate is falling, said Richard Yamarone, chief economist at Argus Research.

Still, some sectors of the economy did not fare as well as others. Employment in manufacturing fell by 5,000 in March and 10,000 in February, more than 1,000 cuts first reported. The sector has lost 56,000 jobs in the last 12 months. Transportation equipment, which includes auto manufacturing, lost 4,900 jobs while computer and electronic product manufacturing added 3,500 jobs.

The construction sector, which has been growing at an torrid pace in the last two years, saw growth slow to 7,000 jobs after adding 37,000 jobs in February and 44,000 in January. Warmer than usual weather earlier in the year boosted growth in the firs two months and a drop in home building activity appears to have slowed gains in March, according to the report.

Jobs in professional and business services increased the most, up about 52,000 jobs, with strong gains reported in temporary help, building services and architectural and engineering.

    Employers Added 211,000 Jobs in March, NYT, 7.4.2006, http://www.nytimes.com/2006/04/07/business/07cnd-econ.html?hp&ex=1144468800&en=bacc7116995349cf&ei=5094&partner=homepage

Delphi Asks Bankruptcy Court to Void Union Deals

March 31, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, March 31 — Delphi, the nation's biggest auto-parts maker, followed through on a months-old threat today and asked a bankruptcy court judge for permission to throw out its labor agreements and impose sharply lower wages and benefits.

It also said it plans to close or sell most of its plants in the United States, and cut its worldwide salaried staff. Together, the moves will eliminate 28,500 jobs.

In addition, Delphi asked the bankruptcy court to reject some of its contracts with General Motors, its biggest customer, which would allow Delphi to renegotiate the prices G.M. pays for parts. It said it would keep only eight of its American plants.

The move was the first time that a major player in the automobile industry had sought to void its labor contracts, setting the stage for a precedent-setting court ruling later this year.

The actions by Delphi, which filed for Chapter 11 last October, would eliminate 20,000 hourly jobs in the United States, or about 60 percent of its total work force. It will cut another 8,500 salaried jobs worldwide. Delphi has about 34,000 hourly workers in the United States, with the United Automobile Workers representing about 24,000.

G.M., which spun off Delphi in 1999, has played a significant role in three-way discussions with Delphi and the U.A.W.

A hearing on Delphi's request is scheduled to begin May 9. If the request is granted, Delphi would be able to tear up its existing labor contracts and impose new terms. Leaders of Delphi's unions have threatened to strike if that happens, a move that in turn could cripple G.M. and lead to its own bankruptcy filing.

However, a judge's decision is still months off, providing time for an agreement to be reached.

"Emergence from the Chapter 11 process in the U.S. requires that we make difficult, yet necessary, decisions," Delphi's chief executive, Robert S. Miller, said in a statement. "These actions will result in a stronger company with future global growth opportunities."

But the U.A.W. reacted angrily to the Delphi move, calling it "a travesty and a concern for every American."

In a statement, the U.A.W. president, Ron Gettelfinger, and vice president, Richard Shoemaker, continued, "Delphi's proposal goes far beyond cutting wages and benefits for active and retired workers. Delphi's outrageous proposal would slash the company's U.A.W.-represented hourly work force by approximately 75 percent, devastating Delphi workers, their families and their communities."

"In the event the court rejects the U.A.W.-Delphi contract and Delphi imposes the terms of its last proposal, it appears that it will be impossible to avoid a long strike," the statement said.

Meanwhile, G.M., which agreed last fall to restore price cuts it had negotiated with Delphi in order to give its former unit some breathing room in bankruptcy, said it was disappointed by its former unit's bid to reject some of its contracts. That is a common tactic in bankruptcy, as companies try to lower their costs.

"We disagree with Delphi's approach but we anticipated that this step might be taken," G.M.'s chief executive, Rick Wagoner, said in a statement. He added, "G.M. expects Delphi to honor its public commitments to avoid any disruption to G.M. operations."

Under their contract, which is essentially the same as the one covering workers at G.M., members of the U.A.W. are paid $27 an hour in wages, as part of total compensation, including pensions, health care and other benefits, of $67 an hour.

Delphi's original offer to the U.A.W., made shortly after its bankruptcy filing, was for wages as low as $9.50, a move that sparked outrage among union members.

In its court filing, Delphi said it wanted to impose its last offer, made a week ago, which was for a $5 an hour cut in wages to $22 this year, followed by another cut to $16 an hour next year. Workers would be given $50,000 each to ease the impact of the cuts.

But the U.A.W. earlier this week rejected the bid , which local union leaders said workers would undoubtedly vote down.

The offer came a week after Delphi, the U.A.W. and G.M. agreed on a buyout program offered to all 113,000 G.M. workers and 13,000 of Delphi's workers. Under the plan, which would be paid for by G.M., workers could receive up to $140,000 if they agree to leave.

That, however, may be all that the U.A.W. agrees to. Although judges encourage labor unions and companies to reach agreements, rather than have lower rates imposed upon them, union leaders have said they may not continue talking with Delphi.

Labor experts say it would be politically impossible for the U.A.W.'s president, Mr. Gettelfinger, to agree to wage cuts, because that would set a precedent in even more critical talks next year with G.M. and Ford.

Delphi has been included in the union's practice of "pattern bargaining," which essentially calls for the same terms at each company, and cuts granted there would open the door for the automakers to demand lower wages and benefits as well.

Although it has agreed to some modifications, particularly changes in health care coverage negotiated at G.M. and Ford last year, the U.A.W. has not granted pay cuts at a major auto company since it agreed to concessions with Chrysler Corporation in 1978 as part of its bid for a Congressional bailout. Those cuts were later restored, however.

    Delphi Asks Bankruptcy Court to Void Union Deals, NYT, 31.3.2006, http://www.nytimes.com/2006/03/31/business/31cnd-delphi.html?hp&ex=1143867600&en=0ec4fa333ed9e67a&ei=5094&partner=homepage

G.M. Will Offer Buyouts to All Its Union Workers

March 23, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, March 22 — General Motors reached a landmark agreement Wednesday with the United Automobile Workers intended to reduce sharply the ranks of a generation of auto workers long envied by other blue-collar workers for their wages and benefits.

G.M., staggering under the weight of $10.6 billion in losses last year, said it would offer buyouts and early-retirement packages ranging from $35,000 to $140,000 to every one of its 113,000 unionized workers in the United States who agreed to leave the company.

At the same time, Delphi, the nation's biggest automotive parts maker and a unit of G.M. until seven years ago, will offer buyouts of $35,000 to 13,000 U.A.W. members, of 24,000 on its factory floors.

Despite the ambitious plan, G.M. still has much more to do in its effort to rebuild itself as a smaller, more competitive automaker after losing ground for two decades in the United States against the growing strength and sophistication of Asian and European rivals.

For G.M., which is paying the full cost, the buyout offer is an expensive way to persuade its workers and those at Delphi to retire rather than accept the full pay and benefits they would ordinarily receive when their plants closed or they were laid off. Analysts said the plan could cost G.M. as much as $2 billion, depending on how many workers took part in the buyout program. [Page C4.]

On average, U.A.W. members at G.M and Delphi cost the equivalent of $67 an hour, including pay of about $27 an hour plus pensions and health care expenses.

The buyout plan, coupled with concessions on health care late last year, signals the willingness of the U.A.W. president, Ron Gettelfinger, to grant concessions without formally reopening the union contract for new bargaining — something not done since the industry slump of the early 1980's. At that time, the U.A.W. renegotiated its contract only after Chrysler sought a federal bailout and both G.M. and Ford suffered deep losses.

For G.M.'s American workers, the offer presents a host of difficult choices, forcing them to consider the risk that the company may be even worse off in the future if the buyouts fail to spur a turnaround in business.

Amid all the maneuvering, analysts said, bargaining in next year's contract talks has already begun, with Mr. Gettelfinger gambling that if the union can address major issues now, it can stave off a bitter confrontation in 2007.

But the situation is far from resolved for G.M.'s chief executive, Rick Wagoner, whose future is now in serious doubt. He must deliver even broader cost cuts to save both G.M. and his own job. Already, he is under growing pressure from the company's largest individual shareholder, Kirk Kerkorian, whose representative has joined the board.

Delphi, which is operating under bankruptcy protection, remains a wild card. Despite G.M.'s assistance, it is still demanding that U.A.W. members accept sharply lower wages and benefits by the end of the month. Otherwise, Delphi has threatened to ask a bankruptcy judge for the ability to impose lower rates. If that happens, the U.A.W. has warned that it may go on strike.

In pursuing this substantial a downsizing, said John A. Challenger, president of Challenger, Gray & Christmas, a Chicago firm that follows workplace trends, G.M. is finally recognizing that its dominant position in industrial America is over. "It's taken the company losing $10 billion," he said, "for the jam to begin to break."

Beyond the buyouts, analysts said, G.M. must take further steps to become more competitive or risk being pushed aside by strong rivals like Toyota, which could unseat G.M. to become the world's biggest auto company as soon as sometime this year.

A number of industry analysts have raised fears that G.M. could be forced into its own bankruptcy filing as a result of a flood of bad news at the company.

Late last year, G.M. announced plans to eliminate 30,000 jobs and close all or part of 12 plants through 2008.

It estimated that it faced a liability of $5.5 billion to $12 billion from the bankruptcy at Delphi, because it must pay for the pensions and health care coverage of workers who were at G.M. before Delphi was spun off.

Its once-sterling credit rating has sunk to junk-bond status, and its financial results have been restated twice in four months, most recently last week.

G.M., its union and Delphi began talking about the retrenchment plan shortly before Delphi sought bankruptcy protection last October.

Under the program, G.M.'s hourly workers would be offered packages to retire or leave, ranging from $35,000 for those who are already eligible to retire to $140,000 for those with 10 years at the company who are willing to cut ties and give up health care coverage.

At the same time, as Delphi will be offering buyouts to roughly half its unionized employees, G.M. agreed to take back 5,000 workers from Delphi, and those workers can opt for one of the G.M. retirement programs.

Employees are not under the obligation to accept a deal, and there is little likelihood that G.M. would give buyouts to all its workers — something that would cripple factories.

Rather, it is likely to look for volunteers at the plants it already wants to close so it can make room for the Delphi workers who come back.

Even so, some executives and union officials have been concerned that workers could hold out for sweetened offers. The $35,000 lump-sum payment, for example, is roughly half what some better-paid workers earn in a year.

The Ford Motor Company, for example, is offering buyouts of $35,000 to $100,000 under a program that will eliminate 30,000 jobs by 2012.

Reaction to the G.M. plan Wednesday was decidedly mixed.

Robert Betts, president of the U.A.W. local at the Delphi plant in Coopersville, Mich., said the offers were attractive. "If someone is going to give you $35,000 to take your pension, that's good," Mr. Betts said. "I think a whole lot of people are going to hit the road over this."

But Steve Brunner, who has spent 22 years as an electrician at the G.M. truck plant in Flint, Mich., and still has eight years to go until he can retire, said he was not interested.

"I mean, $35,000 is not even a year's wages," Mr. Brunner said. "I don't think it'll change anyone's mind unless they were ready to go."

Analysts also said they were not convinced that the plan had gone far enough to push G.M. and Delphi over the hump.

"The risk of a strike has not been eliminated," John Murphy, an auto analyst at Merrill Lynch, said in a research report. Mr. Murphy called the deal "disappointing," especially because it was likely to increase G.M.'s ratio of 2.5 retirees for every active worker.

But in a statement, Mr. Wagoner said that the move was an important step in the company's revamping, and that G.M. was "pleased" by the agreement.

A G.M. spokeswoman, Katie McBride, said that about 36,000 workers were eligible to retire with full pension and benefits, meaning that they had spent at least 30 years on the job.

An additional 27,000 are within a few years of retirement, and would be offered a plan providing them up to $2,900 a month, on top of their usual pay, if they agreed to retire when they reached the 30-year level.

Michigan's governor, Jennifer M. Granholm, whose state has about half the employees at G.M. and Delphi, said the agreement "signals that Michigan's manufacturers and workers are committed to working together in new ways."

Governor Granholm, who faces re-election this fall, has aggressively courted Toyota to build an engine plant in the state.

Given G.M.'s cutback plans, there are not likely to be jobs for the Delphi workers when they "flow back" to G.M. Unless they retire, that means some would go into a program called the Jobs Bank, where workers receive full pay and benefits until the U.A.W. contract expires next year.

The buyout program is the second major accommodation the union has made under the terms of its current labor agreement, which has 17 months to run. Late last year, U.A.W. members at G.M. and Ford agreed to pay more for health care benefits.

The union has not yet reached a similar agreement at Chrysler, which was the only Detroit auto company to earn a profit in North America and gain market share last year.

Union officials said last week that Delphi would possibly hold off filing its motion to dissolve its labor agreements if it reached a deal with G.M. and the U.A.W. on early retirement. Delphi, though, reiterated its intention to go ahead on March 31 if there was not a deal with the U.A.W.

Talks are likely to continue after that. But a strike by the U.A.W. would cripple production at G.M., and could topple the company into filing for bankruptcy protection, under which its own workers could face the threat of lower wages and benefits like those Delphi is seeking from the union.

Averting that is the supreme challenge for G.M., said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

"When we look back at this particular period," Mr. Cole said, "what we are going to realize is that we were right in the middle of the most dramatic restructuring period in the history of the automobile industry."

Jeremy W. Peters contributed reporting from Flint, Mich., for this article.

    G.M. Will Offer Buyouts to All Its Union Workers, NYT, 23.3.2006, http://www.nytimes.com/2006/03/23/business/23auto.html?hp&ex=1143176400&en=10c6201d3bba1520&ei=5094&partner=homepage

Once Set for Life, Auto Workers May Have to Gamble

March 23, 2006
The New York Times
By JEREMY W. PETERS

FLINT, Mich., March 22 — For General Motors workers who once thought they were set for life, the buyouts the company offered Wednesday may well represent the first real gamble of their careers: Do they stay with G.M. and hope for a turnaround or take the money and run?

Ron Linn, an electrician at G.M.'s Flint Truck Assembly plant, is taking his chances. Having just remarried and purchased a new house, Mr. Linn, 52, said he planned on working at least another five years before he retired.

"A million dollars wouldn't be enough to get me to go," he said. "A hundred thousand dollars, after they take out taxes, that ain't going to last long. That's not much incentive to retire early."

The question is whether his job will be around in five years.

People like Mr. Linn, who has been with G.M. almost 29 years, are exactly the type of worker the company is hoping to entice with buyout offers. And his reluctance illustrates the difficulty the besieged automaker faces as it tries to pare down its factory work force by 30,000 over the next two years. The company is offering $35,000 in cash to employees who have already worked at G.M. for 30 years and are eligible to retire.

But Mr. Linn is among 27,000 workers at G.M. who are a few years away from retirement. For them, G.M. is offering a special plan that would pay up to $2,900 a month on top of their hourly wages, if they agree to retire as soon as they reach 30 years on the job.

Mr. Linn, who on Wednesday afternoon sat at the counter at the Capitol Coney Island diner here drinking coffee after his shift, said he would rather stay in his job than accept a lump sum cash payment and re-enter the work force midcareer.

Others would, too. Down the street at the Wooden Keg, a smoky, dimly lighted tavern across from the truck plant, Brian Kaufmann, 30, said he was not even considering leaving his job on the assembly line.

"I think you're kind of short-changing people," he said, sipping beer out of a small round glass. "You're putting a price on people's heads. I can't put a price on anybody's head."

Though Mr. Kaufmann said he thought staying at G.M. was risky — with all the recent job cuts and plant closings and the uncertainty looming over what the United Automobile Workers might have to give up in next year's contract negotiations — he said he would rather stay where he was than risk being unemployed.

Because he only has nine years on the job, by leaving he could walk away with as much as $70,000 if he agreed to give up everything but his pension.

Mr. Kaufmann was lucky to get hired at G.M. in the first place. About 80,000 people in Flint once worked for G.M., or more than one out of every two people here. Now, G.M. has only 15,000 workers left here, or about one in eight residents.

"There are no jobs out there for us," Mr. Kaufmann said. "And it's hard to start over. Who wants to hire a washed-up 30-year-old G.M. worker?"

But for other G.M. workers, uncertainties about the company's future are enough to persuade them to leave.

"I'd sign the papers right now if I could," said Spanky Waldorp, a 48-year-old worker at the truck plant who was sitting at a table in the Wooden Keg playing Keno. His numbers did not come up — all the more reason, he joked, to take a buyout.

"I'm two years away from retirement," he said. "And the way the company is going, who knows what's going to happen? As long as I'm getting something that's guaranteed, I'll take it. I mean, I could get laid off. This is a guarantee."

He could be offered as much as $2,800 a month on top of his hourly pay to retire once he reached the 30-year mark. "We'd be fools not to take that," Mr. Waldorp said.

Scott Shumaker, 45, said that after 27 years as a die maker for G.M., he was ready to try something else — teaching, perhaps, or starting his own landscaping business.

He said he thought a buyout would give him that chance.

"I've got a lot of things I'd like to do," he said. "I may even go south and roof houses. There's a lot of money to be made, but not around here. A lot of guys, they were waiting to see what was going to happen. Now, I think there'll be a lot of people who are going to take it. A lot of them were going to go anyway."

Anne Forsberg, 71, retired from General Motors 15 years ago as an auditor in the Buick City complex here, a cluster of factories that once employed 20,000 workers, but now is mostly demolished. As she sat eating her lunch at a McDonald's down the street from the truck plant, she offered a message to younger workers contemplating a buyout: wait and see.

"If you're young enough, hang in there," she said. "G.M. is going to come back. But if you're 45 or older, take the buyout because recovery is going to take a while. It always does."

    Once Set for Life, Auto Workers May Have to Gamble, NYT, 23.3.2006, http://www.nytimes.com/2006/03/23/business/23workers.html?_r=1&oref=slogin

Dell to Double Workforce in India

March 20, 2006
The New York Times
By SARITHA RAI

BANGALORE, India, Mar. 20 — Dell, the world's largest maker of personal computers, plans to double its employee strength in India to 20,000, and is scouting for a site to set up a manufacturing unit in the country, its chairman, Michael Dell, said today.

"There is a fantastic opportunity to attract talent," Mr. Dell said, referring to the country's technically qualified, English-speaking pool of workers. "We will ensure a major recruitment push in engineering talents," he said in a press meeting during a visit to Bangalore, India's outsourcing capital.

Dell, which is based in Round Rock, Tex., has four call centers in India, where the bulk of its 10,000 employees work, as well as software development and product testing centers.

Dell plans to double its hardware engineering staff to 600 in one year, Mr. Dell said.

Dell's statement today followed similar pronouncements by Microsoft Corp and Cisco Systems which plan to double and treble, respectively, their Indian headcounts.

Many Western multinationals, particularly technology companies, have recently been moving many key functions such as design and research and development to India. Many of these were earlier in the forefront of shifting software development and back office work like call centers to this country.

Salaries in India are rising rapidly, but still are about a fifth of what they are in the West for comparable jobs.

Mr. Dell said his firm was talking with several state governments about a site for manufacturing plant..

In a market where the penetration of computers is very low, companies such as Dell are eager to set up a manufacturing base to help expand sales. Dell accounts for about four percent of the 4 million computers purchased in India.

Sales of computers in India are expected to grow to 20 million a year in the next few years.

    Dell to Double Workforce in India, NYT, 20.3.2006, http://www.nytimes.com/2006/03/20/technology/20cnd-dell.html

Jobs Grow and Wages Rise as Economy Picks Up Steam

March 10, 2006
The New York Times
By VIKAS BAJAJ

The economy added jobs at a brisk pace last month, but the unemployment rate ticked up slightly, the government reported, signs that the economy may be picking up some steam.

Businesses added a total of 243,000 jobs and wages rose 0.3 percent in the month, the Labor Department reported, with the improvements showing up in all sectors of the economy, except manufacturing.

The unemployment rate rose to 4.8 percent from 4.7 percent, as the number of people who started looking for work jumped by 335,000 and the number of people who said they were discouraged by the prospects for finding employment decreased.

The government lowered its previous estimate of job growth in January by 23,000 to 170,000, but employment was revised slightly higher for December. On average, the economy has added 183,000 jobs a month in the last three months, up from the monthly average of 165,000 in 2005. Economists estimate that about 150,000 new jobs are needed to keep up with population growth.

"This is the type of job creation you should expect" from a growing economy, said Richard Yamarone, director of economic research at Argus Research. And "it is starting to attract those persons who were no longer in the labor force or were counted as not in the labor force."

The unemployment rate does not count people as unemployed if they are not actively looking for work because they are discouraged by their prospects or for other reasons. The percentage of working-age people in the labor force who are employed or actively searching for work, 66.1 percent in February, started falling in 2001 during the last recession and has yet to return to the levels it was at during the previous expansion.

Average hourly wages increased 5 cents, to $16.47, up about 3.5 percent from a year ago, an increase that is expected to influence policy makers at the Federal Reserve who have expressed concern about rising inflation.

Employment growth was strongest in the construction sector, rising by 41,000 jobs, or about 0.5 percent. Strong home building activity early this year may help explain that jump. In the last 12 months, the nation has added 346,000 construction jobs. Job growth was also strong in education and health services, up by 47,000, and in professional and business services, up 39,000 jobs.

Manufacturing employment, by contrast, fell by 1,000 as automobile and parts manufacturers cut 10,600 jobs more than offsetting increases in machinery and computer production.

    Jobs Grow and Wages Rise as Economy Picks Up Steam, NYT, 10.3.2006, http://www.nytimes.com/2006/03/10/business/10cnd-econ.html?hp&ex=1142053200&en=fe80071141baa592&ei=5094&partner=homepage

News Analysis

DP World and U.S. Trade: A Zero-Sum Game

March 10, 2006
The New York Times
By EDUARDO PORTER

DP World's decision yesterday to transfer a handful of American port terminals, rather than chilling interest in investing in the United States, may actually have made it safer for foreigners by relieving some of the political pressure that was building up against them.

But as part of a pattern of other antiforeign actions in Washington, fears remain that the United States is becoming a less welcoming place for investment from overseas.

"We need a net inflow of capital of $3 billion a day to keep the economy afloat," said Clyde V. Prestowitz Jr., a former trade official in the Reagan administration who is president of the Economic Strategy Institute. "Yet all of the body language here is 'go away.' "

At least initially, those who support increased globalization were relieved that Dubai appears to have backed away from a confrontation with Congress.

"It is our hope that this relieves some of the political pressure," said Nancy McLernon, senior vice president of the Organization for International Investment, a lobbying group in Washington representing the United States subsidiaries of foreign multinationals.

"People were starting to question the benefits of foreign investment," she said. "We haven't seen this since the Japanese bought the Rockefeller Center."

DP World's takeover was a special case: a state-owned company from the Middle East buying a sensitive American asset. Most multinationals that invest in the United States come from Western industrial democracies and are unlikely to be subject to such scrutiny.

The flap over the ports acquisition alone is unlikely to make a consequential dent in foreign investment flows into the country, most economists agree.

"I don't think this is going to have a major effect on capital flows into the United States," said Ben Stapleton, a partner specializing in mergers and acquisitions at the law firm Sullivan & Cromwell in New York. "It will just affect a deal at the margin every once in a while."

Indeed, while protectionist sentiment in Congress is never far from the surface, so far it has done little to damage the intricate web of cross-border business deals that are going on just about every day. Last summer, animosity against the effort by a state-owned Chinese oil company to buy the American oil company Unocal helped force China to retreat. But there has been no letup in investment flows into the United States in its wake.

Foreign companies plowed $38.8 billion worth of direct investment into the United States in the third quarter of last year, according to government statistics, more than two and a half times the amount recorded in the second quarter and roughly 9 percent more than in the period in 2004.

Foreign investment in American financial markets is even stronger. Last year, capital flows into Treasury bonds, equities in American companies and other securities totaled more than $1 trillion, 14 percent more than in 2004. Much of it came from China and the Middle East.

Some economists argue that it is good that foreign investment in sensitive areas be subject to more scrutiny.

"There are some assets that are absolutely essential to U.S. security and today's action reflects the House and Senate actually drawing a line," said Robert E. Scott, a senior economist and trade specialist at the liberal Economic Policy Institute.

"The question," he added, "is whether or not this is going to be a one-time event or whether we are going to look more carefully at foreign acquisitions, particularly in the military sector."

But some analysts warn that further political hostility against foreign companies buying American assets could boomerang against the United States.

"I think it is very dangerous to enter a new world in which every purchase of an American asset by a foreign entity is scrutinized by the government," said Kevin Hassett, director of economic policies at the conservative American Enterprise Institute in Washington.

"It could make U.S. assets less attractive to foreign buyers because they wonder whether there will be potential future buyers if they decide later to sell what they have purchased."

Some observers worry that nationalist sentiment seems to be on the rise not just in the United States but in other prosperous countries where economic anxieties are present.

The attempt by Mittal Steel, a European company headed by an Indian executive who lives in London, to buy Arcelor, a Luxembourg steel company with many workers in France, is coming under intense scrutiny.

In Britain, officials have worried over the interest of Gazprom, the Russian government-controlled oil monopoly, in the British gas company Centrica.

"It may be well part of a global backlash against globalization," said Michael Grenfell, a partner at the law firm Norton Rose in London. "America could usually be relied on to champion free trade. If that changes, things could get quite chilly."

In the United States, the political flap over the ports deal is still not over. Ms. McLernon noted that members of Congress had submitted some two dozen bills in the last few weeks aimed at changing the review process for foreign investment. Many, without being specific, could end up blocking all kinds of deals.

A bill submitted in the House by Duncan Hunter, Republican of California, and H. James Saxton, a Republican from New Jersey, for example, would bar foreign-controlled concerns from buying any company that operated "critical infrastructure," which could include everything from water and energy companies to those involved in telecommunications.

"It's almost certain that one or another of those bills will pass," Mr. Prestowitz said. "The question is whether it will have sufficient votes to override a veto by the president."

Louis Uchitelle contributed reporting for this article.

    DP World and U.S. Trade: A Zero-Sum Game, NYT, 9.3.2006, http://www.nytimes.com/2006/03/10/business/worldbusiness/10chill.html?_r=1&ei=5094&en=f97e82d6a890b5d8&hp=&ex=1141966800&adxnnl=1&oref=slogin&partner=homepage&adxnnlx=1141966836-NDBDTHnPKgNyffUUj0Nbfg

Trade gap widens in January to record $68.5 bln

Thu Mar 9, 2006 12:35 PM ET
Reuters
By Doug Palmer

WASHINGTON (Reuters) - The U.S. trade deficit swelled to a record $68.5 billion in January, as America's ravenous appetite for foreign goods hit new heights and overpowered record exports, a government report showed.

The monthly trade gap widened 5.3 percent from a revised estimate of $65.1 billion in December and surprised Wall Street analysts who had forecast less of a surge.

It prompted renewed calls for government action -- ranging from tougher enforcement of U.S. trade laws to a surcharge on manufactured goods imports -- to narrow the gap.

The January trade gap followed the record annual trade deficit of $723.6 billion in 2005.

Another annual record of more than $800 billion would be set in 2006 if the trade gap continued to run at the pace set in the first month of the year.

"The trade deficit, if you can still use the term deficit to describe the GDP of a small country, just keeps getting wider. This is the Energizer bunny on steroids as it keeps growing and growing and growing," said Joel Naroff, president and chief economist of Naroff Economic Advisors.

The January gap was "little short of a disaster" that could trim U.S. economic growth in the first quarter if it remains as large in coming months, said Paul Ashworth, senior international economist at Capital Economics.

Economists estimated economic growth could be trimmed up to 1 percentage point if the trade gap does not narrow.

Major financial markets shrugged off the trade data, instead focusing on monetary policy changes in Japan and the U.S. employment report scheduled for Friday.

Sen. Byron Dorgan, a North Dakota Democrat, linked the enormous shortfall to the Bush administration's controversial decision to allow a state-owned Dubai company to take over some terminal operations at U.S. ports.

"The only way for the United States to keep financing $2 billion a day in trade deficits is to sell off U.S. assets and now that apparently includes our security assets," he said.

Dubai Ports World acquired the rights to manage the ports as part of its acquisition of British company P&O.

U.S. imports rose 3.5 percent in January to a new high of $182.9 billion, as American companies and consumers lapped record volumes of foreign goods in categories ranging from food, animal feed and beverages to autos and auto parts.

High prices for imported oil, which increased more than 4 percent in January to $51.93 per barrel, helped push the trade gap to a new high. The United States ran an $8.4 billion deficit with the Organization of Petroleum Exporting Countries, growing 11.6 percent from December.

However, many analysts focused on the trade gap for non-petroleum goods, which was a record $49.6 billion.

"You can't blame it all on energy because the trade deficit excluding petroleum rose faster than the overall deficit. The main culprit once again continues to be that imports are growing faster than exports," said Michael Sheldon, chief market strategist at Spencer Clarke in New York.

The monthly trade gap with China widened 9.9 percent to $17.9 billion in January as U.S exports to that country slipped and imports grew.

The persistent deficit with China, the largest U.S. gap with any single country, has fueled charges in Congress that China is an unfair trader that manipulates its currency to gain a trade advantage. Manufacturers and politicians have demanded that Beijing revalue its yuan currency.

In a sign of improved economic growth overseas, U.S. exports increased in January to a record $114.4 billion, up 2.5 percent from the prior month. The export rise was led by record shipments of industrial supplies and materials, capital goods and auto and auto parts.

Although exports have risen steadily in recent years, they have not been able to match the growth in imports, keeping the trade deficit on an ever-widening path.

Separately, a Labor Department report showed the number of Americans filing new claims for unemployment benefits rose unexpectedly last week to 303,000, the highest level since the start of the year, from 295,000 the prior week. Economists had expected claims to fall to 290,000.

    Trade gap widens in January to record $68.5 bln, R, 9.3.2006, http://today.reuters.com/business/newsarticle.aspx?type=ousiv&storyID=2006-03-09T173610Z_01_N09293460_RTRIDST_0_BUSINESSPRO-ECONOMY-DC.XML

Foreign tourists' spending hits record

Posted 3/9/2006 12:11 AM
USA TODAY
By Barbara De Lollis

Foreign visitors spent more than ever in the USA last year despite their numbers continuing to be held down partly by the war on terror.

Government figures out Wednesday show people from other countries spent a record $104.8 billion on lodging, meals, entertainment and other travel expenses, up 12% from 2004. The number of foreign visitors — 49.4 million — was up 7% from 2004, according to the U.S. Commerce Department. The number of foreign visitors continues to lag behind the recent peak of 51.2 million in 2000.

The USA has been losing its share of international travelers for several years, and the U.S. travel industry has become increasingly aggressive in pushing the government for help.

Post-9/11 airport security measures, more burdensome visa requirements, rising anti-American sentiment and aggressive marketing campaigns from countries such as Spain and Jamaica are behind the USA's declining share of the global travel market.

Jay Rasulo, chairman of the Travel Industry Association of America and chairman of Walt Disney Parks and Resorts, says the record spending by foreign visitors underscores the importance of winning a bigger share of global tourism.

The number of foreign visitors to the USA has risen annually since 2003. But Rasulo says the rebound should be much stronger in light of favorable currency-exchange rates and fast-growing international travel around the world.

"Given the explosive growth of the global travel and tourism market, the United States could and should be doing even better," Rasulo says.

He and other travel industry leaders have been lobbying the government to better balance hospitality and security at U.S. borders and to provide more help with a marketing campaign abroad. The government this year is spending about $10 million to market U.S. tourism in Japan and the United Kingdom.

The new government figures show the USA had record numbers of visits from 58 of the more than 200 countries tracked, including Australia, Spain, India and the Dominican Republic.

Commerce Secretary Carlos Gutierrez said in an interview the record spending "shows that we have great appeal for tourists around the world."

According to the new figures, visitors to the USA spent nearly $10 billion more here than U.S. travelers spent elsewhere.

For 2004, the USA ranked as the world's third-most-visited country behind France and Spain. China was fourth. It is not yet clear whether the USA kept its No. 3 ranking last year because worldwide figures have not yet been compiled.

    Foreign tourists' spending hits record, UT, 3.9.2006, http://www.usatoday.com/money/biztravel/2006-03-09-foreign-usat_x.htm

U.S. Businesses Are Lining Up Behind Dubai

March 8, 2006
The New York Times
By HEATHER TIMMONS and LESLIE WAYNE

As the Bush administration re-examines a proposal to allow a Dubai company to take over operations at some American ports, executives from unrelated businesses have quietly begun lobbying in Dubai's favor, fearing that recent fierce criticism could damage trade with the United Arab Emirates.

Some corporate groups are also planning public moves to smooth relations between the United States and Dubai. The American Business Group of another emirate, Abu Dhabi, is set to announce today that it will send seven delegates to Washington at the end of the month to speak to lawmakers. The group has several hundred corporate members, including Lockheed Martin, Federal Express, the Hilton Group and Exxon Mobil.

Dubai in particular among the seven emirates has become a business partner for many American companies in recent years, as it expands an international airline, creates a major financial center and stock exchange, and adds to its already substantial hotel and tourism business.

With its $6.8 billion deal to acquire the Peninsular & Oriental Steam Navigation Company of Britain, Dubai's port company, DP World, expands its reach into transportation, with plans to operate terminals at six major United States ports.

Criticism of the deal, focusing on security concerns, has come from both sides of the political spectrum. Representative Duncan Hunter, Republican of California, for example, said last week that "Dubai cannot be trusted" to manage the ports.

While calling for additional review of the deal, Senator Robert Menendez, a New Jersey Democrat, called the transfer of the ports to Dubai control "an unacceptable risk that we cannot tolerate."

Many American companies have had operations in the United Arab Emirates for several years, often with American employees, and they are relying on the region for some of their growth.

Much of the uproar is coming from "people in Washington who have never been here or worked here," said Kim Childs, executive vice president of the American Business Group of Abu Dhabi, who first came to the United Arab Emirates 11 years ago from Pennsylvania. "Most of us have raised our children here and have our businesses here," she said. Some of the criticism of the emirates has been like "slapping your best friend in the face," she added.

Jeffrey Adams, a spokesman for Lockheed Martin, said, "Lockheed Martin defense equipment sold to the U.A.E. is an instrument of U.S. foreign policy and as such is vetted at the highest levels of the administration and Congress."

Exports from the United States to the United Arab Emirates grew rapidly last year, more than doubling to $8.48 billion, according to the United States Census Bureau. Some of America's largest companies, including Boeing, General Electric and several large banks, have forged strong ties to the emirates.

Dubai is also a big buyer of goods from United States military and aircraft manufacturers. The Emirates Group airline, for example, is Boeing's largest 777 customer, and placed an order last year for 42 jets, worth $9.7 billion. The airline is also considering whether to buy Boeing's new 787 Dreamliner or the Airbus A350, with a decision expected this spring.

"The emirates are a very important customer to Boeing," said Cai von Rumohr, an aerospace analyst with SG Cowen & Company. "They buy a lot of planes. They've also got a big pending sale coming up, and I'm sure that Boeing is doing everything it can right now."

Dubai is "a customer you do not want to alienate," said Richard Aboulafia, an analyst with the Teal Group, an aviation and military information company located in Fairfax, Va. "There is a good chance that there will be Dubai-bashing and xenophobia in Congress. That could help poison commercial relations, and I would hope that calmer heads will prevail."

On March 13, representatives from the United States and the United Arab Emirates will meet for trade talks that are expected to center on the creation of a free trade agreement. The United States opposition to the ports deal "will influence the ongoing discussions between the U.A.E. and the U.S. negatively," the central bank governor of the emirates, Sultan bin Nasser al-Suwaidi, said in a recent interview, according to Bloomberg News.

The dispute over the ports deal has done nothing to curb the ability of some American companies to do business with Dubai. On March 5, for example, Morgan Stanley received a license to operate in Dubai's financial center. Georges Makhoul, Morgan Stanley's regional head for the Middle East and North Africa, called the license a "true demonstration of our commitment to the growth and development of this region."

    U.S. Businesses Are Lining Up Behind Dubai, NYT, 8.3.2006, http://www.nytimes.com/2006/03/08/business/08dubai.html


 

Wall St. Cheers Huge Phone Deal; Others Seem Likely        NYT        6.3.2006

http://www.nytimes.com/2006/03/06/business/06cnd-phone.html

Wall St. Cheers Huge Phone Deal;

Others Seem Likely

March 6, 2006
The New York Times
By VIKAS BAJAJ

AT&T's proposed $67 billion purchase of BellSouth was received warmly by Wall Street today, and even critics who expressed concerns about the acquisition's impact on competition acknowledged that the deal should easily win regulatory approval.

The deal, which will go a long way toward recreating the original AT&T before it agreed to be split up in 1984 to settle an antitrust case, could put greater pressure on competitors like Verizon Communications and Comcast to get bigger by acquiring smaller companies like Sprint Nextel, Qwest Communications and Alltel, telecommunications analysts said.

Shares of BellSouth were up 11.5 percent, to $35.07, and AT&T shares were down 1.4 percent, to $27.61, at midday. The shares of potential telecommunications acquisitions like Qwest and Alltel were up about 4 percent each, and shares of the would-be acquirers Verizon and Comcast fell early in the day but appeared to recover most of their losses by midday.

"While the premium is greater than we expected, longer term there is great strategic merit to this combination," said Will Power, an analyst at Robert W. Baird & Company, an investment bank.

"On the competitive landscape, it puts additional pressure on other carriers to make other acquisitions," he added.

AT&T and BellSouth are already close partners, jointly operating Cingular Wireless, the nation's largest cellular company .

The biggest changes for consumers, at least initially, will be the disappearance of the BellSouth and Cingular brands. Cingular will be recast as AT&T Wireless, a name that it decommissioned less than two years ago. Over time, AT&T officials suggested that consumers will benefit as it offers more products that meld its wireless and wireline services.

Regulators and lawmakers are expected to examine whether the acquisition, which comes on the heels of SBC Communications purchase of AT&T and Verizon's takeover of MCI, will limit consumer choice. But they will likely conclude that most Americans, including the millions in the Southeast where BellSouth is the dominant local-phone company, can chose from an array of competitors like cable, wireless and Internet providers, experts said.

"AT&T-SBC has been putting up trial balloons for the past six months, giving policy makers the opportunity to shoot darts at it," said Andrew Lippman, a partner at the law firm of Bingham McCutchen in Washington. "There has been real little opposition that has been voiced from the administration."

Consumer advocates said the deal should heighten worries about the increasing control that a few large telephone and cable companies exert over Internet access. That concern has been stoked by recent suggestions by phone and cable executives that they would like to charge the providers of Internet content, and possibly also consumers, for the network capacity they use in addition to the subscription charges paid by individuals for unlimited access to the Internet.

"We need a clear crisp enforceable policy of nondiscrimination," said Mark Cooper, a research director at the Consumer Federation of America.

AT&T said today it would cut 10,000 jobs in addition to the 26,000 positions it had previously said it would eliminate from 2006 to 2008 as part of the SBC-AT&T merger and other continuing cost-cutting efforts. The companies today employ a combined total of 371,000 workers.

All together, the company said it should be able to cut its costs by roughly $2 billion a year beginning in 2008 as it combines overlapping functions and operations. Executives said the deal, which will have to be approved by the Justice Department, the Federal Communications Commission and state regulators, should close by early next year.

    Wall St. Cheers Huge Phone Deal; Others Seem Likely, NYT, 6.3.2006, http://www.nytimes.com/2006/03/06/business/06cnd-phone.html?hp&ex=1141707600&en=c96cd3de59a97d79&ei=5094&partner=homepage

World's biggest stock exchange goes public in growth quest

Sun Mar 5, 2006 5:12 PM ET
Reuters
By Belinda Goldsmith

NEW YORK (Reuters) - Founded by some traders under a tree on Wall Street two centuries ago, the world's biggest stock exchange enters a new growth phase this week as it goes public, building a war chest to expand globally and add assets.

The New York Stock Exchange ends 213 years as a member-owned exchange on Tuesday when it seals its purchase of electronic rival Archipelago Holdings and sets up the NYSE Group Inc. which starts trading on Wednesday.

Adding stock options, fixed income products and more over-the-counter trading to its menu, the NYSE will pit itself in the United States against the younger, more nimble Nasdaq Stock Market Inc., the world's second largest exchange.

But with the NYSE planning a share sale within weeks of going public, analysts also expect the new company to be quick off the mark to join the ongoing consolidation among bourses in Europe and even in Asia.

"I think the NYSE chose this route to go public, merging with Archipelago, to give it the currency to be able to act more quickly in this consolidation," said Richard Herr, an analyst with Keefe, Bruyette & Woods.

"So far the NYSE has given no formal guidance on its plans but after Wednesday we will want to see what its strategy will be going forward in this growing, competitive market."

When the NYSE Group starts trading on Wednesday analysts expect the stock price to pick up from Archipelago's close on Tuesday, with the deal already factored into the price.

Technology has transformed financial trading, with a new breed of online traders allowing buyers and sellers to pair up in a fraction of a second. A race to offer the fastest, cheapest trading system set off a bull market in exchanges.

The NYSE has been slower than other exchanges to go public as it first had to do deal with a few internal problems.

In 2003 NYSE Chairman Richard Grasso was forced out in a pay dispute.

The NYSE also has had to handle charges that some traders had failed to act in investors' best interests.

Last year, however, under new Chief Executive John Thain, the NYSE announced that it would now follow other exchanges and go public.

The NYSE declined to comment other than to refer to previous statements released by the exchange.

BUILDING A WAR CHEST

The not-for-profit NYSE opted to go public, not through an initial public offering but by giving its 1,366 owners, or seat holders, $300,000 each in cash and 80,177 shares in a new company of which NYSE shareholders own 70 percent. NYSE Group will have a market value of over $10 billion.

Some of the shares given to NYSE seat holders and staff will be put up for sale within weeks, but the NYSE has not given any clues on a primary share sale. Analysts speculate this sale could raise up to $2 billion.

"This offering and anything that happens going forward is to build up a war chest as they work out how to compete on an international basis," said Sang Lee, managing partner of Aite Group, a financial research and advisory firm.

Analysts expect the stock sale to be well received, mirroring other offerings since exchanges worldwide began to move away from being member-owned clubs and go public.

Shares of Deutsche Borse AG, which led this trend in 2001, have continued to do well, rising 94 percent last year as one of Europe's best-performing stocks.

In the United States, shares of the Chicago Mercantile Exchange have climbed more than 12-fold to $434 each since it went public at $35 in 2002. They rose 61 percent in 2005.

NYSE is going public at a time when U.S. exchanges are trading at a premium to their European peers, sparked by a busy 12 months as the U.S. market catches up with European changes.

Herr said European exchanges are trading at about 18 to 20 times forward earnings, compared with 30 to 40 times for U.S. exchanges.

"But it is difficult because there is so much sea change going on with the equity markets and NYSE and Nasdaq that it is hard to accurately say what they will earn," said Herr.

But Lee said, the NYSE has one advantage over any rivals when it comes to attracting new company listings -- its size and reputation. It's hard to put a value that.

TECHNOLOGY FAST TRACK

Thain has made it clear that the NYSE wants to add new products on top of its equities business to bolster growth.

But Larry Tabb of the financial markets research firm Tabb Group said expanding the NYSE's bond trading capability, for example, could be an uphill battle given how many other banks and brokerages in recent years have tried similar systems and failed.

"Back in the Internet heyday there must have been 20 companies that tried to develop electronic bond trading systems and only one succeeded," said Tabb.

But Thain has also made clear his ambitions to expand abroad, expressing interest in Europe where the three main exchanges -- the London Stock Exchange, the Deutsche Borse, and Euronext (a merger of the Paris, Amsterdam, Brussels and Lisbon exchanges) -- have been locked in on-off mergers.

This could help the NYSE capture the business it loses before the U.S. market opens in the mornings as well as attract listings that are not eligible for U.S. exchanges.

"But although Thain is talking about overseas expansion, they really need to focus on the U.S. domestic market where there is enough competition and there is going to be a lot of work around integration," said Lee.

    World's biggest stock exchange goes public in growth quest, R, 5.3.2006, http://today.reuters.com/news/articlenews.aspx?type=topNews&storyid=2006-03-05T221212Z_01_N01302422_RTRUKOC_0_US-FINANCIAL-NYSE.xml

U.S. Is Reducing Safety Penalties for Mine Flaws

March 2, 2006
The New York Times
By IAN URBINA and ANDREW W. LEHREN

CRAIGSVILLE, W.Va. — In its drive to foster a more cooperative relationship with mining companies, the Bush administration has decreased major fines for safety violations since 2001, and in nearly half the cases, it has not collected the fines, according to a data analysis by The New York Times.

Federal records also show that in the last two years the federal mine safety agency has failed to hand over any delinquent cases to the Treasury Department for further collection efforts, as is supposed to occur after 180 days.

With the deaths of 24 miners in accidents in 2006, the enforcement record of the Mine Safety and Health Administration has come under sharp scrutiny, and the agency is likely to face tough questions about its performance at a Senate oversight hearing on Thursday.

"The Bush administration ushered in this desire to develop cooperative ties between regulators and the mining industry," said Tony Oppegard, a top official at the agency in the Clinton administration. "Safety has certainly suffered as a result."

A spokesman for the agency, Dirk Fillpot, defended its record, pointing out that last year the coal industry had 22 fatalities, the lowest number in its history.

"Safety is definitely improving," Mr. Fillpot said.

A spokeswoman for the National Mining Association, Carol Raulston, agreed.

"The agency realized in recent years that you can't browbeat operators into improved safety, and this general approach has worked," Ms. Raulston said. "The tragic events of this year have given everyone pause. But I don't think it means we want to abandon what we have found works."

Federal records show that fatalities across all types of mining have stayed relatively stable. In each of the last three years, 55 to 57 miners have died in all areas of mining. Experts say a long-term decline in coal mine fatalities is in part a result of growing mechanization.

Mr. Fillpot also said delinquent cases had not moved to the Treasury Department since 2003 because of computer problems. He could not say when the problems would be corrected. "Referrals from M.S.H.A. to the Treasury Department have been impacted by technical issues on both ends, which we are working to resolve while maintaining an aggressive record on enforcement and collections," he said.

Although the agency has recently trumpeted Congressional plans to raise the maximum penalties, federal records indicate that few major fines are issued at the maximum level. In 2004, the number of major fines issued at maximum level was one in 10, down from one in 5 in 2003.

Since 2001, the median for penalties that exceed $10,000, described as "major fines," has dropped 13 percent, to $21,800 from $25,000.

Also troubling, critics say, is that fines are regularly reduced in negotiations between mine operators and the agency. From 2001 to 2003, more than two-thirds of all major fines were cut from the original amount that the agency proposed. Most of the more recent cases are enmeshed in appeals, so it is impossible to know whether that trend has continued.

"The agency keeps talking about issuing more fines, but it doesn't matter much," said Bruce Dial, a former inspector for the mine safety agency. "The number of citations means nothing when the citations are small, negotiable and most often uncollected."

Before the January disaster at the Sago Mine near here, where 12 miners died, the operator had been cited 273 times since 2004. None of the fines exceeded $460, roughly one-thousandth of 1 percent of the $110 million net profit reported last year by the current owner of the mine, the International Coal Group.

[At a House oversight hearing on Wednesday, agency officials repeatedly cited the frequency of fines against Sago in the year before the accident as proof of aggressive enforcement. Exasperated, Representative Lynn Woolsey, Democrat of California, replied that maybe those fines had little effect because many were for $60. That point set off applause from audience members.]

"Most fines are so small that they are seen not as deterrents but as the cost of doing business," said Wes Addington, a lawyer with the Appalachian Citizens Law Center in Prestonsburg, Ky., which handles mine safety cases. Using federal records, Mr. Addington released a study in January indicating that since 1995 nearly a third of the active underground mines in Kentucky had failed to pay their fines.

"Operators know that it's cheaper to pay the fine than to fix the problem," Mr. Addington said. "But they also know the cheapest of all routes is to not pay at all. It's pretty galling."

Larry Williams, who now lives in Craigsville, 50 miles east of Charleston, knows this frustration well. In 2002, he was working with a fellow miner, Gary Martin, in a deep mine near Rupert, 25 miles south of here, when the roof collapsed on them. Mr. Martin died instantly, and Mr. Williams was trapped for more than four hours under several thousand pounds of rock that crushed his pelvis and both legs.

The men had been pillaring, or second mining, which involves extracting the last remaining coal in tunnels by scraping it from the coal pillars used to hold up the roof. This method is considered extremely dangerous. Federal regulations aim to reduce the risk.

In this case, federal investigators found that the regulations were not followed. The operators were fined $165,000. Those fines have not been paid, even though the mine owner, Midland Trail Resources, which did not reply to requests for comment, remains in business, according to state records.

"It makes me mad," said Mr. Williams, 50, who is paralyzed through much of his right side. "One dead and another man's life ruined, and they pay nothing? It just doesn't make sense."

On Feb. 14, Senator Arlen Specter, Republican of Pennsylvania, introduced a measure to raise the maximum penalty that the mine safety agency can assess for failing to eliminate violations that cause death or serious injury, to $500,000, from the current $60,000.

The law would also prohibit administrative law judges from reducing fines for violations deemed flagrant or habitual.

Ellen Smith, editor of Mine Safety and Health News, an independent newsletter that covers the industry, said that although the law was a positive step, one regulation that continued to need attention allowed fines to be lowered for smaller or financially troubled mines.

"The result of that provision is that it helps keep some habitual offenders in business," Ms. Smith said.

Cecil E. Roberts, president of the United Mine Workers of America, said changes in the law were vital but so were changes in the agency. "If you don't have enforcement along with a strong law, then you don't have a law," Mr. Roberts said. "The current agency mentality is to cooperate with mine operators rather than watchdog them, and safety suffers as a result."

Even when Congress passes strong safety laws, the agency can write regulations that work around them. In 2004, for example, after years of pressure from mine operators, regulators wrote a rule that let mines use conveyor belts not just for moving coal but also to draw in fresh air from outside. A law already existed preventing such safety regulations because of concerns that in the event of a fire, the belts would carry flames and deadly gases directly to the work area or vital evacuation routes.

Though the investigation is not complete, many experts say this is probably what occurred at the Aracoma Alma No. 1 Mine in Logan County, W.Va., where a fire left two miners dead on Jan 21.

Mr. Fillpot said his agency was revising the regulations on imposing penalties. He also pointed to civil suits filed by the agency in what he said was an increasing effort to force operators to pay millions of dollars in unpaid penalties.

"You can expect to see more of these types of efforts from us in the coming months," Mr. Fillpot said.

Mr. Williams, the miner who is partly paralyzed, remains skeptical.

"All I know is the roof collapsed only days after a federal inspector looked right at those pillars and saw that the operator was having us do illegal things," he said. "In these mines, laws don't matter."

Ian Urbina reported from Craigsville, W.Va., and Andrew W. Lehren from New York.

    U.S. Is Reducing Safety Penalties for Mine Flaws, NYT, 2.3.2006, http://www.nytimes.com/2006/03/02/national/02mine.html?hp&ex=1141362000&en=16f66ee262e5d96b&ei=5094&partner=homepage

Economic View

Why Do Stocks Pay So Much More Than Bonds?

February 26, 2006
The New York Times
By DANIEL ALTMAN

YOU might think that the nation's high priests of finance would have agreed by now on why stocks have paid much higher returns than bonds over the years.

You'd be wrong. But depending on whose explanation you believe, there are some important implications for the economy's future. The outlook may not be so good, at least not for everyone.

As every first-year finance student knows, there is a not-easily-measurable number called the equity risk premium. Simply put, this premium is the extra return that stocks have to pay, because they're riskier than safe government bonds, in order to attract investors. It's the same reason that individual numbers on a roulette wheel pay more than odds or evens: higher risk, higher return.

For decades, the returns on stocks have usually been much higher, relative to bonds, than risk alone would seem to justify — perhaps as much as six or seven percentage points higher. If risk were the only explanation, the difference would suggest that investors were extremely risk-averse, to the point that they would never leave the house for fear of having to cross the street.

Some economists have suggested that the equity risk premium is reasonable, if you account for very rare but very costly events, like depressions and wars. But there is still much debate, and there are other explanations for the gap in returns.

Think about the two types of securities in terms of supply and demand. The market for safe government bonds includes investors who can't buy stocks at all: foreign central banks, other government agencies, some institutional money managers and certain kinds of trusts. Moreover, financial planners may be too eager for their clients to buy safe government bonds. If their paychecks depended solely on whether their clients made or lost money, they might try to avoid losses at all costs.

In other words, it may just be ridiculously easy to raise money for bonds. Or investors' expectations of stock returns may be irrationally low, focused more on crashes than booms. Either way, the equity risk premium wouldn't explain the entire gap in returns. .

We do know, though, that the risk premium must be some part of that gap. According to research by William N. Goetzmann and Robert G. Ibbotson, two finance professors at Yale, that premium has stayed fairly constant over long periods through virtually all of American history. For lack of a better reason, there may just be something special about American capital markets, so that a high equity premium would tend to revert to some sort of long-run average. In other words, the equity premium may be a partial predictor of future stock returns and even the future growth of the economy.

Yet many financial economists believe that the equity risk premium has been dropping in recent times. "Over the last 20 or 30 years there have been dramatic changes in the financial markets," said John C. Heaton, a professor of finance at the University of Chicago. "Investors have become just more comfortable with the stock market. Part of that is education. The other thing is sort of a classic finance effect, which is that the level of diversification that investors have available to them has increased."

Professor Heaton said that with the coming of age of American financial markets, many types of investors have found it easier to diversify their assets. For example, it's easier now for entrepreneurs to bring their businesses to the market, and after selling off shares or partnerships, they can invest in other securities. The same goes for homeowners, who can take equity out of their houses and then diversify their holdings.

The ability to diversify makes the buying of risky assets, like stocks, more palatable. "It makes wealthier people more comfortable holding positions in the stock market," Professor Heaton said. He suggested that the equity risk premium might now be around three or four percentage points. A result is more money available to the corporate sector. "The cost of capital is going down, and therefore we're going to see more investment," he added. "The riskier projects that investors would have shied away from are now going to be taken on."

But does this mean more economic growth? It may in the long term, if those risky investments pay off at a higher rate than less-risky alternatives. In the shorter term the effects may be quite different.

In addition to the long-term decline in the equity risk premium, there may be changes over the course of the business cycle, said Campbell R. Harvey, a professor of international business at Duke University. "If you're in the depths of a recession, to get people to use some of their income and invest in the stock market, you have to offer a larger premium to do that," he said. When times improve, the necessity of paying a premium fades a bit; people are more willing to take on risk when they're feeling more comfortable in general.

THE last couple of business cycles have been pretty mild, Professor Harvey noted. But he said that the reduction in the equity risk premium could actually mean lower growth in the near future. "It's true that we've got lower volatility, but with the lower volatility, there's a lower expected return," he said. "The lower expected return translates into a lower growth rate in the economy." Professor Harvey predicted that the economy would expand at a rate of about 3.25 percent annually in the next several years, well below its long-term average in boom times.

Yet even if the economy's growth slows down, people could feel better off than they did before. "In my opinion, the lower volatility of economic growth helps the people that are less advantaged," Professor Harvey said. "Those are the people that are most likely to be laid off in a recession. There's less disruption in the part of our population that's less well off."

    Why Do Stocks Pay So Much More Than Bonds?, NYT, 26.2.2006, http://www.nytimes.com/2006/02/26/business/yourmoney/26view.html

U.S. to Pay Big Employers Billions Not to End Their Retiree Health Plans

February 24, 2006
The New York Times
By MARY WILLIAMS WALSH

America's largest companies expect the federal government to pay them about $4 billion over the next four years to help keep their retiree health plans alive at a time when such benefits are increasingly on the chopping block, according to a new study by Credit Suisse First Boston.

The money is due to start flowing to employers this month as part of Medicare's new prescription drug benefit. When Congress authorized the Medicare drug benefit, it also agreed to start subsidizing the drug component of employers' retiree health plans, to keep them from shifting their retirees into the government program.

The goal is to save the government money, even after the subsidies, while giving the retirees a better deal than they might get if they were pushed into Medicare.

Among the nation's 500 largest companies, 331 offer retiree health plans.

With the program just starting its first year, it is not yet clear whether the subsidy will achieve its goals. For one thing, there are about 36 million people 65 and older in this country who are eligible for Medicare, but only about 7 million retirees currently covered by employer-sponsored health plans. Still, the Credit Suisse study, published on Wednesday, shows that the subsidy is popular with big employers — even those that do not fit the stereotype of companies in waning industries unable to cope with health care inflation and armies of baby-boomer retirees.

The money, to be sure, will flow to some financially weaker companies staggering under the weight of their health plans, like General Motors, which is expected to receive $1.1 billion over the next four years in drug subsidies for their retired workers.

But there are also thriving businesses like the utility company Exelon, which seem able to afford their plans on their own but will nonetheless receive the federal payouts.

There are companies, too, like BellSouth, that have been setting aside money for retiree health care for years and have billions on hand.

And some that have no reserves for those outlays, like Delta Air Lines, will also receive subsidies.

The government is not drawing distinctions because the subsidy is meant only to help employers stay in the retiree health care business, not to direct public funds to the neediest employers.

Mark Hamelburg, director of employer policy and operations at the Centers for Medicare and Medicaid Services, the agency that runs Medicare, said, "The whole purpose was to incentivize employers to keep providing the good level of coverage that they have had." So far, employers covering 6.4 million retirees have enrolled for the subsidy, he said.

To get the new subsidy, a company must offer retirees a prescription drug benefit that is at least as valuable as the minimum benefits now available under Medicare. Even though General Motors, 3M, Unocal, International Flavors and Fragrances and Avaya are among businesses that have limited or cut back their retiree health plans in recent years, the study showed, all still offer benefits generous enough to qualify for the subsidy.

At the same time, the study found a few large companies that were expanding their retiree health plans, not cutting them. General Electric, for example, in 2003 increased its total obligations of this sort by about $2.5 billion, as part of a new labor agreement. The Medicare subsidy will offset some $583 million of that increase.

And BellSouth's commitments to retiree health care increased $3.3 billion in 2004, after auditors for the company required changes in the way it was accounting for the benefits. The Medicare subsidy will offset $1.1 billion of that.

The Credit Suisse analysts who conducted the study, David Zion and Bill Carcache, prepared it to show investors how successful, or not, companies had been in shifting the cost of their retiree health plans onto other payers.

Companies that fear they have promised more benefits than they can deliver "are actively trying to pass the buck," the analysts wrote. This means trying to shift costs "to anyone who will bear them: their retirees, active workers, the U.S. taxpayer, etc.."

"If they succeed," the analysts added, "it's a giant transfer of risk from corporate America to the work force, and retirees."

Instead of increasing corporate profits in a given year, the subsidies are supposed to free up cash that the company would otherwise have to spend on health care. Mr. Zion and Mr. Carcache said this effect would show up on corporate cash-flow statements. In the future, though, after the Financial Accounting Standards Board completes its current project on pension accounting, retiree medical plan activity might make its way onto corporate balance sheets.

The company with by far the biggest retiree health plan is G.M. — a plan so large that the $77 billion obligation constitutes 18 percent of the combined retiree health obligations of the nation's 500 largest companies. G.M. projects that it will make cash outlays of about $18 billion for retiree health care over the next four years.

Those projections were made before it negotiated a package of concessions with the United Auto Workers union in October, but a G.M. spokesman, Jerry Dubrowski, said newer projections were not available. He said the cutbacks were still being challenged in court by retirees, who argue that the union has no legal authority to negotiate for them, only for active workers. If the concessions are upheld, Mr. Dubrowski said, the retirees will still get a better deal under G.M.'s health plan than if they were pushed into Medicare.

"This is an important first step in reforming the whole health care system," he added.

But the company that will get the biggest boost from Medicare on a percentage basis is not G.M., but Genuine Parts, a distributor of auto replacement parts and office products that has rising sales and profits, and a much smaller health plan. The subsidy, estimated at $6 million over the next four years, will reduce its overall health care obligations to retirees by 62 percent, the study found.

The Credit Suisse analysts found that the big companies, over the life of their retiree health plans, expected to receive about $25 billion from the federal subsidy arrangement.

But Mr. Hamelburg of the federal Centers for Medicare and Medicaid Services said that companies' estimates did not capture the entire outlay expected because they did not include the substantial subsidies that would go to state and local governments that run retiree health plans. The government expects to pay all employers, private and public, about $14 billion over the next four years.

    U.S. to Pay Big Employers Billions Not to End Their Retiree Health Plans, NYT, 24.2.2006, http://www.nytimes.com/2006/02/24/business/24retire.html

Increasingly, the Home Is Paying for Retirement

February 24, 2006
The New York Times
By MOTOKO RICH and EDUARDO PORTER

Two years ago, George and Mollie Weiner were scraping by on $1,800 a month in Social Security payments and just $100 in monthly payouts from their individual retirement accounts.

But last year, the couple, both 80, realized they could generate more income from their two-bedroom condo near Tampa, Fla., which had more than doubled in value since they bought it in 1997. They took out a "reverse mortgage," a loan that does not require monthly repayments, giving them access to more than $100,000.

"We are very relaxed now because we have extra spending money," Mr. Weiner said. "And the house is taking care of it."

An increasing number of retirees may be starting to follow the Weiners' example. New data released yesterday from the Federal Reserve shows that for the elderly, like Americans in general, housing wealth has soared even as other forms of savings have declined.

The Fed's latest survey of consumer finance showed that overall wealth increased very little for most American families from 2001 to 2004. For the typical American household, net worth — the sum of all assets less debts — barely increased, to $93,100 from $91,700. Their savings dropped by 23 percent while the value of their homes rose 22 percent.

For retirees, this shifting financial status is likely to force many of them into a decision no other generation has faced: to use their home as the centerpiece of their retirement plan.

Americans have not traditionally used their homes to finance retirement, choosing instead to pay down the mortgage and bequeath the house to their children. But the increasing wealth that has concentrated in homes during the boom of the last decade, compared with dwindling pension benefits and lackluster market returns, means that many retirees are finding that their largest source of additional income could come, in fact, from their homes.

"People are living longer and longer, so over time they're going to be draining their retirement accounts," said Gillette Edmunds, an investor and author, with Jim Keene, of "Retire on the House: Using Real Estate to Secure Your Retirement" (John Wiley & Sons: 2005.)

"The only thing they are not draining yet is their houses," Mr. Edmunds said, "and that's what they're going to have to turn to."

The Fed's 2004 survey, released yesterday, painted a precarious tableau of retirement planning.

Just under half of all families held retirement accounts in 2004, down from 52.2 percent in 2001, the date of the previous survey. The stock market has rebounded from its low in 2002, but the Fed's survey illustrates the lingering damage inflicted by the stock market collapse and the 2001 recession on Americans' net worth. At the same time, it underscores how the surge in housing prices has propped up otherwise shaky balance sheets, even as housing prices in some markets appear to have peaked.

The typical family's savings — either in retirement accounts or elsewhere — fell to $23,000, almost $7,000 less than three years earlier. Meanwhile, the median indebtedness of the three out of four families who had some form of debt rose by a third, to $55,300.

The erosion of savings affected the wealthy and the poor alike. The savings of people at the top 10 percent of the income scale declined by 6 percent, to $365,100; their income, on average, fell by about the same proportion. (Meanwhile, the typical American's income rose marginally.)

The financial picture is particularly unsettling for those households headed by a retired person. The typical savings of such a family fell to $26,500 in 2004, from $34,400 in 2001.

"Everybody is having a terrible time," said Alicia Munnell, who heads the retirement research center at Boston College. "Nobody is enjoying much in terms of growth in net worth. No one has enough to support themselves in retirement for 20 years."

According to calculations by Ms. Munnell, even the group aged 55 and 64 — the only age category to increase savings in the last three years — has only amassed a small fraction of what people need to maintain their lifestyle in retirement.

Home prices provided pretty much the only upbeat news. Just over 69 percent of Americans owned their own homes in 2004, according to the Fed data. The median value of their homes jumped to $160,000 in 2004 from $131,000 three years before, a rise of 22 percent.

Among households headed by retirees, nearly 76 percent owned their homes in 2004. The median value of their homes also jumped 22 percent, to $130,000, compared with $106,500 in 2001. Few people expect to draw equity from their homes to finance their retirement. "They use it more like catastrophic insurance," said Steven F. Venti, an economist at Dartmouth College. "It's not a means to finance day-to-day consumption."

But increasing numbers of retirees may find themselves forced to turn to their homes for further income.

"A lot of people went into retirement with pension funds and stock market investments that they thought would serve them toward the end," said Bronwyn Belling, reverse mortgage specialist at the AARP Foundation in Washington. "They've been in for some pretty rude awakenings."

Already, evidence is mounting that older people are tapping the equity in their homes more aggressively. In the late 1980's, the Federal Housing Authority began a pilot program of reverse mortgages — loans, made mostly to seniors against the value of their homes, that do not require monthly payments.

Elderly borrowers whose incomes will not qualify them for a more traditional home equity loan can still opt for a reverse mortgage. The loans are usually worth some fraction of a home's value, and need to be repaid, with interest, only when the house is sold or the borrower dies.

The program drew little attention for more than a decade. But as home prices soared, it took off. Last year, more than 43,000 older homeowners took out reverse mortgages insured by the Federal Housing Authority, a sixfold jump since 2000.

"This is the fastest-growing mortgage segment by far," said Jim Mahoney, chief executive of Financial Freedom, an arm of IndyMac Bank that specializes in reverse mortgages. "Clearly this is a product whose time is coming."

The wealth that retirees have accumulated in their homes may be used not only to finance day-to-day expenses, but long-term care as well. Barbara R. Stucki, who manages a project about reverse mortgages at the National Council on Aging, told a Congressional subcommittee last year that a broader use of these loans could save many seniors from dropping into the arms of Medicaid, saving the federal program $3.3 billion to $5 billion a year in 2010.

Some retirees are cashing out of their homes to support themselves. Don Took, who worked most of his career as a stage actor in Southern California, sold his condo in Santa Ana last year for $355,000, nearly four times what he paid for it in 1998.

Mr. Took, 66, has invested the proceeds from the sale and now rents an apartment for $750 a month in North Hollywood. The investment income supplements his Social Security and pensions he receives from Actors Equity and the theater where he worked for most of his career.

"Now I have more money than I ever did while I was working," he said.

For many retirees, though, selling a home to finance other expenses is unappealing. According to an AARP survey released earlier this month, 89 percent of those over 50 said they wanted to stay in their homes as long as possible. For those aged 65 to 74, the proportion was even higher.

For the moment, families headed by people aged 55 to 64 appear to be in somewhat better shape than other age groups. The prices of their homes, like everyone else's, boomed, but unlike other cohorts, their incomes rose and their savings increased, according to the Fed survey.

Yet even this group does not have enough in financial assets to pay for a secure retirement. According to Ms. Munnell of Boston College, families should save at least five times their annual income to finance an adequate retirement.

According to the Fed's survey, however, the 95 percent of Americans 55 to 64 who had any savings at all typically had amassed $78,000, which is only about 1.5 times their median annual earnings.

That suggests that more of them will need to tap into their home equity. "We're looking at the Baby Boomers coming in shortly and a lot of them have been earn-and-spend type personalities," said W. L. Pulsipher, president of American Reverse Mortgage in Ocala, Fla. "So chances are they are going to be more apt to need to use their home than the current people that are doing it."

    Increasingly, the Home Is Paying for Retirement, NYT, 24.2.2006, http://www.nytimes.com/2006/02/24/business/24wealth.html?hp&ex=1140843600&en=3f8c3e2e054305fb&ei=5094&partner=homepage

For Minorities, Signs of Trouble in Foreclosures, NYT, 22.2.2006,
http://www.nytimes.com/2006/02/22/business/22home.html?hp&ex=1140584400&en=af5bd775261cce2a&ei=5094&partner=homepage

For Minorities, Signs of Trouble in Foreclosures

February 22, 2006
The New York Times
By VIKAS BAJAJ and RON NIXON

CLEVELAND — Catrina V. Roberts, a single mother of four, joined a new, growing class of minority homeowners when she moved from her subsidized apartment to a two-story house in 1999.

But Ms. Roberts fell behind on her payments and declared bankruptcy last year. Now, as she loses her modest home to foreclosure, Ms. Roberts may represent the vanguard of a worrying trend of retreat.

The housing boom of the last decade helped push minority home ownership rates above 50 percent for the first time in 2004 and the overall foreclosure rate below 1 percent. Social scientists laud these accomplishments because ownership can foster greater neighborhood stability and economic progress. President Bush cites rising minority ownership as a milestone achievement under his "ownership society" programs.

But hidden behind such success stories lies a disturbing trend: in the last several years, neighborhoods with large poor and minority populations in places like Cleveland, Chicago, Philadelphia and Atlanta have experienced a sharp rise in foreclosures, in some cases more than a doubling, according to an analysis of court filings and other housing data by The New York Times and academic researchers.

The black home ownership rate even dipped slightly last year, according to the Census Bureau.

The increase in foreclosures could be the first of a wave of financial distress for many minority homeowners, experts say, because they are twice as likely as whites to have taken out expensive subprime mortgages, most of which will jump to higher interest rates in the next two years, according to an analysis of data that lenders disclose under the federal Home Mortgage Disclosure Act.

Subprime loans, which are made to borrowers with credit histories that the industry considers less than prime, have interest rates that are, on average, three points higher than the prime rate, about 6.2 percent now, and they carry higher fees and prepayment penalties that make it expensive to refinance.

Some housing experts worry that the minority foreclosure rate could worsen if the economy or the housing market, nationally or regionally, hits a rough patch as it has in industrial Midwestern states like Ohio.

"Anybody who is on the edge, those are factors that can tip them over into foreclosure," said William C. Apgar, a lecturer at Harvard who has studied foreclosure patterns in Atlanta, Chicago and Los Angeles. "That could happen even though foreclosure rates are down."

The example of Ms. Roberts is noteworthy because her loan was not considered subprime. It came from KeyBank, a longstanding Cleveland institution, and carried a relatively low fixed interest rate of 7.4 percent on a principal of $65,000. She never had a credit card, much less a credit record, and put down only $2,000.

Over the years, Ms. Roberts's monthly expenses rose because of repairs to a dilapidated porch and the birth of two grandchildren, but the $880 a month she takes home after taxes from her job as a home health aide did not.

Ms. Roberts, 35, also receives $1,100 in Social Security benefits because two of her younger children have learning disabilities. "I know when you buy a house, eventually you have to put work into it," she said and sighed, "but I didn't know it would lead me here, because if I did I would have never bought it. So, I am at a point right now that I don't want to ever buy a house, ever again."

The Mortgage Bankers Association of America plays down the severity of foreclosures, noting that most new minority homeowners are doing well and that the Midwest is facing unique economic challenges. The trade group estimates that fewer than 1 percent of all loans were in foreclosure in the three months that ended last September, down from 1.5 percent in 2002. For subprime loans, the rate was 3.3 percent, down from 8 percent in 2002.

Trouble in Cuyahoga County

But broad national statistics can obscure hard local realities. In Cuyahoga County, which includes Cleveland, Ms. Roberts's hometown, court filings by lenders seeking to foreclose on delinquent borrowers totaled more than 11,000 in 2005, more than triple the number in 1995.

There were 17 auctions of foreclosed properties for every 100 regular single-family homes sold in the county in 2005, up from 10 in 2004 and 5 in 1995, according to data tabulated by Cleveland State University. (Not all homes that enter foreclosure are sold at auction; sometimes borrowers and lenders settle out of court or the property is sold on the open market.)

There is no way to know how many foreclosures of minority-owned homes have occurred in the Cleveland area, because county filings do not identify people by race. Experts say the closest proxy is the number of auctions of seized homes conducted by a sheriff as a ratio of conventional sales in areas with large minority populations.

In the eastern part of the county, which is 52 percent black and 7 percent Hispanic, the ratio of auctions to regular sales was 23 per 100 last year, up from 9 in 1995. In the west, which is 82 percent white, the ratio was 11 per 100, up from 2.5.

A similar pattern can be seen in Chicago, where foreclosure filings tripled, to 7,576, from 1993 to 2005. Neighborhoods where the population is more than 80 percent non-white account for 65 percent of all cases, up from 61 percent in 1993, according to data compiled by the National Training and Information Center, a housing advocacy and research group based in Chicago. The same trends have been documented in Atlanta and Philadelphia, according to researchers from Harvard and the Reinvestment Fund, a Philadelphia-based investment organization hired by the Pennsylvania Department of Banking to study mortgage foreclosures in the state.

Mr. Apgar and other experts note that foreclosure is the worst, but not the only, negative consequence faced by overextended minority families.

In areas where home prices have appreciated, families that have defaulted on their loan might still be able to sell their homes before they are seized. Though they would lose their homes and damage their credit records, their financial troubles would not register in foreclosure statistics. People who live in the great middle of the country where home prices have not risen rapidly may not have that option because demand there is soft.

At stake are historic gains in minority home ownership rates, which until the mid-1990's had been stagnant for two decades.

Last year, black home ownership fell slightly, to 48.8 percent, from 49.7 percent in 2004, only the second year the rate has declined in the last 10 years. Still, the fact that nearly half of all black households and half of all Hispanic families owned their homes is widely seen as a step forward.

In 1995, fewer than 43 percent of black families and just under 44 percent of Hispanic families owned their own homes. Among all minorities, a group that includes Asians and mixed-race households, the rate was 51 percent in 2005, up from 44 percent a decade ago. By comparison, more than three-quarters of white households owned their own homes in 2005, up from 71 percent.

The Role of Subprime Loans

In addition to lowering crime and revitalizing blighted neighborhoods, home ownership also helps families build wealth that can pay for education and be passed on to the next generation, said Dowell Myers, a professor at the University of Southern California who has studied Hispanic home buying patterns.

Experts attribute the recent increase in minority ownership to income and employment gains, but also to the growth of subprime lending, which provides credit in areas where few lenders and banks operated before. The expansion of credit, particularly to the poorest minorities, has been controversial.

Advocates for the poor say that aggressive lenders and mortgage brokers have given loans to borrowers who are lured by dreams of home ownership but have few savings and little job security. Many families might be better off, and receive less expensive loans, if they saved for a down payment and paid down other debts before buying a home, said Kathleen E. Keest, a senior policy counsel at the Center for Responsible Lending, a housing advocacy and research group based in Durham, N.C.

And for all the talk of expanding opportunities to the less well-off, experts note that the gap between minority and white home ownership remains unchanged from a decade ago at about 25 percentage points.

Loan data that mortgage lenders must disclose show that minorities are far more likely to receive subprime loans than whites. About 30 percent of home purchase loans made to blacks from 1999 to 2004 and 20 percent of home loans made to Hispanics were subprime, compared with 10.4 percent of loans to Asian-Americans, only slightly higher than for white borrowers.

In 2004, the latest year with data available, nearly 27 percent of loans taken out by minorities were subprime, up from 15 percent in 1999.

The disparities persist even when income is taken into account. Among minority borrowers who made $51,000 to $75,000 a year, 23 percent received subprime loans. By comparison, only 10 percent of whites in the same income bracket did. Minorities who made $151,000 to $175,000 were twice as likely to get a subprime loan as whites were.

The Mortgage Bankers Association said lenders used a number of factors like credit scores and the size of down payments, in addition to income, to determine what kind of loan and interest rates are offered to borrowers. For instance, "whites have traditionally had more wealth than minorities, and that's a factor in who gets what kind of loan, as well," said Douglas G. Duncan, the chief economist at the trade group.

Almost 70 percent of subprime loans issued since 2001 will shift from low, fixed introductory rates to higher adjustable rates in the next two years, according to an analysis by Fannie Mae.

Still, Mr. Duncan added, subprime lending has benefited minorities and lower-income borrowers. For every 100 subprime loans made nationally, only 5 end in foreclosure. Some increase in total foreclosures is to be expected simply because the number of mortgages has increased substantially over the last decade, he said.

Mr. Duncan and others in the industry say that higher foreclosure levels in the Midwest should not be seen as worrying signals for the nation because the region's economic problems are unique.

Ohio lost 215,000 jobs from 2001 to 2005, with 63,800 of them coming from the Cleveland metropolitan area. The state unemployment rate was 5.6 percent in December, up from 4 percent in 2000. The jobless rate in Cleveland was 5.5 percent in December, up from 3.8 percent.

James Rokakis, the Cuyahoga County treasurer and an advocate of tighter lending standards, said a 5 percent national foreclosure rate for subprime loans was acceptable to lenders because their profits were greater on those loans than on prime mortgages. But he noted that his county's 17 percent rate is creating blight in many neighborhoods.

In Slavic Village, once a thriving Eastern European enclave where many of Cleveland's steelworkers lived and now an increasingly black and Hispanic neighborhood, about 500 homes, or 5 percent of its properties, are vacant, Mr. Rokakis said. "Who pays for the damage done to these communities?"

Vikas Bajaj reported from Cleveland for this article and Ron Nixon from New York.

    For Minorities, Signs of Trouble in Foreclosures, NYT, 22.2.2006, http://www.nytimes.com/2006/02/22/business/22home.html?hp&ex=1140584400&en=af5bd775261cce2a&ei=5094&partner=homepage

Company Town Relies on G.M. Long After Plants Have Closed

February 20, 2006
The New York Times
By JEREMY W. PETERS and MICHELINE MAYNARD

ANDERSON, Ind., Feb. 16 — General Motors once had so many plants here that it had to stagger their schedules so that the streets would not be clogged with traffic when the workday ended. At the city's peak, 35 years ago, one out of every three people in Anderson worked for G.M.

Now there is not a single G.M. plant left, and just two parts plants that G.M. once owned still survive. Anderson, about 50 miles northeast of Indianapolis, had 70,000 people in 1970 and now has fewer than 58,000.

But in many ways, Anderson is still just as dependent on G.M. as it once was. Only now, rather than being dependent on General Motors, the corporation, it is dependent on General Motors, the welfare state.

The company's generous medical plans, prescription drug coverage, dental care and pension checks are a lifeline for the 10,000 G.M. retirees and an untold number of surviving spouses and other family members who still live in the Anderson area.

They in turn help to prop up the doctor's offices, hospitals, buffet restaurants and shopping centers that might otherwise vanish along with the G.M. plants around the city that are fast becoming rubble. Anderson's G.M. retirees outnumber its remaining auto manufacturing workers by a ratio of nearly four to one.

"When we all die off, this city will die," Jesse Lollar, 83, said last week, as he finished an early dinner of lima beans and macaroni and cheese at the MCL Cafeteria in the Mounds Mall.

Other communities will start to look more like Anderson as G.M. carries out its plan to close a dozen factories and cut 30,000 blue-collar jobs by the end of 2008, in part by offering buyouts and early retirement packages. And Anderson will in all probability begin to look even grimmer as the company cuts back on its vaunted benefits.

"General Motors is more than just a symbol of American industry," said Gary N. Chaison, professor of industrial relations at Clark University in Worcester, Mass. "It envelops the towns where it operates, and people become dependent on it in those towns."

Three of those people are Mr. Lollar, a retired G.M. engineer, and his two brothers, Charles, 72, and John, 74, who are also retired from G.M.

Together, they share 112 years of collective G.M. experience, years that have been made comfortable by one of the richest retirement plans offered to working Americans.

But earlier this month, G.M. told its retired salaried employees and their family members that it planned to cap its health care expenses at the same level as in 2005.

It told them that if costs rise, as they are now at a rate of 9 to 10 percent a year, they could expect to pay more for everything from dental and vision care to prescription drugs and doctors' visits, with the full details to come later this year. Medicare could make up some of the difference for older retirees. (G.M. reached an agreement last year with the U.A.W. on a plan that would make modest cuts in hourly workers' medical coverage. The plan still requires court approval.)

"You just take it day by day," John Lollar said. "I just hope my benefits last longer than I do."

In Anderson, St. John's Medical Center, the city's biggest hospital, is already bracing for the impact of the changes. Over the past two years, 15 to 20 percent of its patients at any one time were G.M. retirees, a spokeswoman said last week.

At Community Medical Center, the other major hospital, 14 percent of the patients last year were retired from G.M.

Iva Hazelbaker, 96, who retired from her job on an assembly line 35 years ago, said that without G.M., "we'd be in a heck of a mess."

Ms. Hazelbaker, who walks with a cane but has a sprightly manner, does not see a very bright future for Anderson, her home for 40 years. "Young people don't stand a chance," she said.

Anderson's unemployment rate is 6.7 percent, near its peak for the last ten years and well above the national average of 4.7 percent. Even so, the figure is misleading, said Patrick Barkey, the director of economic and policy studies at Ball State University in Muncie, Ind., because many people here stopped looking for work long ago and are not captured in the numbers.

"I think it masks the state of the economy and understates the degree to which the job picture has worsened," Mr. Barkey said.

Across the country, about 80 other communities have lost more than a third of their auto manufacturing jobs in the last ten years.

A visit to Anderson, now a stripped-down shell of its former self, offers perhaps the starkest example of the damage that plant closings can do. Reminders of the once-mighty auto industry are everywhere: abandoned plants, a ghostly downtown and residents who speak with bewilderment and frustration about what has happened to the auto business.

Sharon Boone, 60, followed in her father's footsteps and started working at G.M. when she was 23, building ignition parts on an assembly line. She was eligible for a full retirement package after 30 years with the company, so she left in 1999.

Standing in the kitchen of the United Automobile Workers Local 662 hall, she pointed out an aerial photograph of Anderson from 1973. Parking lots around a dozen factories were jammed with hundreds of cars, creating a vibrant city within a city.

G.M.'s operations were "so big we even had our own water-treatment plant," Ms. Boone said. "Now the jobs aren't here, and the money isn't here."

Along with once being the country's biggest employer until it was passed by Wal-Mart in the 1990's, G.M. was a powerhouse when it came to benefits.

And even though G.M. stopped offering retiree health care coverage to new workers 13 years ago, it still covers 679,000 retirees, their spouses and eligible dependents — on top of the coverage it gives to 435,000 active workers. This costs the company an average of $5,000 a year per recipient.

Given the sheer number of people who will be affected, the impact of the company's health care changes will run far beyond those of steel makers, retailers, railroads and airlines that have already eliminated or trimmed the benefits that their workers enjoyed.

Earlier this month, G.M.'s chief executive, Rick Wagoner, expressed sympathy for those faced with paying more for their coverage. "When these benefits were conceived decades ago, no one could have foreseen the explosive cost inflation that we have been experiencing in recent years," Mr. Wagoner said.

Anderson once ranked right behind Flint, Mich., where one out of every two people worked for G.M. at the company's peak in 1978, as the city with the largest concentration of G.M. operations.

Back then, G.M. employed 22,000 people in Anderson making everything from headlights to horns; now only 2,600 jobs are left at a pair of auto parts plants, one of them owned by Delphi, which is operating in bankruptcy protection. The other is the Guide Corporation, a headlight and tail light maker that was once a unit of G.M. and is now for sale. Analysts have said the Delphi plant could soon be closed or sold.

Across the street from what was once a vast G.M. manufacturing complex on Anderson's industrial east side is the former White Corner bar, one of Anderson's most storied factory taverns. Now called Stanley's, it is still open for business, but patrons are hard to come by.

"You used to have to wait for someone to get up to get a seat," Naomi Scales, the 69-year-old daytime bartender, said one recent afternoon as a lone customer sat in the back of the bar, sipping a soda. "It's just not fun anymore."

The city's dependence on retiree income is a major concern for the mayor, Kevin S. Smith, who said Anderson must attract new jobs if it is to survive. That is why he has gone as far as Japan and is planning a trip to China to look for investors, armed with multilingual business cards.

"We realize those retiree pensions will not be here in the coming years," Mr. Smith said. "That's why it's important that we are involved in new job creation that will employ the younger people now, too, and keep them in our community."

Yet there were few young people at the tables of the MCL Cafeteria last week. Its manager, Dan Cantrell, said about a third of his business came from G.M. retirees like the Lollar brothers.

With specials like a $4.49 all-you-care-to-eat fish fry on Fridays, the MCL is a favorite of Anderson's elderly, who receive a 10 percent discount in the afternoon.

Their spending is "still a lot of the economy," Mr. Cantrell said, referring to the retirees.

And Anderson can never hope to find anything as big, or as generous, as G.M. to provide its economic backbone. "There's not really another major manufacturing plant, anything, that could supplement a city's income the way G.M. did — and still does," Mr. Cantrell said.

Eventually, the retirees whose G.M. benefits are helping to prop up this place will be gone as well. As Jesse Lollar, the retired G.M. engineer, put it: "We're going to turn the lights off when we leave."

    Company Town Relies on G.M. Long After Plants Have Closed, NYT, 20.2.2006, http://www.nytimes.com/2006/02/20/business/20auto.html?hp&ex=1140411600&en=a11e48747cf7958c&ei=5094&partner=homepage

Housing Starts in January Hit 33-Year High

February 17, 2006
The New York Times
By VIKAS BAJAJ

Home construction jumped 14.5 percent to a 33-year high last month, the Commerce Department reported yesterday, a sign that builders may have taken advantage of unseasonably warm weather in January.

The report surprised many analysts because home sales have slowed and the number of unsold homes has risen in many markets around the country in the last several months. Many home builders have also been saying that they are offering bigger incentives to lure buyers.

In January, builders began constructing homes — known as housing starts — at an annual pace of 2.28 million, the fastest level since 1973, after a drop of 6.9 percent in December. Permits for new construction increased 6.8 percent, to 2.22 million, after falling 4.1 percent in December. Compared with January 2005, housing starts were up 4 percent, the government reported.

Warmer weather tends to spur construction activity, and the average temperature in the United States in January, at 39 degrees, was the highest ever recorded by the government, an increase of 8.5 degrees over the historical average for the month. The unusual weather has also been cited for stronger retail sales and weaker industrial production, the latter because utilities produced less electricity.

"It is a time-tested pattern," said David F. Seiders, chief economist for the National Association of Home Builders, noting that builders may have started work on homes that they sold ahead of construction at the end of last year. "February has essentially returned to normal conditions, suggesting to me that we will see a substantial decline in housing starts."

The effect of the weather could further be magnified because most economic data, including housing starts, is adjusted to account for seasonal weather and other patterns. Because January is usually one of the coldest months of the year, those adjustments would have bolstered the data that the Commerce Department reports for the month even if construction were flat. Before adjusting for seasonal factors, housing starts were up 11.3 percent from December.

"Builders were able to build and so they were out there doing it, and the seasonal adjustment process pumped it up," said Joshua Shapiro, chief economist at MFR, a research firm in New York.

Housing start data is also subject to a significant margin of error, plus or minus 9.9 percentage points in January, because it is based on a relatively small sampling of data.

Just last week, two large home builders warned about slowing sales: Toll Brothers, the nation's largest luxury home builder, said orders fell 21 percent in the three months ended Jan. 31 compared with the same period a year ago, and KB Home said more buyers were canceling orders and fewer were signing contracts in the first two months of the year compared with 2005.

But even as they acknowledge the slowdown, many housing industry officials are generally optimistic about the year to come, given that mortgage interest rates remain low and that the economy has been adding jobs at a stronger clip in recent months. The average interest rate on a 30-year fixed rate mortgage was 6.15 percent in January, up from 5.71 percent a year earlier, according to Freddie Mac, but that is still low by historical standards.

"Everybody would agree that 2006 won't be 2005," said William Emerson, chief executive of Quicken Loans, a mortgage lender based in Livonia, Mich. "But it will be strong."

Home building activity was strongest in the Northeast, where starts jumped 29.2 percent; followed by the Midwest, up 23.7 percent; the West, 16.9 percent; and the South, 8.7 percent.

Separately, the Labor Department reported that initial claims for unemployment insurance climbed by 19,000 last week, to 297,000 for the week ending Feb. 11. At 2.5 million, the total number of jobless claims at the end of Feb. 4 was down 7 percent from a year earlier.

    Housing Starts in January Hit 33-Year High, NYT, 17.2.2006, http://www.nytimes.com/2006/02/17/business/17econ.html

Jobless Rate Falls to Lowest Level in More Than 4 Years

February 3, 2006
The New York Times
By VIKAS BAJAJ

The unemployment rate fell to its lowest level in four and a half years in January, the government reported today, as the economy added construction, education, health and other jobs.

Employment was up in virtually every sector of the economy and the country as a whole added 193,000 jobs, the Labor Department reported; the unemployment rate fell to 4.7 percent, the lowest it has been since July 2001.

The report also revised upward the employment gains for November and December, increasing the total number of new jobs created in those months to 81,000. With those additions and other revisions to the 2005 data taken into account, the economy added an average of 174,000 per month in the last 12 months. Economists estimate that the nation needs to add roughly 150,000 jobs a month just to keep up with population growth.

Though January's report fell short on economists' expectation of 250,000 new jobs, it showed surprising and broad-based strength. The construction industry added 46,000 jobs, perhaps reflecting the warmer than usual January, and the number of education and health services jobs increased by 39,000. Employment was up in all parts of the economy except for retail services, in which jobs decreased by 2,000, and the government, which was down 1,000.

The unemployment rate also fell across most major population groups, except teenagers, who saw a slight increase. It fell the most for blacks, to 8.9 percent from 9.3 percent, and for adult men, to 4 percent from 4.3 percent. Average wages, which have lagged behind inflation for much of the last year, were up 0.4 percent, or 7 cents an hour, to $16.41.

"In short, this report is much stronger than it first appears," Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a research note.

Among people who evacuated their homes because of Hurricane Katrina in late August, the unemployment rate rose to 14.7 percent in January from 12.4 percent in December.

About half the 1.2 million people who left their homes because of the hurricane had returned by January, most of whom were employed; the unemployment rate for returnees was 2.9 percent in January, down from 5.6 percent in December. But the situation appears to be getting worse for those who have not returned; the unemployment rate for them rose to 26.3 percent from 20.7 percent in December.

    Jobless Rate Falls to Lowest Level in More Than 4 Years, NYT, 3.2.2006, http://www.nytimes.com/2006/02/03/business/03cnd-econ.html?hp&ex=1139029200&en=71eaaede30e79d63&ei=5094&partner=homepage

Big Results at Google Fall Short

February 1, 2006
The New York Times
By SAUL HANSELL

After astounding Wall Street with its incredible growth, Google yesterday learned the perils of high expectations. An earnings increase that fell shy of investors' hopes sent its shares plummeting.

Google's stock fell almost 20 percent immediately after the announcement, made after the close of regular trading, then recovered somewhat. By evening it was down about 12 percent from yesterday's close, trading around $379.

Only three weeks ago, at its high-water mark, the stock reached $475.11. It has still been less than a year and a half since the company made its initial public offering at $85 a share.

Safa Rashtchy, an analyst with Piper Jaffray & Company, attributed yesterday's decline to "momentum investors" who had been betting that Google would continue to surpass published estimates.

"This is one of the biggest momentum stocks there is," Mr. Rashtchy said. "They said this stock should be growing even faster. And when it doesn't, they just get out."

For any other company, the results announced yesterday would be impressive. Google said it earned $372 million in the fourth quarter of last year, up 82 percent from the year before.

But the enormous valuation of Google is based — to the extent it has any rational basis — on predictions that it will continue to grow very rapidly, extending its success in Internet advertising to other Internet services and other forms of advertising. Signs of even a modest slowing in that expansion, relative to investors' expectations, could have a large impact on Google's share price.

Google's aura of infallibility, moreover, has been clouded on other fronts in recent weeks. The debut of its video download store met with critical reviews. And its decision to introduce a Chinese service that filters out content objectionable to the Chinese government raised questions about its commitment to its informal slogan, "Don't be evil."

Google has been insistent about doing things its own way, and yesterday's surprise may be a consequence of its unusual policy of not providing guidance to investors about its anticipated financial results. Its shortfall was largely the sum of several modest drags to its results — developments that many other companies might have warned of in advance.

Its revenue internationally was hurt by a strong dollar. Its tax rate was higher than expected. And expenses increased faster than anticipated, especially as the company expanded its sales force overseas.

All told, its quarterly earnings came to $1.22 a share. Excluding some special items — including $58 million in stock-based compensation, and a $90 million contribution to the Google foundation — Google earned $1.54 a share, far below the $1.76 a share that analysts had expected.

The company's revenue was $1.92 billion for the quarter, up 86 percent. Excluding payments to other Web sites that display ads that Google sells, the company's revenue was $1.29 billion. That matched analysts' published estimates but was shy of the number anticipated by investors, said Jordan Rohan, an analyst with RBC Capital Markets.

"Consensus expectations are not reflective of the hopes and dreams of Google investors," he said.

In an interview, Eric E. Schmidt, Google's chief executive, dismissed the minor added expenses and the lower foreign income and emphasized the company's vast potential.

"We actually think we had a strong quarter," he said. As for Wall Street's reaction, he added, "It is a mistake for the C.E.O. of a company to talk about its stock price."

He did say, however, that the gap between the company's reported profits and analysts' expectations could be attributed almost entirely to the increased tax rate, which stemmed from a shift in expenses overseas — where tax rates are lower — that accordingly increased the portion of its income subject to the higher tax rates of the United States.

Mr. Schmidt said that in general the company would not change its longstanding policy against providing guidance because "it is hard for us to forecast results quarter over quarter."

Still, in a modest change, Google did project that its tax rate for 2006 will be 30 percent (compared to 32 percent last year). It also provided an estimate that its stock grants to employees will dilute its earnings per share by 1 percent to 1.5 percent.

"We had a big argument about this," Mr. Schmidt said about whether Google should provide any information to help analysts forecast its results. "It's not fair. We have all these nice people trying to build models, and they can't get them even close to right unless we give them the tax rate."

Mr. Schmidt also said that Google's revenue grew 22 percent over the third quarter, an acceleration from the 14 percent increase of the third quarter from the second. The reason, he said, was an increase in the number of searches on Google and in the revenue earned from each search.

Mr. Rashtchy, the Piper Jaffray analyst, said he remained among Google's believers. Google's results did not indicate any fundamental problems with its business, he said, and provided no reason to change his own target price of $600 a share. That is based on his expectations that Google's shares will ultimately trade for 50 times his estimate of its 2007 profits. (Mr. Rashtchy owns no Google shares; Piper Jaffray has done investment banking work for the company in the last year.)

Mr. Rohan, by contrast, said "the stock reaction makes sense" because it appears that Google's growth internationally may be a little bit slower than previously expected. As a result, he is likely to reduce his long-term forecasts for the company slightly.

"This company will only be extraordinary, not extraordinary and spectacular," he said.

Even with yesterday's after-hours decline, Google's stock is worth about $112 billion, more than any other media company in the world. That is down from $140 billion on Jan. 11, just before Yahoo — its main rival — also announced disappointing earnings.

The largest one-day drop in Google's stock in regular trading came on Jan. 20, a decline of 8.5 percent in a broad market sell-off. That was also a day after Google announced it would not comply with a request from the Justice Department for a sample of its users' search-query data, part of a government effort to uphold a law restricting online pornography.

The glamour stocks of the first Internet wave experienced even greater volatility. As that wave was receding in 2000, companies including eBay, Yahoo and Amazon all had one-day declines of more than 20 percent in their share prices.

Yahoo, which is only growing half as fast as Google, disappointed investors two weeks ago when it said that it had fallen behind in efforts to develop technology that would increase the ad revenue it earns from each search. Search engines are paid only when users click on the ads, and Google is an acknowledged leader in software that determines which advertisements to display.

    Big Results at Google Fall Short, NYT, 1.2.2006, http://www.nytimes.com/2006/02/01/technology/01google.html?hp&ex=1138770000&en=f10900f0f8d6fa67&ei=5094&partner=homepage

Exit Greenspan, Amid Questions on Economy

February 1, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, Jan. 31 — Stepping down on Tuesday after 18 years as steward of the nation's economy, Alan Greenspan left his successor a wide berth to set his own policy but some major uncertainties about the future.

Acting with almost choreographic precision, Mr. Greenspan wrapped up his last big initiative as chairman of the Federal Reserve less than an hour before the Senate confirmed Ben S. Bernanke as his successor.

On his last day at the Fed, Mr. Greenspan pushed through one more small increase in short-term interest rates, to 4.50 percent, and signaled that the current series of rate rises was nearing an end.

That gave Mr. Bernanke, a highly respected monetary economist who is to be sworn in on Wednesday, considerable freedom to make his own mark on an economy that performed much better during most of the Greenspan era than many experts thought possible when he took over at the Fed in 1987.

But the handoff also meant that Mr. Bernanke would face murkier choices at a time of substantial risks that increase the chances for serious missteps.

Laurence H. Meyer, a former Fed governor and now a top forecaster at Macroeconomic Advisers, remarked: "The challenge is in making day-to-day policy at a time when mistakes are most likely to be made. We are close in many ways to a soft landing. But that's really a razor's edge."

He and other specialists saw a variety of such challenges.

The nation's housing market, which was propelled by low interest rates to something of a frenzy in recent years, is poised for a slowdown that many economists fear could chill the broader economy.

The United States current-account deficit — the gap between what Americans spend and what they produce in goods and services — soared well past $700 billion in 2005 and requires about $2 billion a day in new foreign financing. The federal budget deficit has also been on an upward path.

Energy prices, which declined during most of Mr. Greenspan's tenure, have climbed back to new records and seem likely to remain high. And the nation's dependence on imported oil is greater than ever, a problem that President Bush addressed Tuesday night in the State of the Union address.

Wages of low- and middle-income workers are barely keeping pace with inflation, and in some places are falling behind. Wage inequality appears to be widening between the top and bottom ranks of the work force, partly because of a relentless contraction in blue-collar factory jobs.

The cross-currents in the economy, and the lack of a well-defined policy road map from this point on, will make Mr. Bernanke's new job especially difficult. He has previously served as a Fed governor and as the White House's chief economist, but is little known to most Americans and is sure to face second-guessing by some in the financial markets and some political figures.

Mr. Greenspan, in his last act as Fed chairman on Tuesday, came close to wrapping up his final major policy challenge: gradually reversing the drastic rate reductions that he had used to fight the recession of 2001 as well as the fallout from terrorist attacks and corporate scandals.

With the rate increase on Tuesday, the 14th since June 2004, the federal funds rate for overnight loans between banks is roughly in line with longtime patterns.

In a statement accompanying its decision, the Fed's policy-making committee made clear that its march to higher interest rates was almost over, but warned that it would keep its options open.

"The committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the panel, the Federal Open Market Committee, said.

But in a notable change that Fed officials have been debating for months, the policy makers, for the first time in nearly three years, dropped their reference to raising rates at a "measured" pace.

This change amounted to closing the last chapter of the Greenspan era at the Fed, which began shortly before the stock market meltdown in 1987, propelled the economic boom of the 1990's and endured through the shocks of terrorist attacks, corporate accounting scandals and the still-unfinished war in Iraq.

Mr. Greenspan spent much of his time after 2001 reacting to the collapse of the stock market bubble and to a battered economy by cutting interest rates to levels not seen since the 1950's.

Then he spent the last two years gradually trying to reverse the policy of cheap money that contributed to the housing boom, raised the risk of reviving inflation and threatened to add important elements of economic uncertainty. It would be his last big task, he told lawmakers early in 2004, and it would not be a "gimme" — golfers' jargon for a short, all-but-certain putt.

At the moment, Mr. Greenspan seems to have lined up his shot accurately. The Fed's short-term interest benchmark is much closer to the presumed "neutral" rate, one that neither slows the economy nor leads to higher inflation.

Reported unemployment, at 5 percent, is back down to levels that economists once equated with "full employment." Inflation, despite high energy prices, has remained tame.

In an attempt to give Mr. Bernanke as much flexibility as possible, Fed policy makers issued a statement soaked in so much ambiguity that Wall Street analysts variously described it as the end of rate increases, a warning of new ones, or something in between.

Some analysts paid attention to the statement's lack of the word "measured" and its wording that further rate increases "may" be needed rather than, as the Fed said in December, were "likely" to be needed. Those were hints, this argument went, that the rate increases were just about over.

Others noted that the Fed continued to warn about inflation pressures, and that it would base decisions on new data. Some took that as a warning that it was not finished.

But the Fed's most important message may have been that it wanted to stop telegraphing its policy decisions in advance, a practice it has followed for the last three years.

"The committee will no longer give us a forward-looking statement," noted Sung Won Sohn, a leading economist who is chief executive of Hanmi Bank in Los Angeles. "This also gives a lot of flexibility to Chairman Bernanke, who will give more weight to economic data as they are released."

Mr. Bernanke, a former economics professor at Princeton University, has been a champion for years of greater openness at the Fed.

But the ambiguity of the economic outlook and the fact that the Fed is at the tail end of a basic shift in policy may mean that he takes over at a moment when the Fed becomes less open and more cagey about its plans.

As for Mr. Greenspan, he spent much of his last day at work saying farewell to the staff and receiving a cornucopia of farewell gifts.

Among his going-away gifts was an old chair from the Fed's boardroom; an old baseball glove signed by each president of the Federal Reserve's 12 district banks; a frame with 12 dollar bills, each from a separate Fed district; and the Federal Reserve's flag, which flew during the policy meeting on Tuesday.

Mr. Greenspan, 79, plans to start a consulting firm in Washington but has promised that he will not comment on monetary policy.

"I know this institution will go on doing extraordinary things," he said at lunch with other Fed board members. "I will look on from the sidelines and cheer."

    Exit Greenspan, Amid Questions on Economy, NYT, 1.2.2006, http://www.nytimes.com/2006/02/01/business/01fed.html?hp&ex=1138856400&en=944da784c8a88b11&ei=5094&partner=homepage

Banker to Receive $135 Million Parachute

January 31, 2006
The New York Times
By ERIC DASH

Wallace D. Malone Jr., who became Wachovia's vice chairman just 15 months ago after selling it SouthTrust Bank, will receive a golden parachute worth about $135 million when he steps down from the company today.

The bulk of those retirement benefits were awarded to Mr. Malone, who is 69, during his long tenure as chief executive of SouthTrust, but were accepted by Wachovia's board as part of its $14 billion acquisition in November 2004.

The retirement benefits come on top of the $473 million worth of Wachovia stock he now holds from the sale of SouthTrust, including a $10 million stock grant last year.

The lush payday underscores two trends in executive compensation that have lately come under fire: the tendency to shower rich payouts on retiring executives, as in the case of Philip J. Purcell of Morgan Stanley or John F. Welch Jr. of General Electric, or on executives of companies that are taken over.

For example, James M. Kilts, who ran Gillette for four years, became eligible for a $175 million payday when the company was taken over by Procter & Gamble. (Mr. Kilts is on The New York Times Company board.)

Corporate governance advocates say that Mr. Malone's case highlights the need for greater scrutiny and disclosure at the time a merger is approved, not just when an executive walks out the door. Indeed, the Securities and Exchange Commission has just proposed 370 pages of new rules to improve the disclosure of executive pay.

"There were plenty of mistakes that were made and could have been set right when SouthTrust was acquired and not given him reason to terminate his employment," said Paul Hodgson, an executive compensation analyst at the Corporate Library. "Stockholders are having to pay for it now."

Mary Eshet, a Wachovia spokeswoman, said the company's shareholders approved the transaction in November 2004.

According to Wachovia securities filings, Mr. Malone will receive "termination payments" totaling about $33.4 million over the next five years, an amount equal to five times his salary and the highest annual bonus he ever received. In addition, he will collect retirement benefits and deferred compensation worth over $82 million from SouthTrust employment contracts that Wachovia directors agreed to absorb.

Wachovia, based in Charlotte, N.C., also said it would give him another $2.1 million worth of deferred compensation besides those previously agreed amounts.

Wachovia shareholders will also pick up the bill for a handful of perks: some big, some small. According to company filings, Mr. Malone will be provided office space and secretarial support over the next five years (worth more than $1 million since the bank will pay his taxes). He also will retain his company car (a $58,500 gift).

Mr. Malone began his career at a small Alabama bank in 1959 that he grew into SouthTrust, a regional player with $53 billion in assets. He had been chief executive for 23 years when he agreed to sell to Wachovia.

At the time of the merger, he expressed his desire to retire in one or two years and said he planned to put part of his retirement nest egg into a charitable trust — a move that would carry both philanthropic and tax benefits. Ms. Eshet said that $60 million would be given away.

Ms. Eshet also said that G. Kennedy Thompson, Wachovia's chief executive, decided to end his own employment contract in December. The reason: He wanted his pay determined by the bank's performance.

    Banker to Receive $135 Million Parachute, NYT, 31.1.2006, http://www.nytimes.com/2006/01/31/business/31bank.html

Americans' Savings Rate at Lowest Level Since 1933

January 30, 2006
By THE ASSOCIATED PRESS
Filed at 1:13 p.m. ET

WASHINGTON (AP) -- Americans' personal savings rate dipped into negative territory in 2005, something that hasn't happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before -- in 1932 and 1933 -- two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.

With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years.

But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement.

''Americans seem to have the feeling that it is wimpish to save,'' said David Wyss, chief economist at Standard & Poor's in New York. ''The idea is to put away money for old age and we are just not doing that.''

The Commerce report said that consumer spending for December rose by 0.9 percent, more than double the 0.4 percent increase in incomes last month.

A price gauge that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November. This inflation index linked to consumer spending is closely watched by officials at the Federal Reserve.

The central bank meets on Tuesday, when it is expected it will boost interest rates for a 14th time. However, many economists believe those rate hikes are drawing to a close with perhaps another quarter-point hike at the March 28 meeting as the central bank is starting to see the impact of the previous rate hikes in a slowing economy.

The government reported on Friday that overall economic growth slowed to a 1.1 percent rate in the final three months of the year, the most sluggish pace in three years.

That slowdown was heavily influenced by a big drop for the quarter in spending on new cars, which had surged in the summer as automakers offered attractive sales incentives.

A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases. For the month, the savings rate fell to 0.7 percent, the largest one-month decline since a 3.4 percent drop in August.

The 0.5 percent negative savings rate for 2005 followed a 1.8 percent rate of savings in 2004. The last negative rates occurred in 1932, a drop of 0.9 percent, and a record 1.5 percent decline in 1933. In those years Americans exhausted their savings to try to meet expenses in the wake of the worst economic crisis in U.S. history.

One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a ''wealth effect'' that supported greater spending.

The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closing watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don't feel as wealthy as the price appreciation of their homes would seem to indicate.

For December, the 0.4 percent rise in incomes was in line with Wall Street expectations. It followed a similar 0.4 percent increase in November, with both months lower than the 0.6 percent rise in October.

The 0.9 percent rise in spending with slightly above the expectation for a 0.8 percent increase and was almost double the 0.5 percent increase in November.

    Americans' Savings Rate at Lowest Level Since 1933, NYT, 30.1.2006, http://www.nytimes.com/aponline/business/AP-Economy.html

Economic View

Unions Pay Dearly for Success

January 29, 2006
The New York Times
By EDUARDO PORTER

WANT to hear some good news for the labor movement? The percentage of American workers who are union members remained almost steady in the private sector last year.

The bad news is that the figure stood at 7.8 percent — less than a third of the rate of the early 1970's.

Even worse for labor, the rate of unionization has further to fall, according to most labor economists and experts in industrial relations. "In the immediate future, unions will carry on shriveling in the private sector," said Richard Freeman, a professor of economics at Harvard.

While union leaders attribute the weakness to everything from insufficient organizing vigor to a hostile political environment, unions, in a way, are victims of their own success. They have obtained better wage and benefit packages for workers, and in an increasingly competitive business world, that is working against them. Businesses in some competitive industries cannot afford unions.

In the United States, unions may have done their job only too well. Last year, according to the latest report from the Bureau of Labor Statistics, private-sector workers who were members of unions typically made 23.1 percent more per week than their nonunion colleagues, up from a 22.4 percent premium in 2004.

In a recent study, David Blanchflower, professor of economics at Dartmouth, and Alex Bryson, a researcher at the Policy Studies Institute in Britain, found that this wage premium was higher in the United States than in most other big industrial countries — including Australia, Canada, France, Germany, Britain and New Zealand.

This success is coming at a steep price. The high premium, Mr. Bryson said, "could well be why management is particularly anti-union in the U.S."

Pressured by increasing competition from producers in cheap labor markets like China and nonunion rivals at home, businesses are resisting unions with an increasing fervor. Union organizing has plummeted.

The number of representation elections in American workplaces has declined sharply. And the share of these elections won by unions is down to about half, from more than 70 percent in the 1950's. And even as employment in nonunion businesses has grown, union jobs have disappeared. Companies either moved them overseas or, overwhelmed by competition, eliminated the work entirely.

"The more competitive a market the more limited is unions' bargaining power and ability to organize," said Barry T. Hirsch, a professor of economics at Trinity University in San Antonio. "Unions raise wages and so reduce profits. This is less and less feasible the more competitive the environment."

Consider the ailing auto industry. In the past two months, the top two American automakers announced plans to cut some 60,000 jobs, most of them union positions. That's roughly the number of nonunion jobs created in the American transplants of the German, Japanese and Korean car companies who are dining quite nicely at the expense of the American companies once known as the Big Three, and at a table that used to be their exclusive domain.

While the auto sector remains heavily unionized, relative to other businesses, this dynamic helped to drive down union penetration in the industry to around 30 percent in 2004 from about 60 percent 20 years ago. Competition has ravaged unions in other sectors. Trucking de-unionized after the industry was deregulated in the 1970's — prompting a stampede of nonunion owner-operators into the market. Unionization in the steel industry has dropped by half in the past 20 years as the big integrated steel mills have come under pressure from foreign steelmakers and nonunion domestic minimills.

The central problem for unions stems from a core strategy: to organize all the businesses serving a given market, and thus avoid putting unionized companies at a disadvantage relative to their competition. "One of unions' most fundamental jobs is to take wages and benefits out of competition," said Bruce S. Raynor, the general president of Unite Here, the union of workers in the textile and hotel industries. While this strategy worked well when a few industrial giants had a virtual lock on the nation's consumers, it started to fall apart as deregulation and trade liberalization took hold in the 1970's, ushering in an era of more intense competition in business.

"Regulation in many cases put a floor under competition," said Ruth Milkman, director of the Institute of Industrial Relations at the University of California, Los Angeles. "In a way it made unionization possible by eliminating cutthroat competition. In manufacturing what's changed is international competition."

Despite the long odds, unions still have potential pockets of growth. In the public sector, where there is little competition, unionization rates remain at more than 35 percent. Mr. Bryson said that even in the private sector, there were still industries in which competition was modest and corporations could raise prices without fear of losing markets to rivals. On economic grounds, these industries would seem prime candidates for union expansion.

What kind of businesses are we talking about? Hospitals would be one place to look. Energy companies would be another. Or why not an even bigger prize? Perhaps the labor movement should forget about cars and focus instead on a company that has crushed much of its competition: Wal-Mart.

    Unions Pay Dearly for Success, NYT, 29.1.2006, http://www.nytimes.com/2006/01/29/business/yourmoney/29view.html

Corporate Wealth Share Rises for Top-Income Americans

January 29, 2006
The New York Times
By DAVID CAY JOHNSTON

New government data indicate that the concentration of corporate wealth among the highest-income Americans grew significantly in 2003, as a trend that began in 1991 accelerated in the first year that President Bush and Congress cut taxes on capital.

In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent.

In 2003, incomes in the top 1 percent of households ranged from $237,000 to several billion dollars.

For every group below the top 1 percent, shares of corporate wealth have declined since 1991. These declines ranged from 12.7 percent for those on the 96th to 99th rungs on the income ladder to 57 percent for the poorest fifth of Americans, who made less than $16,300 and together owned 0.6 percent of corporate wealth in 2003, down from 1.4 percent in 1991.

The analysis did not measure wealth directly. It looked at taxes on capital gains, dividends, interest and rents. Income from securities owned by retirement plans and endowments was excluded, as were gains from noncorporate assets such as personal residences.

This technique for measuring wealth has long been used in standard economic studies, though critics have challenged that tradition.

Among them is Stephen J. Entin, president of the Institute for Research on the Economics of Taxation in Washington, which favors eliminating most taxes on capital and teaches that an unintended consequence of the corporate income tax is depressed wage rates. Mr. Entin said the report's approach was so flawed that the data were useless.

He said reduced tax rates on long-term capital gains may have prompted wealthy investors to sell profitable investments. That would show up in tax data as increased wealth that year, even though the increase may have built up over decades.

Long-term capital gains were taxed at 28 percent until 1997, and at 20 percent until 2003, when rates were cut to 15 percent. The top rate on dividends was cut to 15 percent from 35 percent that year.

The White House said it did not believe that the 2003 tax cuts had much influence on wealth shares. It also said that since wealth is transitory for many people, a more important issue is how incomes and wealth are influenced by the quality of education.

"We want to lift all incomes and wealth," said Trent Duffy, a White House spokesman. "We are starting to see that the income gap is largely an education gap."

"The president thinks we need to close the income gap, and he has talked about ways in which we can do that," especially through education, Mr. Duffy said.

The data showing increased concentration of corporate wealth were posted last month on the Congressional Budget Office Web site. Isaac Shapiro, associate director of the Center on Budget and Policy Priorities in Washington, spotted the information last week and wrote a report analyzing it.

Mr. Shapiro said the figures added to the center's "concerns over the increasingly regressive effects" of the reduced tax rates on capital. Continuing those rates will "exacerbate the long-term trend toward growing income inequality," he wrote.

The center, which studies how government affects the poor and supports policies that it believes help alleviate poverty, opposes Mr. Bush's tax policies.

The center plans to release its own report on Monday that questions the wisdom of continuing the reduced tax rates on dividends and capital gains, saying the Congressional Budget Office analysis indicates that the benefits flow directly to a relatively few Americans.

    Corporate Wealth Share Rises for Top-Income Americans, NYT, 29.1.2006, http://www.nytimes.com/2006/01/29/national/29rich.html

U.S. Economy Slowed Sharply at End of 2005

January 28, 2006
The New York Times
By EDUARDO PORTER and VIKAS BAJAJ

Economic growth weakened unexpectedly in the fourth quarter of 2005, rising 1.1 percent, the slowest pace in three years, and clouding the immediate outlook for the economy, the government reported yesterday.

Consumer spending slowed abruptly as purchases of motor vehicles collapsed after automakers phased out the generous incentive programs that had lifted sales through the summer. As consumers cut back on spending, business investment also slowed as companies curtailed spending on cars and trucks. Military spending also fell unexpectedly, while a surging import bill put a drag on overall growth.

The intensity of the economic slowdown, which reduced yearly growth to 3.5 percent from 4.2 percent in 2004, surprised many forecasters. They had expected a sharp pickup in business investment in the final months of the year to take up some of the slack in consumer spending and had predicted an overall growth rate of 2.5 percent to 3 percent in the fourth quarter.

"It is not so much surprising as baffling," said Ian C. Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y.

The weak economic data pleased investors, who pushed up the price of stocks in the expectation that the Federal Reserve, whose policy-making committee meets on Tuesday, might end its 18-month campaign to raise its benchmark interest rate — now at 4.25 percent — after it reaches 4.5 percent or 4.75 percent.

"The silver lining in this is that the Fed should look at this and realize that this economy is not overheating," said David Kelly, a senior economic adviser at Putnam Investments in Boston, the mutual fund manager.

Yet the abrupt slowdown fed into a bubbling debate over the nation's economic prospects as the housing market weakens and removes a core pillar supporting consumers' hearty spending.

Many economic analysts have been warning for months that the housing bubble will burst and lead to retrenchment as rising interest rates and the stalling of home sales put a dent in consumer spending.

"I believe it is a genuine slowdown," said Robert J. Barbera, chief economist at ITG, arguing that higher interest rates and expensive oil are taking the wind out of consumers' sails.

Specifically, he argued, the auto sector will keep bogging the economy down because car companies have built up heavy inventories that they must unload.

After setting records last summer, sales of existing homes, which make up 85 percent of the housing market, fell in each of the last three months as mortgage interest rates rose modestly.

New-home sales, a more volatile and less reliable indicator, increased 2.9 percent in December, to an annual pace of 1.27 million, after falling 9.2 percent in November, the Commerce Department said yesterday. Median prices, however, fell 3.4 percent, to $221,800 from a year ago.

Yet even though the housing market has started to cool, most forecasters argued that the fourth quarter's slowdown is not the beginning of a deeper slide. As they took stock of the data, economists argued that the economic slump would prove fleeting, caused by factors that are unlikely to be repeated in the first quarter.

Some warned that the reading for growth in the fourth quarter was merely a preliminary estimate and could be revised upward — especially business investment, which should be surging at this stage in the economic cycle, when profits are high and companies are hitting capacity constraints. Most expected consumer spending and business investment to rebound in the first half of the year as the downturn in auto sales ends.

"The probability of a substantial upward revision is quite high," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "Then growth should rebound in the first quarter back into the region of 4 percent."

Much of the current slowdown could be attributed to Detroit. "It all boils down to the auto sector," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a business research group. "Auto sales permeate everything in final demand."

Deep discounts on cars and trucks pumped sales by the three domestic automakers during the summer and early fall. But as the incentives expired and gasoline prices surged above $3 a gallon in some places in the aftermath of Hurricane Katrina, sales dropped precipitously.

In the fourth quarter of last year, final sales of motor vehicles fell 50.4 percent at an annual rate. Consumer spending on sport utility vehicles and other light trucks fell by 69 percent, at an annual rate, while business spending declined 19 percent. The effect on overall economic output was significant. Just the decline in consumer purchases of vehicles subtracted 2.06 percentage points from growth in the quarter.

Other items also contributed to the decline, but analysts argued they would prove temporary. Military spending slumped, a surprising development during a war.

"We are still trying to figure out where that came from," a Lehman Brothers economist, Joseph Abate, said.

Moreover, the surge in the price of oil led to a big jump in the nation's energy bill, contributing to a sharp rise in imports that put a drag on domestic output.

A buildup in business inventories provided a significant lift, 1.45 percentage points, to the economy. But if consumption remains weak, that additional stock of goods could force manufacturers to cut back on production in coming months.

"That's not sustainable growth," said Anthony Chan, chief economist at J. P. Morgan's private client services group.

Still, though economists believe that the economy will rebound in the immediate future, there remains a deep-rooted concern about a downturn further down the road.

Mr. Shepherdson, for instance, forecast a 30 percent to 40 percent drop in the number of home sales by the end of the year, which would put a freeze on consumer spending. Mr. Barbera predicted economic growth this year would fall to about 2.4 percent.

Charles Dumas, the chief international economist at forecasting firm Lombard Street Research in London, said in a note to investors: "It will take a miracle as fine as Mozart, 250 years old today and as fresh as new, to prevent a sharp U.S. slowdown in the second half of 2006, probably to nil growth" by the fourth quarter.

    U.S. Economy Slowed Sharply at End of 2005, NYT, 28.1.2006, http://www.nytimes.com/2006/01/28/business/28econ.html?_r=1

Total Home Sales for 2005 Rise, Despite December Dip

January 25, 2006
The New York Times
By VIKAS BAJAJ

Sales of existing homes fell to their lowest monthly pace in almost two years last month, a trade group reported today, even though the housing market registered a fifth consecutive year of sales increases.

The number of homes sold fell or was flat in all four regions of the country, while the total inventory of homes for sale dipped slightly, the National Association of Realtors reported. Median prices — half the homes sold for less, half for more — were up 10.5 percent, to $211,000, from a year ago.

For the full year, home sales grew by 4.2 percent, to 7.07 million, setting another record in total annual sales. The nation's long housing boom is almost a full decade old, with the exception of 2000, when sales fell by 0.4 percent.

But data from the last three months appears to suggest that the boom, or at least the era of rapidly increasing sales, may be coming to a close. Sales fell 5.7 percent, to an annual pace of 6.6 million homes, in December after a 1.3 percent dip in November and a 2.7 percent drop in October. It was the lowest level of sales since March 2004.

The slowing of the roaring housing market has been long anticipated, in part, because the nation's economy has become increasingly dependent on the growth generated by home sales, mortgage refinancings and the related spending on furnishings and other goods.

But forecasters who have called an end to the boom have frequently been proven wrong. Mortgage interest rates, though higher than a year ago, remain near historical lows, making home ownership more affordable for many. Economists say the sharpness or significance of the current slowdown, and whether it will become a more severe downturn, will not become clear until the peak spring and summer home buying and selling season.

"Bear in mind, however, that December numbers are always subject to seasonal and winter effects and we cannot be sure the underlying trend in sales has fallen so far," Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note to clients. He added that prices, while higher than a year ago, were lower than earlier in 2005 and appear to be headed for a bigger slowdown and even declines.

Officials with the Realtors group cast the slowing sales as a "soft landing" for the housing sector, a characterization it has frequently used in recent months. "Overall fundamentals remain solid, driven by population and employment growth as well as favorable affordability conditions in most of the country, so we expect the housing market to remain historically high but lower than last year's record," David Lereah, the association's chief economist, said in a statement.

December sales dropped the most in the West, 11.4 percent, followed by the South, 7.2 percent, and the Midwest, 2.6 percent. Sales activity in the Northeast was unchanged from November.

    Total Home Sales for 2005 Rise, Despite December Dip, NYT, 25.1.2006, http://www.nytimes.com/2006/01/25/business/25cnd-econ.html

John Trever        New Mexico, The Albuquerque Journal        Cagle        25.1.2006
http://cagle.msnbc.com/politicalcartoons/PCcartoons/trever.asp

Ford to Cut Up to 30,000 Jobs and 14 Plants by 2012

January 23, 2006
By THE ASSOCIATED PRESS
Filed at 11:25 a.m. ET
The New York Times

DEARBORN, Mich. (AP) -- Ford Motor Co., the nation's second-largest automaker, said Monday that it will cut 25,000 to 30,000 jobs and idle 14 facilities by 2012 as part of a restructuring designed to reverse a $1.6 billion loss last year in its North American operations.

The cuts represent 20 percent to 25 percent of Ford's North American work force of 122,000 people. Ford has approximately 87,000 hourly workers and 35,000 salaried workers in the region.

Ford shares rose 68 cents, or 8.6 percent, to $8.58 in morning trading on the New York Stock Exchange.

Earlier Monday, Ford reported earnings of $2 billion in 2005, down 42 percent from last year's profit of $3.5 billion. It was the third straight year the automaker has reported a profit, but gains in Europe, Asia and elsewhere were offset by a loss of $1.6 billion in North American operations.

Plants to be idled through 2008 include the St. Louis, Atlanta and Michigan's Wixom assembly plants and Batavia Transmission in Ohio. Windsor Casting in Ontario also will be idled, as was previously announced following contract negotiations with the Canadian Auto Workers. Another two assembly plants to be idled will be determined later this year, the company said.

The other seven facilities that will be idled were not immediately identified.

A total of 14 facilities, including seven assembly plants, will cease production by 2012, Ford said.

''We will be making painful sacrifices to protect Ford's heritage and secure our future,'' Chairman and Chief Executive Bill Ford said in a statement. ''Going forward, we will be able to deliver more innovative products, better returns for our shareholders and stability in the communities where we operate.''

The No. 2 U.S. automaker after General Motors Corp. has been hurt by falling sales of its profitable sport utility vehicles, growing health care and materials costs and labor contracts that have limited its ability to close plants and cut jobs. The United Auto Workers union will have to agree to some of the changes Ford wants to make.

Ford also has seen its U.S. market share slide as a result of increasing competition from foreign rivals. The company suffered its tenth straight year of market share losses in the United States in 2005, and for the first time in 19 years, Ford lost its crown as America's best-selling brand to GM's Chevrolet. Ford sold around 2.9 million vehicles for a market share of 17.4 percent in 2005, down from 18.3 percent the year before and 24 percent in 1990.

Ford said Monday it would no longer provide earnings guidance beginning in 2006.

''We must be guided by our long-term goals of building our brands, satisfying customers, developing strong products, accelerating innovation, and, most importantly, producing a sustainable profit from our automotive business,'' the CEO said.

The restructuring is Ford's second in four years. Under the first plan, Ford closed five plants and cut 35,000 jobs, but its North American operations failed to turn around.

Alan Hallman, mayor of Hapeville, Ga., where the Atlanta Assembly Plant is located, called the latest news ''a setback for the state.''

The plant, which makes the Taurus, has about 2,000 employees. Hallman said it accounts for 9 percent of the small city's budget.

''We've got hundreds of man-hours and thousands of dollars invested on various plans to keep them here. The fact that they've elected to idle the plant is very disappointing,'' he said.

Ford used just 79 percent of its North American plant capacity in 2005, down from 86 percent in 2004, according to preliminary numbers released last week by Harbour Consulting Inc., a firm that measures plant productivity. By contrast, rival Toyota Motor Corp. was operating at full capacity.

Ford said in its earnings announcement Monday that it reduced employment in 2005 by 10,000 people due to layoffs, buyouts and attrition. Ford has around 300,000 employees worldwide.

------

On the Net:

Ford Motor Co.: http://www.ford.com

    Ford to Cut Up to 30,000 Jobs and 14 Plants by 2012, NYT, 23.1.2006, http://www.nytimes.com/aponline/business/AP-Ford-Restructuring.html?hp&ex=1138078800&en=f482a6d3c90cf07c&ei=5094&partner=homepage

Long-declining union membership levels off

Posted 1/21/2006 2:51 PM
USA Today

WASHINGTON (AP) — Long-declining union membership leveled off last year at 12.5% of the workforce, the Labor Department said Friday in a report labor leaders called encouraging.
Union membership was about a third of the workforce a half-century ago, and was one in five, 20%, in 1983, when the Labor Department started keeping such data.

The department said 15.7 million workers were union members in 2005. Blacks were more likely than whites, Hispanics or Asian workers to be members of a union. Men were more likely than women to be in unions and those in the public sector were four times as likely as those in the private sector to be in unions.

Full-time workers who were union members had median weekly earnings of $801, compared with a median weekly income of $622 for workers who were not in unions.

"The good news is that the annual hemorrhaging of union membership slowed last year," said Teamsters' President James P. Hoffa. "And that's not really good news. A worker's right to join a union has been continually eroded by a corporate takeover of our government."

The difficulties facing labor contributed to a split between the AFL-CIO, an umbrella federation of more than 50 unions, and about a half dozen unions including the Teamsters, who wanted to focus more resources on building membership.

AFL-CIO President John Sweeney cited the leveling off of union membership as good news for a movement that has faced troubles.

"In a political climate that's hostile to worker's rights," Sweeney said, "these numbers illustrate the extraordinary will of workers to gain a voice on the job despite enormous obstacles."

    Long-declining union membership levels off, UT, 21.1.2006, http://www.usatoday.com/news/nation/2006-01-21-union-members_x.htm

America's dark materials        E    19.1.2006
http://www.economist.com/finance/displaystory.cfm?story_id=5408129

Economics focus

America's dark materials

Jan 19th 2006
From The Economist print edition

The United States' current-account deficit is a figment of bad accounting. If only

STARE at something long and hard enough, and it will begin to swim before your eyes. Economists have been scrutinising America's current-account deficit for years now, and they are no closer to agreeing on what they are looking at. Now two economists at Harvard doubt whether the deficit even exists. Ricardo Hausmann and Frederico Sturzenegger first put this claim in a working paper* released last November. Your correspondent has blinked twice since then, but the claim has not gone away. On the contrary, it is gathering moss†.

At the heart of the argument is a well-known paradox. In the mainstream view, America is now the world's biggest debtor. Thanks to its chronic trade deficits, it stood $2.5 trillion in the red at the end of 2004. And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004.


Most economists conclude that America earns a higher return on its overseas assets (eg, EuroDisney) than foreigners earn on investments in America (eg, Rockefeller Centre). They don their anoraks, immerse themselves in the data and try to work out why this might be so. Messrs Hausmann and Sturzenegger turn the question on its head. It is not the $36.2 billion of income that is the mystery, they say. The anomaly lies in the $2.5 trillion of debt. If America is still coming out ahead of foreigners, then, contrary to popular belief, it must still be a net creditor. America must have more foreign wealth than we can see.

The two authors have borrowed a name for this invisible wealth: dark matter. In theoretical physics, dark matter is the stuff in the universe that we can identify only by its gravitational pull. For the Harvard economists, dark matter is foreign wealth, the existence of which we can infer from the income it provides.

How much of it is out there? You can calculate a price for an asset from the earnings it provides. Messrs Hausmann and Sturzenegger elect to value America's net foreign assets at 20 times their annual earnings, which corresponds to a 5% rate of return. Valued at this ratio, America's national “portfolio” of foreign assets and liabilities is really worth $724 billion, not minus $2.5 trillion. What is more, if its foreign assets are as stable as the authors say, it follows that “the country has not been running a deficit.”

Messrs Hausmann and Sturzenegger were the first to name dark matter, but not the first to discover it. In his book, “The United States as a Debtor Nation”, published last year, William Cline, of the Institute for International Economics, performed the same calculation, backing out the value of America's net foreign assets from the income they generate. (Instead of calling it dark matter, Mr Cline, evidently not a born marketing man, called it “capitalised net capital income”.)

Mr Cline agrees with the dark materialists when they say there is “something misleading about calling a country that makes money on its financial position the world's largest debtor”. But sadly he does not think Americans can stop worrying. After making $36.2 billion in 2004, America made just $4 billion on its net foreign assets in the first three quarters of 2005. If it continues on its present trajectory, it will shell out about $190 billion in 2010, Mr Cline calculates. Using Messrs Hausmann and Sturzenegger's methodology, America's net foreign assets would then amount to minus $3.8 trillion. A dark matter indeed.

Ptaking on Ptolemy

Apart from its name, the dark matter thesis appeals because of its simplicity. Philip Lane, of Trinity College, Dublin, thinks it too simple. It matters, he says, what a nation's foreign wealth is composed of. Foreigners hold a lot of American debt (bonds and bank loans), whereas America holds a lot of foreign equity, especially foreign direct investment (FDI). This has two implications. First, what America pays to foreign creditors depends a lot on interest rates, which have been unusually low in recent years. Second, the value of America's assets depends on the risks they carry. Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.

That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain. Perhaps taxes can. To dodge the revenuemen, a multinational company might report artificially high profits in a low-tax jurisdiction abroad. This tax arbitrage, Mr Lane points out, can shift money from one line of the current account to another. But it does not change the size of the deficit one jot.

To Messrs Hausmann and Sturzenegger, mainstream attempts to explain away dark matter look a bit desperate. Fond of their cosmological analogies, they liken them to the labours of medieval astronomers, trying to fit anomalous movements of the planets into their Ptolemaic model of the universe.

But the authors' thesis raises anomalies of its own. By their own account, dark matter should be stable. It stems from abiding features of the American economy, such as managerial know-how, a prized but uncounted commodity that Americans export to their subsidiaries abroad. But as Ed McKelvey, of Goldman Sachs, points out, America's exports of dark matter seem to jump up and down wildly from year to year: $351 billion in 2004, $1.2 trillion in 2003, just $172 billion in 2002. Dark matter seems to fluctuate at frequencies that are not structural, nor even cyclical. Perhaps they are best described as epicyclical.

Not all physicists regard dark matter as an elegant theoretical solution to the mysteries of the universe. Many think it is a bit of a fudge. Just a few months before the concept was introduced into economics, two theorists were hoping to dispel it from physics. Physicists, you see, expect beauty as well as truth from their theories. Economists, alas, must settle for one or the other.

    America's dark materials, E, 19.1.2006, http://www.economist.com/finance/displaystory.cfm?story_id=5408129

Trade Gap Narrowed in November as Energy Costs Eased

January 13, 2006
The New York Times
By VIKAS BAJAJ

A surge in aircraft exports and a drop in imports and energy prices helped narrow the nation's trade deficit in November, according to government reports yesterday.

The United States imported $64.2 billion more in goods and services than it exported in November, which was about 5.8 percent less than the $68.1 billion deficit in October. It was the lowest reading on the trade deficit in four months, though it remained far larger than in any single month before 2005. Economists had expected a trade gap of $66.1 billion, according to a Bloomberg News survey.

In the first 11 months of the year, the deficit totaled $661.8 billion, up 17.6 percent from the comparable period in 2004.

A big part of November's improvement could be explained by an easing of higher oil prices and surging fuel imports that occurred in September after Hurricanes Katrina and Rita disrupted energy production in the Gulf Coast region. The price of petroleum imports dropped 9.2 percent in November and 0.9 percent further in December, the Labor Department said yesterday in a separate report. Prices for other imports rose 0.1 percent in November and were flat in December.

In addition to paying less for energy, Americans also imported less of it. Crude oil imports fell 4.4 percent, to 421,086 barrels.

In other industries, civilian aircraft exports rose 27.4 percent in November, to $3.2 billion. Boeing had its best year for orders in 2005, as Asian airlines, particularly in China and India, expanded rapidly. Some Boeing plane deliveries were delayed to later in the year because of a machinists' strike in September, helping to increase November's figures.

The trade deficit with China eased by nearly 10 percent in November, to $18.5 billion; for the first 11 months of the year, the China gap increased to $185 billion.

The trade deficit with the European countries, Canada and other nations also narrowed in November.

Total exports increased $1.9 billion and imports dropped $2 billion.

Joshua Shapiro, chief United States economist at MFR Inc., explained: "A lot of what you are seeing now on the export side is some life abroad. European growth is fanning up, and even Japan is showing some signs of life."

Analysts cautioned, though, that November's improvement in the deficit should not be read as the beginning of a trend, given that trade in energy is resuming its normal pattern: one of steady growth in imports. And aircraft deliveries are expected to dip in December.

Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note to clients that "the underlying trends are still adverse" and that "the deficit will rebound next month."

Oil prices, which according to the Commerce Department averaged $52.16 a barrel in November, have risen in the last two weeks amid concern about Iran's nuclear program. Crude oil for February delivery settled unchanged at $63.94 yesterday on the New York Mercantile Exchange.

For the economy as a whole, the trade deficit may continue to depress growth. Mr. Shapiro estimated that it could subtract 0.5 percentage point to one point from the fourth quarter's gross domestic product.

The Labor Department also reported yesterday that initial claims for unemployment benefits rose last week by 17,000, to 309,000. The total number of continuing claims, at 2.7 million, were up by about 12,000 from the week before. Compared with a year earlier, continuing claims were up slightly.

    Trade Gap Narrowed in November as Energy Costs Eased, NYT, 13.1.2006, http://www.nytimes.com/2006/01/13/business/13econ.html

America's economy

Danger time for America

Jan 12th 2006
From The Economist print edition


The economy that Alan Greenspan is about to hand over is in a much less healthy state than is popularly assumed

DESPITE his rather appealing personal humility, the tributes lavished upon Alan Greenspan, the chairman of the Federal Reserve, become more exuberant by the day. Ahead of his retirement on January 31st, he has been widely and extravagantly acclaimed by economic commentators, politicians and investors. After all, during much of his 18½ years in office America enjoyed rapid growth with low inflation, and he successfully steered the economy around a series of financial hazards. In his final days of glory, it may therefore seem churlish to question his record. However, Mr Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history.

One should not exaggerate Mr Greenspan's influence—both good and bad—over the economy. Like all central bankers he is constrained by huge uncertainties about how the economy works, and by the limits of what monetary policy can do (it can affect inflation, but it cannot increase the long-term rate of growth). He controls only short-term interest rates, not bond yields, taxes or regulation. Yet for all these constraints, Mr Greenspan has long been the world's most important economic policy maker—and during an exceptional period when globalisation and information technology have been transforming the world economy. His reign has coincided with the opening up to trade and global capital flows of China, India, the former Soviet Union and many other previously closed economies. And Mr Greenspan's policies have helped to support globalisation: the robust American demand and huge appetite for imports that he facilitated made it easier for these economies to emerge and embrace open markets. The benefits to poorer nations have been huge.


So far as the American economy is concerned, however, the Fed's policies of the past decade look like having painful long-term costs. It is true that the economy has shown amazing resilience in the face of the bursting in 2000-01 of the biggest stockmarket bubble in history, of terrorist attacks and of a tripling of oil prices. Mr Greenspan's admirers attribute this to the Fed's enhanced credibility under his charge. Others point to flexible wages and prices, rapid immigration, a sounder banking system and globalisation as factors that have made the economy more resilient to shocks.

The economy's greater flexibility may indeed provide a shock-absorber. A spurt in productivity has also boosted growth. But the main reason why America's growth has remained strong in recent years has been a massive monetary stimulus. The Fed held real interest rates negative for several years, and even today real rates remain low. Thanks to globalisation, new technology and that vaunted flexibility, which have all helped to reduce the prices of many goods, cheap money has not spilled into traditional inflation, but into rising asset prices instead—first equities and now housing. The Economist has long criticised Mr Greenspan for not trying to restrain the stockmarket bubble in the late 1990s, and then, after it burst, for inflating a housing bubble by holding interest rates low for so long (see article). The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit.

Burning the furniture

Ben Bernanke, Mr Greenspan's successor, likes to explain America's current-account deficit as the inevitable consequence of a saving glut in the rest of the world. Yet a large part of the blame lies with the Fed's own policies, which have allowed growth in domestic demand to outstrip supply for no less than ten years on the trot. Part of America's current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. The words of Ludwig von Mises, an Austrian economist of the early 20th century, nicely sum up the illusion: “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.”

As a result of weaker job creation than usual and sluggish real wage growth, American incomes have increased much more slowly than in previous recoveries. According to Morgan Stanley, over the past four years total private-sector labour compensation has risen by only 12% in real terms, compared with an average gain of 20% over the comparable period of the previous five expansions. Without strong gains in incomes, the growth in consumer spending has to a large extent been based on increases in house prices and credit. In recent months Mr Greenspan himself has given warnings that house prices may fall, and that this in turn could cause consumer spending to slow. In addition, he suggests that foreigners will eventually become less eager to finance the current-account deficit. Central banks in Asia and oil-producing countries have so far been happy to buy dollar assets in order to hold down their own currencies. However, there is a limit to their willingness to keep accumulating dollar reserves. Chinese officials last week offered hints that they are looking eventually to diversify China's foreign-exchange reserves. Over the next couple of years the dollar is likely to fall and bond yields rise as investors demand higher compensation for risk.

When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble. Given that consumer spending and residential construction have accounted for 90% of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy.

Handovers to a new Fed chairman are always tricky moments. They have often been followed by some sort of financial turmoil, such as the 1987 stockmarket crash, only two months after Mr Greenspan took over. This handover takes place with the economy in an unusually vulnerable state, thanks to its imbalances. The interest rates that Mr Bernanke will inherit will be close to neutral, neither restraining nor stimulating the economy. But America's domestic demand needs to grow more slowly in order to bring the saving rate and the current-account deficit back to sustainable levels. If demand fails to slow, he will need to push rates higher. This will be risky, given households' heavy debts. After 13 increases in interest rates, the tide of easy money is now flowing out, and many American households are going to be shockingly exposed. In the words of Warren Buffett, “It's only when the tide goes out that you can see who's swimming naked.”

How should Mr Bernanke respond to falling house prices and a sharp economic slowdown when they come? While he is even more opposed than Mr Greenspan to the idea of restraining asset-price bubbles, he seems just as keen to slash interest rates when bubbles burst to prevent a downturn. He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall. This is dangerous as it encourages excessive risk taking and allows the imbalances to grow ever larger, making the eventual correction even worse. If the imbalances are to unwind, America needs to accept a period in which domestic demand grows more slowly than output.

The big question is whether the rest of the world will slow too. The good news is that growth is becoming more broadly based, as demand in the euro area and Japan has been picking up, and fears about an imminent hard landing in China have faded. America kept the world going during troubled times. But now it is time for others to take the lead.

    Danger time for America, E, 12.1.2006, http://www.economist.com/opinion/displaystory.cfm?story_id=5385434

More Companies Ending Promises for Retirement

January 9, 2006
The New York Times
By MARY WILLIAMS WALSH

The death knell for the traditional company pension has been tolling for some time now. Companies in ailing industries like steel, airlines and auto parts have thrown themselves into bankruptcy and turned over their ruined pension plans to the federal government.

Now, with the recent announcements of pension freezes by some of the cream of corporate America - Verizon, Lockheed Martin, Motorola and, just last week, I.B.M. - the bell is tolling even louder. Even strong, stable companies with the means to operate a pension plan are facing longer worker lifespans, looming regulatory and accounting changes and, most important, heightened global competition. Some are deciding they either cannot, or will not, keep making the decades-long promises that a pension plan involves.

I.B.M. was once a standard-bearer for corporate America's compact with its workers, paying for medical expenses, country clubs and lavish Christmas parties for the children. It also rewarded long-serving employees with a guaranteed monthly stipend from retirement until death.

Most of those perks have long since been scaled back at I.B.M. and elsewhere, but the pension freeze is the latest sign that today's workers are, to a much greater extent, on their own. Companies now emphasize 401(k) plans, which leave workers responsible for ensuring that they have adequate funds for retirement and expose them to the vagaries of the financial markets.

"I.B.M. has, over the last couple of generations, defined an employer's responsibility to its employees," said Peter Capelli, a professor of management at the Wharton School of Business at the University of Pennsylvania. "It paved the way for this kind of swap of loyalty for security."

Mr. Capelli called the switch from a pension plan to a 401(k) program "the most visible manifestation of the shifting of risk onto employees." He added: "People just have to deal with a lot more risk in their lives, because all these things that used to be more or less assured - a job, health care, a pension - are now variable."

I.B.M. said it is discontinuing its pension plan for competitive reasons, and that it plans to set up an unusually rich 401(k) plan as a replacement. The company is also trying to protect its own financial health and avoid the fate of companies like General Motors that have been burdened by pension costs. Freezing the pension plan can reduce the impact of external forces like interest-rate changes, which have made the plan cost much more than expected.

"It's the prudent, responsible thing to do right now," said J. Randall MacDonald, I.B.M.'s senior vice president for human resources. He said the new plan would "far exceed any average benchmark" in its attractiveness.

Pension advocates said they were dismayed that rich and powerful companies like I.B.M. and Verizon would throw in the towel on traditional pensions.

"With Verizon, we're talking about a company at the top of its game," said Karen Friedman, director of policy studies for the Pension Rights Center, an advocacy group in Washington. "They have a huge profit. Their C.E.O. has given himself a huge compensation package. And then they're saying, 'In order to compete, sorry, we have to freeze the pensions.' If companies freeze the pensions, what are employees left with?"

Verizon's chief executive, Ivan Seidenberg, said in December that his company's decision to freeze its pension plan for about 50,000 management employees would make the company more competitive, and also "provide employees a transition to a retirement plan more in line with current trends, allowing employees to have greater accountability in managing their own finances and for companies to offer greater portability through personal savings accounts."

In a pension freeze, the company stops the growth of its employees' retirement benefits, which normally build up with each additional year of service. When they retire, the employees will still receive the benefits they earned before the freeze.

Like I.B.M., Verizon said it would replace its frozen pension plan with a 401(k) plan, also known as a defined-contribution plan. This means the sponsoring employer creates individual savings accounts for workers, withholds money from their paychecks for them to contribute, and sometimes matches some portion of the contributions. But the participating employees are responsible for choosing an investment strategy. Traditional pensions are backed by a government guarantee; defined-contribution plans are not.

Precisely how many companies have frozen their pension plans is not known. Data collected by the government are old and imperfect, and companies do not always publicize the freezes. But the trend appears to be accelerating.

As recently as 2003, most of the plans that had been frozen were small ones, with less than 100 participants, according to the Pension Benefit Guaranty Corporation, which insures traditional pensions. The freezes happened most often in troubled industries like steel and textiles, the guarantor found.

Only a year ago, when I.B.M. decided to close its pension plan to new employees, it said it was "still committed to defined-benefit pensions."

But now the company has given its imprimatur to the exodus from traditional pensions. Its pension fund, the third largest behind General Motors and General Electric, is a pace-setter. Industry surveys suggest that more big, healthy companies will do what I.B.M. did this year and next.

"There's a little bit of a herd mentality," said Syl Schieber, director of research for Watson Wyatt Worldwide, a large consulting firm that surveyed the nation's 1,000 largest companies and reported a sharp increase in the number of pension freezes in 2004 and 2005. The thinking grows out of boardroom relationships, he said, where leaders of large companies compare notes and discuss strategy.

Another factor appears to be impatience with long-running efforts by Congress to tighten the pension rules, Mr. Schieber said. Congress has been struggling for three years with the problem of how to make sure companies measure their pension promises accurately - a key to making sure they set aside enough money to make good.

But it is likely to be costly for some companies to reserve enough money to meet the new rules, and they - and some unions - have lobbied hard to keep the existing rules intact, or even to weaken them. So far, consensus has eluded the lawmakers.

"If Congress will not do its job and clarify the regulatory environment, then I think more and more companies will come to the conclusion that, given everything else that they've got to face, this just isn't the way to go," Mr. Schieber said of the traditional pension route.

Defined-benefit pensions proliferated after World War II and reached their peak in the late 1970's, when about 62 percent of all active workers were covered solely by such plans, according to the Employee Benefit Research Institute, a Washington organization financed by companies and unions. A slow, steady erosion then began, and by 1997, only 13 percent of workers had a pension plan as their sole retirement benefit. The percentage has held steady in the years since then. The growth of defined-contribution plans has mirrored the disappearance of pension plans. In 1979, 16 percent of active workers had a defined contribution plan and no pension, but by 2004 the number had grown to 62 percent.

For many workers, the movement away from traditional pensions is going to be difficult. Already there are signs that people are retiring later, or taking on different jobs to support themselves in old age. Participation in a pension plan is involuntary, but most 401(k) plans let employees decide whether to contribute any money - or none at all. Research shows that many people fail to put money into their retirement accounts, or invest it poorly once it is there.

Even skillful 401(k) investors can be badly tripped up if the markets tumble just at the time they were planning to retire. Mr. Schieber of Watson Wyatt ran scenarios of what would happen to a hypothetical man who went to work at 25, put 6 percent of his pay into a 401(k) account every year for 40 years, retired at 65, then withdrew his account balance and used it to buy an annuity, a financial product that, like a pension, pays a lifelong monthly stipend.

He found that if the man turned 65 in 2000 he would have enough 401(k) savings to buy an annuity that paid 134 percent of his pre-retirement income. But if he turned 65 in 2003, his 401(k) savings would only buy an annuity rich enough to replace 57 percent of his pre-retirement income. Someone in that position might decide he could not afford to retire.

When a company switches from a pension plan to a 401(k) plan, the transition is hardest on the older workers. That is because they lose their final years in the pension plan - often the years when they would have built up the biggest part of their benefit. They then start from zero in the new retirement plan.

Jack VanDerhei, an actuary who is a fellow at the Employee Benefit Research Institute, offered a hypothetical example. If a man joins a firm at 40, works 15 years, and is making $80,000 a year by age 55, he might expect to have built up a pension worth $16,305 a year by that time, Mr. VanDerhei said. If he keeps on working under the same pension plan, that benefit will have increased to $27,175 a year when he retires at 65.

But if instead when the man turns 55 his company freezes the pension plan and sets up a 401(k) plan, the man will get just the $16,305 a year, plus whatever he is able to amass in the 401(k). It will take both discipline and investment skill to reach the equivalent of the old pension payments in just ten years, Mr. VanDerhei said.

For women, the challenge is even tougher. They have longer life expectancies, so they have to pay more than men if they buy annuities in the open market. It turns out the traditional, pooled pension offered them a perk they did not even know they had.

    More Companies Ending Promises for Retirement, NYT, 9.1.2006, http://www.nytimes.com/2006/01/09/business/09pension.html?hp&ex=1136869200&en=67b0e319e5bee502&ei=5094&partner=homepage

Economy Added 2 Million Jobs in '05

January 6, 2006
By THE ASSOCIATED PRESS
Filed at 11:05 a.m. ET

WASHINGTON (AP) -- Job growth slowed in December -- following a big hiring spurt in November -- with employers expanding payrolls by 108,000, underscoring the sometimes choppy path traveled by job seekers.

The Labor Department's fresh snapshot of the nation's jobs climate, released Friday, also showed that the unemployment rate dipped from 5 percent in November to 4.9 percent in December, as some people left the labor market for any number of reasons.

The 108,000 gain in payrolls registered in December followed a big pickup of 305,000 jobs added in November, according to revised figures released Friday. That was the most since April 2004 and was even stronger than the 215,000 job gains first estimated for November a month ago.

For all of 2005, the economy added 2 million jobs -- a solid amount and about the same as the year before. The unemployment rate averaged 5.1 percent last year, an improvement from the 5.5 percent average registered in 2004.

''We have a sturdy job market,'' said Mark Zandi, chief economist at Moody's Economy.com. He expects another 2 million jobs to be created this year and that average unemployment rate for all of 2006 will move lower.

On Wall Street, stocks edged higher. The Dow Jones industrials were up 9 points and the Nasdaq gained 7 points in morning trading.

December's gain of 108,000 jobs was about half of what economists were expecting. Before the release of the report, they were forecasting employers to add around 200,000 positions during the month.

Job losses in construction, retail and transportation helped to blunt job gains in manufacturing, professional and business services, education and health services, government and elsewhere.

Economists said that the slower growth in payrolls in December was likely to be temporary and didn't suggest a serious backslide in the labor market.

''There are a lot of cross currents out there ... but overall the report suggests the job market is still doing pretty well,'' said Carl Tannenbaum, chief economist at LaSalle Bank.

Analysts pointed out that month-to-month job figures can be erratic but that the picture painted over the past year is a good one.

President Bush, whose standing with the public has improved but still remains relatively low, has shifted into a campaign-like mode to shine a spotlight on the economy's good points in speeches around the country, including an appearance in Chicago on Friday.

Employees' average hourly earnings climbed to $16.34 in December up 0.3 percent from November. That increase was a bit larger than the 0.2 percent gain economists were forecasting.

While wage growth is good for workers, a rapid pickup -- if sustained -- would be worrisome to investors and economists who worry about inflation.

To keep inflation in check, the Federal Reserve is expected to boost short-term rates at its next meeting on Jan. 31, which will mark the last session for chairman Alan Greenspan, who will retire that day after 18-plus years at the helm.

Another rate increase could come at the following meeting on March 28-- the first one to be presided over by incoming Fed chief Ben Bernanke. Either way, many economists believe the Fed's nearly two year credit-tightening campaign will be winding down this year.

The report also showed that the average time the unemployed spent searching for work in December was 17.3 weeks, an improvement from the 17.6 weeks in November.

October's payrolls turned out to be a bit weaker -- showing an increase of 25,000, versus 44,000 previously reported, according to revised figures released Friday. Still, given that was a month where the lingering effects of the devastating Gulf Coast hurricanes were still being felt, the lackluster performance could be explained.

Katrina struck in late August, with Rita following in late September. Wilma hit in late October. The economy managed to grow solidly despite the destruction of the hurricanes.

    Economy Added 2 Million Jobs in '05, NYT, 6.1.2006, http://www.nytimes.com/aponline/business/AP-Economy.html

To Battle, Armed With Shares

January 4, 2006
The New York Times
By ANDREW ROSS SORKIN

Two months ago, a little-known investor demanded that the publisher of The Miami Herald and The Philadelphia Inquirer be put up for sale. Just 14 days later, after several other investors also emerged with the same demand, the board of the publisher, Knight Ridder, gave in and put the company on the block.

Unlike the 1980's, when such challenges might be resisted at all costs, today corporate boards are adjusting to a new reality: the activist investor, armed with a handful of shares and a megaphone, is changing corporate America and the deal-making landscape.

It is happening at big and small companies everywhere. At Time Warner, the media giant, the billionaire financier Carl C. Icahn has pressed the company to buy back billions of dollars more of its shares - and Time Warner has done so to some extent, although without crediting Mr. Icahn. At Six Flags, the amusement park company, Daniel Snyder, the owner of the Washington Redskins football team, pushed the company to put itself up for sale and he then took over the board.

The quick response by Knight Ridder came after Bruce S. Sherman, an investor based in Florida, started his blistering attack.

Nelson Peltz - another investor who, like Mr. Icahn, was once derided as a corporate raider - has started a fund, Trian, that pursues what he calls "operational activism." In a filing with the Securities and Exchange Commission related to its campaign involving Wendy's International, Trian said that it did not seek to take over companies, just to prod them into action by threatening to start a proxy contest for seats on the board.

And while Kirk Kerkorian has not turned into an activist at General Motors just yet, he is widely expected to begin waging a campaign if the company's fortunes do not turn around soon.

"I think that we've only scratched the surface on the pressure by hedge fund activist investors on companies to make changes in their business in order to increase the current price of their stock," said Martin Lipton, the takeover lawyer who is a founding partner at the Wall Street law firm of Wachtell, Lipton, Rosen & Katz. "We have a group of activist hedge funds now where the hedge funds essentially marshal over a trillion dollars of capital, joined in by many of the traditional institutions."

Activist investors, who were labeled greenmailers in the 1980's, are being listened to by boards that once would not even acknowledge them. That shift toward shareholders' interests has been a long time coming, as outside directors have become more questioning and demanding of top executives and as defenses like poison pills that once entrenched management have been eroded by the courts.

"Boards feel today that they are under an unprecedented level of scrutiny from every direction - from the Congress, courts, shareholders and the media," said Paul T. Schnell, a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom. "They are no longer always going to side with management when an activist comes along."

Jack Levy, chairman of the mergers and acquisitions practice at Goldman Sachs, said: "A lot is happening in the environment which allows activists to stir the pot. And therefore, I think it's too simple to conclude that the activists are solely responsible for all the change today."

Still, this activism may also prompt more underperforming companies to get out of the cross hairs of shareholders and go private. That would add more fuel to the recent frenzy of deal making by private equity firms, flush with cash, said Douglas Braunstein, the head of investment banking for the Americas at J. P. Morgan Chase.

"Managements may decide that being private is more attractive and that they can unlock more value than being a public company," he said. "My prediction is that activism is going to create more opportunities for public companies to go private."

The stakes have indeed become much higher. Activists are not just demanding minor changes in business strategies or management ranks anymore. They are pushing for complex, often wholesale, changes. This year, MCI agreed to sell itself to Verizon for $6.6 billion.

A rival, Qwest Communications, jumped into the fray with a higher bid, but one that was not considered credible by many on Wall Street. Still, a vocal group of activist shareholders, led by Leon Cooperman, the longtime hedge fund manager, put their weight behind Qwest's offer and eventually forced Verizon to raise its offer to $8.5 billion to seal the deal.

In another instance, VNU, the Dutch publishing and market research company, was forced to abandon its $6.4 billion deal to acquire IMS Health after a shareholder revolt.

But perhaps the greatest shift in the influence that activist shareholders have gained is the role that once-conservative institutional investors - big money managers like the mutual fund giant Fidelity - have begun to take.

"You have establishment institutions that now think they have to be more proactive," said Charles I. Cogut, a partner at Simpson Thacher & Bartlett who runs its mergers and acquisitions practice. "That's the big difference."

For decades, institutional investors, despite their size, were relatively passive in the positions they would take in their investments. For the most part, they sided with management when shareholder activists emerged. Now they are joining the activists.

As part of Mr. Icahn's campaign at Time Warner, he has assembled a group of investors that includes more than the usual suspects of fellow activists. Indeed, the group includes Franklin Advisers, a unit of Franklin Templeton, that has long been considered one of the more traditional institutional investors.

With activists so active, Wall Street's allegiances may be changing. Lazard, for example, recently began representing Mr. Icahn.

"In the past, a bank would never represent a hedge fund or activist as a client," said Boon Sim, the head of mergers and acquisitions for the Americas at Credit Suisse First Boston. "Increasingly, there is a lot of pressure for the major banks to reconsider that position."

Despite the surge in activist activity, not everyone is convinced that activism is here to stay.

"While activism will assuredly rise in 2006, the movement will likely abate," said Paul Taubman, who runs the mergers and acquisitions practice at Morgan Stanley.

"Activists will increasingly be held to a higher standard. Do they have a proven record of value creation? Does their plan make sense? Or are they simply mischief makers?" he said. "The mere existence of activists creates efficiencies in the system," he added, explaining that many corporate boards are trying to stay one step ahead of activists by making changes.

Scott A. Barshay, a partner at the law firm of Cravath, Swaine & Moore, said the issue of activism has been overblown. "The number of big companies truly subject to a successful attack by activists is small," he said.

But, at least for now, activism is here and some corporations are finding ways to take advantage of it. One trend in 2005 that is expected to continue is what is known as deal jumping: an interloper pursues a company that has already agreed to be sold to another party. Interlopers are increasingly depending on activist shareholders to champion their cause.

Interlopers emerged in a handful of big deals last year. Boston Scientific has a competing offer on the table for Guidant, which had agreed to be acquired by Johnson & Johnson for $21.5 billion. Cnooc, a Chinese state-owned oil company made an $18.5 billion, ultimately unsuccessful, bid for Unocal, which had agreed to be sold to Chevron. Whirlpool won a bidding war for Maytag after it had agreed to be sold to Ripplewood Holdings, a private equity firm, and Qwest made an offer for MCI after it had agreed to be sold to Verizon.

"It's remarkable," said Steven Baronoff, who heads Merrill Lynch's mergers and acquisitions practice. "Once a transaction is announced, other companies have no compunction about stepping in on either side of the transaction. Part of the reason is that these deals will only be successful if shareholders support them, and shareholders are increasingly taking activist roles in choosing the transaction they want."

There remains an underlying question about whether all of this activism is in the best interests of the corporations and the entire market.

Mr. Lipton, for one, is dubious. "I think it's a terrible thing for corporate America," he said. "I think what we're seeing is a replay of the attempt to drive American business to short-term results instead of long-term values. And ultimately it's a tremendous threat to the vitality of our economy. I think that it's even more dangerous than the kind of junk bond bust-up, the greenmail activity of the 70's and early 80's."

Mark G. Shafir, global head of mergers and acquisitions at Lehman Brothers, said: "The jury is still out on whether these guys will generate returns. It'll be very interesting to see what happens."

    To Battle, Armed With Shares, NYT, 4.1.2006, http://www.nytimes.com/2006/01/04/business/04deal.html

Owners' Web Gives Realtors Run for Money

January 3, 2006
The New York Times
By JEFF BAILEY

MADISON, Wis. - Across the country, the National Association of Realtors and the 6 percent commission that most of its members charge to sell a house are under assault by government officials, consumer advocates, lawyers and ambitious entrepreneurs. But the most effective challenge so far emanates from a spare bedroom in the modest home here of Christie Miller.

Ms. Miller, 38, a former social worker who favors fuzzy slippers, and her cousin, Mary Clare Murphy, 51, operate what real estate professionals believe to be the largest for-sale-by-owner Web site in the country.

They have turned Madison, a city of 208,000 known for its liberal politics, into one of the most active for-sale-by-owner markets in the country. And their success suggests that, in challenging the Realtor association's dominance of home sales, they may have hit on a winning formula that has eluded many other upstarts. Their site, FsboMadison.com (pronounced FIZZ-boh) holds a nearly 20 percent share of the Dane County market for residential real estate listings.

The site, which charges just $150 to list a home and throws in a teal blue yard sign, draws more Internet traffic than the traditional multiple listing service controlled by real estate agents.

Madison is home to the University of Wisconsin and a city where the percentage of residents who graduated from college is twice the national level. It is also a hotbed of antibusiness sentiment, which turns out to be the perfect place for a free-market real estate revolution. Bucking the system is a civic pastime here.

"It may be an extension of the 1960's, when we stuck it to the man by protesting the war," said Mayor David J. Cieslewicz, who notices all the FsboMadison signs around town. "These days we stick it to the man by selling our own home - and pocketing the 6 percent."

Elsewhere, the Justice Department, free-market scholars, plaintiffs' lawyers and countless entrepreneurs are vowing to make real estate more competitive and to bring down sales commissions. To do that, they advocate forcing the Realtors' association to share control of its established listing services. Those critics seem to view the listings as an unassailable monopoly.

And who can blame them? Those 800-plus local listing services, controlled by local branches of the Realtors' association, help dole out about $60 billion a year in commissions to real estate agents and the firms that employ them. Despite numerous attacks, the association has been remarkably successful to date at protecting its turf. Through lobbying, litigation and legislation, the Realtors' group has managed to keep control of the crucial listings.

Ms. Miller and Ms. Murphy, however, built a separate and alternative listing service - a parallel market, much like the Nasdaq, which rose in recent decades to challenge the New York Stock Exchange's dominance and sparked competition that eventually reduced transaction costs for all stock investors.

The price competition is startling. FsboMadison listed about 2,000 homes in 2005 and said that about 72 percent of its listings sell. If those 1,440 houses averaged $200,000 per sale, the real estate commissions under the 6 percent system would have been about $17.3 million. Ms. Miller and Ms. Murphy collected about $300,000.

"They don't care - they're not profit-driven," said François Ortalo-Magné, an associate professor of real estate at the University of Wisconsin who has studied residential sales in Europe and the United States.

That lack of profit motive - big profit, anyway - may be the reason FsboMadison is succeeding. Most entrepreneurs want to quickly grab a piece of that $60 billion in commissions by offering a price lower than what most real estate agents charge to attract consumers. Ms. Miller and Ms. Murphy, working patiently, are focused on providing a place for buyers and sellers to meet and exchange information.

"I don't think we've done anything unusual," Ms. Murphy said. "We are not out to take over the market, to eliminate the real estate world. We're just here to offer this service."

For hardship cases, divorces mostly, they waive the $150 fee. They refuse to accept referral fees from real estate agents, lawyers or others. Advertising on their Web site costs $150 a year - $250 with a corporate logo. And payment for listings is by personal check only, an anachronism in today's world of immediate credit card transactions. The policy is aimed at keeping people from listing their house on a whim. "Some people are impulsive; they're not ready," Ms. Murphy said.

In 1997 Ms. Murphy and her husband bought a house together and she decided to sell her place without a real estate agent. But it was a bother. "You'd have to guess. Do we put a $120 ad in the paper this weekend?"

Her husband suggested she start a Web site. At a play date with their year-old daughters, Ms. Murphy, a former nurse, bounced the idea off her cousin, Ms. Miller, who told her husband about it that night. "We both laughed about Mary Clare's stupid idea," Ms. Miller said.

But it grew on them. The cousins contacted for-sale-by-owner sellers in the local newspaper, about 25 of them, and offered a free listing on a Web site. Ms. Miller's husband paid $50 for a used power saw at a garage sale to make yard signs. They checked out library books on making a Web site. With eight listings, including Ms. Murphy's, FsboMadison went live Feb. 28, 1998.

A young couple found the site and bought Ms. Murphy's house. "We sat there and had a glass of wine," Ms. Murphy recalled. "And they said, 'Hey, there's that crack in the basement wall.' And we said, 'No problem. We'll take care of it.' "

Dealing directly with each other seemed so civilized, she said. "I keep coming back to that."

With the yard signs, some newspaper advertising and people finding it on the Web, the site took off: 333 listings in 1998; 777 in 1999; about 2,000 each of the last three years.

Briefly stay-at-home moms after their daughters were born, the cousins became busy home-based entrepreneurs. Among the first words spoken by Ms. Miller's daughter, Tatum, "was FSBO, and we were so proud of her," Ms. Miller said.

To real estate agents, "for sale by owner" conjures up some cranky tightwad trying to sell an overpriced, ramshackle house. Agents utter FSBO as if there was something foul stuck to the bottom of their shoe. "It's a commission-avoidance scheme," said Sheridan Glen, manager of the downtown Madison office for Wisconsin's biggest real estate broker, the First Weber Group.

Mr. Glen ticks off the tasks that real estate agents handle: using market expertise to price a house; advertising and showing it; negotiating an offer; organizing the paperwork for closing. "We do a good job," he said. "We deserve 6 or 7 percent."

The Justice Department sued the Realtors association in September, claiming that its rules for listings unfairly disadvantage online brokers who might stimulate price competition in the business.

Agents take comfort by reminding themselves that FSBO and other alternative sales methods blossom in an up market and tend to wither in market downturns. The market is slowing now. And they note that owner sales, which have been around as long as property rights, have always accounted for something less than 20 percent of home sales.

Kevin King, executive vice president of the local Realtors' association, runs the multiple listing service but says he pays no attention to FsboMadison. "It's not important; I don't follow it," he said. "I don't even know the people."

But times have changed. Most consumers are now accustomed to executing large transactions, including airline tickets and investments, over the Internet with little or no assistance. Buyers and sellers are now far more comfortable dealing with each other through Web sites like eBay. And it is far easier to find the FSBO offerings on a single Web site with photographs and property descriptions, not unlike the official multiple listing service. Do-it-yourselfers were hard to find among the classified ads and makeshift yard signs.

A robust for-sale-by-owner operation has also helped open the Madison market for other alternatives to real estate agents. Jason A. Greller, a lawyer, charges a flat fee of $600 to help a buyer or seller on a house transaction and handles about 200 a year. Many of his clients find a house on FsboMadison and also see his advertisement on the site.

Stuart and Sheri Meland, both 28, put their graduate studies on hold in 2002 and started a business that offers sellers a spot on the traditional multiple listing service, plus a yard sign, for a flat fee of $399. Most sellers agree to pay a buyer's agent a 3 percent commission, show the home themselves and either negotiate on their own or hire a lawyer.

William A. Black, a lawyer for the Wisconsin Department of Regulation and Licensing, says he does not think consumers who bypass real estate agents are missing much. "The majority of residential transactions are very simple: 99 percent can be done without a broker. And the 1 percent screwed up - the broker couldn't have prevented it."

Alternative listing services would need to reach a combined 50 percent to 60 percent of a market to topple a multiple listing service, Steve Murray, an industry consultant, guessed.

That is what David B. Zwiefelhofer, Webmaster for FsboMadison, would like to see, and he constantly encourages Ms. Miller and Ms. Murphy to expand. "I think this is the one place in the country where FSBO could overtake" the multiple listing service, he said.

His clients, not surprisingly for a social worker and a nurse, are embarrassed by their success, Mr. Zwiefelhofer said. "It bugs me to no end," he said. "The Web site still looks like it was designed by some high school student five years ago."

True, there are no FsboMadison business cards. The filing system is a stack of paper in the bedroom closet. The 2006 business plan, Ms. Miller said, is to "keep going." But FsboMadison does have its first part-time employee, someone to relieve Ms. Miller's husband of sign-installing duty. Ms. Miller hired a man who was her middle school gym teacher.

    Owners' Web Gives Realtors Run for Money, NYT, 3.1.2006, http://www.nytimes.com/2006/01/03/realestate/03madison.html?hp&ex=1136350800&en=784b03679e5f26a8&ei=5094&partner=homepage

States Take Lead in Push to Raise Minimum Wages
NYT        2.1.2006
http://www.nytimes.com/2006/01/02/national/02wage.html?ei=5094&en=4493a16f2168c6e7&hp=&ex=
1136264400&adxnnl=1&partner=homepage&adxnnlx=1136223439-bAmXs16NsSXTwvFEuQbe4Q

States Take Lead in Push to Raise Minimum Wages

January 2, 2006
The New York Times
By JOHN M. BRODER

Despite Congressional refusal for almost a decade to raise the federal minimum wage, nearly half of the civilian labor force lives in states where the pay is higher than the rate set by the federal government.

Seventeen states and the District of Columbia have acted on their own to set minimum wages that exceed the $5.15 an hour rate set by the federal government, and this year lawmakers in dozens of the remaining states will debate raising the minimum wage. Some states that already have a higher minimum wage than the federal rate will be debating further increases and adjustments for inflation.

The last time the federal minimum wage was raised was in 1997 - when it was increased from $4.75 an hour. Since then, efforts in Congress to increase the amount have been stymied largely by Republican lawmakers and business groups who argued that a higher minimum wage would drive away jobs.

Thwarted by Congress, labor unions and community groups have increasingly focused their efforts at raising the minimum wage on the states, where the issue has received more attention than in Republican-dominated Washington, said Bill Samuel, the legislative director of the national A.F.L.-C.I.O.

Opinion polls show wide public support for an increase in the federal minimum wage, which falls far short of the income needed to place a family at the federal poverty level. Even the chairman of Wal-Mart has endorsed an increase, saying that a worker earning the minimum wage cannot afford to shop at his stores.

"The public is way ahead of Washington," Mr. Samuel said. "They see this as a matter of basic fairness, the underpinning of basic labor law in this country, a floor under wages so we're not competing with Bangladesh."

The minimum wage has been the subject of fierce ideological debate since it was first established in 1938 under President Franklin D. Roosevelt as part of the Fair Labor Standards Act. Business groups and conservative economists have argued that the minimum wage is an unwarranted government intrusion into the employer-employee relationship and a distortion of the marketplace for labor. An increase in the minimum wage, they say, drives up labor costs across the board and freezes unskilled and first-time workers out of the job market.

"Increasing the minimum wage is a bad move economically, philosophically and politically," said Marc Freedman, director of labor law policy for the United States Chamber of Commerce. Mr. Freedman said that any minimum wage set by the federal government was completely arbitrary and did not take local labor market costs into account.

According to the federal Bureau of Labor Statistics, about two million American workers, 2.7 percent of the overall work force, earned the minimum hourly wage of $5.15 or less in 2004, the last year for which such statistics were available. Those workers were generally young (half were under 25, and a quarter were teenagers), unmarried and had not earned a high school diploma. About three-fifths of all workers paid at or below the federal minimum wage worked in bars and restaurants, and many received tips to supplement their basic wages.

Advocates of an increase in the minimum wage said that inflation had so eroded the value of the minimum wage in the last nine years that it was worth less today in real terms than at any time since 1955. They also cited studies that found that raising the minimum wage did not cause job loss, as opponents argue. According to these studies, employers can absorb the higher labor costs through efficiencies, less employee turnover and higher productivity.

Tim Nesbitt, the former president of the Oregon A.F.L.-C.I.O., said that despite having one of the highest minimum wages in the country at $7.25 an hour, Oregon had had twice the rate of job growth as the rest of the country.

The 2006 battle over the minimum wage is expected to be particularly intense in Ohio, one of only two states that have a minimum wage below the federal level (the other is Kansas). The minimum wage in Ohio since 1991 has been $4.25 an hour, which applies to small employers, some farms and most restaurants. Workers at larger enterprises are generally covered by the federal minimum wage.

Efforts to get the Republican-run General Assembly to consider raising Ohio's minimum wage have gone nowhere, so labor groups and the Association of Community Organizations for Reform Now, known as Acorn, an advocacy group for low-income individuals and families, are planning a ballot initiative to put the issue to a popular vote in November.

Tim Burga, legislative director for the Ohio A.F.L.-C.I.O., said that 92,000 workers in the state made less than the federal minimum wage, some as little as $2 an hour. The proposed Ohio Constitutional amendment would set the state minimum wage at $6.85 an hour, indexed to future inflation, bringing an immediate raise to as many as 400,000 workers.

Former Senator John Edwards, the 2004 Democratic vice-presidential nominee, said in an interview that he planned to help organize the minimum wage campaign in Ohio as part of his national campaign to alleviate poverty. He called the current minimum wage a moral disgrace and a national embarrassment.

"My view is it should be $7.50 an hour, and I can make a great argument for it being a lot higher than that," Mr. Edwards said. "This is a perfect example of the Republican leadership in Congress, combined with the powerful presence of lobbies in Washington, thwarting the will of the people."

Leading the opposition to the initiative will be the Ohio Restaurant Association, which like its parent organization, the National Restaurant Association, closely monitors and vigorously opposes efforts to raise the minimum wage.

"Restaurants are a low-margin business," said Geoff Hetrick, president of the Ohio Restaurant Association. "A number of marginal operations which are more or less on the ragged edge right now might find this to be the straw that breaks the camel's back, especially in northern Ohio where they've had a significant loss in manufacturing employment that's taken a lot of disposable income out of the economy."

One of those who would be affected by the proposed minimum wage increase in Ohio is Rick Cassara, owner of John Q's Steakhouse in downtown Cleveland. He said that while all of his 55 employees currently earn more than the minimum wage, he opposed a mandated increase because it would drive up all of his labor costs. "It exerts upward pressure on all wages and prices," Mr. Cassara said. "If the minimum wage is $7 and I have to pay $8 or $9 to hire a dishwasher, then the cooks are going to say they want more. How much can I charge for that hamburger?"

Another small employer, Dan Young, owner of Young's Jersey Dairy in Yellow Springs, a working farm and restaurant operation, said that more than half of his 300 workers were high school and college students, many of them in their first jobs. He said he paid many of them $5.25 an hour, just above the federal minimum wage, but most quickly won raises or earned far more than that in tips.

Mr. Young said that if Ohio enacted a Democratic proposal to raise the state's minimum wage by $1 an hour over the federal level, his labor costs would go up by $250,000 a year or more. "When you do all the math," he said, "I'll have to figure out a way to hire fewer workers, or raise prices, or both."

In 2004, voters in Nevada and Florida approved ballot initiatives raising the state minimum wage to $6.15 an hour, in both cases by more than a 2-to-1 margin. Nevada voters must vote on the measure again this year because it is a Constitutional amendment, but proponents are confident they will prevail. Lawmakers in California, which already has one of the highest rates in the nation at $6.75 an hour, approved a bill last year to increase the wage to $7.75 an hour in 2007, but Gov. Arnold Schwarzenegger vetoed it, the second time he has rejected such legislation.

Mr. Schwarzenegger said then that he believed that low-wage California workers deserved a raise, but said the legislation, which contained automatic increases tied to inflation, would be too costly to employers.

But aides to Mr. Schwarzenegger said late last week that the governor would propose a $1-an-hour increase in the California minimum wage in his State of the State address this week. If approved, the proposal would take effect over the next 18 months and would not have an automatic inflation adjustment, the aides said. The move appears designed in part to pre-empt a ballot initiative that would raise the California hourly rate an additional $1, to $8.75 an hour, and include annual cost-of-living increases.

Inflation indexing is also an issue in Oregon, where the minimum wage is currently $7.25 an hour and adjusts every year for inflation under an initiative approved by voters in 2002. Each year since passage of that measure, the Oregon Restaurant Association and other business groups have pushed legislation to cancel the indexing provision or to exempt some workers from the wage law, but have so far failed. Gov. Theodore R. Kulongoski, a Democrat and former labor lawyer, has vowed to veto any such measure that reaches his desk.

    States Take Lead in Push to Raise Minimum Wages, NYT, 2.1.2006, http://www.nytimes.com/2006/01/02/national/02wage.html