History > 2006 > USA > Economy (II)

Real Wages Fail

to Match a Rise in Productivity

August 28, 2006
The New York Times
By STEVEN GREENHOUSE
and DAVID LEONHARDT

With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.

That situation is adding to fears among Republicans that the economy will hurt vulnerable incumbents in this year’s midterm elections even though overall growth has been healthy for much of the last five years.

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.”

Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers’ benefits has also failed to keep pace with inflation, according to government data.

At the very top of the income spectrum, many workers have continued to receive raises that outpace inflation, and the gains have been large enough to keep average income and consumer spending rising.

In a speech on Friday, Ben S. Bernanke, the Federal Reserve chairman, did not specifically discuss wages, but he warned that the unequal distribution of the economy’s spoils could derail the trade liberalization of recent decades. Because recent economic changes “threaten the livelihoods of some workers and the profits of some firms,” Mr. Bernanke said, policy makers must try “to ensure that the benefits of global economic integration are sufficiently widely shared.”

Political analysts are divided over how much the wage trends will help Democrats this fall in their effort to take control of the House and, in a bigger stretch, the Senate. Some see parallels to watershed political years like 1980, 1992 and 1994, when wage growth fell behind inflation, party alignments shifted and dozens of incumbents were thrown out of office.

“It’s a dangerous time for any party to have control of the federal government — the presidency, the Senate and the House,” said Charles Cook, who publishes a nonpartisan political newsletter. “It all feeds into ‘it’s a time for a change’ sentiment. It’s a highly combustible mixture.”

But others say that war in Iraq and terrorism, not the economy, will dominate the campaign and that Democrats have yet to offer an economic vision that appeals to voters.

“National economic policies are more clearly in focus in presidential campaigns,” said Richard T. Curtin, director of the University of Michigan’s consumer surveys. “When you’re electing your local House members, you don’t debate that on those issues as much.”

Moreover, polls show that Americans are less dissatisfied with the economy than they were in the early 1980’s or early 90’s. Rising house and stock values have lifted the net worth of many families over the last few years, and interest rates remain fairly low.

But polls show that Americans disapprove of President Bush’s handling of the economy by wide margins and that anxiety about the future is growing. Earlier this month, the University of Michigan reported that consumer confidence had fallen sharply in recent months, with people’s expectations for the future now as downbeat as they were in 1992 and 1993, when the job market had not yet recovered from a recession.

“Some people who aren’t partisans say, ‘Yes, the economy’s pretty good, so why are people so agitated and anxious?’ ” said Frank Luntz, a Republican campaign consultant. “The answer is they don’t feel it in their weekly paychecks.”

But Mr. Luntz predicted that the economic mood would not do significant damage to Republicans this fall because voters blamed corporate America, not the government, for their problems.

Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology — as well as the insecurity caused by them — appear to have eroded workers’ bargaining power.

Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.

Together, these forces have caused a growing share of the economy to go to companies instead of workers’ paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Total employee compensation — wages plus benefits — has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990’s and otherwise has not been so low since 1966.

Over the last year, the value of employee benefits has risen only 3.4 percent, while inflation has exceeded 4 percent, according to the Labor Department.

In Europe and Japan, the profit share of economic output is also at or near record levels, noted Larry Hatheway, chief economist for UBS Investment Bank, who said that this highlighted the pressures of globalization on wages. Many Americans, be they apparel workers or software programmers, are facing more comptition from China and India.

In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” Low interest rates and the moderate cost of capital goods, like computers, have also played a role, though economists note that an economic slowdown could hurt profits in coming months.

For most of the last century, wages and productivity — the key measure of the economy’s efficiency — have risen together, increasing rapidly through the 1950’s and 60’s and far more slowly in the 1970’s and 80’s.

But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

“If I had to sum it up,” said Jared Bernstein, a senior economist at the institute, “it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth.”

Nominal wages have accelerated in the last year, but the spike in oil costs has eaten up the gains. Now the job market appears to be weakening, after a protracted series of interest-rate increases by the Federal Reserve.

Unless these trends reverse, the current expansion may lack even an extended period of modest wage growth like one that occurred in the mid-1980’s.

The most recent recession ended in late 2001. Hourly wages continued to rise in 2002 and peaked in early 2003, largely on the lingering strength of the 1990’s boom.

Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers. Even for workers at the 90th percentile of earners — making about $80,000 a year — inflation has outpaced their pay increases over the last three years, according to the Labor Department.

“There are two economies out there,” Mr. Cook, the political analyst, said. “One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.

“And then there’s the working stiffs,’’ he added, “who just don’t feel like they’re getting ahead despite the fact that they’re working very hard. And there are a lot more people in that group than the other group.”

In 2004, the top 1 percent of earners — a group that includes many chief executives — received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data.

With the midterm campaign expected to heat up after Labor Day, Democrats are saying that they will help workers by making health care more affordable and lifting the minimum wage. Democrats have criticized Republicans for passing tax cuts mainly benefiting high-income families at a time when most families are failing to keep up.

Republicans counter that the tax cuts passed during Mr. Bush’s first term helped lifted the economy out of recession. Unless the cuts are extended, a move many Democrats oppose, the economy will suffer, and so will wages, Republicans say.

But in a sign that Republicans may be growing concerned about the public’s mood, the new Treasury secretary, Henry M. Paulson Jr., adopted a somewhat different tone from Mr. Bush in his first major speech, delivered early this month.

“Many aren’t seeing significant increases in their take-home pay,” Mr. Paulson said. “Their increases in wages are being eaten up by high energy prices and rising health care costs, among others.”

At the same time, he said that the Bush administration was not responsible for the situation, pointing out that inequality had been increasing for many years. “It is neither fair nor useful,” Mr. Paulson said, “to blame any political party.”

    Real Wages Fail to Match a Rise in Productivity, NYT, 28.8.2006, http://www.nytimes.com/2006/08/28/business/28wages.html?hp&ex=1156824000&en=eae4ab9ab2ce13d5&ei=5094&partner=homepage

Global Trends May Hinder Effort to Curb U.S. Inflation

August 28, 2006
The New York Times
By EDMUND L. ANDREWS

JACKSON HOLE, Wyo., Aug. 27 — As the Federal Reserve fiercely debates how to reduce inflation within the United States, economists are warning that trends outside the country may soon make the Fed’s job much harder.

In recent years, global integration has made things easier for the Fed in two ways. An explosion in low-cost exports from China and other countries helped keep prices of many products low even as Americans spent heavily and loaded up on debt.

At the same time, China and other relatively poor nations reversed the normal patterns of global investment by becoming net lenders to the United States and Europe. Analysts estimate that this “uphill’’ flow of money from poor nations to rich ones may have reduced long-term interest rates in the United States by 1.5 percentage points in recent years — a big difference when home mortgage rates are about 6 percent.

But as Fed officials held their annual retreat this weekend here in the Grand Tetons, a growing number of economists warned that those benign international trends could abate or even reverse.

For one thing, they said, China’s explosive rise as a low-cost manufacturer does not mean that prices will fall year after year. Indeed, China’s voracious appetite for oil and raw materials has aggravated inflation by driving up global prices for oil and many commodities.

Beyond that, new research presented this weekend suggested that the United States could not count on a continuation of cheap money from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home.

“Medium- and long-term interest rates are set outside of the country,’’ said Kenneth S. Rogoff, a professor of economics at Harvard University and a former director of research at the International Monetary Fund. “It’s very important to think about what to do if the winds of globalization change.’’

The warnings come as the Fed’s new chairman, Ben S. Bernanke, faces widespread skepticism among economists about his forecast for a “soft landing” — a mild slowdown that will tame inflation without costing many jobs.

Inflation is already running above Mr. Bernanke’s unofficial target — 2 percent a year, excluding energy and food prices — and few analysts here say they believe the Fed will raise rates and slow growth enough to bring inflation down to its target anytime soon.

“They are in a box, and they know it,” said John H. Makin, an economist at the American Enterprise Institute and a hedge fund manger. “It’s an awkward position for them to be in.”

Economists presenting papers at the Fed retreat said that the central bank may be hindered as global trends that have kept inflation and interest rates lower than they would otherwise be turn less favorable.

The biggest change could be an increased reluctance by foreign investors to finance the United States’ huge trade gap, now more than $700 billion a year.

“What happens if foreign investors decide they don’t want to accumulate American assets any more?” asked Martin S. Feldstein, economics professor at Harvard and president of the National Bureau of Economic Research.

“Something has to change to make the debt more attractive — an increase in interest rates in the U.S. or a decline in the exchange rate of the dollar,’’ he continued. “In the short term, the Fed will face slowing output growth, possible with higher inflation.”

For the moment, bond investors appear to accept the Fed’s view that inflation will remain low. Long-term interest rates have actually edged down slightly since the Fed decided on Aug. 8 not to raise overnight rates.

But economists, including some leading bond investors, predict that inflation will creep higher even if oil prices stop climbing.

“The consensus among people here is that the Fed’s real target is not 2 percent but about 2.5 percent,’’ said David Hale, an economic forecaster in Chicago. Looking ahead 12 months, if Fed members do not make progress bringing inflation down, “it’s going to call into question their credibility,’’ he said.

Members of the Federal Open Market Committee, which sets monetary policy, appear torn. In a sign of uncertainty this weekend, Mr. Bernanke and all other senior Fed policymakers were unusually tight-lipped about any of the issues — wage trends, the ability of companies to pass higher costs on to customers, or the plunge in home sales — that are at top of their agenda.

Mr. Bernanke has been arguing that inflation will cool as annual economic growth slows to 2.5 percent, from about 3.5 percent.

But some Fed officials, worried that inflation pressures are becoming more entrenched, want to take tougher action. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, voted against the pause in rate increases.

Michael H. Moskow, president of the Chicago Fed, strongly suggested last week that he favored higher rates and declared that the risks of higher inflation were greater than the risks of an unexpectedly sharp slowdown. Mr. Moskow is not currently a voting member of the policy committee, which rotates the regional bank presidents, but he participated in the debates.

Ethan S. Harris, chief United States economist at Lehman Brothers, said the Fed’s focus on core inflation understated the challenges posed by international shifts. The focus, he said, includes the price-lowering impact of China’s expansion but excludes the impact of higher oil prices. “They’ve included the part that makes things look better and thrown out the part that makes things look worse,” he said.

Officially, the Federal Reserve does not set explicit targets for inflation. But Mr. Bernanke, a longtime champion of inflation targets, has said that his own definition of price stability is to keep core inflation between 1 percent and 2 percent a year.

The Fed’s job is not made any easier by the upcoming midterm elections, in which Republicans are struggling to keep from losing control of both the House and Senate.

The Fed has two policy meetings, in late September and late October, before the November elections. The central bank often likes to avoid any interest rate changes immediately before an election, for fear that it will be accused of interfering on behalf of one party or another.

Regardless of what Mr. Bernanke does in the next few months, economists at the conference here said that globalization and the United States’ growing foreign debt could make his job more difficult.

Raghuram G. Rajan, the International Monetary Fund’s current head of research, presented new research to explain why many poorer countries are now net lenders to rich countries — and why they might change course. He argued that fast-growing poor countries relied less on foreign capital than many nations, and that they saved much more than they invested.

One example is Chile, the most prosperous country in Latin America. Thanks to soaring copper prices in recent years, Chile has paid off its government debt and is running a budget surplus equal to about 7 percent of its gross domestic product. Chilean leaders are putting the surplus into a long-term stability fund, part of which is invested in foreign securities, that will be used to maintain full government operations if copper prices plummet.

Mr. Rajan said many countries might not have a way to channel their excess savings because their banking systems were too underdeveloped. If so, the savings rates of those countries may decline as people become more accustomed to rising incomes and as banks find ways to rechannel savings into consumer and business loans.

Even though capital is flowing uphill to rich countries like the United States right now, Mr. Rajan said, “it doesn’t mean these flows are optimal, safe or permanent.”

    Global Trends May Hinder Effort to Curb U.S. Inflation, NYT, 28.8.2006, http://www.nytimes.com/2006/08/28/business/worldbusiness/28fed.html

John L. Weinberg, 81, Former Leader of Goldman, Dies

August 9, 2006
The New York Times
By LANDON THOMAS Jr.

John L. Weinberg, a senior investment banker who ran Goldman Sachs from 1976 to 1990 and who was part of a family dynasty that has been at the firm since 1907, died Monday in Greenwich, Conn. He was 81.

The cause was complications from a fall two weeks ago, said Peter Rose, a spokesman for Goldman Sachs.

With John C. Whitehead he was senior partner at Goldman Sachs from 1976 to 1984 and continued to lead the firm on his own until he retired in 1990, capping a 40-year career at the bank. During that period, Goldman had some of its best times, but it also endured bad times, including the scandal surrounding the bankruptcy of Penn Central (a client of Goldman Sachs) in 1976 to insider-trading accusations directed at a senior Goldman partner in the mid-1980’s.

While Goldman’s partners had praise for Mr. Weinberg’s leadership during those low points, it was his decision in 1986 to accept a $500 million investment from Sumitomo Bank of Japan that is widely seen as his defining moment at the firm.

The investment, which came with no strings attached, gave Goldman a fresh source of capital just before the stock market crash in 1987 and was instrumental in giving the firm the resources it needed to compete with peers like Morgan Stanley that were breaking up their own partnerships and selling shares to the public.

Mr. Weinberg also presided over the purchase of the commodities trading firm J. Aron in 1981. That acquisition would eventually lay the groundwork for the rich profits currently generated by the firm’s principal trading and investing areas. The deal also brought to the firm a future chief executive, Lloyd C. Blankfein, who assumed that position in June. Mr. Weinberg also served briefly on Goldman’s board following its public offering in 1999.

A former marine who saw combat during World War II, Mr. Weinberg had a blunt, unpretentious manner. His style, like his disposition, was unadorned. He kept his hair closely cropped and wore off-the-rack suits and socks that hung a bit too low. He was also known for his earthy maxims, many of them aimed to deflate the ballooning egos of his bankers.

A relationship banker of the old style, Mr. Weinberg’s chief talent was his ability to gain entree to the boardrooms of America’s most blue-chip companies, from Ford Motor, to General Electric to DuPont, a trait that he inherited from his father, Sidney J. Weinberg, who led Goldman Sachs from 1930 to 1969 and in many ways defined the art of relationship banking on Wall Street. Mr. Weinberg’s son, John S. Weinberg, who is 49 and is currently co-head of investment banking, has carried on the family tradition.

In addition to his son, Mr. Weinberg, who lived in Greenwich, is survived by his wife, Sue Ann; a daughter, Jean Weinberg Rose of Greenwich; and five grandchildren.

John S. Weinberg has inherited his father’s clients, like Seagram and Ford and was recently appointed vice chairman at the firm. John. L. Weinberg’s brother, Sidney J. Weinberg Jr., and his nephew Peter A. Weinberg have also held senior management positions at the firm. Under Mr. Weinberg’s leadership, Goldman also expanded aggressively overseas.

In contrast to a relentless focus on the bottom line, or being “long-term greedy,” a term coined by Gus Levy, a legendary Goldman trader and senior partner from the past, Mr. Weinberg always seemed to be more focused on the client — even if it that meant that the firm might come up short.

“I don’t think John ever thought about money,” said Robert E. Rubin, the former Treasury secretary who, together with Stephen Friedman succeeded Mr. Weinberg. “It goes back to his father — when he dealt with clients he never thought about the transaction, he thought about them.”

As an example, Goldman executives point to an underwriting that Goldman managed for the British government just after the crash of 1987 that, as recounted in a history of the firm, “Goldman Sachs: The Culture of Success’’ by Lisa J. Endlich, cost the firm $100 million.

“It’s expensive and painful,” Mr. Weinberg said, according to Ms. Endlich’s account in the book. “But we are going to do it and those of you who decide not to do it, you won’t be underwriting a goat house. Not even an outhouse.”

John Livingston Weinberg was born Jan. 25, 1925, in Scarsdale, N.Y., and went to Deerfield Academy, Princeton University and Harvard Business School. During his senior year at Deerfield, he joined the Marines and was soon leading troops in the Pacific while still a teenager. After beginning at Goldman, he would return to duty during the Korean War and was promoted to captain.

He was a trustee at Deerfield and Princeton and honorary chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

    John L. Weinberg, 81, Former Leader of Goldman, Dies, NYT, 9.8.2006, http://www.nytimes.com/2006/08/09/business/09weinberg.html

In Policy Shift, Fed Calls a Halt to Raising Rates

August 9, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, Aug. 8 — The Federal Reserve on Tuesday suspended its two-year campaign of raising interest rates, a long-awaited policy shift based on the hope that a modest economic slowdown will subdue inflation without much pain.

After 17 consecutive increases at each meeting since June 2004, the central bank voted to hold its benchmark interest rate steady at 5.25 percent. Policy makers suggested that they wanted more time to see where the economy was headed before deciding whether further increases might be necessary.

In a statement accompanying its decision, the Fed acknowledged that inflation had accelerated. But it predicted that slowing economic growth — led by the retreat of the housing market — would lead to smaller consumer price increases before long.

“Readings on core inflation have been elevated in recent months,” the Fed’s policy-making committee said. “However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.”

The central bank left itself ample room to resume its rate increases if inflation proves more stubborn than expected. But it implied that its hope was to avoid any more increases for the foreseeable future.

The shift amounts to a bet by the Federal Reserve’s chairman, Ben S. Bernanke, on an elusive goal in monetary policy: a “soft landing” in which the economy slows enough to cool spending and ease inflationary pressures but not enough to cause a big jump in unemployment.

The move comes at a risky moment. Inflation, while still modest, has been stoked by surging oil prices that are now being accompanied by rising costs for materials and labor.

At the same time, economic growth has slowed sharply, unemployment is creeping up and productivity growth — the primary determinant of overall prosperity and the crucial ingredient in having healthy growth without rising prices — has stalled.

In a sign of uncertainty among policy makers, the Fed committee was not unanimous in its decision on interest rates, a relatively rare occurrence in a body that strives for consensus. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who has often sounded alarms about inflation, argued for raising rates an additional one-quarter percentage point. It was the first such dissent since Mr. Bernanke took over the Fed chairmanship from Alan Greenspan in February.

Many economists said they disagreed with the Fed’s sanguine outlook, saying that prices and wages were both climbing significantly faster than just a year ago and showed no signs of slowing yet.

“There hasn’t been even a whisper of inflation pressures easing,” Ethan Harris, chief economist at Lehman Brothers, said. “It’s amazing that the Fed can sound that comfortable on a day that you’ve had another piece of bad news on the inflation front. If I were on the Fed, I would have voted for another rate increase.”

A few hours before the Fed announced its decision, the Commerce Department reported that workers’ compensation — the biggest component in production costs — climbed at an annual rate of 5.4 percent in the second quarter of 2006. Unit labor costs, which are the cost of labor necessary to produce a given amount of output, were 3.2 percent higher in the second quarter than during the period 12 months earlier. That was the biggest jump in almost five years.

The dilemma for policy makers is that if the Fed is forced into a serious crackdown on inflation, it risks throwing the economy into a recession. That would leave workers whose wages have barely kept up with price increases in worse shape, just as many are beginning to reap some modest gains from economic growth. And with energy prices up sharply, many workers, whose pay increases have lagged far behind productivity gains, have less disposable income for other purposes.

The central bank stopped short of saying that additional “firming” — Fed jargon for higher interest rates — would be necessary. Instead, it repeated previous statements that “the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth.”

Among economists, one camp interpreted the statement to mean the Fed was essentially finished with this round of interest rate increases. And in contrast to those more worried about inflation, they argued that the Fed was right to leave interest rates alone.

“It’s the end of the game,” wrote Bernard Baumohl, executive director of the Economic Outlook Group in Princeton Junction, N.J., in a research note to clients.

He argued that the Fed’s previous 17 rate increases had already set the stage for lower inflation and that further rate increases risked tilting an economy that was already hitting the brakes into a full-blown recession.

“By keeping their hands off the monetary throttle at this time,” Mr. Baumohl wrote, “the Federal Reserve has increased the probability the economy is on approach toward a soft landing.”

The nation’s overall economic growth slowed to an annual pace of just 2.5 percent in the second quarter of this year, less than half the torrid pace of the first quarter. Job creation has been low for the last four months, and the unemployment rate edged up to 4.8 percent in July from 4.6 percent in June.

But other experts are skeptical, saying the Fed may be forced by inflation data to begin raising rates again soon. In practice, the Fed has effectively engineered only one other “soft landing” in history — in 1994 and 1995, under Mr. Greenspan.

Conditions then were in many ways more benign than they are today, however. Inflation was heading down, not up; the federal budget was moving toward lower rather than higher deficits; energy prices were erratic, but far lower than they are today.

“The current situation looks a lot more like the 1970’s than the 1990’s,” said Allen Sinai, chief economist at Decision Economics. “We are seeing the leading edge, though not necessarily the ultimate outcome, of what in the old days used to be called the wage-price inflation spiral.”

Mr. Bernanke, both before and after he became Fed chairman, has said that his definition of price stability is a “core” inflation rate — excluding prices for energy and food — of 1 to 2 percent. But by the Fed’s preferred measure of core inflation prices are about 2.9 percent higher than one year ago. That is the biggest year-over-year jump in 11 years.

“Rather than taking pre-emptive measures against a very serious inflation threat, Bernanke and company have adopted a very dangerous reactionary approach,” said Richard Yamarone, chief economist at Argus Research. “They’re in a wait-and-see mode.”

Laurence H. Meyer, a former Fed governor and now an economic forecaster at Macroeconomic Advisers, predicted that it would take more than a soft landing to reduce inflation significantly. For that to happen, he said, unemployment would have to rise for a sustained period.

But Mr. Meyer speculated that Fed officials might not want to reduce inflation to Mr. Bernanke’s unofficial targets. He noted that the Fed’s latest economic outlook, based on forecasts from Fed district banks, called for core inflation to remain about 2 or 2.25 percent through 2007.

Even that goal could require a painful economic adjustment. “There’s too much inflation in the system,” said Mr. Harris of Lehman Brothers, who predicted that the Fed would be forced to raise rates again before the year is over. “At this stage, there has to be a bumpy landing.”

    In Policy Shift, Fed Calls a Halt to Raising Rates, NYT, 9.8.2006, http://www.nytimes.com/2006/08/09/business/09fed.html?hp&ex=1155182400&en=bb4e98ebc2fcb842&ei=5094&partner=homepage

Court Rules for I.B.M. on Pension

August 8, 2006
The New York Times
By MARY WILLIAMS WALSH

A three-judge appellate panel ruled yesterday that I.B.M. did not discriminate against its older workers when it switched retirement plans in 1999, a long-awaited decision that could help shelter hundreds of companies from possible age discrimination suits.

Yesterday’s decision reversed a 2003 federal court ruling that changes International Business Machines made to its pension plan discriminated against older workers by making it impossible for their benefits to grow in value as much as the benefits of younger workers.

“All terms of I.B.M.’s plan are age-neutral,” Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit in Chicago wrote of the switch to a cash-balance plan, in which employees earn retirement benefits evenly throughout their careers, and away from a traditional plan, where benefits are based on length of service and final pay.

At least 1,500 pension plans similar to I.B.M.’s are in place in the United States, covering more than seven million workers and retirees.

The lower court ruling, by Judge G. Patrick Murphy of the Southern District of Illinois, had suggested that virtually all cash-balance pension plans were illegal. Businesses had worried that if the lower court’s decision had been upheld, they could be vulnerable to hundreds of age discrimination lawsuits.

In the appellate court ruling, Judge Easterbrook wrote that older workers were generally correct in perceiving “that they are worse off under a cash-balance approach” because such a plan eliminated the possibility of earning larger benefits as they neared retirement. “But removing a feature that gave extra benefits to the old differs from discriminating against them,” the judge wrote.

Yesterday’s decision protects I.B.M. from having to pay up to $1.4 billion in remedies to about 140,000 employees and retirees to settle the two significant claims in the original lawsuit, filed in 1999. Both sides in the class-action lawsuit had agreed to cap the remedies at that amount in 2004, while they waited for the appellate ruling.

The decision has no effect on a $320 million settlement that I.B.M. reached with plaintiffs on the five other claims in the original lawsuit. Those claims dealt primarily with changes that I.B.M. made to its pension plan in 1995. I.B.M. has agreed to pay the $320 million once all legal proceedings have ended.

A spokesman for the plaintiffs said the group planned to request a new hearing by the entire Seventh Circuit. He asked not to be identified because the group was still studying the three-judge opinion.

Cash-balance pension plans have generated several lawsuits, but the I.B.M. case drew attention because it was among the first to get a decisive ruling for the plaintiffs on the basis of age discrimination claims.

Other lawsuits have focused both on age discrimination accusations and on other issues, with varying results. Yesterday’s ruling in the I.B.M. case was the first from an appellate panel that addressed the question of age discrimination.

Business groups applauded the opinion. The decision “should settle this matter once and for all,” said James A. Klein, president of the American Benefits Council, a group that represents large companies.


While business groups have watched the case closely, they have also lobbied Congress for changes. Business lobbyists were able to include a provision in the recently passed pension reform bill that would shield companies switching to cash-balance plans in the future from age discrimination lawsuits.

Cash-balance pension plans are often called hybrid plans because they combine the features of a traditional plan — in which the employer promises to make guaranteed payouts at a predetermined amount — with certain features of a 401(k) plan, in which the employees save their own money in a tax-exempt framework created by their employer. In the 1990’s, many companies converted their traditional pension plans to the hybrid designs. In many cases, those conversions deprived employees of early retirement benefits that they had been on the brink of claiming under the old plans.

Employee anger over the switch was often compounded by the failure of some companies to clearly explain the changes. Announcements of the changes sometimes claimed the cash-balance plan would be better, implying that it would be better for everybody. In fact, the conversions could affect different employees in different ways, and some people were much worse off.

In Monday’s decision, Judge Easterbrook said the question at the heart of the I.B.M. lawsuit was how to correctly interpret the phrase “benefit accrual.” The federal pension law states that a plan is unlawful if “the rate of an employee’s benefit accrual is reduced” when he reaches a certain age. But the law does not explicitly define the term “benefit accrual.”

In his 2003 decision, Judge Murphy wrote that a worker’s “benefit accrual” should be determined by the amount of money the plan makes available when the worker retires at age 65. But in his ruling yesterday, Judge Easterbrook said the 2003 decision “went off the rails” at that point. He said that instead of focusing on what an employee could take out of a pension plan at age 65, the law “reads most naturally” as a reference to the amount of money the employer puts into the plan while the employee is working.

“A phrase dealing with inputs was misunderstood to refer to outputs,” Judge Easterbrook said.

The spokesman for the plaintiffs said the appellate ruling appeared to confuse the distinctions between pension plans and 401(k) plans, denying workers the benefit of special legal protections Congress had provided.

The appellate panel also agreed with I.B.M. on the second issue under consideration, whether the company had properly calculated the amounts its workers had earned in the old pension plan, before entering the cash-balance plan. In a cash-balance plan, workers are given regular statements telling them how much interest they have accumulated in hypothetical accounts. Calculating the benefits earned before the changeover is important because it will become the starting account balance for the hypothetical amount, and if it is too low, the employees will never catch up.

The issue before the Seventh Circuit panel was whether I.B.M. had handled this step in a discriminatory way, because it offered employees the chance to take the higher of two possible numbers. The plaintiffs argued that this was discriminatory because it offered younger workers a chance to jump to a higher calculation, without offering older workers the same “bump-up.”

Judge Easterbrook wrote that this choice was not discriminatory for the same reason the cash-balance plan was not discriminatory: “An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests — and this transition did not. That the change disappointed expectations is not material.”

    Court Rules for I.B.M. on Pension, NYT, 8.8.2006, http://www.nytimes.com/2006/08/08/technology/08blue.html?_r=1&oref=slogin

Public Pension Plans Face Billions in Shortages

August 8, 2006
The New York Times
By MARY WILLIAMS WALSH

In 2003, a whistle-blower forced San Diego to reveal that it had been shortchanging its city workers’ pension fund for years, setting off a wave of lawsuits, investigations and eventually criminal indictments.

The mayor ended up resigning under a cloud. With the city’s books a shambles, San Diego remains barred from raising money by selling bonds. Cut off from a vital source of cash, it has fallen behind on its maintenance of streets, storm drains and public buildings. Potholes are proliferating and beaches are closed because of sewage spills.

Retirees are still being paid, but a portion of their benefits is in doubt because of continuing legal challenges. And the city, which is scheduled to receive a report today on the causes of its current predicament, still has to figure out how to close the $1.4 billion shortfall in its pension fund.

Maybe someone should be paying closer attention in New Jersey. And in Illinois. Not to mention Colorado and several other states and local governments.

Across the nation, a number of states, counties and municipalities have engaged in many of the same maneuvers with their pension funds that San Diego did, but without the crippling scandal — at least not yet.

It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Nor is the accounting for government pension plans uniform, so comparing one with another can be unreliable.

But by one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.

And that may well understate the gap: Barclays Global Investments has calculated that if America’s state pension plans were required to use the same methods as corporations, the total value of the benefits they have promised would grow 22 percent, to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.

Not all of that shortfall, of course, is a result of actions like those that brought San Diego to its knees. And few governments have been as reckless as San Diego officials in granting pension increases at the same time as they were cutting back on contributions.

Still, officials in Trenton have been shortchanging New Jersey’s pension fund for years, much as San Diego did. From 1998 to 2005, the state overrode its actuary’s instructions to put a total of $652 million into the fund for state employees. Instead, it provided a little less than $1 million. Funds for judges, teachers, police officers and other workers got less, too.

To make up the missing money, New Jersey officials tried an approach similar to one used in San Diego. They said they would capture the “excess” gains they expected the pension funds’ investments to make and use them as contributions.

It was a doomed approach, leaving New Jersey to struggle with a total pension shortfall that has ballooned to $18 billion. Its actuary has recommended a contribution of $1.8 billion for the coming year, but the state has found only $1.1 billion, so it will fall even farther behind.

Illinois also duplicated one of San Diego’s pension mistakes. It tried to make its municipal pension plan cheaper by stretching its funding schedule over 40 years — considerably longer than the 30 years that governmental accounting and actuarial standards permit, and more than five times what companies will get under a pension bill that has just passed Congress.

Illinois is stretching its pension contributions over 50 years. At that rate, many of its retirees will have died by the time the state finishes tapping taxpayers for their benefits.

Colorado does not meet the 30-year funding guidelines, either. “At the current contribution level, the liability associated with current benefits will never be fully paid,” the state said in its most recent annual financial report.

Many officials dispute the suggestion that their pension plans are less than sound. The director of the New Jersey Division of Pensions and Benefits, Frederick J. Beaver, wrote recently that “our benefits systems are in excellent financial condition.”

Illinois officials say the state’s 50-year schedule is actually an improvement; before adopting it in 1995, the state had no funding schedule at all. In Colorado’s most recent legislative session, lawmakers enacted pension changes that they hope will make the plan solvent in 45 years.

And the National Association of State Retirement Administrators says it is unrealistic to expect all public plans to be fully funded, because they do not have to pay all the benefits they owe at once.

Still, the lack of a national response to what would seem to be a nationwide problem underscores a peculiarity of the public pension world: like banks and insurance companies, the pension plans are large and complex financial institutions, but they face no comparable systems of checks and balances.

“There’s no oversight; there’s no requirements; there’s no enforcement,” said Lance Weiss, an actuary with Deloitte Consulting in Chicago who advised Illinois on its pension problems. “You’re kind of working off the good will of these public entities.”

Experts do not think that is good enough.

In January, the board that writes the accounting rules for governments announced that it was looking for ways to tighten the rules for public pensions.

In July, Senators Charles E. Grassley and Max Baucus, the Republican chairman and the ranking Democrat on the Finance Committee, asked the Government Accountability Office to investigate the financial condition of the nation’s public pension plans.

In some states, lawmakers have been trying to stop some of the more egregious pension practices that have come to light. Illinois, Louisiana and Nebraska passed laws making it hard for employees to “spike” pensions higher by manipulating their salaries. Because pensions are often based on a worker’s final salary, workers have found ways to credit one-time bonuses to their last year and reap a lifelong reward. Arizona required that early retirement programs be paid for up front.

And today in San Diego, a former chairman of the Securities and Exchange Commission, Arthur Levitt Jr., is scheduled to issue a long-awaited report on the years of pension lapses that got the city into its current predicament.

Mr. Levitt is not tipping his hand on his findings. But given the activist stance he took on cleaning up the municipal securities markets as S.E.C. chairman, it would be no surprise if he called for tighter control over a sector where the amounts of money are huge and the amount of oversight is small.

The city of San Diego hired Mr. Levitt’s three-man audit team in February 2005, after the city’s outside auditor, KPMG, would not sign off on its accounts.

He is working with the S.E.C.’s former chief accountant, Lynn E. Turner, and Troy Dahlberg, a managing director in the forensic accounting and litigation consulting practice of Kroll Inc., the investigative firm that is a unit of Marsh & McLennan Companies.

Public plans are not governed by the federal pension law, the Employee Retirement Income Security Act, that companies must follow. They are not covered by the Pension Benefit Guaranty Corporation, so if they come up short, they must turn to the taxpayers.

Instead, they are governed by boards that often include municipal labor leaders, whose duty to represent their workers’ interests can easily conflict with their fiduciary duty to represent the plan itself. And even the most exemplary pension boards can be overruled, in many cases, by politicians whose priorities may be incompatible with sound financial management.

“When the state runs into financial trouble, pension contributions are something that they can defer without, quote-unquote, hurting anybody,” said David Driscoll, an actuary with Buck Consultants who recently helped Vermont come up with a plan to revive its pension fund for teachers. Politicians shortchanged it every year for more than a decade.

“In fact, they are hurting people, and the people they are hurting are the taxpayers, who, whether they realize it or not, are going into a form of debt,” Mr. Driscoll added. “Those pension obligations don’t get cheaper over time. They get more expensive.’’

Eventually the cost gets too big to ignore, as it now has in New Jersey.

Corporate pension funds have plenty of problems of their own. But they are at least required to adhere to a uniform accounting standard, which provides information that investors can use to decide upon stocks to buy and sell. The standards, in turn, are policed by the S.E.C.

Taxpayers have no such help. For municipal plans, the accounting standards are much more flexible, a decision that was denounced, when it was issued in 1994, by the head of the very board that wrote it.

James F. Antonio, chairman at that time of the Governmental Accounting Standards Board, attached a detailed 10-page dissent to the new rule, saying that it “fails to meet the test of fiscal responsibility” because it permitted “an extraordinary number of accounting options” and some governments were bound to choose the weakest one. Mr. Antonio has since retired.

Even though the governmental accounting board has now begun the slow process of improving the standard, it is unlikely to come up with the level of detailed disclosure required of corporations. And the board, with a full-time staff of just 15, has no authority to enforce its rules.

San Diego violated the rules for a number of years, using accounting techniques that hid both its failure to put enough money behind its pension promises and the debt to its workers that was growing every year as a result.

Several times, the city asked the government accounting board to make a special exception and approve its unorthodox pension calculations, but the board rebuffed it.

But the accounting board was forced to look on in silence as San Diego issued reassuring financial statements, because its charter bars it from issuing public pronouncements on individual cities.

San Diego might have gone on unchallenged indefinitely if not for the decision of one of its pension trustees, Diann Shipione, to blow the whistle, eventually forcing the city to correct the financial disclosures it had made in connection with an impending bond sale. Only then was it possible to see in one place what had been going on with the pension fund. And only then did the S.E.C. get involved.

The Depression-era laws that created the commission gave it no direct jurisdiction over municipal securities; it can pursue municipal wrongdoing only when it finds fraud at work. Lack of complete and accurate disclosure can constitute fraud, but the S.E.C. has only infrequently shown interest in throwing its weight around in the area.

One of those rare instances happened when Mr. Levitt was chairman of the S.E.C., in 1994, after Orange County, Calif., abruptly declared bankruptcy and threatened to repudiate its debts. Mr. Levitt became, as he said at the time, “obsessed” with cleaning up the municipal securities markets.

He created an independent Office of Municipal Securities that reported directly to the chairman; he championed rules to eliminate the pay-to-play practices then commonplace in the municipal bond business; he forced better financial disclosure; and he began an unheard-of number of enforcement actions.

Since Mr. Levitt’s departure from the S.E.C. in 2001, much of what he built has been dismantled. The Office of Municipal Securities is down to a staff of two and is no longer independent. The wave of enforcement actions against cities has slowed to a trickle. The S.E.C. investigators who went to work in San Diego after the pension scandal erupted have never said what they found.

When the S.E.C. shifted its gaze away from municipal finance, Mr. Levitt now says, it left “a regulatory hole.” If the agency were equipped to monitor state and local governments the way it monitors corporate disclosures, he said, “it could provide an early warning of financial conditions threatening the solvency of any number of communities.”

    Public Pension Plans Face Billions in Shortages, NYT, 8.8.2006, http://www.nytimes.com/2006/08/08/business/08pension.html?hp&ex=1155096000&en=e759e215563bc364&ei=5094&partner=homepage

Men Not Working, and Not Wanting Just Any Job        NYT        31.7.2006
http://www.nytimes.com/2006/07/31/business/31men.html?hp&ex=
1154404800&en=f82d5d3f9f822e4f&ei=5094&partner=homepage

Men Not Working, and Not Wanting Just Any Job

July 31, 2006
The New York Times
By LOUIS UCHITELLE and DAVID LEONHARDT

ROCK FALLS, Ill. — Alan Beggerow has stopped looking for work. Laid off as a steelworker at 48, he taught math for a while at a community college. But when that ended, he could not find a job that, in his view, was neither demeaning nor underpaid.

So instead of heading to work, Mr. Beggerow, now 53, fills his days with diversions: playing the piano, reading histories and biographies, writing unpublished Western potboilers in the Louis L’Amour style — all activities once relegated to spare time. He often stays up late and sleeps until 11 a.m.

“I have come to realize that my free time is worth a lot to me,” he said. To make ends meet, he has tapped the equity in his home through a $30,000 second mortgage, and he is drawing down the family’s savings, at the rate of $7,500 a year. About $60,000 is left. His wife’s income helps them scrape by. “If things really get tight,” Mr. Beggerow said, “I might have to take a low-wage job, but I don’t want to do that.”

Millions of men like Mr. Beggerow — men in the prime of their lives, between 30 and 55 — have dropped out of regular work. They are turning down jobs they think beneath them or are unable to find work for which they are qualified, even as an expanding economy offers opportunities to work.

About 13 percent of American men in this age group are not working, up from 5 percent in the late 1960’s. The difference represents 4 million men who would be working today if the employment rate had remained where it was in the 1950’s and 60’s.

Most of these missing men are, like Mr. Beggerow, former blue-collar workers with no more than a high school education. But their ranks are growing at all education and income levels. Refugees of failed Internet businesses have spent years out of work during their 30’s, while former managers in their late 40’s are trying to stretch severance packages and savings all the way to retirement.

Accumulated savings can make dropping out more affordable at the upper end than it is for Mr. Beggerow, but the dynamic is often the same — the loss of a career and of a sense that one’s work is valued.

“These are men forced to compete to get back into the work force, and even then they cannot easily reconstruct what many lost in a former job,” said Thomas A. Kochan, a labor and management expert at the Sloan School of Management at Massachusetts Institute of Technology. “So they stop trying.”

Many of these men could find work if they had to, but with lower pay and fewer benefits than they once earned, and they have decided they prefer the alternative. It is a significant cultural shift from three decades ago, when men almost invariably went back into the work force after losing a job and were more often able to find a new one that met their needs.

“To be honest, I’m kind of looking for the home run,” said Christopher Priga, who is 54 and has not had steady work since he lost a job with a six-figure income as an electrical engineer at Xerox in 2002. “There’s no point in hitting for base hits,” he explained. “I’ve been down the road where I did all the things I was supposed to do, and the end result of that is nil.”

Instead, Mr. Priga supports himself by borrowing against the rising value of his Los Angeles home. Other men fall back on wives or family members.

But the fastest growing source of help is a patchwork system of government support, the main one being federal disability insurance, which is financed by Social Security payroll taxes. The disability stipends range up to $1,000 a month and, after the first two years, Medicare kicks in, giving access to health insurance that for many missing men no longer comes with the low-wage jobs available to them.

No federal entitlement program is growing as quickly, with more than 6.5 million men and women now receiving monthly disability payments, up from 3 million in 1990. About 25 percent of the missing men are collecting this insurance.

The ailments that qualify them are usually real, like back pain, heart trouble or mental illness. But in some cases, the illnesses are not so serious that they would prevent people from working if a well-paying job with benefits were an option.

The disability program, in turn, is an obstacle to working again. Taking a job holds the risk of demonstrating that one can earn a living and is thus no longer entitled to the monthly payments. But staying out of work has consequences. Skills deteriorate, along with the desire for a paying job and the habits that it requires.

“The longer you stay on disability benefits,” said Martin H. Gerry, deputy commissioner for disability and income security at the Social Security Administration, “the longer you’re out of the work force, the less likely you are to go back to work.”

As a rule, out-of-work men are less educated than the population as a whole. Their numbers have grown sharply among black men and men who live in hard-hit industrial areas like Michigan, West Virginia and upstate New York, as well as those who live in rural states like Mississippi and Oklahoma.

The missing men are also more likely to live alone. Nearly 60 percent are divorced, separated, widowed or never married, up from 50 percent a decade earlier, the Census Bureau reports. Sometimes women who are working throw out men who are not, says Kathryn Edin, a sociologist at the University of Pennsylvania. In any case, without a household to support, there is less pressure to work, and for men who fall behind on support payments, an incentive exists to work off the books — hiding employment — so that wages cannot be garnisheed.

“What happens to a lot of guys who become unmoored from family life, they become unmoored from everything,” Ms. Edin said. “They are just living without attachments and by the time they are 40 or 50 years old, the things that kept these men from falling away — family and community life — are gone.”

Even as more men are dropping out of the work force, more women are entering it. This change has occurred partly because employment has shrunk in industries where men predominated, like manufacturing, while fields where women are far more common, like teaching, health care and retailing, have grown. Today, about 73 percent of women between 30 and 54 have a job, compared with 45 percent in the mid-1960’s, according to an analysis of Census data by researchers at Queens College. Many women without jobs are raising children at home, while men who are out of a job tend to be doing neither family work nor paid work.

Women are also making inroads in fields where they were once excluded — as lawyers and doctors, for example, and on Wall Street. Men still make significantly more money than women, but as women become more educated than men, even more men may end up out of the work force.

At the low end of the spectrum, men emerging from prison with felony records are not easily absorbed into steady employment. Hundreds of thousands of young men were jailed in the 1980’s and 1990’s, in a surge of convictions for drug-related crimes. As prisoners, they were not counted in the employment data; as ex-prisoners they are. They are now being freed in their 30’s and 40’s and are struggling to be hired. Roughly two million men in this group have prison records, according to a calculation by Richard Freeman and Harry J. Holzer, labor economists at Harvard and the Urban Institute, respectively.Many of these men do not find work because of their records.

Despite their great numbers, many of the men not working are missing from the nation’s best-known statistic on unemployment. The jobless rate is now a low 4.6 percent, yet that number excludes most of the missing men, because they have stopped looking for work and are therefore not considered officially unemployed. That makes the unemployment rate a far less useful measure of the country’s well-being than it once was.

Indeed, a larger share of working-age men are not working today than at almost any point in the last half-century, which raises the question of how they will get by as they age. They may be forced back to work after years of absence, they may fall into poverty, or they may be rescued by the government. This same trend is evident in other industrialized countries. In the European Union, 14 percent of men between 25 and 54 were not working last year, up from 7 percent in 1975, according to the Organization for Economic Cooperation and Development. Over the same period in Japan, the proportion of such men rose to 8 percent from 4 percent.

In these countries, too, decently paying blue-collar jobs are disappearing, and as they do men who held them fall back on government benefits for income. But the growth of subsidies through federal and state programs like disability insurance has happened largely without notice in this country while it is a major topic of political debate in Europe.

“We have a de facto welfare system as Europe does,” said Teresa Ghilarducci, a labor economist at the University of Notre Dame. “But we are not proud of it, as they are.”

Reading, Sleeping, Scraping By

Alan Beggerow has not worked regularly in the five years since the steel mill that employed him for three decades closed. He and his wife, Cathleen, 47, cannot really afford to live without his paycheck. Yet with her sometimes reluctant blessing, Mr. Beggerow persists in constructing a way of life that he finds as satisfying as the work he did only in the last three years of his 30-year career at the mill. The trappings of this new life surround Mr. Beggerow in the cluttered living room of his one-story bungalow-style home in this half-rural, half-industrial prairie town west of Chicago. A bookcase covers an entire wall, and the books that Mr. Beggerow is reading are stacked on a glass coffee table in front of a comfortable sofa where he reads late into the night — consuming two or three books a week — many more than in his working years.

He also gets more sleep, regularly more than nine hours, a characteristic of men without work. As the months pass, they average almost nine-and-a-half hours a night, about 80 minutes more than working men, according to an analysis of time-use surveys by Harley Frazis and Jay Stewart, economists at the Bureau of Labor Statistics.

Very few of the books Mr. Beggerow reads are novels, and certainly not the escapist Westerns that he himself writes (two in the last five years), his hope being that someday he will interest a publisher and earn some money. His own catholic tastes range over history — currently the Bolshevik revolution and a biography of Charlemagne — as well as music and the origins of Christianity.

He often has strong views about what he has just read, which he expresses in reviews that he posts on Amazon.com: 124 so far, he said.

Always on the coffee table is a thick reference work, “Guide to the Pianist’s Repertoire” by Maurice Hinson. Mr. Beggerow is a serious pianist now that he has the time to practice, sometimes two or three hours at a stretch. He does so on an old upright in a corner of the living room, a piano he purchased as a young steelworker, when he first took lessons.

His new life began in the spring of 2001 with the closing of Northwestern Wire and Steel in Sterling, Ill., where he had worked since 1971. During the last three of those 30 years, Mr. Beggerow found himself assigned to work he really liked: as a union representative on union-management teams that assessed every aspect of the plant’s operations.

What made him valuable was his dexterity as a writer. No one could put together committee reports as articulately as he did, and he found himself on nearly every team. His salary rose to $50,000. During those years, he taught himself more math, too, to help in the analyses of the issues that the teams tackled: productivity, safety, plant layout and the like.

“I actually loved that job,” he said. “I even looked forward to going to work. The more teams they had, the more they found out what I could do and the more I found out what I could do.”

Mr. Beggerow would take another job in a heartbeat, he says, if it were like the work he did in those last three years at Northwestern. The closest he has gotten has been as an instructor at a community college, teaching plant maintenance and other useful factory skills. His students were from nearby manufacturing companies, which subsidized the courses, including his pay of $45 an hour. But factory operations in the area are shrinking, and Mr. Beggerow has not had a teaching stint since November.

Like Mr. Beggerow, the great majority of the missing men are out of the work force for months or years at a time rather than drifting in and out of jobs. There appears to have been no rise since the 1960’s in the percentage of men out of work for short periods, according to research by Chinhui Juhn, a University of Houston professor, and other economists.

Mr. Beggerow will not take a lesser job, he says, because of his bitter memories of earlier years at Northwestern Wire, particularly the 1980’s, when the industry was in turmoil. A powerful man, over 6 feet and 200 pounds, he worked then as a warehouseman.

What got to him was not the work. It was the frequent furloughs, the uncertainty whether he would be recalled, the mandatory overtime and 50-hour weeks often imposed when he did return, the schedules that forced him to work every holiday except Christmas, and then, as rising seniority finally gave him some protection, a six-month strike in 1983 followed by a wage cut. His pay shrank to $13 an hour from $17, a loss he did not fully recover until those last three years.

“I was always thinking if there was some way I could get out of this, do something else,” Mr. Beggerow said. “What made me so upset was the insecurity of it all and the humiliation. I don’t want to take a job that would put me through that again.”

Shortly after Northwestern closed, Mr. Beggerow married. It was his third marriage, and also Cathleen’s third. He has one adult child by the first wife; Cathleen has no children. For six months they lived on his $12,000 from a shrunken pension and her $28,000 as a factory worker — until severe injuries in an auto accident five months after their wedding forced her out of that job. She eventually qualified for $12,000 a year in disability insurance.

Their two incomes are not enough to cover expenses, which bothers Mrs. Beggerow, although not enough to badger her husband to take a job, any job. She respects him too much for that, she says.

Instead, she finds ways to make money herself, in activities she enjoys. She is taking in work as a seamstress, baking pastries for parties and selling merchandise for others on eBay, collecting a fee. Still, she says, she hopes to land a part-time clerical job. “The comfort of a paycheck every week would take a load off my mind,” she said.

While she is tolerant of her husband’s reluctance to work, respecting his current pursuits, she is not above looking for a job he would consider suitable. “I look at the employment ads every day,’’ she said, “and every so often I find one that I think might be right up his alley.”

Less Concern About the Future

Recently there was an opening for an editor-writer at a small travel magazine published in a nearby town. “I applied,” Mr. Beggerow said, “but the publisher did not seem to want someone my age.”

Meanwhile the Beggerows’ savings are shrinking. This year, for the first time, they have drawn down so much from their 401(k)’s they have been forced to pay early-withdrawal penalties. But Mr. Beggerow resists being stampeded.

“The future is always a concern, but I no longer allow myself to dwell on it,” he said, waving aside, in his new and precarious life, the preparations for retirement and old age that were a feature of his 30 years as a steelworker.

“When you are in the mode of having money coming in,” he explained, “naturally you think about planning and saving. And then when you don’t have the money coming in, you think less about the future, at least money-wise. It is still a concern, but not a concern that keeps me up at night, not in this life that I am now leading.”

Men like Mr. Beggerow, neither working nor looking for a job, also have become more common in the popular culture, making the phenomenon more acceptable. On the television show “Seinfeld,” Cosmo Kramer, who did not work, and George Costanza, who regularly lost jobs, were beloved figures. Personal-finance magazines whose circulations have grown rapidly over the last 25 years also encourage not working — by telling readers how to afford retirement at 50 and by painting not working as the good life, which it apparently is for a small number of wealthy men. About 8 percent of non-working men between 30 and 54 lived in households that had more than $100,000 of income in 2004.

“Men don’t feel a need to be in a career, not as much as they once did,” said Ruth Milkman, a sociologist at the University of California at Los Angeles. “Nor do men have the incentive they once had to pursue a career, not when employers are no longer committed to them.”

Mr. Priga, the former Xerox engineer who lives in Los Angeles, has been wandering in this latter Diaspora. He is a tall, thin man with a perpetually dour expression. His dress — old jeans and a faded khaki shirt — seemed out of place in the upscale Beverly Hills restaurant where he was interviewed for this article. But his education and skill were not out of place.

Mr. Priga is an electrical engineer skilled in computer technology, and much involved, as he tells the story, in writing early versions of Internet and e-mail software for banks and other companies. A divorce in 1996 left him with custody of his three children. One of them had behavioral problems and to care for the boy he dropped out of steady work for a while, mortgaging his house to raise money and designing Web sites as a freelancer.

He re-entered the work force in 2000, joining Xerox at just over $100,000 a year as a systems designer for a new project, which did not last. In the aftermath of the dot-com bust, Xerox downsized and Mr. Priga was let go in January 2003.

From Prison to Joblessness

“I’ve been through a lot of layoffs over the years, and there is a certain procedure you follow,” he said. “You contact the headhunters. You go looking for other work. You do all of that, and this time around it didn’t work.”

So he went back to designing Web sites as a freelancer, postponing the purchase of health insurance. No work has come his way since March, and even if people had hired him to design Web sites for them, Mr. Priga would not consider that real employment.

His father is his standard. At Mr. Priga’s age, 54, “my father was with Rockwell International designing the fiber optic backbone for U.S. Navy ships,” he said. “He got a regular paycheck. He had retirement benefits, medical benefits, all of that. I’m at that age and I don’t see that as even possible. I’ve kind of written off the idea completely. I’m more like a casual laborer.”

The Bureau of Labor Statistics determines who is working through a monthly survey of 65,000 representative households. People are asked if they did any work for pay in the week before the survey, including self-employment. For Mr. Beggerow and Mr. Priga, the answer has been no.

The same goes for Rodney Bly, a 41-year-old Philadelphia man struggling with a prison record, although he has had income — from off-the-books work that he refuses to think of as employment.

Mr. Bly, a lanky, neatly dressed six-footer, was in and out of jail, mostly on drug convictions, from 1996 until 2003, but has been clean since then, he said in an interview last month. He has even been a leader of an Alcoholics Anonymous-style group of former addicts who meet regularly and do their best to stay off drugs and out of jail.

Mr. Bly has been living in a recovery shelter for addicts and shows up occasionally for meals at St. Francis Inn, a soup kitchen and health clinic in a poor North Philadelphia neighborhood that tries to help ex-convicts get work and keep it.

He has worked pretty regularly, distributing flyers. But that brings him only $270 a week, most of which goes to the shelter for rent, utilities and food. More to the point, the work is off the books, which makes Mr. Bly invisible in the national statistics as a member of the work force.

Still, he has a girlfriend, reports Karen Pushaw, a staff member at St. Francis, “and that grounds him, keeps him looking for legitimate work.”

Ms. Pushaw tries to help. At her encouragement, he applied for 25 jobs this spring but received no offers, not even an interview. The obstacle is two felony convictions, one for car theft, the other for three instances of drug possession.

“Because of the two felonies, I can’t get a job as a security guard or a sales person or a short-order cook,” Mr. Bly said. “I can be a pot washer or a dish washer, but I can’t get a job that pays more than $8 an hour, not a legitimate one. I’m excluded.”

Amanda Cox contributed reporting for this article from New York.

    Men Not Working, and Not Wanting Just Any Job, NYT, 31.7.2006, http://www.nytimes.com/2006/07/31/business/31men.html?hp&ex=1154404800&en=f82d5d3f9f822e4f&ei=5094&partner=homepage

Our Lady of Discord

July 30, 2006
The New York Times
By SUSAN HANSEN

IT takes a singular sense of purpose to turn a lone Michigan pizza joint into a multibillion-dollar global brand. Yet the founder of Domino’s Pizza, Thomas S. Monaghan, certainly had it more four decades ago, when he bought his first restaurant in Ypsilanti, Mich., near Detroit — and he has brought that same sense of mission to the task of giving his pizza fortune away.

Since netting about $1 billion from the 1998 sale of Domino’s to Bain Capital, Mr. Monaghan, 69, has become one of the leading philanthropists in the country and the biggest benefactor of conservative Catholic institutions.

In the past eight years, his Ave Maria Foundation, based in Ann Arbor, Mich., has donated $140 million to promote conservative Catholic education, media and other organizations, including Detroit-area parochial grade schools, a law school and small regional colleges in Michigan and Nicaragua, along with radio stations and a fellowship group for Catholic business leaders.

His boldest charitable venture by far, however, is Ave Maria University, a four-year liberal arts campus under construction 30 miles northeast of Naples, Fla., to which Mr. Monaghan has donated or pledged $285 million so far. Along with the university, which enrolled its first students three years ago on a temporary campus, he and a local developer are building an adjoining new town called Ave Maria.

The bar for the school has been set high, with plans to eventually attract up to 6,000 students to what supporters, including Gov. Jeb Bush of Florida, predict will be a top-tier academic institution devoted to the Catholic faith.

Mr. Monaghan, who has called the Florida campus and town “God’s will,” has even loftier intentions. He has said that he sees the university, which says it adheres to a strict interpretation of Catholic doctrine, as a chance to save souls. “I’m a businessman. I get to the bottom line,” Mr. Monaghan, who declined to be interviewed for this article, told The Orlando Sentinel in 2004. “And the bottom line is to help people get to heaven.”

Yet as he aims for the divine, Mr. Monaghan has been facing some unexpected earthly trials, including a revolt at his law school in Ann Arbor and sharp criticism by many of the conservative Catholics who once supported his foundation’s projects.

In many ways, Mr. Monaghan’s troubles illustrate how difficult it can be for wealthy, driven entrepreneurs to make the transition to full-time philanthropy, particularly when they have single-minded ideas about how they want their money spent. Traits that make successful business leaders — ego, ambition, determination, even a touch of imperiousness — do not necessarily go over well in charitable work, causing even the most well-intentioned projects to founder.

As the legendary investor Warren E. Buffett recently noted when he donated most of his $40 billion fortune to an established foundation rather than create one of his own, making a mint — as difficult as that is — can be easier than giving it away.

As he tries to build a new university and town in his own image, Mr. Monaghan has been experiencing some of those difficulties firsthand. Faculty members, students and parents tied to his Detroit-area schools have complained that he runs his charitable foundation like a sole proprietorship, starting and abandoning projects as whim strikes him. And they characterize his new Florida university as a vanity venture that could well prove to be a colossal waste of cash.

“It all belongs to Tom Monaghan; that’s the problem,” said Therese M. Bower of Cincinnati, whose son attended Ave Maria College, one of the schools Mr. Monaghan founded in Michigan. His foundation moved to close the school’s Ypsilanti campus to focus on building his university in Florida.

“If Tom were a real philanthropist,” said Jay W. McNally, the former director of communications and advancement at the college, “he would donate his money and step off.” Mr. McNally said the school let him go after he told federal officials that some financial aid for students in Michigan had been diverted to Florida; Ave Maria University later returned $259,000 in federal money.Mr. Monaghan’s many defenders, including Bowie K. Kuhn, the former baseball commissioner, and Michael Novak, a Catholic theologian, dismissed much of the criticism as carping by academics. “If it weren’t Monaghan, it would be dissatisfaction with whomever,” says Mr. Novak, an Ave Maria University trustee.

Mr. Kuhn, who is on the board of the Ave Maria School of Law, said Mr. Monaghan had every right to use his money as he wished. “Tom makes very good judgments, and he sticks to his guns,” he said.

Mr. McNally, a former editor of the Detroit archdiocese’s newspaper, said he too had admired Mr. Monaghan’s determination. Back in the 1980’s, Mr. McNally recalled, he and other conservative Catholics cheered Mr. Monaghan’s donations to anti-abortion causes and his refusal to withdraw that support even when abortion-rights groups called for a boycott of Domino’s.

He and other conservative Catholics were equally enthusiastic when Mr. Monaghan’s foundation began its push into higher education eight years ago, starting Ave Maria College in Ypsilanti and the Ave Maria School of Law in neighboring Ann Arbor, and taking over the administration of St. Mary’s College in nearby Orchard Lake, Mich.

Many Detroit-area Catholics said they gave up jobs and teaching posts elsewhere to work at the schools, with some faculty members moving from hundreds of miles away because, as a former Ave Maria College biology professor, Andrew J. Messaros, recalled, they were committed to promoting a faithful version of core Catholic teachings.

“I bought into the whole vision lock, stock and barrel,” Professor Messaros said. He added that he took a $16,000 pay cut from a tenure-track position at the West Virginia University School of Medicine to teach at Ave Maria in mid-2003.

Mr. Monaghan had considered building Ave Maria University, along with a 250-foot crucifix, in Ann Arbor Township, but local officials denied him the necessary zoning changes in 2002. That fall, he announced that the Barron Collier Company, a Florida developer, had donated 750 acres of farmland to the university on the northwest edge of the Everglades. His new plan was to build Ave Maria University in Florida, while investing another $50 million in a separate partnership with Barron Collier to build the adjoining Ave Maria town.

NICHOLAS J. HEALY JR., who was president of Ave Maria College in Michigan and is now president of the Florida university, promptly set up a temporary campus near Naples. It opened with about 100 students in a retirement complex in fall 2003; enrollment has grown to nearly 400 students.

“We’ve tried to create an environment traditional Catholics can be comfortable with,” Mr. Healy said, adding that the devotion to the faith was put into action in many ways: from single-sex dorms and daily rosary walks to a scholarship that the school, in keeping with what it describes as its strong pro-life ethic, recently began offering in the name of Terri Schiavo, the brain-damaged Florida woman whose husband won a bitter court fight in 2004 to authorize doctors to stop life support.

While Mr. Healy was opening the Florida university, financing for Mr. Monaghan’s projects in Michigan began to disappear. In late 2002, the foundation said it would no longer support St. Mary’s. An expected shutdown of the school was averted only when another Catholic institution, Madonna University in nearby Livonia, Mich., agreed to take it over.

In Ypsilanti, the news that Ave Maria College would be merged into the new university in Florida went down a little easier — at least initially — given that Mr. Monaghan pledged to keep the Michigan campus open until 2007, so that the school’s 230 students could stay and finish their degrees.

Despite that assurance, however, Professor Messaros said that by the fall of 2003 school officials were pressuring him and other faculty members to move to Florida quickly — or risk losing their jobs. “Their attitude was, ‘This is what we’re going to do. Take it or leave it,’ ” he said.

Mrs. Bower, whose son Paul was a junior at Ave Maria College when the move to Florida began to accelerate, said she became concerned that the Michigan campus was being deserted. She grew more anxious in 2004 when word got out that school administrators in Florida had tried to have most of the books at the Michigan campus’s library shipped to Naples.

“I thought, ‘Wait! There are still students there. They can’t just take all the stuff,’ ” said Mrs. Bower, who created a Web site — geocities.com/aveparents — to help keep the Michigan campus intact.

Another parent — Edward N. Peters, who taught canon law in a theology program now based at Ave Maria University — threatened to sue if the campus was dismantled.

“It has become clear that Tom Monaghan regards Ave Maria not as a kind of public trust but rather as his personal domain which he can effectively treat however he wants,” Professor Peters, whose son attended the college, wrote in a June 2004 letter to the college board. He added that since Mr. Monaghan shifted his attention to Florida, he had cut support for several of his Michigan projects, including a weekly Catholic newspaper and a new convent. “Ironically, the very legacy that was being built up with Monaghan’s help is now being torn down at his will,” Professor Peters wrote. “It is a tragic and scandalous waste of the human and financial resources given by God.”

In late 2004, Father Neil J. Roy, Ave Maria College’s academic dean, actually did sue Mr. Monaghan and the school’s trustees in a bid to stall the Michigan campus’s closure, but a state court judge dismissed the suit last September. The exodus of faculty and students to Florida and elsewhere continued, and last year school officials began making cash buyout offers to the 30 or so students who had planned to continue studies on the Ypsilanti campus in 2007.

Paul R. Roney, executive director of Mr. Monaghan’s foundation, said he understood that the decision to shift resources to Florida was difficult for some in Ypsilanti to accept. But he added that Mr. Monaghan had honored his promise to keep the campus operating through 2007 — albeit now with just three students and a handful of professors. “Any pledges that were made have been more than fulfilled,” Mr. Roney said.

Despite all the criticism, Mr. Healy, Ave Maria University’s president, said that most professors in Michigan happily relocated to Florida.

For a while, the Ave Maria School of Law seemed immune to the strife. Its enrollment, now about 380, was growing, and the American Bar Association had granted it full accreditation. But Mr. Monaghan wants to relocate that school to Florida, too, upsetting teachers, students and alumni. Opponents say it is crazy to leave an intellectual center like Ann Arbor, home of the University of Michigan, for an undeveloped outpost on the edge of the Everglades.

“There’s nothing there yet, with all due respect,” said Chris McGowan, a law school alumnus who noted that students in Ann Arbor have easy access to a federal courthouse and many local internship opportunities.

He and others who are fighting the move said the only reason the school’s board was even considering it was that Mr. Monaghan, the chairman, had invested more than $330 million in the Florida university and town and wanted the law school there to shore up that investment.

One veteran board member — Charles E. Rice, an emeritus professor of law at Notre Dame University — tried to make the case against the move. But he said that Mr. Monaghan and other board members, including the law school’s dean, Bernard Dobranski, “did not want a contrary voice,” so last fall they adopted term-limit bylaws and ejected him from the board.

Dean Dobranski denied the bylaws change was directed at Professor Rice, noting that three other members left the board at the same time.

Faculty members, students and alumni rallied around Professor Rice, however, and since last fall they have mounted a campaign that has included pointed attacks against Mr. Monaghan and resolutions calling on Dean Dobranski to resign.

“The bigger issue is school governance,” said Jason B. Negri, president of the law school’s alumni association. Specifically, he criticized Mr. Monaghan’s insistence on operating the school like a private business and what he said was the board’s failure to stand up to him.

MR. KUHN rejected that criticism. “This is not a bunch of trained dogs,” he said of his fellow directors, adding that the board would not make any decision on relocating the law school to Florida until a feasibility study on the move was completed and members had seen the results.

“The key question is where we will thrive in the long term,” said Dean Dobranski. He pointed out that Mr. Monaghan had given the law school $50 million, so “it’s not unreasonable for him to say ‘I think the move is a good idea.’ ” Dean Dobranski added, “He’s to be commended for how he’s used his wealth.”

At the university’s construction site in Florida, the fruits of Mr. Monaghan’s generosity are coming into view. Miles of pipes and electricity lines have been laid, and buildings are going up. Mr. Healy, the president, said the school should be out of its temporary home and on the new campus by August 2007.

Not that the process has been easy — or cheap. Mr. Healy said damage from hurricanes last year and the year before, along with strong demand for raw materials in China has sent labor, cement and steel prices soaring — nearly doubling building costs and eating up Mr. Monaghan’s money faster than expected. Indeed, in the next year, Mr. Roney said, the Ave Maria Foundation’s assets might drop to as little as $15 million from $251 million in 1999.

As a result, school officials have had to scale back plans. For now, they have settled for putting up only about half of the 14 buildings they originally intended to complete in the first phase of campus construction. Mr. Healy is counting on more money from Mr. Monaghan as houses are sold in the adjoining town, because Mr. Monaghan has promised to donate his share of profits, expected to exceed $100 million, to the university. “Very few schools have this kind of start-up capital,” Mr. Healy said.

But it could be several years or more before the university sees much of that cash, given that home sales will not start until later this year, amid a cooling housing market, and the whole town — which has been planned to include 11,000 homes, a retail district and an 18-hole golf course — will not be completed until around 2015.

IN the meantime, Mr. Novak, the Ave Maria trustee, said the university would have to raise millions of dollars to cover salaries and other operating expenses and to keep construction, expected to cost at least $1 billion over the next 50 years, moving forward. The school has raised about $20 million in the last three years and is now expanding efforts to sell “naming opportunities” for campus buildings. Mr. Novak said he was hopeful that that initiative would attract some major donors, but he added, “until you actually get them in the door you don’t have them.”

Kate Cousino, the 2004 salutatorian of Ave Maria College, said she would not be writing any checks. In fact, she said that she and other Ave Maria graduates recently started an alternative alumni group because they didn’t want fund-raisers for the Florida campus asking them for donations.

She and other critics of Mr. Monaghan say that other like-minded Catholics will hesitate to hand over money now that, at least in conservative Catholic circles, word of his troubles has gotten out. “I think he’s really turned off a lot of his target market,” said Terrence L. McKeegan, an Ave Maria law school graduate.

Mr. McKeegan, who now works for a human-rights group at Franciscan University of Steubenville in Ohio, said recent fund-raising letters suggested that the university may be facing a cash crunch. One letter signed by Mr. Monaghan, for example, said that steeper construction costs had hampered the university’s ability to buy books for its library, and urgently appealed for donations. Mr. McKeegan and others predicted that the university would wind up amounting to far less than the first-rate institution Mr. Monaghan has envisioned in spite of all the money he has put into it.

Professor Messaros called the millions that Mr. Monaghan has spent “mind-numbing.” His fortune could have been spent helping the poor or assisting established universities or on any number of better causes, instead of on building what he called “a ‘Citizen Kane’ monument to waste,” Professor Messaros added.

Mr. Healy, the university president, and Mr. Novak, the trustee, denied that that the controversy had hurt fund-raising efforts. “We haven’t seen any decline in our support at all,” Mr. Healy said, adding that the extra attention could even help. “The more publicity there is,” he said, “the better off you are.”

Mr. Novak said that many of the difficulties Mr. Monaghan and university officials have faced are not surprising. “All good things are fraught with troubles,” he said. “You just have to work through them.” The school already has a standout theology program, a strong sacred music program and a devoted student body, he said. He said he had faith the university would thrive over time.

“I feel very strongly,” Mr. Novak said, “that this is something the Lord wants.”

    Our Lady of Discord, NYT, 30.7.2006, http://www.nytimes.com/2006/07/30/business/yourmoney/30monaghan.html

Housing Slows, Taking Big Toll on the Economy

July 29, 2006
The New York Times
By VIKAS BAJAJ and DAVID LEONHARDT

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation. That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.

“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “But there’s now a growing and measurable risk that things don’t go according to plan.”

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16 percent of the economy, making it the largest single sector, slightly bigger than health care.

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs. From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s Economy.com.

Housing continued its rapid growth last year, and other industries began hiring in far greater numbers than they had been, creating the healthiest national job market since 2000. In the last few months, though, three pillars of the housing sector — homebuilders, mortgage lenders and real-estate agencies — have stopped adding to their payrolls, and overall job growth in housing has begun to slow.

In South Florida and Las Vegas, where contractors until recently complained that they could not find enough workers to begin work on many projects, developers are scrubbing plans for new condominiums because they cannot sell enough units to get construction financing.

Mr. McCraw, the developer in Fort Lauderdale, said slowing condo sales and a 35 percent jump in the cost of construction materials like steel, copper and concrete convinced him to shelve his project. He is now considering building office space, where demand remains strong, or simply waiting for two years.

In Las Vegas, cranes are still busily at work on new casino projects but dozens of gleaming condominium towers that were slated to sprout up a few miles from the Strip are not likely to be joining the city’s neon-bedecked skyline soon. John Restrepo, a real estate consultant in the city, estimates that only about 7 percent of the 60,000 condominium units that were announced and under construction as of the first quarter of the year are actually being built today.

Among the high-profile projects that were scrapped is Las Ramblas, an 11-building, $3 billion condominium and hotel complex being developed by the Related Companies and Centra Properties and had investors like the actor George Clooney.

“The period of irrational exuberance we saw in ’04 and ’05 and the gold rush fever has gone away,” Mr. Restrepo said.

The Commerce Department said yesterday that housing investment fell at an annual rate of 6.3 percent last quarter, after dropping less than 1 percent in each of the two previous quarters. It grew at roughly 9 percent a year during the previous three years.

Still, building activity for single-family homes, condos, hotels and casinos in Las Vegas is vibrant enough that construction workers are not struggling to find work, said George Vaughn, a business manager for a local of the Laborer’s International Union of North America, which represents almost 5,000 workers in Las Vegas. “The boom is still on,” he said.

The situation is somewhat different elsewhere. An official at the International Union of Bricklayers and Allied Craftworkers said housing work was more difficult to find, but most of its members had been able to find work on commercial building sites.

“If something were to happen with both markets, that would affect us — and everybody for that matter,” said Robert A. Fozio, director of the union’s Northern Ohio district.

On average, real-estate jobs pay somewhat less — about 7 percent less a year on average — than those in other parts of the economy. But real estate has also been one of the only industries creating good jobs for workers without college degrees in recent years, especially in construction and contracting work.

At Hovnanian Enterprises, one of the nation’s largest homebuilders, executives are renegotiating the company’s options to purchase land for future developments, in an effort to delay some transactions and reduce the purchase price on other parcels of land. In April, it forfeited $5.6 million in deposits on property near West Palm Beach, Fla., and Minneapolis, because it was not ready to build in the area.

“It doesn’t make sense to own the land and have it sit there,” said J. Larry Sorsby, the company’s chief financial officer and an executive vice president.

Orders for Hovnanian’s homes fell by 18 percent in the three months ended April 30 and cancellation of existing orders by homebuyers rose to 32 percent from 21 percent a year ago. The company, whose earnings jumped 34 percent to a record last year, is expecting a mere 3.4 percent profit increase this fiscal year.

Mr. Sorsby said the company had not resorted to layoffs, but it had been asking sub-contractors to lower labor costs — with some success.

Going forward, many economists say, the biggest question is whether the orderly real-estate slowdown the Fed has engineered thus far will continue. “Outside the threat of surging energy prices,’’ Mr. Zandi said, “the most significant threat to the expansion is that the housing correction turns into a housing crash.”

The fact that mortgage rates remain low by historical standards offers one reason to doubt that a crash will happen. The average rate on a 30-year conventional mortgage was 6.8 percent last week, up from 5.7 percent a year earlier, according to the Fed.

On the other hand, the boom of recent years has pushed housing prices out of reach for many families along the coasts. Already, some homeowners have resorted to creative loans, like interest-only mortgages, to afford a house, and even modest increases in mortgage rates have the potential to cause a significant drop in demand for new houses.

In either case, housing seems unlikely to continue being the economic powerhouse it was over the last five years.

“Housing is just not going to be what it has been,” said Edward Yardeni, chief investment strategist at Oak Associates, a money management firm. “It could go back to being a significant but relatively small contributor to economic growth.”

Jeremy W. Peters contributed reporting for this article.

    Housing Slows, Taking Big Toll on the Economy, NYT, 29.7.2006, http://www.nytimes.com/2006/07/29/business/29housing.html?hp&ex=1154232000&en=860c2effed19ae22&ei=5094&partner=homepage

Economy Slowed This Spring

July 29, 2006
The New York Times
By EDUARDO PORTER

Economic growth braked sharply in the second quarter from its blistering pace in the first, as the housing market cooled and consumer spending pulled back, slowing the economy to a more sustainable rate of expansion.

Still, the government also reported brisk inflation in the quarter, underscoring that slower growth has not yet put a check on rising prices.

The Commerce Department reported that the nation’s gross domestic product grew 2.5 percent in the second quarter, less than half the 5.6 percent expansion in the first three months of the year. The growth in consumer spending halved, while residential investment suffered its steepest decline in almost six years.

“There’s a slowdown under way,” said Steven Wieting, an economist at Citigroup Global Markets. Barring an external shock like a further spike in oil prices, he added, “a soft landing has a very high probability.”

The economic data bolstered the prices of stocks and bonds, as it raised investors’ hopes that the Federal Reserve will stop raising interest rates. The price of the 10-year Treasury bond rose, pushing its yield, which moves in the opposite direction, to 4.99 percent, below 5 percent for the first time in six weeks.

Both the Standard & Poor’s index of 500 leading stocks and the Dow Jones industrial average rose sharply, for their biggest weekly gain since November 2004.

Investors seemed to agree with the stance of the Federal Reserve and its chairman, Ben S. Bernanke, that inflation would moderate as the economy was reined in by the Fed’s string of 17 uninterrupted interest rate increases since June 2004.

Earlier this week, the Fed’s Beige Book, which records economic conditions around the country, underscored that growth in most regions moderated in the period from June through mid-July.

In testimony before Congress earlier this month, Mr. Bernanke said he expected the housing market would cool, economic growth would decelerate and unemployment would edge up, taking pressure off prices.

“A sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the last three years to a pace more consistent with the rate of increase in the nation’s underlying productive capacity,” Mr. Bernanke said. “The anticipated moderation in economic growth now seems to be under way.”

Still, despite the positive reaction in financial markets yesterday, some analysts argued that while growth may be down, inflation is still very high —and might still force the Fed to raise interest rates further. “It looks as if markets are totally setting aside the inflation data,” said Richard Moody, senior economist at PNC Financial.

The Commerce Department also reported that the core price index for personal consumer expenditures, which measures the price of consumer goods and services, excluding food and energy, surged at an annual rate of 2.9 percent in the second quarter, up from 2.1 percent in the first quarter.

At the same time, the Department of Labor reported that the employment cost index — a measure of labor costs — increased by 0.9 percent in the second quarter, up from a 0.6 percent increase in the first. The data suggested that inflation could continue to spread beyond energy through the rest of the economy, even as the economy itself slackens.

“There’s no question that this worsens the Fed’s dilemma,” said Nariman Behravesh, chief economist at Global Insight, an economic analysis firm based in Waltham, Mass. “The question is what does the Fed do as the economy slows but inflation continues to worsen.”

Growth in the last three years has been somewhat slower than the government had previously said. In its annual revision of the economic data, it said the economy grew by 3.2 percent in 2005 — not the 3.5 percent previously recorded. It also reduced measured growth in 2004 to 3.9 percent from 4.2 percent and in 2003 to 2.5 percent from 2.7 percent.

Moving forward, rising interest rates and cooling home prices are likely to be painful for many Americans. “The numbers will stop well short of a recession,” said Robert J. Barbera, chief economist at ITG/Hoenig in Rye Brook, N.Y. “Still, there will be a sectoral squeeze hitting housing and spending.”

Most economists underscored that the slowdown was broadly benign, however. Fast growth in consumer spending over the last few years, financed in great measure by mortgage refinancing and other forms of debt, has pushed the nation’s personal saving rate into negative territory and helped fuel the enormous trade deficit.

Just as housing spurred consumer spending as home prices rose, the slowing housing market put the brakes on consumers buying power, helping slow the growth of personal consumer expenditures to 2.5 percent in the second quarter, down from 4.8 percent in the first.

Consumer spending on durable goods fell by 0.5 percent, driven by declining car sales. Residential investment also declined by 6.3 percent, shaving 0.4 percent off output growth, following declines of 0.3 percent in the first quarter and 0.9 percent in the fourth quarter of last year.

And the decline has barely started. Michael Carliner, vice president for economics at the National Association of Home Builders, pointed out that there was still a lot of building in the pipeline from 2005, which was a record year for single-family housing starts. When that is gone, residential construction could decline more sharply.

“Residential investment is not going to carry the load it has been carrying the past few years,” Mr. Carliner said. “Business investment should pick up the slack.”

Yet the one big surprise in the second quarter was the sluggishness of business investment, which grew by a mere 2.7 percent, down from a 13.7 percent increase in the first quarter of the year as purchases of software and other equipment fell unexpectedly for the first time in more than three years.

Trade contributed 0.33 percentage points to economic growth, for the first time in a year, as export growth outpaced growth in imports. Inventory accumulation also contributed 0.4 percentage points.

Economists said corporate spending should recover. “I don’t think this indicates a decline is coming in business investment, but it means that its rate of growth will slow,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a business research group in Arlington, Va. “We won’t see double digits but high single digits.”

    Economy Slowed This Spring, NYT, 29.7.2006, http://www.nytimes.com/2006/07/29/business/29econ.html?_r=1&oref=slogin

Gas prices climb back above $3

Updated 7/25/2006 12:18 AM ET
USA TODAY
By Barbara Hagenbaugh

WASHINGTON — The nationwide average price for regular gasoline passed $3 a gallon Monday for the first time in more than 10 months and was within pennies of the all-time high, the government said.

The average U.S. price at the pump was $3.003 Monday, up more than a penny from a week earlier and 71 cents higher than a year ago, the Energy Department said in a weekly report.

The price was the highest since Sept. 5, when the average gasoline price shot up to a record $3.069 in the wake of Hurricane Katrina, which damaged U.S. oil refineries and set off a surge in energy costs.

In a separate, daily survey, motor club AAA said the average gasoline price was $2.989 Monday, up 70 cents from a year ago. The two surveys have similar methodologies but use a different pool of stations.

Gas prices are "likely to stay in this ($3) area through the end of the driving season," Wachovia economist Jason Schenker says. The summer driving season traditionally stretches from Memorial Day through Labor Day.

For many drivers, $3 a gallon gas is a distant memory. The statewide average price for a gallon of regular gasoline was at or exceeded $3 a gallon in 16 states and the District of Columbia on Monday, according to AAA. The cheapest gas is in South Carolina, where the statewide average was $2.81 a gallon Monday.

Gas prices are varying greatly from region-to-region, Oil Price Information Service head Tom Kloza says. "It's very, very choppy out there right now," he says. "Not all markets are going up; some markets are going down."

The average gasoline price has been rising largely in response to high oil costs and strong demand.

The price of a barrel of crude oil trading for future delivery was $75.05 Monday, up 62 cents from Friday and not far from the record, not adjusted for inflation, of $77.03 reached July 14. Oil prices, which account for approximately half of retail gasoline costs, lately have been rising as violence in the oil-rich Middle East has raised concerns about the region's supplies.

But gasoline prices also have been lifted by strong demand. Gasoline demand was up 1.9% in mid-June to mid-July from the same period a year ago, according to the Energy Department.

Many consumers say they are reducing spending on other items because of higher gas prices. Fifty-three percent said they are reducing their discretionary spending on non-essential goods and services, according to a survey of 1,000 adults conducted July 13-16 for the International Council of Shopping Centers and UBS Securities.

    Gas prices climb back above $3, UT, 25.7.2006, http://www.usatoday.com/money/industries/energy/2006-07-24-gas-prices-eia_x.htm

Democrats Link Fortunes to Rise in Minimum Wage

July 13, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, July 12 — Democrats, seeking to energize voters over economic issues in much the way that Republicans have rallied conservatives with efforts to ban same-sex marriage, have begun a broad campaign to raise the minimum wage and focus attention on income inequality.

The Democratic argument is straightforward: it has been more than eight years since Congress last raised the minimum wage, to $5.15 an hour, and inflation has reduced its real value to the lowest level in more than 20 years. At the same time, Democrats say, executive pay has risen to ever-higher levels and Congress has regularly approved pay raises for itself.

With midterm elections less than four months away, Democrats have begun state ballot initiatives to raise the minimum wage in more than a half-dozen states where Republicans are in danger of losing House or Senate seats.

The issue is playing a role in Missouri, Ohio, Pennsylvania and Arizona — all states where Republican senators are fighting for survival.

Pressure is so high in Ohio that Senator Mike DeWine broke ranks with fellow Republicans last month and voted for a Democratic bill that would have raised the minimum wage to $7.15 an hour. The measure received 52 votes, a majority, but not the 60 votes needed to prevent a filibuster.

Democratic leaders in Congress are closely coordinating their efforts in Washington with campaigns in critical races around the country. Democratic lawmakers say they will try to block what is normally an automatic pay increase for members of Congress until Republicans agree to raise the federal minimum wage.

“We are putting some skin in the game,” said Representative Rahm Emanuel of Illinois, chairman of the Democratic Congressional Campaign Committee. “We’re saying that there will be no pay increases for Congress until there’s an increase in the minimum wage. This separates us from Republicans.”

Last weekend, Mr. Emanuel held news conferences in five cities across upstate New York, with Democratic lawmakers and candidates signing pledges to oppose any increase in Congressional pay until the minimum wage is raised.

Republican lawmakers have repeatedly defeated increases in the minimum wage over the past eight years. Business groups, supported by many economists, have always fought such increases on the argument that setting wages above normal market levels will cause employers to cut back on hiring the very low-wage workers an increase would be intended to benefit.

“The minimum wage raises the take-home pay for some people at the expense of others,” said Kevin A. Hassett, an economist at the American Enterprise Institute, a conservative policy group.

“It is wrong to redistribute money from the worse-off workers to other low-income workers.”

For the most part, Republicans have sought to avoid debates about the minimum wage and focus on the overall strength of the economy. They note that unemployment is down to 4.6 percent, that the nation has added about 5.4 million jobs in the last three years and that wages have been climbing this year. Though most economists are dubious about the benefits of a minimum wage, the evidence of a link between a higher minimum wage and higher unemployment is mixed.

The unemployment rate among teenagers, a big share of minimum-wage workers, has remained above 13 percent ever since 2000 even though the minimum wage has gone down in real terms, after adjusting for inflation. Unemployment among people 16 to 19 has hovered around 15 percent this year.

Opponents of higher minimum wages contend that prosperity is best generated by stronger economic growth rather than by mandated wage levels. And while the minimum wage has lost about 20 percent of its buying power since the last increase, average hourly wages have done better.

According to the Economic Policy Institute, a left-of-center economic research group in Washington, “real” average hourly wages, adjusted for inflation, have edged up to $16.52 in May of this year from $15.58 in 1997.

In general, hourly wages have climbed much more slowly than productivity. Largely as a result, corporate profits have increased rapidly over the past several years and account for an unusually big share of the nation’s total gross domestic product.

Senate Democrats, at a news conference here on Wednesday, said the minimum wage was long overdue for an increase and had lagged far behind prices for gasoline, health care and college tuition.

“We cannot sit by while minimum-wage workers see the real value of their wages decline,” said Senator Hillary Rodham Clinton of New York. “We need to do right by hard-working Americans and raise the minimum wage.”

Mrs. Clinton, a potential presidential candidate in 2008, traveled through Ohio on Sunday and Monday and talked up the issue as she campaigned for Representative Sherrod Brown, who is trying to unseat Senator DeWine this fall. On Monday, she spoke specifically about the minimum wage before a crowd of community activists.

Senator Charles E. Schumer of New York, head of the Democratic Senatorial Campaign Committee, said: “The average American thinks that the minimum wage ought to be raised, even if they are making more than the minimum wage. Far more importantly from a political viewpoint, it appeals to certain groups of people who don’t usually turn out to vote.”

Democratic strategists systematically looked for issues on which they could start statewide ballot initiatives that would increase voter turn-out among groups that were likely to vote Democratic. “Minimum wage was at the top of the list,” Mr. Schumer said.

    Democrats Link Fortunes to Rise in Minimum Wage, NYT, 13.7.2006, http://www.nytimes.com/2006/07/13/washington/13wage.html

Report Shows Quick Growth in New York Since 9/11

July 13, 2006
The New York Times
By PATRICK McGEEHAN

New York City’s economy bounced back after Sept. 11 with surprising speed and is much healthier now than its slow-growing job market indicates, according to a report released yesterday by the Federal Reserve Bank of New York.

Labor market data shows that there are 100,000 fewer private-sector jobs in the city than there were five years ago. But the report, which offers an analysis of the economic effects of 9/11 over the past five years, showed that the city has been recovering at least as fast as the nation by other measures. Most notably, average incomes have been rising faster for city residents than for other Americans, it states.

The report’s authors also concluded that the economic effects of the terrorist attacks were sharp but short-lived and had largely disappeared by the end of 2002. In the first months after the attacks, some analysts had predicted that the damage to the economy would be permanent.

Indeed, the report noted, the bursting of the stock market bubble of the late 1990’s has had a more lasting effect on the city’s job market.

“People keep asking, why are we 100,000 short of this last peak?” said Jason Bram, a Fed economist and a co-author of the report. “What’s surprising is not how low it is now, but how high it was in 2001.”

Mr. Bram said that at the rate the city was creating jobs, it would take another 18 months to recover the rest of the 225,000 jobs lost between early 2001 and the second half of 2003. But he said his analysis showed that the job market was no weaker now than it would have been had the attacks never happened.

“We still would have had pretty big job losses, owing to a national recession and a couple of key industries like new media and dot-coms and the financial sector taking a big hit,” Mr. Bram said.

Other analysts, however, were less sanguine about the strength of the city’s rebound. A recovery that does not replace the jobs lost in a recession is not cause for much celebration, they said.

“It’s a little bit startling and also depressing when you try to measure an economy and forget about job growth,” said Steve Malanga, a senior fellow at the Manhattan Institute, a conservative research organization. “When you forget about job growth, you are forgetting about opportunity for all in a city like this.”

James A. Parrott, chief economist at the Fiscal Policy Institute, a liberal watchdog group, said most of the income gains have gone to wealthier residents, and have not been shared by the typical city worker. He said that the average overall income increase masks the fact that hourly wages of most residents have been declining since 2002, when adjusted for inflation.

“If you look at family costs and energy costs and the cost of health care, I’d be hard-pressed to make the case that real living standards are rising for average New Yorkers,” Mr. Parrott said. “The polarization trend if anything is more pronounced in New York City than it is nationwide.”

The Fed report’s conclusions also run counter to some other studies of the effect of Sept. 11, including one published by the federal Bureau of Labor Statistics two years ago. Many of the high-paying jobs in finance, technology and professional services that were lost immediately after the attacks had not been recovered by the end of 2002, said Michael Dolfman, the regional commissioner of labor statistics.

The big financial services firms in Manhattan sent tens of thousands of jobs out of the city in the fall of 2001 and many did not return. But with their profits rising rapidly to new highs, those firms are again filling high-paying positions in Manhattan and contributing to the recovery of the city’s job market in the past two years.

In May, New York City’s unemployment rate dropped to 5 percent, its lowest level in nearly 18 years. Mr. Bram said that if measured by the number of city residents with jobs, which is derived from a different survey than the payroll estimate, the city’s economic health appears even rosier, with household employment surpassing both the pre-9/11 peak and the previous high mark reached in 1969. The number of city residents with jobs rose above 3.6 million in May.

One explanation for the discrepancy between those two types of employment measures, he said, is that significantly more city residents are “reverse commuting” to jobs in the suburbs.

“This still is such a Manhattan-centric economy but less so than in the past,” Mr. Bram said.

Indeed, New York City accounts for only about 2.7 percent of the nation’s private-sector jobs now, down from about 3.3 percent in 1989, Mr. Bram said. But those New York jobs pay considerably better on average than the national norm. He said the “New York City premium” — the difference between the average wages in the city and in the nation — was about 63 percent now, compared with about 20 percent in 1980, and almost 68 percent in 2001.

Mr. Bram acknowledged that other economists and analysts “have this perception that all the growth is in the high end.” But he said he believed a lot of the job losses had been incurred in low-paying industries like apparel and other manufacturing and that much of the gains had come in the middle of the job spectrum, especially among the self-employed and small businesses.

    Report Shows Quick Growth in New York Since 9/11, NYT, 13.7.2006, http://www.nytimes.com/2006/07/13/nyregion/13economy.html

Trade Deficit Up; Countertrends Are Seen

July 13, 2006
The New York Times
By JEREMY W. PETERS

The nation’s trade deficit edged slightly higher in May, pushed up by soaring oil prices. But a surge in American exports helped keep the imbalance between exports and imports in check, suggesting that trade is starting to stabilize.

The Census Bureau said in a report yesterday that the difference between what Americans export and import grew to $63.8 billion in May, about $500 million more than in April. Though the deficit was not quite as large as many economists had forecast, it was still 13 percent larger than the $56.6 billion recorded in May 2005.

But economists noted that because energy prices exaggerated the overall deficit figure, the trade imbalance report was not as grim as it appeared at first glance. In fact, exports reached a record high. And when energy prices are removed from the trade gap calculation, the numbers suggest the imbalance is actually leveling off.

Imports of crude oil jumped by 17 percent in value in May, or $2.8 billion. Oil prices climbed $4.92 a barrel, the largest month-to-month increase the Census Bureau has recorded since 1990. The surge in oil prices overshadowed a healthy gain in American exports, which reached a record level of $118.7 billion.

Exports of industrial materials like metals and plastics rose, as did exports of civilian aircraft, a more volatile sector but one that contributes heavily to trade figures.

“The underlying trend seems to be toward stabilization,” Stephen Stanley, chief economist with RBS Greenwich Capital, said, noting that exports have been on the rise in recent months. “If we ever saw a sustained period of steady energy prices, I think we’d see at least stabilization, perhaps a little improvement in the trade deficit.”

The Census Bureau report also showed that the ever-expanding trade deficit with China, which many American politicians contend is a function of China’s undervalued currency, grew by 4 percent in May, reaching $17.7 billion. China has an increasingly one-sided trade relationship with the rest of the world as well: on Monday it reported an overall surplus of $14.5 billion for June, its largest on record.

Economists have warned that for both countries, such large imbalances are unsustainable. “We’re both dancing on the Titanic here,” said Ethan Harris, chief United States economist for Lehman Brothers. “Still, it took a long time for the Titanic to sink.”

Many economists see the American trade imbalance moderating along with the economy, meaning that for the first time in two years, the steadily growing gap between imports and exports could begin to stabilize. If growth slows, as most economists predict it will, Americans will make fewer purchases, and demand for foreign goods will shrink. At the same time, higher gas prices could cause Americans to cut back on gasoline consumption.

“We are really shipping money out of this country hand over fist,” said Joel L. Naroff, president of Naroff Economic Advisers. “And I don’t know how long you can keep spending this kind of money without ultimately there being significant adjustments.”

But in last month’s trade report, there were no signs that demand for oil was on the decline. The number of barrels of oil imported each day hit 10.4 million, the highest level since October.

Another factor that could help contain the trade deficit is growth overseas.

“With slower U.S. growth and the rest of the world carrying on pretty much as it was, the trend for the U.S. trade deficit does look better,” said Simon Hayley, senior international economist for Capital Economics.

    Trade Deficit Up; Countertrends Are Seen, NYT, 13.7.2006, http://www.nytimes.com/2006/07/13/business/worldbusiness/13econ.html

Surprising Jump in Tax Revenues Curbs U.S. Deficit

July 9, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, July 8 — An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief.

On Tuesday, White House officials are expected to announce that the tax receipts will be about $250 billion above last year's levels and that the deficit will be about $100 billion less than what they projected six months ago. The rising tide in tax payments has been building for months, but the increased scale is surprising even seasoned budget analysts and making it easier for both the administration and Congress to finesse the big run-up in spending over the past year.

Tax revenues are climbing twice as fast as the administration predicted in February, so fast that the budget deficit could actually decline this year.

The main reason is a big spike in corporate tax receipts, which have nearly tripled since 2003, as well as what appears to be a big rise in individual taxes on stock market profits and executive bonuses.

On Friday, the Congressional Budget Office reported that corporate tax receipts for the nine months ending in June hit $250 billion — nearly 26 percent higher than the same time last year — and that overall revenues were $206 billion higher than at this point in 2005.

Congressional analysts say that the surprise windfall could shrink the deficit this year to $300 billion, from $318 billion in 2005 and an all-time high of $412 billion in 2004.

Republicans are already arguing that the revenue jump proves their argument that tax cuts, especially the 2003 tax cut on stock dividends, would spur the economy and ultimately increase revenues.

"The tax relief we delivered has helped unleash the entrepreneurial spirit of America and kept our economy the envy of the world," President Bush said in his weekly radio address on Saturday.Democrats and many independent budget analysts note that revenues have barely climbed back to the levels reached in 2000, and that the government has spent trillions of dollars from Social Security surpluses just as the first of the nation's baby boomers are nearing retirement.

"The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan."

The run-up in taxes looks good because the past five years looked so bad. Revenues are up, but they have lagged well behind economic growth.

The surge could also evaporate as quickly as it appeared. Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections.

Nevertheless, the short-term change has been striking. At the beginning of the year, the Congressional Budget Office projected that this year's deficit would be $371 billion and the White House Office of Management and Budget put the figure at $423 billion.

Corporate tax payments are expected to exceed $300 billion, up from $131 billion three years ago. The other big increase is an extraordinary jump in individual taxes that were not withheld from paychecks, usually a reflection of taxes on investment income and executive bonuses.

The jump in receipts is providing Mr. Bush and Republicans in Congress with a new opportunity to assert that tax cuts of 2001 and 2003 are working and that Congress should make them permanent.

Pat Toomey, president of the Club for Growth, a conservative political fund-raising group said: "The supply siders were absolutely right. All the major sources of revenue have grown, especially in areas where we said they would."

But budget analysts, supporters and critics of Mr. Bush alike, cautioned that this year's windfall would do little to improve the government's long-term budget woes.

Government spending under Mr. Bush continued to climb rapidly this year, more than twice as fast as the economy. Spending on the war in Iraq has accelerated, to about $120 billion this year.

Far more ominously, the nation's oldest baby boomers will be eligible for Social Security benefits in just two years. Conservatives and liberals alike predict a huge escalation in costs of Social Security and Medicare over the next several decades.

"The long-term outlook is such a deep well of sorrow that I can't get much happiness out of this year," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a former White House economist under President Bush.

Despite almost five years of economic growth, individual tax receipts have yet to reach the levels of 2000. Even with surging payments for investment profits and business income, individual tax payments in 2005 were only $972 billion — below the $1 trillion reached in 2000, even without adjusting for inflation.

Over all, individual and corporate taxes have lagged well behind the economy's growth over the past five years. Government spending, by contrast, mushroomed far faster than the economy.

And federal debt has ballooned to $8.3 trillion, up from $5.6 trillion when Mr. Bush took office. Republicans are trying to raise the authorized debt ceiling to $9.6 trillion.

War costs for Iraq and Afghanistan have totaled more than $300 billion since 2003, and the Bush administration has not included any war costs in its budget estimates beyond next year.

Domestic discretionary programs, like education and space exploration, have slowed their growth after climbing rapidly in Mr. Bush's first term. But entitlement programs, particularly Medicaid and Medicare, are climbing rapidly as a result of rising medical prices and Mr. Bush's prescription drug program.

Outlays for Medicare have climbed 15 percent this year and are expected to hit $300 billion. About half of that increase results from the new prescription drug program, which is expected to cost nearly $1 trillion over the next 10 years.

"Even if spending is not going up as fast as it was before, it's not coming down," said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan group that advocates budget discipline.

Despite a public outcry this year over pork-barrel spending sought by individual lawmakers for local projects, Mr. Bixby said, the main causes of higher spending stem from the war in Iraq and entitlement programs.

Both supporters and critics of Mr. Bush cautioned against attributing much long-term significance to the recent fiscal improvement, in part because tax revenues have become more volatile.

In the late 1990's, revenues exceeded predictions by more than $100 billion a year. After the recession of 2001, revenues plunged about $100 billion below what could be explained by slower economic growth and higher unemployment.

One reason for the increased volatility may be that a large share of income taxes is now paid by the nation's wealthiest families, and their incomes are based much more on the swings of the stock market than on wages and salaries.

About one-third of all income taxes are paid by households in the top 1 percent of income earners, who make more than about $300,000 a year. Because those households also earn the overwhelming share of taxable investment income and executive bonuses, both their incomes and their tax liabilities swing sharply in bull and bear markets. "These people have incomes that fluctuate much more rapidly, so when the economy is doing well and the stock market is doing well, tax revenues will be up," said Brian Riedl, a budget analyst at the Heritage Foundation, a conservative research organization. "Rapidly fluctuating tax revenues will continue to be the norm for years to come."

Compared with the size of the economy, tax revenues are still below historical norms and far below what the administration predicted as recently as 2003.

Tax receipts amounted to about 17.5 percent of the nation's gross domestic product in 2005, far below the level five years ago and still slightly below the average of 18 percent since World War II. Spending, by contrast, is running at about 20 percent of gross domestic product .

"Spending has not been restrained," Mr. Riedl said. "One hundred percent of the reduced deficit is because taxpayers are sending more money to Washington."

    Surprising Jump in Tax Revenues Curbs U.S. Deficit, NYT, 9.7.2006, http://www.nytimes.com/2006/07/09/washington/09econ.html?hp&ex=1152417600&en=59c195577b27a9bd&ei=5094&partner=homepage

Dow Ends Down 134, Nasdaq Closes Down 25

July 8, 2006
By THE ASSOCIATED PRESS
Filed at 12:22 a.m. ET
The New York Times

NEW YORK (AP) -- Corporate profit warnings and record oil prices overshadowed a benign jobs creation report and sent stocks sharply lower Friday as investors worried that the economy was cooling too quickly. The Dow Jones industrials shed 134 points as stocks ended the week with a loss.

The Labor Department reported just 121,000 new jobs in May, short of the 175,000 economists expected. With the unemployment rate steady at 4.6 percent, the report was exactly what Wall Street had hoped for -- low unemployment, but modest job growth that won't spark a sharp increase in consumer demand, which could foreshadow inflation and interest rate hikes.

However, with 3M Co. warning of lower-than-expected earnings, investors grew concerned that slower economic growth, while good for keeping rates steady, could cut into corporate profits. Yet few other companies have warned the markets about falling profits, analysts noted.

''I think what you're seeing with 3M is a bit of a head-fake,'' said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. ''Overall, I think you'll see second-quarter profits come in strong across the board. Today could just be a tempest in a teapot.''

Record oil prices also pressured stocks, with traders worrying that consumers hit with higher energy prices would spend less elsewhere. A barrel of light crude set an intraday record of $75.78 before settling at $74.09, down $1.05, on the New York Mercantile Exchange.

The Dow fell 134.63, or 1.2 percent, to 11,090.67, with part of its fall due to a drop in component 3M.

Broader stock indicators also lost ground. The Standard & Poor's 500 index lost 8.60, or 0.67 percent, to 1,265.48, and the Nasdaq composite index dropped 25.03, or 1.16 percent, to 2,130.06.

Bonds rallied for a second straight session, with the yield on the 10-year Treasury note falling to 5.13 percent from 5.18 percent late Thursday. The dollar fell against most major currencies, while gold prices rose.

The early losses illustrated the acute balance investors, perhaps unrealistically, are seeking. On the one hand, a strong economy could spark inflation, but a weak economy would eat into corporate profits and send stocks lower. While the Federal Reserve seeks to maintain that balance, the selloff reflects investors' chronic worries that the balance will shift, or has already.

''You got people wondering here if the Fed has already overshot on rates,'' pushing them too high and halting economic growth, said Bill Groenveld, head trader for vFinance Investments. ''And that fear has the market jumping over every little thing right now.''

The holiday-shortened week showed Wall Street's edgy mood as stocks gyrated from session to session. For the week, the Dow lost 0.53 percent, the S&P slid 0.37 percent and the Nasdaq tumbled 1.91 percent due to weakness in technology and small-cap stocks.

The industrial conglomerate 3M, seen as something of a barometer for its sector, was particularly troubling Friday. 3M cut its second-quarter and 2006 profit forecasts due to lower-than-expected sales, and its stock tumbled $7.29, or 9 percent, to $74.10.

Other companies added to the dour mood with more warnings of sales shortfalls. Advanced Micro Devices Inc. fell 27 cents to $23.56 after cutting its revenue forecasts. Rival Intel Corp., a Dow industrial, dropped 29 cents to $18.56.

And Starbucks Corp. stock suffered after the coffeehouse chain reported June sales figures that fell short of analysts' forecasts. Starbucks slid $1.84, or 4.9 percent, to $36.04.

In other news, General Motors Corp. added 28 cents to $29.48 after the automaker's board voted to start talks with Renault SA and Nissan Motor Co. on a potential alliance.

Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange, where preliminary consolidated volume came to 2.12 billion shares, compared with 2.14 billion traded Thursday.

The Russell 2000 index of smaller companies was down 11.34, or 1.57 percent, at 709.30.

Overseas, Japan's Nikkei stock average slipped 0.09 percent. In Europe, Britain's FTSE 100 closed down 0.02 percent, France's CAC-40 fell 0.26 percent for the session and Germany's DAX index lost 0.24 percent.

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The Dow Jones industrials ended the week down 59.55, or 0.53 percent, finishing at 11,090.67. The S&P 500 index lost 4.72, or 0.37 percent, to close at 1,265.48.

The Nasdaq dropped 42.03, or 1.94 percent, to end at 2,130.06.

The Russell 2000 index closed the week down 15.23, or 2.1 percent, at 709.30.

The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended the week at 12,760.34, down 88.93 points from last week. A year ago, the index was 12,115.55.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Dow Ends Down 134, Nasdaq Closes Down 25, NYT, 8.7.2006, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Job Growth Last Month Was Tepid, Labor Dept. Reports

July 7, 2006
The New York Times
By JEREMY W. PETERS

Job growth last month was tepid, the Labor Department reported today, with fewer new jobs added than economists had expected.

Taken with recent economic data suggesting that the housing market is cooling and consumer spending is slowing, today's report was further evidence of moderating economic growth. But there were also some signs of strength in the numbers, leaving economists and investors to mull over a mixed bag of economic data.

The Labor Department reported that the United States economy added 121,000 non-farm jobs in June, based on seasonally adjusted figures. Economists say at least 150,000 new jobs are needed each month just to keep pace with the natural growth of the work force. June was the third month in a row that the number of jobs added was below that level.

Forecasters had predicted a figure closer to 175,000 for June, or even higher, especially after a survey released Wednesday by Automatic Data Processing, a major payroll-services company, showed a rise of 368,000 jobs.

The Labor Department said the national unemployment rate for June was unchanged at 4.6 percent.

Investors appeared to react coolly to the report, leaving stocks essentially flat in trading early this afternoon.

Today's report contained some conflicting signals about what the Federal Reserve might do with interest rates when its policy committee next meets in August.

On the one hand, slower job growth would be a sign that the economy is cooling, allowing the Fed to pause in its steady rate-tightening to head off inflation. On the other hand, average hourly earnings for the year grew by 3.9 percent in June, up from 3.5 percent in May, a sign that inflationary pressures are not abating and that further rate increases may still be needed.

"This report does contain some potentially worrying information on inflation," said Rob Carnell, an economist with ING, who added that last month's jobs growth was "less than impressive."

Dean Baker, co-director for the Center for Economic and Policy Research, said the report was yet another reminder that the economy's rapid expansion is starting to ease. "If we saw something going in the other direction, then you could look at it and say this is an anomaly. But it's pretty much a slowdown across the board."

The number of jobs added in the private sector last month was particularly modest. Government jobs accounted for 31,000 of the 121,000 jobs added last month, a troubling sign for some economists.

"It is clear that the private business sector is actually much weaker than I think any of us had thought," said Bernard Baumohl, executive director of the Economic Outlook Group. "We're seeing a substantial deceleration of hiring in the private sector, and that's to be expected when employers are seeing a raft of economic signals showing that the economy is slowing down. There's no reason to go on a hiring spree when the economy is slowing."

The Labor Department report also contained some positive signs, like an increase in average hourly earnings — a suggestion that inflation is running up, but good news for workers coping with rising gasoline prices.

The average number of hours American workers logged in June also ticked up to 105, from 104.6 in May.

The unemployment rate stayed at 4.6 percent, a five-year low, while the number of working-age people not in the labor force fell in June by 87,000. And the share of the total pool of possible workers — adult civilians not in institutions — who are employed rose to 63.1 percent, seasonally adjusted, compared with 62.9 in June 2005.

    Job Growth Last Month Was Tepid, Labor Dept. Reports, NYT, 7.7.2006, http://www.nytimes.com/2006/07/07/business/07cnd-jobs.html?hp&ex=1152331200&en=df9d39c637b926e2&ei=5094&partner=homepage

Search for New Oil Sources Leads to Processed Coal

July 5, 2006
The New York Times
By MATTHEW L. WALD

EAST DUBUQUE, Ill. — The coal in the ground in Illinois alone has more energy than all the oil in Saudi Arabia. The technology to turn that coal into fuel for cars, homes and factories is proven. And at current prices, that process could be at the vanguard of a big, new industry.

Such promise has attracted entrepreneurs and government officials, including the Secretary of Energy, who want domestic substitutes for foreign oil.

But there is a big catch. Producing fuels from coal generates far more carbon dioxide, which contributes to global warming, than producing vehicle fuel from oil or using ordinary natural gas. And the projects now moving forward have no incentive to capture carbon dioxide beyond the limited amount that they can sell for industrial use.

Here in East Dubuque, Rentech Inc., a research-and-development company based in Denver, recently bought a plant that has been turning natural gas into fertilizer for forty years. Rentech sees a clear opportunity to do something different because natural gas prices have risen so high. In an important test case for those in the industry, it will take a plunge and revive a technology that exploits America's cheap, abundant coal and converts it to expensive truck fuel.

"Otherwise, I don't see us having a future," John H. Diesch, the manager of the plant, said.

With today's worries about the price and long-term availability of oil, experts like Bill Reinert, national manager for advanced technologies at Toyota, say that turning coal into transportation fuel could offer a bright future. "It's a huge deal," he said.

There are drawbacks; the technology requires a large capital investment, and a plant could be rendered useless by a collapse in oil prices. But interest was high even before the rise in oil prices; three years ago, the Energy Department ran a seminar on synthetic hydrocarbon liquids, and scores of researchers and oil company executives showed up. The agency that runs municipal buses in Washington, D.C., and other consumers expressed interest.

But the enthusiasm was not enough to overcome the fear of a drop in oil prices. Lately, however, the price of diesel fuel, which determines the value of this coal-based fuel, also called synfuel, has soared, as has the price of natural gas, which made plants like the one at East Dubuque ripe for change.

Most of the interest is in making diesel using a technology known as Fischer-Tropsch, for the German chemists who demonstrated it in the 1920's. Daily consumption of diesel and heating oil, which is nearly identical, runs more than $400 million. The gasoline market is more than twice as large, but if companies like Rentech sated the demand for diesel, the process could be adapted to make gasoline.

The technology was used during World War II in Germany and then during the 1980's by South Africa when the world shunned the apartheid regime there. Now Rentech is preparing to use an updated version.

Sasol, the company that has used the technology for decades in South Africa, is exploring potential uses around the world and is conducting a feasibility study with a Chinese partner of two big coal-to-liquids projects in western China. Last August, Syntroleum, based in Tulsa, agreed with Linc Energy, of Brisbane, Australia, to develop a coal-to-liquids plant in Queensland.

Other projects are in various stages of planning in this country, although the one here on the Mississippi River just south of the Wisconsin border has a head start.

But people who think this technology will find wide use presume some kind of environmental controls, which the Rentech plant, thus far, does not have. Some environment and energy experts doubt that the method is compatible with a world worried about global warming.

Unless the factory captures the carbon dioxide created during the process of turning coal into diesel fuel, the global warming impact of driving a mile would double.

"It's a potential disaster for the environment if we move in the direction of trying to create a big synfuel program based on coal to run our transportation fleet," said Daniel A. Lashof, of the Natural Resources Defense Council. "There's a brown path and a green path to replacing oil, and Fischer-Tropsch fuel is definitely on the brown path."

But the Energy Department sees potential. In March, the Energy Secretary, Samuel K. Bodman, said in a speech that making diesel fuel or jet fuel from coal was "one of the most exciting areas" of research and could be crucial to the President's goal of cutting oil imports. He said that loan guarantees enacted in last summer's energy bill might be used for Fischer-Tropsch diesel fuel.

In Des Plaines, Ill., near Chicago, a new company called GreatPoint Energy has developed, on a laboratory scale, a vastly improved process for turning coal into natural gas.

The promise and the pitfalls are similar for both GreatPoint and Rentech. Measured in the standard energy unit of a million British thermal units, or B.T.U.'s, coal sells for $1 or so, natural gas around $7. Diesel fuel is around $23. As with all energy conversions, turning coal into natural gas or diesel fuel means losing something in translation — specifically, energy — but if the price difference is big enough, the energy loss is not something that investors will worry about.

But it also means carbon emissions, which causes concern to environmentalists. Carbon is released in converting coal into an energy-rich gas made up of carbon monoxide and hydrogen, and then converting the gas into something more useful. Rentech wants to turn it into liquid fuel. GreatPoint wants to rearrange the molecules into natural gas.

But coal is cheap and the energy possibilities are endless. For example, at the Rentech plant, a substation on the east side of the plant that currently pulls in electricity will send it out instead. And, uniquely in this country, the plant will take coal and produce diesel fuel, which sells for more than $100 a barrel.

The cost to convert the coal is $25 a barrel, the company says, a price that oil seems unlikely to fall to in the near future. So Rentech is discussing a second plant in Natchez, Miss., and participating in a third proposed project in Carbon County in Wyoming.

The plant here will "bring back an industry that's shutting down," Hunt Ramsbottom, the company chairman, said of the fertilizer business. "The goal is fuels, but to get the plant up and running, fertilizer is a good backstop."

And it is all local. The coal will come from southern Illinois, by barge or rail. The diesel can go straight to terminals or truckstops in the area, said Mr. Diesch, the plant manager, and the fertilizer to local farms. An odd advantage is that today, most coal-burning power plants in the area use coal hauled from Wyoming, because its sulfur content is lower; burning high-sulfur coal encourages acid rain. But if the coal is gasified, rather than burned, filtering out the sulfur is relatively easy, and the sulfur changes from a pollutant to a salable product.

Emissions of traditional pollutants — that is, the ones the government regulates, and not carbon dioxide — will be lower with coal than they were with natural gas, he said. Outsiders are interested, but skeptical, because of the carbon problem. "It might serve our goals in terms of reducing oil dependence," said Phil Sharp, a former congressman from Indiana and now head of Resources for the Future, a nonprofit research organization in Washington. But "they should take into account that we are headed to a carbon-constrained economy."

Robert Williams, a senior research scientist at Princeton, said "it's a step backward" to operate a plant like Rentech's without capturing the carbon. "It almost doubles the emission rate," he said.

Mr. Ramsbottom also sees the carbon dioxide problem. "The worldwide production of Fischer-Tropsch fuels is going to ramp up dramatically, and carbon sequestration is on everybody's mind," he said. But the geology of this part of Illinois is not suitable for sequestering the carbon dioxide from these plants. Building a pipeline would be expensive and difficult to justify while carbon emissions are not taxed, experts say.

GreatPoint has a different plan: move the plant where it can sell the carbon.

Andrew Perlman, the company's chief executive, thinks it has value. "Not only is it capturable, one of biggest advantages of the system is, we can locate our plant near a natural gas pipeline, in places where we can sell that carbon dioxide for a profit, using existing technology," he said. Oil producers inject carbon dioxide into old oil fields, to force oil to the surface.

Backers also hope that methanization, the process GreatPoint uses, will succeed in part because it fits in with existing energy infrastructures, like gas pipelines and coal mines. If it did, it could have a profound impact on the balance of natural gas imports, lessening or eliminating the need for liquefied natural gas ports. Like Fischer-Tropsch diesel, methanization is not a new idea; one plant in North Dakota does it now, using a technology paid for under the Carter-era Synthetic Fuels Corporation. But GreatPoint is going about it in a new way, in which far less energy is lost in the transition. There is a potential to make fuels from gasification better than ordinary fuels. Robert Williams, a senior research scientist at Princeton University, points out that crop wastes and wood chips can also be gasified, producing carbon monoxide and hydrogen.

Normally, biomass is thought of as carbon-neutral, because for each plant cut down for gasification, another grows and absorbs carbon from the atmosphere. But if biomass is gasified and the carbon dioxide sequestered by being pumped into the ground in the expectation that it will stay there, then atmospheric carbon actually declines for every gallon produced.

From a greenhouse perspective, that is more attractive than what Rentech does now with the carbon dioxide from its plant here. It is sold to soft-drink bottlers. That keeps the gas sequestered until someone burps.

    Search for New Oil Sources Leads to Processed Coal, NYT, 5.7.2006, http://www.nytimes.com/2006/07/05/business/05coalfuel.html?hp&ex=1152158400&en=adee39914211840a&ei=5094&partner=homepage

Enron's Founder Oversaw Company's Rise and Collapse

July 5, 2006
By THE ASSOCIATED PRESS
The New York Times

HOUSTON (AP) -- Enron Corp. founder Kenneth Lay, who was convicted of helping perpetuate one of the most sprawling business frauds in U.S. history, has died. He was 64.

Nicknamed "Kenny Boy" by President Bush, Lay led Enron's meteoric rise from a staid natural gas pipeline company formed by a 1985 merger to an energy and trading conglomerate that reached No. 7 on the Fortune 500 in 2000 and claimed $101 billion in annual revenues.

He was convicted May 25 along with former Enron CEO Jeffrey Skilling of defrauding investors and employees by repeatedly lying about Enron's financial strength in the months before the company plummeted into bankruptcy protection in December 2001. Lay was also convicted in a separate non-jury trial of bank fraud and making false statements to banks, charges related to his personal finances. He was scheduled to be sentenced Sept. 11.

Lay had built Enron into a high-profile, widely admired company, the seventh-largest publicly traded in the country. But Enron collapsed after it was revealed the company's finances were based on a web of fraudulent partnerships and schemes, not the profits that it reported to investors and the public.

When Lay and Skilling went on trial in U.S. District Court Jan. 30, it had been expected that Lay, who enjoyed great popularity throughout Houston as chairman of the energy company, might be able to charm the jury. But during his testimony, Lay ended up coming across as irritable and combative.

He also sounded arrogant, defending his extravagant lifestyle, including a $200,000 yacht for wife Linda's birthday party, despite $100 million in personal debt and saying "it was difficult to turn off that lifestyle like a spigot."

Both he and Skilling maintained that there had been no wrongdoing at Enron, and that the company had been brought down by negative publicity that undermined investors' confidence.

His defense didn't help his case with jurors.

"I wanted very badly to believe what they were saying," juror Wendy Vaughan said after the verdicts were announced. "There were places in the testimony I felt their character was questionable."

Lay was born in Tyrone, Mo. and spent his childhood helping his family make ends meet. His father ran a general store and sold stoves until he became a minister. Lay delivered newspapers and mowed lawns to pitch in. He attended the University of Missouri, found his calling in economics, and went to work at Exxon Mobil Corp. (NYSE:XOM) predecessor Humble Oil & Refining upon graduation.

He joined the Navy, served his time at the Pentagon, and then served as undersecretary for the Department of the Interior before he returned to business. He became an executive at Florida Gas, then Transco Energy in Houston, and later became CEO of Houston Natural Gas. In 1985, HNG merged with InterNorth in Omaha, Neb. to form Enron, and Lay became chairman and CEO of the combined company the next year.

    Enron's Founder Oversaw Company's Rise and Collapse, NYT, 5.7.2006, http://www.nytimes.com/2006/07/05/business/05wire-lay.html

An Outcry Rises as Debt Collectors Play Rough

July 5, 2006
The New York Times
By SEWELL CHAN

The rise in American consumer debt has been accompanied by a sharp increase in complaints about aggressive and sometimes unscrupulous tactics by debt collection agencies, a phenomenon that has government regulators increasingly concerned.

In April, the Federal Trade Commission, which enforces the federal law that governs debt collection practices, reported that it received 66,627 complaints against third-party debt collectors last year — more than against any other industry, and nearly six times the number in 1999.

The agencies often buy the debt from more established companies for pennies on the dollar and seek to collect even if the debt has been paid or was never valid to begin with. Sometimes, consumers pay up simply because they are worn down by threats from the companies and fear damage to their credit rating.

One New York City victim, Judith Guillet, complained and filed a police report in 2003 after receiving a Chase credit card bill for $2,300, including five charges from Amoco gasoline stations in the Bronx. She has never owned a car or had a driver's license.

The bank agreed that the charges were not valid, but the debt case hung on because the bank turned it over to a collection agency. Last November, that agency obtained a court order allowing it to freeze Ms. Guillet's bank account even though it could not demonstrate that the debt was valid.

"I felt helpless," said Ms. Guillet, 57, a nurse who is retired on full disability. "I couldn't pay my rent, buy food or pay my electricity bills."

Officials in New York City, which has some of the most stringent consumer protection laws in the country, said the number of local complaints about debt collectors more than doubled in three years — to 900 in the 2006 fiscal year, which ended on Friday, from 774 in 2005, 509 in 2004 and 422 in 2003.

The city's Department of Consumer Affairs recently subpoenaed records from eight companies with the most complaints and is considering whether to propose tougher regulations. And last month, New York's attorney general, Eliot Spitzer, sued a national debt collection company, accusing it of trying in thousands of cases to collect on debts that could not be verified.

The Federal Trade Commission enforces the Fair Debt Collection Practices Act, the 1977 law that prohibits abusive, deceptive and unfair tactics by collection agencies. Last July, the commission won $10.2 million — its biggest judgment for illegal collection practices — in a case against National Check Control of Secaucus, N.J. The company, now out of business, overstated the amounts consumers owed and threatened them with arrest and prosecution.

"We're very concerned about the increase in complaints about debt collection, and we are stepping up our enforcement against the debt collection industry," said Peggy L. Twohig, who directs the F.T.C.'s Division of Financial Practices.

In its most recent annual report on the act, the commission identified tactics that have become particularly common: misrepresenting the nature, size and status of a debt; making constant harassing and abusive phone calls at all hours; contacting a debtor's relatives, employers and neighbors; failing to investigate claims by consumers that a debt is paid, expired or fraudulent; and threatening to sue or seek prosecution. (Such threats are illegal unless the collector has both the legal basis and the intent to take such action.)

In addition to filing complaints with regulators, a growing number of consumers are suing over debt collection abuses, according to the National Association of Consumer Advocates.

Stephanie M. Clark, 36, and her husband sued the Triad Financial Corporation of Huntington Beach, Calif., and Verizon Wireless in Federal District Court in Santa Ana, Calif., in August 2004. After they fell behind on their car payments, the suit alleged, Triad hired a collector who threatened them with arrest, posed as a Verizon Wireless employee, changed the password on their cellphone account and obtained their cellphone records. According to the suit, the collector called dozens of the couple's relatives, friends and business associates, posing as a law enforcement officer and telling them that there was an arrest warrant for the Clarks.

"They contacted former and future employers," said Ms. Clark, who now lives in Healdsburg, Calif. "It was very stressful. We felt completely violated. Humiliated." In June 2005, before the case was to go to trial, the companies settled with the Clarks for an undisclosed sum. (Both companies said they could not discuss the settlement, which also resolved the original debt, because of a confidentiality agreement.)

Last July, Leigh A. Feist, 39, of Minneapolis, took out a cash-advance loan of around $570. From September to April, a collection agency, Riscuity, called Ms. Feist constantly on her cellphone and at her job at a health insurer, according to a suit that her lawyer, Peter F. Barry, filed on May 25. The calls were so frequent, Ms. Feist said, that her supervisor examined the record of incoming calls and reprimanded her.

Edward Chen, president of Riscuity, based in Marietta, Ga., said that he was not aware of the suit but that the company stops calling debtors at work at their request.

Regulators and consumer advocates say many creditors prefer to hire collection agencies or sell bundled debts to debt buyers because of the expense of litigation.

Robert J. Hobbs, the deputy director of the National Consumer Law Center, an advocacy organization based in Boston, attributed the rise in complaints about abusive collection practices to three broad trends: the rapid growth in the number of collection agencies, the tightening of bankruptcy-protection laws last year and the record level of consumer debt, now totaling $2.2 trillion, complicated by rising interest rates and stagnant personal incomes. Identity theft and Internet fraud are also cited as factors.

Rozanne M. Andersen, the general counsel at ACA International, which represents 3,600 debt collection agencies, more than half of the estimated 6,000 to 7,000 such companies in the United States, said its members adhere to a rigorous code of ethics. "To the extent there are abusive practices taking place in the industry, ACA International absolutely denounces those practices that fall outside of the law," she said.

Eric M. Berman, a lawyer in Babylon, N.Y., and an officer of the National Association of Retail Collection Attorneys, whose members represent creditors, said complaints filed with the government were not always legitimate. For example, he said, some debtors complain when debt collectors will not accept partial payments on the same installment terms that the original lender provided, a practice that may be frustrating to the debtor but is legal.

"People need to get much more education about credit accounts and what they're getting into," Mr. Berman said. "In addition, there are a small minority who are scammers — people who will run up credit with no intent of paying it and then try to negotiate their way out of it."

While consumer advocates say that abusive collection practices have a disproportionate effect on poor people, the elderly, immigrants and people with limited English, the rise in complaints seems to span the social and economic spectrum.

Mary H. Monroe, 71, a retiree in Williamsburg, Brooklyn, received repeated calls last year from Diversified Collection Services, part of the Performant Financial Corporation of Livermore, Calif., insisting that she owed more than $8,000 in tuition and fees at a beauty school that she had never attended. "I thought they had to be kidding," she said.

She said the calls continued, despite her protests that the collectors had the wrong person. "I finally got a lawyer to write to them, and they haven't bothered me since," she said.

Maria Perrin, a senior vice president at Performant, said the company halts its efforts when it learns of cases of mistaken identity. "Honestly, we don't want to spend time with the wrong person," she said.

James M. Rhodes, 65, was not as lucky as Ms. Monroe. In November, Mr. Rhodes, a commercial lawyer and arbitrator on the Upper East Side of Manhattan, received the first of three letters from Midland Credit Management, part of the Encore Capital Group of San Diego. The company insisted that he pay $2,800 on a MasterCard he never had.

Mr. Rhodes repeatedly insisted that the debt was not his, and then wrote to state and city officials. In April, the city's Department of Consumer Affairs got Midland to acknowledge that the debt was erroneous. But that was not the end of it, because in the meantime, in March, Mr. Rhodes heard from a second collection agency, Phillips & Cohen Associates of Westampton, N.J., demanding payment on the same account, this time for $1,900. Mr. Rhodes sent letters of protest and contacted the city again.

J. Brandon Black, the chief executive of Encore, said, "The vast majority of fraud or mistaken-identity complaints and concerns are taken care of at the level of the issuer." Matthew A. Saperstein, a vice president at Phillips & Cohen, said it closed the account on May 12 after receiving a letter from Mr. Rhodes.

Ms. Guillet, the Bronx woman with the gasoline charges, spent two years insisting that her credit card charges were not valid. Finally, lawyers for New Century Financial Services of Cedar Knolls, N.J., which had bought the debt, obtained a judgment in New York City Civil Court that led Emigrant Savings Bank to freeze her account. Ms. Guillet, who has fibromyalgia, a muscle pain and fatigue disorder, lives on $1,324 a month in Social Security Disability Insurance.

Although companies must serve notice before getting permission to freeze a bank account, such notices are often misdirected or, as in Ms. Guillet's case, ignored by people who are fearful or confused.

A nonprofit legal clinic, MFY Legal Services, got the account unfrozen in January and, after providing extensive documentation that Ms. Guillet had saved over two years, reached a settlement with New Century, which agreed to stop contacting her and dropped the case. (A company official, Jeff Esposito, said he could not discuss the case.)

"It stressed me out so bad," Ms. Guillet said of being pursued for a debt she did not incur. "I wondered what else might be out there that I don't know about."

Karen James contributed reporting for this article.

    An Outcry Rises as Debt Collectors Play Rough, NYT, 5.7.2006, http://www.nytimes.com/2006/07/05/nyregion/05credit.html?hp&ex=1152158400&en=4900776bf1b8c88d&ei=5094&partner=homepage

Fed Raises Rates, but Scales Back Talk of Inflation

June 30, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, June 29 — The Federal Reserve raised interest rates for the 17th consecutive time on Thursday, but kicked off a powerful celebration in the stock market by lowering its alarms about inflation.

As expected, the central bank raised its crucial lending rate another quarter-point, to 5.25 percent, and left itself room to raise it again before stopping. But for the first time since it began lifting rates two years ago, the Fed stopped short of signaling that further interest rate increases were all but certain.

In what traders described as a huge "relief rally," the Dow Jones industrial average surged 217 points, or 2 percent, in its biggest one-day jump in three years. Other stock and bond market indicators also rose, as interest rates on long-term bonds edged down. The dollar fell against major currencies, with foreign investors reducing their calibrations for interest rates in the United States.

The turnaround on Wall Street was the latest example of heightened volatility in financial markets and heightened uncertainty about Fed policy under its rookie chairman, Ben S. Bernanke.

Investors are looking for signs that Mr. Bernanke, like the veteran Alan Greenspan who preceded him at the Fed, can manage a tricky transition, achieving a "soft landing" from a period of strong economic growth and rising inflation to an era when underlying inflation slows without throwing the economy into a tailspin.

"The central bank is caught in the middle," said Allen Sinai, chief economist at Decision Economics. The Fed is trying to maintain "a cautious tiptoeing between a moderating economy and elevated core inflation."

The Fed has stumbled along the way, said Robert J. Barbera, chief economist at Hoenig, the research unit of the investment bank ITG, but Mr. Bernanke now appears to have regained his balance.

"This gets him back to Square 1," Mr. Barbera said. "What it takes away is the notion that they're hellbent to squeeze the economy because of an obvious inflation problem. That's not a fair characterization of the economy, and it's not a sensible Fed response."

In late April, Mr. Bernanke rattled bond markets with statements that struck many as being too soft about a general rise in prices, excluding food and energy, known as "core" inflation. Over the last month, Mr. Bernanke and other Fed officials sent markets tumbling as they sought to signal tougher action.

Describing recent price trends as "unwelcome," "unacceptable" and "a warning flag," Fed officials prompted some investors to speculate that the overnight interest rates the Fed uses as its guidepost might climb as high as 6 percent.

In its statement on Thursday, the Fed adopted a more nuanced view. It said that recent price trends had been "elevated" and that "inflation pressures remain." But it also acknowledged that growth appeared to be slowing, which in turn should ease inflation.

"Recent indicators suggest that economic growth is moderating from its quite strong pace," the Fed's policy-making committee said. It said the slowing growth stemmed from a "gradual cooling" of the housing market, the lagged effects of previous interest rate increases and higher energy prices.

What galvanized investors was a change in the Fed's language suggesting that additional rate increases may no longer be needed. Instead, it spoke hypothetically about what it would do if increases were still necessary.

"The extent and timing of any additional firming that may be needed to address risks will depend on the evolution of the outlook for inflation and economic growth," the central bank said. In May, by contrast, it flatly declared that "some additional firming may be necessary."

Mr. Bernanke and his colleagues left themselves ample wiggle room to raise rates at their next policy meeting in August. But their tone was less urgent. Instead of warning that inflation posed a powerful threat, they suggested that the job of preventing inflation from accelerating may not be quite finished.

"People were expecting something very consistent with the hawkish rhetoric we had heard earlier," said Richard Berner, a senior economist at Morgan Stanley. The markets "were pricing in a more hawkish statement."

Inflation has crept up in the last six months, in part because of the spike in energy prices but also because of increases in housing prices.

The Fed's preferred measure of underlying price trends is core inflation, excluding the volatile prices for food and energy, as calculated in the government's estimates of the gross domestic product. By that measure, prices have climbed about 2.4 percent over the last 12 months.

Mr. Bernanke, an advocate of setting explicit inflation targets, has said he would like to keep inflation at 1 to 2 percent a year.

At the same time, the economy seems to have slowed significantly from the torrid growth rate during the first three months of this year.

On Thursday, the government released its final estimate of growth in the first quarter, elevating growth from an annual pace of 5.3 percent to 5.6 percent, far above the pace that most economists consider sustainable without rising inflation.

But many forecasters contend that growth has slowed to something closer to 3 percent in the second quarter and will remain near that level for the rest of the year.

Job creation has slowed sharply in the last three months, to an average of about 125,000 jobs a month from an average of over 160,000 during 2005, and sank to only 75,000 additional jobs in May.

Though housing starts have bumped up and down in recent months, inventories of unsold homes have swelled and sales prices are climbing far more slowly. Construction employment fell sharply last month, and there are signs that consumer spending has slowed as a result of high gasoline prices and fewer cash-out home refinancings.

By some measures, short-term interest rates are back in line with historical norms after being cut to extraordinary lows from 2001 to 2004. At 5.25 percent, the federal funds rate on overnight loans between banks is almost 3 percentage points above the central bank's preferred measure of core inflation. Two years ago, it was only 1 percent and below the core inflation rate.

Richard Yamarone, chief economist at Argus Research, said the fed funds rate has on average been about 2.33 percentage points higher than core inflation since 1987.

But Fed officials face multiple quandaries. On the one hand, inflation is still slightly above Mr. Bernanke's "comfort zone" and many Fed officials are convinced that it would be far more difficult to combat higher inflation expectations than it would be to correct a slowdown if they push interest rates too high.

But some analysts predict that the combination of higher energy prices and higher interest rates has already set the stage for a slowdown that could be deeper than the soft landing that policy makers are seeking.

David Rosenberg, chief economist at Merrill Lynch, recently estimated that the chances of a recession later this year were about 40 percent. Most analysts are far more sanguine, though many predict that the growth will slow and unemployment will edge up from its currently low level of 4.7 percent.

In a sign that Fed policy is beginning to pinch, the National Association of Manufacturers pleaded for the central bank to stop raising rates.

"Evidence of a slowing economy is widespread," said David Huether, the trade association's chief economist. "With manufacturing already facing higher costs at home compared to our major competitors abroad, today's news of higher interest rates will only further burden U.S. industry."

The uncertainties mean that the opportunities for a mistake on policy are higher than they have been for several years.

"Last year a monkey could have run monetary policy," said Ethan Harris, chief United States economist at Lehman Brothers. "What did you have to do? You just had to push the 25 basis points button. Now, just in time for Bernanke to take over, the serious decisions have to be made. How much do you put the brakes on?"

    Fed Raises Rates, but Scales Back Talk of Inflation, NYT, 30.6.2006, http://www.nytimes.com/2006/06/30/business/30fed.html?hp&ex=1151726400&en=53ae7258f3c2113e&ei=5094&partner=homepage

The Energy Challenge

For Good or Ill, Boom in Ethanol Reshapes Economy of Heartland

June 25, 2006
The New York Times
By ALEXEI BARRIONUEVO

This article was reported by Alexei Barrionuevo, Simon Romero and Michael Janofsky and written by Mr. Barrionuevo.

Dozens of factories that turn corn into the gasoline substitute ethanol are sprouting up across the nation, from Tennessee to Kansas, and California, often in places hundreds of miles away from where corn is grown.

Once considered the green dream of the environmentally sensitive, ethanol has become the province of agricultural giants that have long pressed for its use as fuel, as well as newcomers seeking to cash in on a bonanza.

The modern-day gold rush is driven by a number of factors: generous government subsidies, surging demand for ethanol as a gasoline supplement, a potent blend of farm-state politics and the prospect of generating more than a 100 percent profit in less than two years.

The rush is taking place despite concerns that large-scale diversion of agricultural resources to fuel could result in price increases for food for people and livestock, as well as the transformation of vast preserved areas into farmland.

Even in the small town of Hereford, in the middle of the Texas Panhandle's cattle country and hundreds of miles from the agricultural heartland, two companies are rushing to build plants to turn corn into fuel.

As a result, Hereford has become a flashpoint in the ethanol boom that is helping to reshape part of rural America's economic base.

Despite continuing doubts about whether the fuel provides a genuine energy saving, at least 39 new ethanol plants are expected to be completed over the next 9 to 12 months, projects that will push the United States past Brazil as the world's largest ethanol producer.

The new plants will add 1.4 billion gallons a year, a 30 percent increase over current production of 4.6 billion gallons, according to Dan Basse, president of AgResources, an economic forecasting firm in Chicago. By 2008, analysts predict, ethanol output could reach 8 billion gallons a year.

For all its allure, though, there are hidden risks to the boom. Even as struggling local communities herald the expansion of this ethanol-industrial complex and politicians promote its use as a way to decrease America's energy dependence on foreign oil, the ethanol phenomenon is creating some unexpected jitters in crucial corners of farm country.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn.

"This is a bit like a gold rush," warned Warren R. Staley, the chief executive of Cargill, the multinational agricultural company based in Minnesota. "There are unintended consequences of this euphoria to expand ethanol production at this pace that people are not considering."

Mr. Staley has his own reasons to worry, because Cargill has a stake in keeping the price of corn low enough to supply its vast interests in processed food and livestock.

But many energy experts are also questioning the benefits of ethanol to the nation's fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

As one of the hottest investments around, however, few in farm country want to hear any complaints these days about the risks associated with ethanol. Archer Daniels Midland, the politically connected agricultural processing company in Decatur, Ill., and the industry leader that has been a longstanding champion of transforming corn into a fuel blend, has enjoyed a doubling in its stock price and profits in the last year.

One ethanol producer has already sold shares to the public and two more are planning to do so. And the get-rich-quick atmosphere has drawn in a range of investors, including small farm cooperatives, hedge funds and even Bill Gates.

For all the interest in ethanol, however, it is doubtful whether it can serve as the energy savior President Bush has identified. He has called for biofuels — which account for just 3 percent of total gasoline usage — to replace roughly 1.6 million barrels a day of oil imported from the Persian Gulf.

New Jobs, New Life

To fill that gap with corn-based ethanol alone, agricultural experts say that production would have to rise to more than 50 billion gallons a year; at least half the nation's farmland would need to be used to grow corn for fuel. But that isn't stopping out-of-the-way towns looking for ways to pump life into local economies wracked by population loss, farm consolidation and low prices from treating the rush into ethanol as a godsend.

"These projects are bringing 100 new jobs to our town," said Don Cumpton, Hereford's director of economic development and a former football coach at the high school. "It's not as if Dell computer's going to be setting up shop here. We'd be nuts to turn something like this down."

That the United States is using corn, among the more expensive crops to grow and harvest, to help meet the country's fuel needs is a testament to the politics underlying ethanol's 30-year rise to prominence. Brazilian farmers produce ethanol from sugar at a cost roughly 30 percent less.

But in America's farm belt, politicians have backed the ethanol movement as a way to promote the use of corn, the nation's most plentiful and heavily subsidized crop. Those generous government subsidies have kept corn prices artificially low — at about $2 a bushel — and encouraged flat-out production by farmers, leading to large surpluses symbolized by golden corn piles towering next to grain silos in Iowa and Illinois.

While farmers are seeing little of the huge profits ethanol refiners like Archer Daniels Midland are banking, many farmers are investing in ethanol plants through cooperatives or simply benefiting from the rising demand for corn. With Iowa home to the nation's first presidential caucuses every four years, just about every candidate who visits the state pays obeisance to ethanol.

"There is zero daylight" between Democrats and Republicans in the region, said Ken Cook, president of Environmental Working Group, a nonprofit research policy group in Washington, and a veteran observer of agricultural politics. "All incumbents and challengers in Midwestern farm country are by definition ethanolics."

The ethanol explosion began in the 1970's and 1980's, when ADM's chief executive, Dwayne O. Andreas, was a generous campaign contributor and well-known figure in the halls of Congress who helped push the idea of transforming corn into fuel.

Ethanol can be produced from a number of agricultural feed stocks, including corn and sugar cane, and someday, wheat and straw. But given the glut in corn, the early strategy of Mr. Andreas was to drum up interest in ethanol on the state level among corn farmers and persuade Washington to provide generous tax incentives. But in 1990, when Congress mandated the use of a supplement in gasoline to help limit emissions, ADM lost out to the oil industry, which won the right to use the cheaper methyl tertiary butyl ether, or MTBE, derived from natural gas, to fill the 10 percent fuel requirement.

Past Scandal

Adding to its woes, ADM was marred by scandal in 1996 when several company executives, including one of the sons of Mr. Andreas, were convicted of conspiracy to fix lysine markets. The company was fined $100 million. Since then, ADM's direct political clout in Washington may have waned a bit but it still pursues its policy preferences through a series of trade organizations, notably the Renewable Fuels Association.

Some 14 months ago the company hired Shannon Herzfeld, a leading lobbyist for the pharmaceutical industry. But she is not a registered lobbyist for ADM and said in an interview that the company was maintaining its long-held policy that it does not lobby Congress directly.

"Nobody is deferential to ADM," contended Ms. Herzfeld, who says she spends little time on Capitol Hill.

But ADM has not lost interest in promoting ethanol among farm organizations, politicians and the news media. It is by far the biggest beneficiary of more than $2 billion in government subsidies the ethanol industry receives each year, via a 51-cent-a-gallon tax credit given to refiners and blenders that mix ethanol into their gasoline. ADM will earn an estimated $1.3 billion from ethanol alone in the 2007 fiscal year, up from $556 million this year, said David Driscoll, a food manufacturing analyst at Citigroup.

[And the company may be concerned by the recent statement by Energy Secretary Samuel W. Bodman, who suggested that if prices remain high, lawmakers should consider ending the ethanol subsidy when it expires in 2010. "The question needs to be thought about," he said on Friday.]

ADM has huge production facilities that dwarf those of its competitors. With seven big plants, the company controls 1.1 billion gallons of ethanol production, or about 24 percent of the country's capacity. ADM can make more than four times what VeraSun, ADM's closest ethanol rival, can produce.

Last year, spurred by soaring energy prices, the ethanol lobby broke through in its long campaign to win acceptance outside the corn belt, inserting a provision in the Energy Policy Act of 2005 that calls for the use of 5 billion gallons a year of ethanol by 2007, growing to at least 7.5 billion gallons in 2012. The industry is now expected to produce about 6 billion gallons next year.

The phased removal of MTBE from gasoline, a result of concerns that the chemical contaminates groundwater and can lead to potential health problems, hastened the changeover. Now, government officials are also pushing for increasing use of an 85-percent ethanol blend, called E85, which requires automakers to modify their engines and fuel injection systems.

In the ultimate nod to ADM's successful efforts, Mr. Bodman announced the new initiatives in February at the company's headquarters in Illinois.

"It's been 30 years since we got a call from the White House asking for the agriculture industry, ADM in particular, to take a serious look at the possibilities of building facilities to produce alternative sources of energy for our fuel supply in the United States," said G. Allen Andreas, ADM's chairman and Dwayne Andreas' nephew.

Now, ADM is betting even more of its future on ethanol, embracing a shift from food processing to energy production as its focus. In April, it hired Patricia A. Woertz, a former executive from the oil giant Chevron, as the company's new chief executive.

While ADM has pushed ethanol, rivals like Cargill have been more skeptical. To Mr. Staley, ethanol is overpromoted as a solution to the nation's energy challenges, and the growth in production, if unchecked, has the potential to ravage America's livestock industry and harm the nation's reliability as an exporter of corn and its byproducts.

Threat to Food Production

"Unless we have huge increases in productivity, we will have a huge problem with food production," Mr. Staley said. "And the world will have to make choices."

Last year corn production topped 11 billion bushels — second only to 2004's record harvest. But many analysts doubt whether the scientists and farmers can keep up with the ethanol merchants.

"By the middle of 2007, there will be a food fight between the livestock industry and this biofuels or ethanol industry," Mr. Basse, the economic forecaster, said. "As the corn price reaches up above $3 a bushel, the livestock industry will be forced to raise prices or reduce their herds. At that point the U.S. consumer will start to see rising food prices or food inflation."

If that occurs, the battleground is likely to shift to some 35 million acres of land set aside under a 1985 program for conservation and to help prevent overproduction. Farmers are paid an annual subsidy averaging $48 an acre not to raise crops on the land. But the profit lure of ethanol could be great enough to push the acreage, much of it considered marginal, back into production.

Mr. Staley fears that could distract farmers from the traditional primary goal of agriculture, raising food for people and animals. "We have to look at the hierarchy of value for agricultural land use," he said in a May speech in Washington. "Food first, then feed" for livestock, "and last fuel."

And even Cargill is hedging its bets. It recently announced plans to nearly double its American ethanol capacity to 220 million gallons a year. Meanwhile, the flood of ethanol plant announcements is making the American livestock industry nervous about corn production. "I think we can keep up, assuming we get normal weather," said Greg Doud, the chief economist at the National Cattlemen's Beef Association. "But what happens when Mother Nature crosses us up and we get a bad corn year?"

Beyond improving corn yields, the greatest hope for ethanol lies with refining technology that can produce the fuel from more efficient renewable resources, like a form of fuel called cellulosic ethanol from straw, switchgrass or even agricultural waste. While still years away, cellulosic ethanol could help overcome the concerns inherent in relying almost exclusively on corn to make ethanol and make the advance toward E85 that much quicker.

"The cost of the alternative — of staying addicted to oil and filling our atmosphere with greenhouse gases, and keeping other countries beholden to high gasoline prices — is unacceptable," said Nathanael Greene, senior policy analyst at the Natural Resources Defense Council in New York. "We have to struggle through the challenges of growing and producing biofuels in the right way."

But the current incentives to make ethanol from corn are too attractive for producers and investors to worry about the future. With oil prices at $70 a barrel sharply lifting the prices paid for ethanol, the average processing plant is earning a net profit of more than $5 a bushel on the corn it is buying for about $2 a bushel, Mr. Basse said. And that is before the 51-cent-a-gallon tax credit given to refiners and blenders that incorporate ethanol into their gasoline.

"It is truly yellow gold," Mr. Basse said.

Alexei Barrionuevo reported from Chicago for this article, Simon Romero from Hereford, Tex., and Michael Janofsky from Washington.

    For Good or Ill, Boom in Ethanol Reshapes Economy of Heartland, NYT, 25.6.2006, http://www.nytimes.com/2006/06/25/business/25ethanol.html?hp&ex=1151294400&en=7ebb75da12ef90ec&ei=5094&partner=homepage

A Range of Estimates on Ethanol's Benefits

June 25, 2006
The New York Times
By ALEXEI BARRIONUEVO

Would using ethanol save energy?

That question, it turns out, is not easy to answer. Ethanol's enthusiasts point to the potential benefits of replacing gasoline with a renewable energy source that they contend will reduce America's reliance on foreign oil and cut greenhouse gases produced by fossil fuels. But the benefits of ethanol, particularly when it is produced from corn, are not so clear cut.

A number of researchers who have looked at the issue have concluded that more energy now goes into making a gallon of ethanol than is contained in that gallon. Others, however, find a net benefit, though most see it as relatively modest.

Those who question whether ethanol is as "green" as advertised say that supporters ignore or downplay the large quantities of natural gas used to produce ethanol, as well as the diesel fuel used to transport it from plants to markets. Moreover, growing corn requires heavy use of nitrogen fertilizers, made from natural gas, and requires extensive use of farm machinery, which burns fuel refined from crude oil.

Given the complexities of the calculations, there is a wide range of estimates of the benefits of ethanol.

On the positive side, analysts at the Agriculture Department concluded in their most recent assessment that ethanol offered a substantial gain, producing a positive output 67 percent greater than the energy inputs. But others who view ethanol favorably are more conservative, with several estimating the net energy benefit at about 20 percent.

David Pimentel, a professor of agriculture and life sciences at Cornell University, is one of several researchers who has challenged the Agriculture Department's conclusion. He has estimated that ethanol requires 29 percent more energy from fossil fuels than it delivers in savings from not using gasoline.

Dr. Pimentel, along with Tadeusz W. Patzek, a civil and environmental engineer from the University of California at Berkeley, published research finding that the Agriculture Department's analysis excluded the energy required to produce or repair farm machinery, as well as the steel and cement used to build the plants.

The Agriculture Department counters by noting that the professors failed to consider the energy benefit of certain ethanol byproducts, including corn oil and corn gluten, and said they were using old farm machinery data.

"They put all the energy on the ethanol," said Roger Conway, director of the department's office of energy policy and new uses.

The Agriculture Department also points to increases in corn yields, and efficiency improvements in the fertilizer and ethanol industries, which add to ethanol's energy benefit.

Dr. Pimentel acknowledged the omissions of some byproducts, saying they might have boosted the energy balance to as much as break even. But he said that even a best-case scenario, using his calculations, did not justify a heavy investment in ethanol. He called the push into ethanol a "boondoggle" motivated by farm-state politics and big profits.

Dr. Pimentel, who first began criticizing ethanol as an energy alternative about 25 years ago, said that he has never been supported by the oil industry. Dr. Patzek has worked as a researcher for an oil company in the past but said that his biofuels research had received no support from the industry.

Several environmental groups that support ethanol concede that the energy savings from corn-based ethanol may be limited, but they say it will serve as a crucial bridge to more efficient sources like switchgrass, a type of prairie grass that could potentially be used to produce ethanol.

The choice of what fuel to use to run an ethanol plant will also play a role in determining its ultimate energy efficiency. In Hereford, Tex., White Energy expects to use natural gas to power its ethanol plant, while another Dallas-based company, Panda Energy International, plans to use Hereford's ample supplies of cow manure as fuel.

Driven by the high cost of natural gas, about 10 of 39 ethanol plants under construction are being designed to run on coal, according to Robert McIlvaine, who runs a market research firm in Northfield, Ill.

Mr. Conway of the Agriculture Department called the move to cheaper and more abundant coal to run ethanol plants "preferable."

But Nathanael Greene, senior policy analyst at the Natural Resources Defense Council, which has supported ethanol's use, disagreed, pointing out that burning coal normally produces twice as much greenhouse gas as natural gas.

"This is going to significantly increase the local air pollution," Mr. Greene said, "and diminish the benefits of using ethanol."

    A Range of Estimates on Ethanol's Benefits, NYT, 25.6.2006, http://www.nytimes.com/2006/06/25/business/25ethanolside.html

Investors Ignore Warnings in Volatile Markets

June 17, 2006
By REUTERS
Filed at 3:23 a.m. ET
The New York Times

BOSTON (Reuters) - When a 76-year-old pensioner recently told Jill Schlesinger he wanted to put 10 percent of his $100,000 portfolio into gold, the financial adviser knew the latest investment craze would likely end badly, and soon.

``With each passing quarter, people became more greedy and more complacent,'' said Schlesinger, chief investment officer at money-management firm StrategicPoint Investment Advisors in Providence, Rhode Island. ``And people lose sight of what a diversified portfolio is and what risk is.''

Suddenly, investors who had never traveled beyond the East Coast of the United States were plowing money into India and Brazil and metals mined in faraway places.

Many are now suffering double-digit losses, but they won't get much sympathy from regulators because they were warned and because losses aren't yet heavy enough, according to financial advisers.

``There have not been enough people who have been damaged to get the regulators to notice this one,'' said Richard Smith, president of Capital Advisory Group in Richmond, Virginia.

Less than six years after the worst bear market in many investors' memories, people were eagerly dabbling in some of the world's riskiest markets in a craze fueled by hopes of recouping money lost when the technology bubble burst.

Money-management firms' steady offering of new products also fed the frenzy.

Exchange traded funds like StreetTracks Gold Trust, iShares Comex Gold Trust and iShares Silver Trust let investors get into precious metals markets. Crude futures were available, and Deutsche Bank had a ETF to track its diversified commodities index. And more specialized ETFs were on the way.

But many of those bets ended badly. Investors who purchased the recently launched Barclays Global Investors unit's silver ETF lost roughly 26 percent if they got in at the beginning. If they bought later, they lost even more.

ETFs, which have been available for less than 20 years, are similar to mutual funds but are traded in exchanges and allow investors to participate directly in markets.

``With new products like ETFs it is easy to speculate, but investors have no one to blame but themselves for any losses on a run-up they thought looked like a sure thing,'' said Capital Advisory Group's Smith. ``The fund firms are only producing the vehicles, they are not showing anyone how to use them.''

But there were plenty of warning signs along the way, making potential lawsuits over the losses highly unlikely, according to financial advisers and analysts.

Barclays said clearly that its silver ETF wasn't for the faint-hearted, according to financial advisers. And mutual funds that offered other ways to get into recently successful markets also cautioned investors in other ways.

Vanguard told its clients that the energy market was overheated, and Oppenheimer Funds recently raised the investment minimum for its Developing Markets fund to $50,000 to keep out investors who can't afford a potentially heavy loss.

``This was clearly a message to investors that the emerging markets were overheated and that there was a lot of hot money in the asset class,'' said Dan Lefkovitz, analyst at research firm Morningstar Inc. in Chicago.

Still, despite the warnings, investors made a critical mistake with commodities in the last months.

``Wall Street decided that commodities could be bought and held forever,'' and that prompted investors to plow in some $200 billion over the last three to six months, said Leonard Kaplan, president of commodities brokerage firm Prospector Asset Management in Evanston, Illinois.

``That was incredibly ignorant and it will happen over and over again because the public is infinitely stupid about these things,'' Kaplan said.

    Investors Ignore Warnings in Volatile Markets, NYT, 17.6.2006, http://www.nytimes.com/reuters/business/business-column-lifting.html

As Oil Rises in Markets, Rigs Rise in Mississippi

June 17, 2006
The New York Times
By SHAILA DEWAN

LAUREL, Miss., June 14 — In what was once the capital of the Mississippi petroleum business, the new oil boom is hidden in plain sight.

There is a drilling platform behind the Shoney's 24-hour restaurant. Just blocks from City Hall, a rig natters loudly, tended by four roughnecks. Across the road from the country club, nearly a dozen tall blue pumps nod like a council of sleepy elders.

The high price of oil, hovering around $70 a barrel, has brought a nearly dormant Mississippi petroleum industry roaring to life. Wells abandoned long ago by the major oil companies are being reopened by independent operators. Requests for new drilling permits have spiked. Trainees for oil-field work can make nearly $14 an hour. Companies wait 12 months to rent the kind of field equipment that was once sold for scrap.

Five years ago there were some 20 functioning oil wells inside the city limits of Laurel; now there are 83.

But many people here have barely noticed, perhaps because they have lived for decades amid the industrial furniture of the oil patch. Or perhaps because, unlike the boom of the 1970's and 80's, this one has not brought private jets, $1,200 bar tabs, high-stakes craps games or trips out to the Capri Club, an establishment of ill repute where oilmen had corporate accounts. Oil is back, but without the old trappings.

"It's all sort of moderate," said Melvin Mack, the mayor of this city of 18,000 — grown to 24,000 with evacuees from Hurricane Katrina — in southeastern Mississippi. "You don't have all the beer drinking, the gin drinking, that they say goes along with an oil boom."

Gone is the Oil Well Lounge, with its bar the length of a city block and waitresses in short skirts and fishnet stockings. In its place is North of the Border Texmex and Cantina, with its steam-table buffet and $1 margaritas.

Angie Clark, the bartender, looked blank when asked about Laurel's oil wells, one of which was just about directly across the street. "No, I don't know about them," she said.

Nor had she ever heard of the Oil Well Lounge, though her smattering of late-afternoon customers remembered it reverently: the live bands, the bookmakers, the expense accounts.

"If you were broke, you just looked on the floor and picked up a hundred dollar bill," said Paul Swartzfager Jr., a Laurel lawyer. "They were throwing money around that crazy."

That was a time before the aging of the work force, the strict policing of drunken drivers and the rising influence of Bible Belt social mores. It was also back when the major oil companies had a presence here. But because Mississippi's reserves were small, its wells slow-flowing, the majors sold out to independents years ago.

When the price of oil goes high enough, those marginal wells, as they are called, become profitable again. By pumping Mississippi's naturally occurring carbon dioxide reserves into old wells, a process that helps free oil from the ground, one company, Denbury Resources, is expecting to leach 80 million barrels from the state's aging fields.

"The oil we're going after is oil that we left behind," said Gary Wray, an independent operator who is pouring all his available capital into reopening the old wells he amassed during lean times. This is the moment Mr. Wray and others like him have spent years waiting for. "There's no young people in this business," he said. "I'm 54, and I'm one of the youngest people in our business in the state."

Jim Moss, the owner of an oil-field services company in Laurel, scoffed when the comeback was referred to as an oil boom.

"The real boom was in the 50's, 60's and 70's," Mr. Moss said, even as he acknowledged that he was raking in more money than ever. So are the truck drivers, roustabouts, drillers and electricians. Some have come out of retirement. Others have returned to the business from different pursuits.

An experienced oil-field worker here can make as much as $22 an hour — exceptional pay for this part of the country — and a crew boss perhaps $80,000 a year.

And still employers are begging for people.

The labor shortage provokes nostalgia among those who started out as roughnecks and worked their way up. Well work is hard physical labor, involving picks and shovels and plenty of sticky black dirt. Though the pay is good and the jobs come with benefits, "most of them don't like to get dirty," said John Porter, a crew pusher who has been in the business 30 years.

Jerry Huddleston, who runs drilling operations inside Laurel's city limits for Comstock Resources, said people of his generation had grown up working. "I did — I worked on a farm," Mr. Huddleston said. "Used to be you hired 10 people, 9 of them were going to be with you for a while."

When men were out on the platform, they talked only about women, recalled Dan C. Taylor, who put himself through law school working summers on a rig. But when they were off duty, they talked only about rigs and wells.

Julius W. King, 83, an oil-field investor in a powder blue sports coat with a United Way lapel pin, lamented social welfare programs that he said provided a disincentive to work. "The government gives everybody some money now," he said. "They write you a check."

Mr. King grew up in nearby Heidelberg, where oil was discovered in 1943 and where the high school still has two wells on its grounds. "A dirt-poor whistle-stop in the red clay hills of eastern Mississippi was the proud owner of the biggest gusher east of the Mississippi," Mr. King said, quoting as best he remembered from a Time magazine article about his hometown.

Mr. King was unfamiliar, though, with the new labor problems in the field. "So the young guys aren't coming?" he asked.

Eddie Helms, the local manager of a company that provides casing to line wells, blamed crystal meth.

"It's killing us," Mr. Helms said. "We're a drug-free company. I tested eight people, and six of them failed."

Another reason for the shortage is competition from outside the industry. Hurricane Katrina has created thousands of construction and cleanup jobs in the state. Paul Broom, 47, who recently doubled his pay by returning to the petroleum business from a job driving propane trucks, said his 21-year-old son had left the oil fields to take a cleanup job.

Yet another reason labor is scarce may be self-preservation. The business is much safer than it once was, but an old saying — nothing on an oil field will hurt you, it'll kill you — can still hold true. The company that Mr. Broom's son had left lost three men in an explosion this month at a well that was being reopened in Raleigh, about 30 miles northwest of Laurel. The men were 18, 23 and 53. The lone survivor was 72.

    As Oil Rises in Markets, Rigs Rise in Mississippi, NYT, 17.6.2006, http://www.nytimes.com/2006/06/17/us/17wells.html?_r=1&oref=slogin

Less Housing for Residents of Average Pay, Report Says

June 16, 2006
The New York Times
By JANNY SCOTT

The number of New York City apartments considered affordable to hundreds of thousands of moderate-income households — with incomes like those of starting firefighters and police officers — plunged by 17 percent between 2002 and 2005, according to a new report by researchers at New York University.

The report, to be released today, for the first time puts hard numbers on a cost squeeze that has intensified with the real estate boom. The researchers found that the number of apartments affordable to households earning about $32,000 a year, or 80 percent of the median household income in the city, has dropped by 205,000 in just three years.

While precise comparisons for earlier periods are not available, this appears to represent the sharpest decline in the number of apartments within the reach of such households since the mid-1990's.

The report also found that while the median rent for unsubsidized apartments jumped to $900 from $750 — a 20 percent increase in three years — the median household income in the city shrank to $40,000 from $42,700.

Whether the rising housing costs are seen as a sign of the city's economic vitality or a harbinger of trouble depends on who is talking. Several economists said they were proof of the city's success: Lots of people still want to live in New York. But housing experts warned that high rents could force workers out of the city or into overcrowded conditions and multiple jobs.

"The market will work through this, but there are people who really lose," said Chris Mayer, director of the Paul Milstein Center for Real Estate at the Columbia Business School. "Whether that's a city problem really depends on how much city government or residents feel this is an inevitable thing they can't fight, or whether they're going to try to do something about it."

City officials say the rapid rent increases may slow down in coming years as new construction adds more units to the market.

The study — by researchers at the Furman Center for Real Estate and Urban Policy and based in part on the city's Housing Vacancy Survey, done by the Census Bureau every three years — found that the combination of stagnant incomes and rising rents had landed especially hard on households with incomes of $24,000 to $32,000.

The current minimum salary for a city firefighter is $32,700. Police officers start at the equivalent of roughly a $25,000 salary while in the police academy and jump to about $32,000 in their first year. Experienced home health aides, nursing aides, child care workers, bartenders, coffee shop hostesses, tour guides — who work in industries the city hopes will continue to grow — make similar amounts.

Two out of every five New York City households earn $32,000 or less.

In calculating the decline of units, the study's researchers assumed that the rent that is truly affordable to a household is no more than a third of its income. While the city lost 205,000 out of about 1.2 million units affordable to households earning $32,000, the number affordable to households making $24,000, or 60 percent of the median, declined by nearly 92,000, or 15 percent.

"We couldn't believe the numbers," said Vicki Been, director of the Furman Center and an author of the report. "It's pretty remarkable."

Ms. Been said it was not possible to compare the rent increases between 2002 and 2005 with increases in the previous three-year period because of differences in the samples used by the Census Bureau. Adjusted for inflation, the increase in median rent between 2002 and 2005 was 8 percent. She said the median rent for all units increased 1.8 percent between 1996 and 1999, adjusted for inflation; for unsubsidized units, the increase was 5.6 percent.

There are multiple reasons for the recent rise in rents, economists and others say. The population is growing, and housing construction is only beginning to catch up. Many new arrivals make more money than people already here. Much of the new housing has been for people with higher incomes, and most of it has been for sale, not for rent.

Some housing experts say escalating rents pose a threat to the city's well-being. They say workers needed for crucial service jobs will move away, if they are not already doing so. Those who choose to stay will double and triple up in apartments, settle for illegal housing or scrimp on education and health care — investments that might help them get ahead.

"So this disparity between income and rent is worrisome from a public policy perspective," said Elaine Toribio, a senior policy analyst for Citizens Housing and Planning Council, a policy research group. "At the high end, you could reach a point where the Goldman Sachs employee says, 'I'm going to Hoboken.' And at the lower end, you force people to make unsound decisions."

But some economists say high housing costs go hand in hand with economic growth, not stagnation. Andrew F. Haughwout, a research officer at the Federal Reserve Bank of New York, studied 25 metropolitan areas in various time periods including 1980 to 2005 and 1990 to 2005 and found the fastest growth in places where housing prices rose the most.

"You might expect in places where housing gets really expensive, it will have a negative impact on economic growth," he said in an interview. "That's a kind of received wisdom: If a place gets too expensive, people move out and it shuts down. The logic doesn't hold together too well. Because why does a place get too expensive? It's typically because of high demand for that place."

In New York, the availability of more expensive apartments rose significantly between 2002 and 2005. The number of unsubsidized apartments, including rent-regulated apartments, renting for $1,000 and $1,200 a month rose by 58,000, or nearly 34 percent; the number renting for $1,200 to $1,400 rose by 57,500, or 52 percent; and apartments for $1,400 and above rose by 74,432, or 31 percent.

City officials say they believe that the rapid escalation in rents may be slowing and that they will continue to do so over the next few years in part in response to the current housing construction boom. Last year, the city issued permits for the construction of nearly 32,000 new housing units, a 34-year high; the number of permits issued in the first quarter of 2006 was up 27 percent over the same period last year.

Even if most of those new units are for relatively well-off people, city officials say, some existing housing will in turn become available as lower-priced apartments. At the same time, they say, the Bloomberg administration has continued to pursue its goal of creating or preserving 165,000 units of housing affordable to low- and moderate-income people.

"Clearly, one solution to the problem is increasing the housing supply over all," said Shaun Donovan, commissioner of the Department of Housing Preservation and Development. "Through rezonings, revising the building code, a range of initiatives, we're focused on trying to make sure that the current level of housing starts continues. On the other side, though, we do also clearly want to increase the number of subsidized units through the mayor's housing plan."

The Furman Center's report, called State of New York City's Housing and Neighborhoods 2005, ranked the five boroughs and 59 community districts in terms of 30 indicators like median monthly rent, income diversity and overcrowding. Rents were highest in the district that incorporates Greenwich Village and the financial district and lowest in Mott Haven, Hunts Point and central Harlem.

The study found that the rental vacancy rate rose slightly in the city as a whole but declined in much of the Bronx. The percentage of household income spent on rent was lowest on the Upper West Side and highest in Highbridge in the Bronx.

"We're an economy that has a great addiction to low-wage labor," said John H. Mollenkopf, director of the Center for Urban Research at the City University Graduate Center. "To the extent that we want low-wage labor, we have to make housing available for low-wage people to live in."

    Less Housing for Residents of Average Pay, Report Says, NYT, 16.6.2006, http://www.nytimes.com/2006/06/16/nyregion/16housing.html?hp&ex=1150516800&en=f83141849725bf0a&ei=5094&partner=homepage

Stocks Fall Steeply in Asia, Europe and U.S.

June 8, 2006
The New York Times
By JEREMY W. PETERS and WAYNE ARNOLD

Stocks fell steeply around the world today on signs that central banks would go on raising interest rates to fight inflation, even though growth is slowing in the United States and elsewhere. American stocks followed those in Europe and Asia into sharp declines in morning trading.

A fall in oil prices and gains by the dollar, touched off by reports that a major terrorist figure in Iraq had been killed, did little to stem the negative tide in equity markets.

At midday in New York, the Dow Jones industrial average was off by 1.4 percent, and the Nasdaq composite more than 2 percent, continuing a downward trend that markets around the world have been unable to shake all week.

Japan's benchmark Nikkei 225 index fell more than 3 percent today to its lowest level in six months, and stocks also fell steeply in Hong Kong and Taiwan. The Bombay Stock Exchange fell almost 5 percent to its lowest level since January.

Major stock indexes in France, Germany and Great Britain and smaller markets throughout Europe posted losses of well over 2 percent today; Swedish stocks fell more than 4 percent.

Central-bank hawkishness on inflation was the main reason. An unexpected interest-rate increase by the central bank in South Korea contributed to the Asian declines, while a quarter-point increase announced by the European Central Bank for its benchmark short-term interest rate, though widely expected, nonetheless pushed Continental markets lower. Turkey and Thailand also raised rates, though the Bank of England announced that it was leaving its rates unchanged.

Adding to the market jitters were a series of comments around the world in recent days by central bankers, signaling that they were not done tightening credit to squelch inflation.

Jean-Claude Trichet, president of the European Central Bank, warned in Madrid today that the bank's latest rate increase may not be the last, a similar message to the one delivered on Monday by Ben S. Bernanke, the chairman of the Federal Reserve, at a banking conference in Washington on Monday, when he said that inflation remained the Fed's main concern.

Stocks of companies that depend on American consumers for sales, like Toyota and Samsung, or that sell them raw materials, like the metal-mining conglomerate BHP Billiton, have been hit especially hard. Commodity-market prices for goods like copper and tin have fallen in recent days in anticipation of weaker demand.

The dollar gained against other major currencies, especially the Swiss franc, a traditional safe haven in turbulent times, on news that Abu Musab al-Zarqawi, the leader of Al Qaeda in Mesopotamia and the most wanted terrorist in Iraq, had been killed in an air strike north of Baghdad.

In Asia, recent market declines have more or less obliterated a potent spring rally, one fueled largely by foreign investors scouring the world for fresh growth that could beat those available at home.

More often than not, the movement of such money takes no account of s Asia's longer-term growth prospects. But the wide scope of the latest market downdraft has some economists wondering whether the markets are signaling the start of something more ominous.

Australia's benchmark stock index suffered its biggest slide in almost five years, dropping 2.3 percent today. Hong Kong stocks fell 2.3 percent to their lowest level since March 10; South Korean shares fell 3.5 percent, returning to the levels of last November.

"Everybody's worried about the U.S. economy," said Chua Hak Bin, Director of Asia-Pacific economic and market analysis at Citigroup in Singapore. "The fear is that we could be headed for a slowdown that will affect Asia's exports. So what was just a market stress signal has turned into a hemorrhage."

In India, problems began well before Mr. Bernanke spoke. After pouring over $4 billion into India's stock market in the first four months of this year, foreign investors withdrew $2.1 billion in May, according to data compiled by Nomura International in Hong Kong. Taiwan experienced a similar reversal, with $1.2 billion withdrawn in May after $9.7 billion had flowed in.

Still, analysts note, most of the world's stock markets remain at least 15 percent higher than they were a year ago.

Whatever happens in the United States, they say, domestic spending in Asia is likely to weather a downturn. So they are advising clients to sell stocks that depend on American demand and buy those that cater to Asian consumers.

"When the dust settles down," said Frank Gong, head of equity research at J.P. Morgan China, "I think Asia will still outperform."

    Stocks Fall Steeply in Asia, Europe and U.S., NYT, 8.6.2006, http://www.nytimes.com/2006/06/08/business/worldbusiness/08cnd-stox.html?hp&ex=1149825600&en=9d181a71123abb7c&ei=5094&partner=homepage

India Becoming a Crucial Cog in the Machine at I.B.M.

June 5, 2006
The New York Times
By SARITHA RAI

BANGALORE, India, June 4 — The world's biggest computer services company could not have chosen a more appropriate setting to lay out its strategy for staying on top.

On Tuesday, on the expansive grounds of the Bangalore Palace, a colonial-era mansion once inhabited by a maharajah, the chairman and chief executive of I.B.M., Samuel J. Palmisano, will address 10,000 Indian employees. He will share the stage with A. P. J. Abdul Kalam, India's president, and Sunil Mittal, chairman of the country's largest cellular services provider, Bharti Tele-Ventures. An additional 6,500 employees will look in on the town hall-style meeting by satellite from other Indian cities.

On the same day, Mr. Palmisano and other top executives will meet here with investment analysts and local customers to showcase I.B.M.'s global integration capabilities in a briefing customarily held in New York. During the week, the company will lead the 50 analysts on a tour of its Indian operations.

The meetings are more than an exercise in public and investor relations. They are an acknowledgment of India's critical role in I.B.M.'s strategy, providing it with its fastest-growing market and a crucial base for delivering services to much of the world.

"A significant part of any large project that we do worldwide is today being delivered out of here," said Shanker Annaswamy, I.B.M.'s managing director for India, who presides over what is now the company's second-largest worldwide operation. In the last few years, even as the company has laid off thousands of workers in the United States and Europe, the growth in I.B.M.'s work force in India has been remarkable. From 9,000 employees in early 2004, the number has grown to 43,000 (out of 329,000 worldwide), making I.B.M. the country's largest multinational employer.

Some of the growth has been through acquisition. In a deal valued at about $160 million in 2004, I.B.M. bought Daksh eServices of New Delhi, India's third-largest back-office outsourcing firm with 6,000 workers. Since then, that operation alone has grown to 20,000 employees.

"Now that companies such as Infosys Technologies and Cognizant have clearly demonstrated that the services marketplace is not impregnable, the new battle is for talent," said N. Lakshmi Narayanan, president and chief executive of Cognizant Technology Solutions of Teaneck, N.J. Cognizant is one of I.B.M.'s competitors; it is incorporated in the United States but has the bulk of its 28,000 employees in India.

I.B.M. is growing not only in size by adding new hires, but also in revenue. The company's business in India grew 61 percent in the first quarter of this year, 55 percent in 2005 and 45 percent the year before.

That growth has not come just from taking advantage of the country's pool of low-cost talent. In recent months, the technology hub of Bangalore has become the center of I.B.M.'s efforts to combine high-value, cutting-edge services with its low-cost model.

For instance, the I.B.M. India Research Lab, with units in Bangalore and New Delhi and a hundred employees with Ph.D.'s, has created crucial products like a container tracking system for global shipping companies and a warranty management system for automakers in the United States. Out of the second project, I.B.M. researchers have fashioned a predictable modeling system that helps track the failure of components inside a vehicle, a potentially important tool.

In March, the company started a Global Business Solutions Center here, announcing that it would represent the "future of consulting services." I.B.M. said that it expected to invest more than $200 million a year in the new center. The company hopes to provide clients with access to the expertise of its 60,000 consultants worldwide in complex areas like supply chain management and compliance with banking rules.

But competitors are trying to gain on I.B.M. The rival consulting firm, Accenture, based in Hamilton, Bermuda, is ramping up equally rapidly in India, while another outsourcing competitor, Electronic Data Systems, based in Plano, Tex., recently made an offer for a controlling stake in Mphasis, a midsize outsourcing firm in Bangalore.

The race for India's skilled, inexpensive talent may not stop at I.B.M. "Many companies in the technology development and support niche covet and value these workers highly," said Kevin M. Moss, a New York-based special counsel in Kramer Levin Naftalis & Frankel's outsourcing and technology transactions group.

On the pricing front, rivals like Tata Consultancy Services of Mumbai and Infosys Technologies of Bangalore have pioneered and perfected the low-cost model. Infosys Technologies, with 52,700 employees, has $2.15 billion in annual revenues, a figure that is growing 30 percent annually.

But the depth, breadth and geographic spread of I.B.M.'s global operations — which generated $91 billion in sales last year, $47 billion from services — keep it ahead of its competitors for now. For example, I.B.M. manages a system it developed for a large American oil company, which it would not identify, that keeps track of consumption and oversees financial and administrative processes as well as the technical help desk, data network and servers. I.B.M. is also researching tools to track company assets and reduce costs.

"All this is done for one customer seamlessly from three of our centers in Bangalore, Chicago and outside of London," said Amitabh Ray, director of global delivery, I.B.M. Global Services. "These kinds of capabilities and global scale are unmatched."

But smaller rivals are playing catch-up here, too, by talking to customers about their needs and then developing custom-built software. Infosys Technologies, for instance, has a consulting unit with headquarters in Fremont, Calif., near Silicon Valley, where it now has 200 consultants, and an additional 1,800 consultants in India.

Meanwhile, Mr. Annaswamy, I.B.M.'s chief executive in India, acknowledged that growth was difficult because thousands of recruits had to be quickly integrated into the company. Salaries are rising, and employee costs are also moving up, he said.

Even so, the Indian operation is becoming more and more strategic for the company. "Both in terms of size and scale, India has become the focal point," Mr. Ray, of I.B.M. Global Services, said.

    India Becoming a Crucial Cog in the Machine at I.B.M., 5.6.2006, http://www.nytimes.com/2006/06/05/technology/05ibm.html

Uncertainty Surrounds Plans for New Nuclear Reactors

June 4, 2006
The New York Times
By MATTHEW L. WALD

WASHINGTON, June 3 — The nuclear industry is poised to receive the first new orders for reactors in three decades, but what remains unclear is whether the smartest buyers will be those at the head of the line or a little farther back.

The industry expects orders for a dozen or so new reactors. Since the last completed order was placed in 1973, much has changed. There are new designs, a new licensing system, new federal financial incentives, new costs and new risks, and no one is sure how the changes will play out as orders, or requests to build, are filed.

For example, the federal government is offering "risk insurance" for the first six reactors, to protect builders against bureaucratic delays, with the biggest share of the insurance going to the first two. Loan guarantees are also possible, but probably only for the first few plants.

Manufacturers have design costs that they will probably try to recoup from the first few reactors sold, increasing the cost. And no one seems eager to be the first to try out a radically different licensing system.

Substantial questions remain about the predictability of the regulatory process, said James R. Curtiss, a former member of the Nuclear Regulatory Commission who is a lawyer at Winston & Strawn. The firm recently helped with an application for a license for a new uranium enrichment plant in New Mexico.

Long delays occurred, Mr. Curtiss said, as new issues were argued before a three-judge administrative law panel and then went to the five-member commission for a ruling. Licensing a second plant will go much more smoothly, he said.

Progress Energy, a utility based in Raleigh, N.C., has preliminary plans for four new reactors, and it could be the first to announce that it is applying for a license.

But Keith Poston, a spokesman, said, "One can imagine the benefits of not being first, and watching and learning from others."

The industry itself has taken steps to lower the stakes.

For example, the energy bill created a production tax credit, a per-kilowatt-hour benefit, for the first 6,000 megawatts of new capacity, which would represent about five new reactors if applied on a first-come-first-served basis.

The total value is about $1 billion over eight years. But the industry persuaded the Bush administration to spread the credit around, so it will be shared by all the plants that are announced by the end of 2008 and have construction under way by 2014, reducing the value of being first in line.

Michael J. Wallace, the executive vice president at Constellation Energy, which is also contemplating a new reactor, said the industry's effort to spread the tax credit was intentional.

"This is not a race," he said.

"If I end up being the first, I'm quite comfortable with that," Mr. Wallace said, because the incentives would offset the extra risks. "If I'm third, I'm comfortable, because there is less incentive, but two guys will be two or three years in front of me."

The first buyer may get concessions from reactor vendors, who are eager to end a 33-year drought and position themselves for a big slice of the new market, which industry backers hope will include more than a dozen reactors in the next few years.

But opponents of new plants predict doom for any company that tries to build a reactor, with the first likely to draw the most opposition.

"It's like volunteering for an experiment," said Paul Gunter, a nuclear reactor expert at the Nuclear Information and Resource Service, an antinuclear group. "These first experimenters carry a lot of risk."

One, Mr. Gunter said, is getting negative credit reviews from the bond rating agencies.

Curt L. Hebert Jr., a former chairman of the Federal Energy Regulatory Commission who is now an executive vice president of Entergy, a potential builder, sized it up the other way. "I think the financial incentives and governmental guarantees certainly outweigh the risk," Mr. Hebert said. "As we look at this, we see there being more risk in being third or fourth than being first or second."

For all the companies, the biggest factor is the estimate of future electricity requirements, executives say. Next is the cost of competing technologies: the price of natural gas, as well as the price of coal, which is cheap but requires expensive pollution controls.

Speaking of the various kinds of aid offered in last year's energy bill, Mr. Poston said, "We would pursue incentives because they would be beneficial to customers and lower the project cost." That leaves open, however, whether going first is the lowest-cost option.

While the risk and cost of some factors can be calculated, there are nonfinancial considerations as well, said Richard J. Myers, executive director of the Nuclear Energy Institute, the industry's trade association. "It reflects the C.E.O.'s personality," he said. "Some corporations want to be the pioneer, want to be the first one out there. They earn a footnote in the history books by doing so."

    Uncertainty Surrounds Plans for New Nuclear Reactors, NYT, 4.6.2006, http://www.nytimes.com/2006/06/04/washington/04nuke.html

Job Growth and Wages Were Weak Last Month

June 3, 2006
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, June 2 — Job creation slowed to a crawl in May and hourly wages failed to keep up with inflation, the Labor Department said on Friday, in a report suggesting that high energy prices and higher interest rates are starting to crimp economic growth.

The nation's employers added 75,000 jobs in May, less than half what most forecasters had expected. It was the third consecutive month of slower job growth, even though the unemployment rate edged down to 4.6 percent, nearly a five-year low.

The surprisingly weak jobs report provoked contradictory reactions of relief and anxiety among investors — a "Rorschach" view of the economy, in the words of one analyst — because it highlighted the ambiguities that confront the Federal Reserve.

On the one hand, the job numbers bolstered the Fed's expectation — and hope — that economic growth would slow just enough to reduce inflationary pressures.

The Fed and its chairman, Ben S. Bernanke, are hoping for a "soft landing" from the torrid growth earlier this year, reducing the upward push on prices and wages and allowing the Fed to end its two-year campaign to raise interest rates.

On the other, the report was so much weaker than analysts had expected that it prompted new worries about an unexpected downturn.

In the Treasury market, bonds rose as traders bet that the Fed might pause in June from raising rates. Stock prices initially rose, but fell back on concerns of slowing growth, with the Dow ending the day down 12 points. [Page C6.]

Employers turned cautious in May across a broad swath of the economy: in retail stores, in factories and at construction sites. Average hourly wages were almost flat and average weekly earnings, which include pay from overtime and second jobs, declined slightly.

Monthly job numbers are volatile, but analysts said rising oil prices and a cooler housing market were slowing the economy. Consumer confidence dropped sharply last month. Unemployment claims have risen over the last month. Factory orders in April declined 1.8 percent, the government said on Friday. And a closely watched barometer of manufacturing activity, the Institute of Supply Management's monthly survey, declined as well.

The rush of downbeat data comes a few weeks after a growing number of analysts and investors were criticizing Mr. Bernanke for being too soft on inflation.

"It's a perfect example of the Rorschach economy," said Bernard Baumohl, director of the Economic Outlook Group in Princeton Junction, N.J. "We are at the cusp of a turning point in the economy, and it's usually at these turning points where you get a lot of confusion."

But the labor report surprised most analysts, including many who had warned that the May increases might come in well below the consensus forecast of 170,000 additional jobs. Except for two months last fall, when job creation stalled as a result of Hurricane Katrina, the addition of 75,000 jobs in May was the lowest since July 2004.

Retailers shed 27,000 jobs in May, suggesting that store owners anticipated a slowdown even though retail sales have been fairly strong. Manufacturing companies trimmed their work forces by 14,000, largely in the auto and electronics industries, all but reversing a jump in April. Construction employment, which soared last year, was flat in May.

The biggest areas of job creation were in professional and business services, health care and education. Wholesalers added jobs as well, and have added 108,000 in the last year even as retail employment has been flat, suggesting that consumers are shifting purchases to the Internet.

But Ian C. Shepherdson, a forecaster at High Frequency Economics who had been warning about a sharp slowdown in the second half of 2006, said even he was surprised that job creation slumped much earlier than he had expected.

"It certainly fits quite firmly with my view that things would slow down sharply in the second half," Mr. Shepherdson said. "What's accelerated the slowdown, relative to the Fed's expectation and relative to mine, is the spike in oil prices."

Higher gasoline prices are expected to pinch consumer spending in areas beyond transportation. The Fed and Mr. Bernanke have been predicting that growth would slow from the annualized pace of 5.3 percent in the first quarter to about 3 percent for the year.

That would be consistent with hopes for a "soft landing," a return to growth that would be in line with what economists think is the long-run pace of productivity growth.

Laurence H. Meyer, a former Fed governor and chief forecaster at Macroeconomic Advisers, predicted that the economy was poised for "an immediate slowdown" to an annual rate of 2.5 percent or so in the three months ending June 30.

"As far as slowdowns go, this one is quite benign," Mr. Meyer wrote in a note to clients, predicting that unemployment would edge up to about 5 percent by early 2007.

Mr. Bernanke and the Fed almost certainly remain undecided about whether to pause in raising interest rates at the next policy meeting at the end of June.

Minutes from the May meeting, when the central bank raised the overnight federal funds rate to 5 percent, its 16th increase in two years, showed that Fed officials were so uncertain that they discussed options ranging from no increase to an increase that would be twice as big as usual.

Mr. Bernanke has repeatedly insisted that the Fed will base its decisions on incoming economic data. Fed officials are paying close attention to signs that the housing market is cooling, which would reduce the pace of cash-out home refinancings and ultimately consumer spending.

Mr. Bernanke is under pressure, especially from bond investors, to demonstrate his credibility as an inflation fighter. But as was the case with his predecessor, Alan Greenspan, Mr. Bernanke is unlikely to be persuaded by a single month's worth of data.

"The Fed wants to stop raising rates, but they've got to have enough economic data to justify it," said Edward E. Yardeni, chief investment strategist at Oak Associates in Akron, Ohio. "It's like painting by numbers."

    Job Growth and Wages Were Weak Last Month, NYT, 3.6.2006, http://www.nytimes.com/2006/06/03/business/03econ.html?hp&ex=1149393600&en=3637f0983004d054&ei=5094&partner=homepage

On Route of Chevrolet Impala, Signposts to Detroit's Decline

June 3, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, June 2 — To understand why Detroit is having so much trouble competing against Asian car companies, look no further than the Chevrolet Impala.

In the 1960's, the Impala was king of the road. General Motors sold more than a million of them in 1965. Now the Impala is still the best-selling American car, but it is selling less than a third of that total.

The Impala also lags behind four Japanese offerings — the Toyota Camry and Corolla, and the Honda Accord and Civic — in the annual race to be the best-selling car in America.

But Chevrolet, by its own admission, has no plans to try to win back the bragging rights anytime soon.

The reason is that G.M. prefers to stick with its decades-old approach of breadth over depth, buckshot over a silver bullet. So rather than placing an all-or-nothing bet on a single car at one division, it sells family cars through a variety of brands, including Chevrolet, Buick, Pontiac and Saturn.

"We're able to get at more people because we've got locations that sell all these vehicles," said Chevrolet's general manager, Edward J. Peper Jr.

That idea served G.M. well when it sold more than half of all new cars and trucks back in the 1960's. But now G.M. controls less than a quarter of American sales.

And in today's ruthlessly competitive market, that strategy means that no single G.M. car will get the same amount of resources — engineering, design and marketing — as Toyota and Honda devote to their best sellers.

The Impala "comes across as the best that the American companies can do," said Brian Moody, a road test editor at Edmunds. com, a Web site that offers buying advice to consumers. "In a vacuum, it's hard to find anything wrong with it. And then you drive the Camry and the Accord."

The strength of those two cars is a reason Asian auto companies took a record 40 percent of the American market in May, when Detroit's market share fell to its second-lowest level in history, less than 53 percent.

To be sure, G.M. and Ford vastly outsell their Japanese competitors in pickup trucks and sport utility vehicles: the two markets where they have put most of their resources for the last decade and a half.

Moreover, G.M. executives say they are thrilled with the newest version of the Impala, which went on sale last year to good reviews and initially high quality ratings. And while sales at G.M. have dropped 8 percent this year, Impala sales are up 6.4 percent this year over 2005.

Impala can go head to head with Japanese cars in several ways, and price is among them. Like them, Impala sells for about $20,000 to $27,000. The Accord, Camry and Impala are on the list of recommended vehicles of Consumer Reports. And the Impala, like the Camry and Accord, has loyal buyers: some 45 percent of its buyers come back for a second one, according to Chevrolet.

The similarities largely end there, however, and the differences among the cars are marked. The main one is Impala's place in the G.M. lineup. It is part of a flock of family sedans at the automaker. In fact, it is not even the only family car at Chevrolet, which also sells the Malibu.

By contrast, Camry is Toyota's brightest star. Camry is "the center of the target," said James Press, who was recently named president of Toyota Motor North America.

Getting the latest Camry ready for its introduction this April was akin to a space launching for Toyota, which is building Camrys in eight markets around the world, including China, where production began last week.

It corralled engineers from the United States and Japan, and manufacturing experts from all the places it builds Camrys. They worked on ways to improve the car up to the time it started rolling off the assembly line.

The last American company to focus that kind of effort on a family car was Ford, which famously put together a team in the 1980's to develop the Taurus. Even back then, the goal was to beat the Accord and the Camry, and they did so, taking the best-selling title for a number of years until 1997, when Camry captured it. It has ceded the title only once since, to Accord.

Toyota's win coincided with Ford's shift of resources to focus on pickups and S.U.V.'s. Even though Ford now has its own flock of family cars, including the Ford Fusion, it does not plan to build enough of any one model to fight Camry and Accord.

Nor does Chevrolet. In 2006, it expects to make about 275,000 Impalas at a plant in Oshawa, Ontario, the only one where the Impala is built.

That leaves it well shy of Toyota, which sold more than 400,000 Camrys in 2005. For the American market, Toyota builds Camrys in Georgetown, Ky., and it imports more from Japan and soon will be able to build another 100,000 a year when it begins production in 2007 at Subaru's plant in Lafayette, Ind. Toyota holds a stake in Subaru's parent company.

With more than two million Camrys on the road, the name "has become almost a household word," said Tom Libby, an industry analyst with J. D. Power & Associates.

Yet, the Impala was an even bigger household name back when Toyota was barely a blip on the radar. Since 1958, the year after Toyota first sold cars here, Chevrolet has sold more than 14 million Impalas, making it one of the most recognizable cars in automotive history.

But unlike Camry, which has been sold continuously in the United States since 1982, always aimed at the family market, G.M. stopped selling the Impala for two stretches in the 1980's and 1990's. From its roots as a fast, chrome-laden car with six taillights, the Impala grew in size, then shrank and, in the eyes of critics, became generic.

Like many other G.M. models, it is sold to rental car companies, government agencies and corporations, markets where Toyota generally does much less business. The Impala is also a police car, bought by, among others, the New York Police Department. About 20 percent of the Impalas go to so-called fleet sales, down from almost half last year (about 10 percent of Camrys are sold to fleets).

Chevrolet is trying to veer away from the bulk sales and sell more to consumers. One goal with the new Impala, said its marketing manager, Mark A. Clawson, is to put features on the car that Toyota does not offer.

For example, the top-of-the-line SS version can go from 0 to 60 miles per hour in 5.7 seconds, thanks to a zippy V-8 engine with 303 horsepower.

Camry does not offer a V-8, but it has options Impala does not — namely, a manual transmission and four-cylinder engine, both available on its basic and midlevel cars. With gas prices staying high, both those features increasingly are in demand as buyers switch from bigger vehicles, especially S.U.V.'s, to cars.

But buyers who like the roominess of an S.U.V. may be pleased with another Impala feature. Inside the Impala SS, there are fold-flat rear seats, like those in minivans and S.U.V.'s, creating a vast storage space that most sedans cannot match. There are other options, too, like a jack for an MP3 player, a Bose stereo system and satellite radio.

On the outside, Impala looks conservative — a criticism that used to be leveled at Camry before its latest redesign, which created a curvy car with a light, nimble feel.

Unlike Toyota, which was aiming this time out for a more eye-catching car, Chevrolet deliberately tried not to make a style statement with Impala, Mr. Clawson said.

"We weren't looking for a vehicle that would turn heads, but we weren't looking for one that would turn heads away either," Mr. Clawson said. "We were looking for a balance," a car that was "nicely styled but not ostentatious."

That approach, Mr. Moody of Edmunds.com said, seemed reasonable given the relatively bland appearance of the previous Camry and Accord models. But it now seems unwise given what Toyota has done with the latest Camry, which "so far exceeds the previous car that it almost seems like it's not a Camry," he said, but rather a Lexus luxury car. The Accord, already more eye-catching, gets another face-lift this fall.

Chevrolet has put more emphasis this year on marketing its new S.U.V.'s, especially the Chevrolet Tahoe, and its new line of pickup trucks. It is only now beginning to promote cars like the Impala that it maintains get better fuel economy than its Japanese rivals.

"The American companies spent so much time focusing on trucks and S.U.V.'s that they neglected their cars," Mr. Moody said. "Now they're just playing catch-up."

Even so, Chevrolet dealers, for their part, seem happy with the Impala. Sales of the latest version are up 20 percent at Genoa Chevrolet outside Toledo, Ohio, said Mike Pauley, the dealership's executive manager.

In past years, many of Mr. Pauley's customers chose the Impala largely because of G.M.'s deep discounts, or because they wanted an American-made sedan. But the new version, which carries a modest $500 rebate, has attracted buyers more on its own merits, he said.

One recent customer was Gary McKeel, a retired salesman from Perrysburg, Ohio, who switched to the Impala after owning Buicks for the last 17 years. "It's spacious and it rides very nice," Mr. McKeel said.

But down the road, Impala may not be such a great deal. According to Edmunds.com, a typical Impala owner will spend 11.3 percent more, or about $4,300, on the car over five years than the owner of a typical Camry, mainly because the car loses its value faster and has higher repair costs. That figure takes into account the $500 rebate that Chevrolet is offering on Impala versus none on the Camry.

Mr. Libby of J. D. Power said he did not rule out Detroit's taking the car crown again. This Impala will not be the one, however, he said. Impala "has not had the strength, it has not had the equity of the Camry," he said.

Getting the title back will require another companywide effort like Ford made 20 years ago — the kind that Toyota and Honda routinely make when they introduce new versions of their bread-and-butter cars.

"To me, it's a step-by-step process," Mr. Libby said. "There are no shortcuts."

Nick Bunkley contributed reporting for this article.

    On Route of Chevrolet Impala, Signposts to Detroit's Decline, NYT, 3.6.2006, http://www.nytimes.com/2006/06/03/business/worldbusiness/03chevy.html?hp&ex=1149393600&en=fb5a363019aa8582&ei=5094&partner=homepage

Gilded Paychecks    Rewards, Guaranteed

Big Bonuses Still Flow, Even if Bosses Miss Goals

June 1, 2006
The New York Times
By GRETCHEN MORGENSON

It was the kind of mistake that wage slaves can only dream of. Because of what the company called an "improper interpretation" of his employment contract, Sheldon G. Adelson, chairman, chief executive and treasurer of the Las Vegas Sands Corporation, received $3.6 million in salary and bonus last year, almost $1 million more than prescribed under the company's performance plan.

Four more top executives of the Las Vegas Sands, which owns the Venetian Resort Hotel and Casino, received more than they should have. The total in excess bonus payments for the five men was $2.8 million.

The compensation committee of the board conceded that it had made an error. But it said that "the outstanding performance of the company in 2005" justified the extra money, and it allowed the executives to keep it.

Shareholders of Las Vegas Sands did not fare as well. The value of their holdings fell 18 percent last year.

As executive pay packages have rocketed in recent years, their defenders have contended that because most are tied to company performance, they are both earned and deserved. But as the Las Vegas Sands example shows, investors who plow through company filings often find that executive compensation exceeds the amounts allowed under the performance targets set by the directors.

Executives of companies as varied as Halliburton, the military contractor and oil services concern; Assurant, an insurance company; and Big Lots, a discount retailer, all received bonuses and other pay outside the performance parameters set by the boards of those companies.

It is the equivalent of moving the goalposts to shorten the field, compensation experts say.

"Lowering the hurdles is especially disconcerting because very often the goals are not set all that high to begin with," said Lucian Bebchuk, professor at Harvard Law School and author with Jesse Fried of "Pay Without Performance." Mr. Bebchuk said shareholders should be especially alert to increases in bonuses because more companies were shifting away from stock options and into cash incentives.

Some employment agreements actually stipulate that they will provide bonuses even if company performance declines. The agreement struck in 2004 by Peter Chernin, president and chief operating officer of the News Corporation, entitles him to a bonus even if earnings per share fall at the company. If earnings rise by 15 percent in any given year, Mr. Chernin's bonus is $12.5 million. But if they fall 6.25 percent, Mr. Chernin's bonus is $4.5 million, and an earnings decline of 14 percent translates to a $3.52 million bonus.

Last year, Mr. Chernin received $8.3 million in salary and $18.9 million in bonus pay. A company spokesman declined to comment on the bonus structure. He confirmed that the company's chief executive, Rupert Murdoch, has a similar bonus arrangement. Company filings show that Mr. Murdoch received a bonus of $18.9 million last year.

While bonus and other incentive pay figures are included in company filings, shareholders hoping to calculate precisely what performance objectives executives must meet to receive such pay can be confounded.

Descriptions of bonus targets are typically vague and often include a laundry list of measures that the board may or may not consider. The board may factor in sales, earnings, stock price, capital expenditures, cash flow, even inventory levels. Company officials often explain the practice by saying that too-specific information on performance hurdles can give away corporate secrets or invite rival organizations to lure executives away by offering them contract terms that are easier to achieve.

Compensation experts counter that lists of vague hurdles may allow carefully chosen measurements to be met in both fair weather and foul.

Indeed, shareholders often find that the performance measures used by the company to determine pay can be very flexible. For example, Assurant, which is based in New York, says its compensation committee can adjust incentive payments for extraordinary events, "including, but not limited to, acquisitions or dispositions of businesses, litigation costs, tax or insurance recoveries or settlements, changes to accounting principles, asset impairment and restructuring."

For bonuses paid in 2004, Assurant adjusted the earnings performance measure to exclude losses related to hurricanes along the Atlantic coastline. This adjustment helped to increase the company's net operating income and therefore raised bonuses to the company's executives in 2004.

It is impossible to pinpoint precisely how much the hurricane exclusion bolstered the Assurant executives' bonuses in 2004. Company filings stated that without two exclusions, one of which was the hurricane impact, bonuses would have been equal to half of their target. Thanks to the adjustments, bonuses were paid at 1.72 times their target.

As James F. Reda, an independent compensation consultant in New York, pointed out, shareholders cannot adjust their results for things like hurricane losses, or losses on divestitures or discontinued operations, all of which deplete shareholder equity.

"What a lot of these plans are trying to look at is core business, and it is a decent argument," Mr. Reda said. "But sometimes people get lazy and put all sorts of stuff in the restructuring bucket that don't belong there — like operating expenses. Once you give management a little wiggle room, being smart people, they can figure out ways to take advantage of it."

Often, company officials include everyday expenses — like those relating to sales and administration — in restructuring costs, making the company appear to be far more profitable.

In some cases, performance measures appear to reflect basic operational tasks expected of an executive, not something worthy of extra pay. Last year, Assurant's compensation committee chose four elements to determine whether its executives deserved a bonus. Three were fairly typical financial measures: net operating income, revenue growth and return on equity at the company.

The fourth measure, though, was how well Assurant's executives complied with Sarbanes-Oxley, the law enacted in 2002 after Enron and WorldCom collapsed. According to company filings, one-quarter of an executive's bonus calculation related to his or her "compliance with Section 404 of the Sarbanes-Oxley Act," a part of the law that relates to a company's internal financial controls.

Last year, J. Kerry Clayton, Assurant's chief executive; Robert B. Pollock, its president, and Lesley Silvester, an executive vice president, all received bonuses that were 1.62 times their targets.

The compensation committee of Assurant's board is headed by Beth L. Bronner, chief marketing officer of Jim Beam Brands, a division of Fortune Brands. She is joined on the committee by Charles John Koch, vice chairman of the board of the Citizens Financial Group; Michele Coleman Mayes, general counsel for Pitney Bowes, and John M. Palms, president emeritus of the University of South Carolina.

Melissa Kivett, head of investor relations at Assurant, said that the hurricane exclusions in 2004 were appropriate. Because of a substantial increase in Assurant's stock price, she said, "the compensation committee of our board felt that on this one occasion they needed to make an adjustment to net operating income to recognize and compensate management for this record performance."

As for the bonuses relating to Sarbanes-Oxley, Ms. Kivett said they were designed "to ensure that we had all the processes in place to meet compliance goals. The result was we did have a clean SOX opinion." She added that this year, the portion of the bonus related to Sarbanes-Oxley was smaller than it was in 2005.

But Paul Hodgson, senior research associate at the Corporate Library, an institutional research firm in Portland, Me., said paying a bonus for compliance with a law was unusual. "I can see making compliance a requirement," he said. "Because they were not a public company until 2004 they didn't have to comply with Sarbanes-Oxley before. But actually giving them a bonus for it is taking it a step further than my logic can let me go. Compliance with the law is part of your day-to-day work, not something you have to be incentivized for."

Another company that gave extra pay to executives for regular business activities was Halliburton. Its top executives received special bonuses last year for settling asbestos litigation in which the company was a defendant.

Halliburton's filings described the asbestos settlement as a "historical achievement" requiring a "tremendous amount of effort and sacrifices on the part of the employees who worked diligently over the last three years orchestrating and implementing this uniquely creative and complicated strategy."

In recognition of their performance, the company paid cash bonuses totaling $5.5 million to 36 employees. Among them were C. Christopher Gaut, Halliburton's chief financial officer; Albert O. Cornelison Jr., the company's general counsel, and Mark A. McCollum, the chief accounting officer. Mr. Gaut received $750,000, Mr. Cornelison received $1 million and Mr. McCollum received $50,000.

David J. Lesar, the company's chief executive, did not receive cash for his contribution to the asbestos settlement. He decided to take an option grant of 100,000 shares, worth $2.04 million at the time, as his extra pay for his settlement work.

Halliburton's compensation committee is made up of Robert L. Crandall, former chief executive of AMR, the parent of American Airlines; Kenneth T. Derr, the committee's chairman and a former chief executive of Chevron; W. R. Howell, a former chief executive of J. C. Penney; and Debra L. Reed, president of the San Diego Gas and Electric Company.

None of the directors returned phone calls seeking comment about the asbestos awards. Cathy Mann, a Halliburton spokeswoman, said: "This additional compensation was for the extraordinary amount of time and effort these individuals exerted, which was above and beyond what is normally expected of them in relation to their job responsibilities."

At least Halliburton and Assurant produced strong returns to shareholders last year before handing over more to executives.

Perhaps most exasperating to shareholders are bonuses to executives who fail to meet their basic performance targets. Consider what was paid to Dan W. Matthias, chief executive of Mothers Work, a maternity retailer, and his wife, Rebecca C. Matthias, the company's president.

According to the company's filings, Mr. and Mrs. Matthias were not entitled to either a cash bonus or an option grant during the year because the company failed to achieve the expected growth in earnings before interest, taxes, depreciation and amortization.

Each of the Matthiases, though, received a grant of 40,000 stock options in fiscal 2005, on top of half-million-dollar salaries. The company's compensation committee wanted to "recognize the progress made in the past year in both the development and launch of the company's strategic business initiatives, which included its Destination Maternity superstores and expansion of the company's relationship with Sears and a new tie with Kohl's, another retailer," its filing said.

"The compensation committee believes that the stock options grant is consistent with aligning the interests of these senior executives with the stockholders and will serve to reinforce the importance of improving stockholder value over the long term," the filing said.

Those stock options, if they have not been cashed in, are now worth $2.8 million.

The compensation committee of Mothers Work is overseen by Joseph A. Goldblum, a private investor; David Schlessinger, founder of Five Below, a discount retailer; and William A. Schwartz Jr., chief executive of U.S. Vision, an optical products retailer.

A spokeswoman for Mothers Work said neither the company nor its directors would comment on the option grant.

"What is often missing in these after-the-fact changings of the bonus rules of engagement is a sufficient — or any — quid pro quo," said Brian Foley, an independent compensation consultant in White Plains. Mr. Foley suggests that companies instead delay paying part of the bonus or stretch out the performance period to link the payout to an improvement in performance.

Like Mothers Work, Big Lots paid bonuses to executives last year even though performance was lagging. Big Lots, a discount retailer based in Columbus, Ohio, is going through a restructuring and last year hired a new chief executive, Steven S. Fishman. Performance criteria set by the compensation committee were not met, its proxy filing pointed out.

Still, four executives received one-time bonuses in 2005, on top of other pay. Brad A. Waite, executive vice president of Big Lots, received a bonus of $375,000; John C. Martin, also executive vice president, received $279,000; Lisa M. Bachmann, senior vice president, received $187,500, and Joe R. Cooper, chief financial officer, received $175,000.

As the Big Lots filing explained, without those one-time bonuses, the executives' cash compensation would have been below the market average. The committee determined that the pay additions would not be excessive.

Big Lots' shares started 2005 at $12.13 and ended the year at $12.01. Charles W. Haubiel, general counsel at Big Lots, said the bonuses were given to keep the company's talent intact during a time of uncertainty. "The compensation committee identified a core group of executives," he said, "and devised a retention program that said if you stay on during the year during the C.E.O. search process, you will receive a retention bonus equal to the target bonus you are typically eligible for."

The compensation committee of Big Lots is headed by David T. Kollat, president of 22 Inc., a research consulting firm, who is also on the board of Wolverine World Wide, a shoe manufacturer, and Select Comfort, a maker of air-bed mattresses. The committee's other members are Brenda J. Lauderback, a former president of the wholesale division of the Nine West Group, a shoe maker, who is also on the board of Wolverine Worldwide and Select Comfort; and Dennis P. Tishkoff, chief executive of the Drew Shoe Corporation.

These examples indicate that companies do not always practice what they preach about pay for performance. As a result, investors must read company proxies closely.

Back at the Las Vegas Sands, for example, the company's regulatory filings say that executive bonuses will be paid only when they are earned. Bonuses are generated, the company said, "only upon the attainment of the applicable performance goals during the applicable performance period." The compensation committee of the Las Vegas Sands' board establishes both the goals and the period during which they are measured, the filings state.

Last year's $2.8 million mistake proves otherwise, however. The mistaken payout was equal to almost 1 percent of the company's earnings.

The unearned bonuses are notable not only because they followed $62 million in bonuses paid to the five men in 2004 (to reflect the "significant value" they created for shareholders when they helped secure financing for a mall at the Palazzo Hotel and Casino, adjacent to the Venetian). They are also striking because they cannot be justified as performance-based under the tax code. The extra bonuses therefore were not deductible as a business expense, making them more costly for shareholders.

The error did prompt a meeting on March 1 of the four-man compensation committee of Las Vegas Sands' board, its filings stated. The committee considered what to do about the overpayments, and a majority concluded that the company's performance supported them. One member of the committee dissented, the filing said: James L. Purcell, who retired as a partner at Paul, Weiss, Rifkind, Wharton & Garrison in 1999.

The members who voted to allow the executives to keep the unearned bonuses were Irwin Chafetz, a former executive at the Interface Group, a vacation tour operator that is owned by Mr. Adelson, Las Vegas Sands' chief executive; Charles Forman, a former executive at the Interface Group who is chief executive officer of the Centric Events Group, a trade show and conference business; and Michael A. Leven, founder of U.S. Franchise Systems, franchisor of Microtel Inns and Suites. Even though Mr. Chafetz and Mr. Forman have extensive affiliations, either present or past, with Mr. Adelson's Interface Group, they are considered independent directors according to New York Stock Exchange standards.

A company spokesman said that neither Mr. Purcell nor the other members of the compensation committee of Las Vegas Sands' board would comment on the bonus overpayments. Las Vegas Sands officials who might be able to discuss the bonuses were traveling and unreachable, he said.

Mr. Foley, the independent compensation consultant, said he had never seen anything like the multimillion-dollar mistakes last year at Las Vegas Sands. "There's nothing like playing by the house rules," he said, "when you own the house, the chips, the rules and the croupiers."

    Big Bonuses Still Flow, Even if Bosses Miss Goals, NYT, 1.6.2006, http://www.nytimes.com/2006/06/01/business/01bonus.html?hp&ex=1149220800&en=e67e1814966732da&ei=5094&partner=homepage