History > 2012 > USA > Economy (I)

How Good Is the Housing News?

March 7, 2012
The New York Times

The housing market has shown signs of life recently. Home sales have beat expectations and pending sales neared a two-year high. But prices — the crucial measure of housing-market health — are still falling, driven down by increasing levels of distressed sales of foreclosed properties. That means the market, and the broader economy, which derives much of its strength from housing, are not out of the woods — not by a long shot.

For too long, President Obama and his team have relied on the banks to voluntarily modify troubled loans. Those efforts were focused on reducing monthly payments, not principal — a more powerful form of relief.

Now President Obama is trying again. On Tuesday, he announced a new policy of easier refinancings for loans that are backed by the Federal Housing Administration. As part of the settlement announced in February, the major banks will be required to promote loan modifications for troubled borrowers, including principal reductions for underwater homeowners.

Mr. Obama has also promised a far-reaching investigation into mortgage abuses that is supposed to yield more accountability from the banks and more money for foreclosure prevention. He must deliver.

One thing is sure: Waiting for the situation to self-correct, as Mitt Romney has recommended, won’t fix the problem. The recent good news on sales has been driven by pent-up demand and warm winter weather that lured buyers. But more sales won’t translate into higher prices until foreclosures abate.

In the last quarter of 2011, national home prices fell 4 percent, putting prices back to levels last seen in mid-2002, according to the Standard & Poor’s/Case-Shiller price index. Moody’s Analytics estimates that 3.3 million homes are in or near foreclosure and another 11.5 million underwater homeowners are at risk of foreclosure if the economy or their finances weaken.

Is help really on the way?

The main component of the administration’s new efforts is the recent foreclosure settlement between the big banks and state and federal officials. In exchange for immunity from government civil lawsuits over most foreclosure abuses, the banks will provide $26 billion worth of relief, including principal write-downs, to an estimated 1.75 million borrowers. That is a pittance compared with the losses in the housing bust. But by preventing a chunk of additional foreclosures, it could help ensure that prices do not fall much further before bottoming out.

The settlement was announced nearly a month ago, but the specific terms have yet to be released. One concern is that banks may have leeway to tailor loan modifications in ways that help them clean up their balance sheets, while leaving many homeowners deeply underwater. Another is that states may be able to use money from the settlement for purposes other than foreclosure relief.

The investigation that is supposed to be the powerful follow-up to the settlement has also gotten off to a worryingly slow start. Announced in January by Mr. Obama, it still has no executive director, raising questions about the administration’s commitment to truly holding the banks accountable. The longer it takes to do an investigation, the longer it will take to secure verdicts or settlements that would include money for further antiforeclosure efforts.

Because the banks held off on foreclosure while the settlement was being negotiated, reclosure filings are set to rise in the coming year to more than two million. That means more pain for struggling homeowners — and the economy. By this point, homeowners should be inundated with relief, not still anxiously awaiting help.

    How Good Is the Housing News?, NYT, 7.3.2012,
    http://www.nytimes.com/2012/03/08/opinion/how-good-is-the-housing-news.html

In California, City Teeters on Brink of Bankruptcy

February 29, 2012
The New York Times
By JENNIFER MEDINA

STOCKTON, Calif. — The signs of better times are easy to spot downtown: the picturesque marina on the San Joaquin Delta, the gleaming waterfront sports arena, and the handsome high-rise that was meant to house a new city hall. But those symbols are now bitter reminders of how bad things are here today: on Tuesday this city of almost 300,000 moved a step closer to becoming the nation’s largest city to declare bankruptcy.

During a contentious meeting that stretched late into the night, the City Council decided, nearly unanimously, to begin mediation with public employee unions and major bond creditors in what is widely seen as the city’s last-ditch attempt to restructure its finances outside of bankruptcy. Facing a budget deficit from $20 million to $38 million on a budget of roughly $165 million, the Council declared a fiscal emergency for the third year in a row.

“Right now we are a city that has frankly hit a wall,” Mayor Ann Johnston told the Council and hundreds of city residents who attended the meeting. “If the players don’t come together and agree to a fix, then we’re all in big trouble.”

Under a law passed by the California Legislature last year, cities must hire a third-party mediator to help negotiate with unions and debtors for a period of 90 days before declaring Chapter 9 bankruptcy. Stockton will be the first to test the new procedure. Nearby, Vallejo, Calif., declared bankruptcy in 2008, and Stockton has hired the same bankruptcy lawyer who represented that city.

Stockton officials say they hope mediation will allow them to avoid bankruptcy and indicated they might focus their push on reducing generous retiree health benefits. The city is also suspending $2 million in debt payments this year.

The city has already drastically cut back municipal staff, including the Police and Fire Departments. With nearly 100 fewer police officers than there were just four years ago, many residents fret about rising crime rates; there were 58 murders last year, an all-time high for the city.

City Manager Bob Deis blamed previous administrations for the city’s troubles, saying that in his 32 years of municipal management he had “never seen such poor fiscal management practices.”

Stockton, about an 80-mile drive east of San Francisco, boomed a decade ago, as eager buyers from Silicon Valley bought up homes in the area. But in the past several years, housing values have plummeted, and the city has steadily had one of the highest foreclosure rates in the country.

During the boom times, the city eagerly began development projects to improve the area, transforming the waterfront and refurbishing several buildings that had fallen into disrepair. City officials lured a Sacramento restaurateur to open an upscale bistro, in part by offering space in a historic downtown building rent-free for five years. But the restaurant struggled and closed after just two years, and the space has sat empty and shuttered for the past year.

In 2007, after Washington Mutual shut down operations in an eight-story building here, the city bought the space for $35 million, reasoning that the price was a bargain, less than the cost of construction. Officials planned to move out of the crumbling old City Hall building and into the Washington Mutual building, but it soon became clear that the city did not have the money for the move.

“The city was very aggressive in trying to take advantage of the boom and got completely swept up in those times — not unlike its citizens,” said Jeffrey Michael, the director of the Business Forecasting Center at the University of the Pacific. “It’s a combination of bad luck and bad management. If they’d been more prudent, you might still be cutting back 20 percent of the staff, but maybe you wouldn’t be dealing with the brink of bankruptcy.”

The city consented to a wide variety of bond agreements that have contributed to its increasing debt, but officials say that generous retirement health benefits and the increasing costs of maintaining them also threaten to cripple the city with insolvency. The city estimates that it will pay $9 million in retiree health care benefits in the 2012 fiscal year, and that the amount will double over the next 10 years.

Much of the harshest criticism of the current city administration has come from the police union, which has accused Mr. Deis of manipulating numbers. The union paid for billboards that proclaimed “Welcome to the 2nd most dangerous city in California: Stop laying off cops!” and included a running tally of murders in the city and Mr. Deis’s telephone number, against a background depicting spatters of blood. Mr. Deis accused the union of harassing him after it bought a house next door to his. The union said the purchase was an investment and not intended to antagonize Mr. Deis.

“Things have just gone from bad to worse,” said Kathryn Nance, an executive board member of the police union and a Stockton native. “There’s just nowhere to cut anymore, and the whole city is suffering.”

But Ms. Nance and other union officials say they believe that the city has more money than it is letting on and criticized decisions to give raises to several top city workers and spend millions on outside consultants and lawyers to help with the fiscal crisis.

Councilman Elbert Holman dismissed the union’s criticism by comparing the city to a patient with a life-threatening infection.

“If I have to cut off my arm to save my life, it’s a negative thing, but what choice do I have?” he said. “And who do I want to operate on me, an intern who has no experience or someone who has actually done this before? We can’t work off emotions. We just have to be practical.”

Even if there are no other options, nobody here sees bankruptcy as an ideal solution, and people fret about another black eye for a place that has twice been ranked the “most miserable city in America” by Forbes magazine.

Denise Jefferson, a former city planner and the executive director of the Miracle Mile Improvement District, said previous administrations had ignored signs of problems for years, despite internal criticism from employees.

“Everyone kept pretending that the problems were something the next generation could clean up, but there’s no way to clean this up anymore,” she said. “In high times everyone wants to grow, but the growth we had was never something we could sustain. We played the game, and now there’s no longer a game to play.”

Malia Wollan contributed reporting from Stockton,

and Mary Williams Walsh from New York.

    In California, City Teeters on Brink of Bankruptcy, NYT, 29.2.2012,
    http://www.nytimes.com/2012/03/01/us/stockton-calif-moves-closer-to-bankruptcy.html

Tensions Raise Specter of Gas at $5 a Gallon

February 29, 2012
The New York Times
By CLIFFORD KRAUSS

HOUSTON — Gasoline for $5 a gallon? The possibility is hardly far-fetched.

With no clear end to tensions with Iran and Syria and rising demand from countries like China, gas prices are already at record highs for the winter months — averaging $4.32 in California and $3.73 a gallon nationally on Wednesday, according to AAA’s Daily Fuel Gauge Report. As summer approaches, demand for gasoline rises, typically pushing prices up around 20 cents a gallon.

And gas prices could rise another 50 cents a gallon or more, analysts say, if the diplomatic and economic standoff over Iran’s nuclear ambitions escalates into military conflict or there is some other major supply disruption.

“If we get some kind of explosion — like an Israeli attack or some local Iranian revolutionary guard decides to take matters in his own hands and attacks a tanker — than we’d see oil prices push up 20 to 25 percent higher and another 50 cents a gallon at the pump,” said Michael C. Lynch, president of Strategic Energy and Economic Research.

For the typical driver who pumps 60 gallons a month of regular unleaded gasoline, a 50-cent increase in price means an extra expense of $30 a month.

The prospect of such a price increase underscores the political and economic risks that Western political leaders must contend with as they decide how to address the Iran situation. A sharp rise in the prices of oil and gas would crimp the nation’s budding economic recovery. It would also cause big political problems at home for President Obama, who is already being attacked by Republican presidential candidates over gas prices and his overall energy policies, and for European nations struggling to deal with the Continent’s debt crisis.

The Federal Reserve chairman, Ben S. Bernanke, told a House committee on Wednesday that rising global oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” He maintained the Fed’s forecast that the nation’s economy would grow 2.2 to 2.7 percent this year.

The Iran situation has already raised the price of crude oil as much as 20 percent, according to oil experts. On Wednesday, the price of the benchmark American crude settled at $107.07 a barrel. That is about four dollars higher than on the same day in 2008. Later that year, oil and gasoline prices surged to new records, including a record nominal high of $145.29 a barrel for oil and $4.11 a gallon for gasoline in July. (In today’s dollars, that would be $150.87 for oil and $4.27 for gasoline.)

Although prices plunged late in 2008 as the financial crisis took its toll and the recession deepened, that kind of sharp increase could happen again as summer approaches.

“That’s what frightens people,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.

That fear is tempered by optimism — if tensions ease in the Middle East, experts predict that energy prices will fall, with gasoline at the pump potentially dropping 50 cents a gallon or more because supplies are relatively strong in many parts of the country. Some analysts say the world price of oil could fall to $80 a barrel if tensions eased.

And there have been signs in recent days that Iran is feeling the pain of sanctions on its critical oil exports, perhaps increasing its willingness to negotiate with the West.

On Wednesday, Tehran offered Pakistan, which has been suffering power shortages, 80,000 barrels of oil a day on an easy payment plan. It also offered to accept gold rather than dollars for payment from any dealers hoping to get around the Western restrictions on the usual financial channels for buying oil.

And this week, Secretary of State Hillary Clinton told a Congressional committee that the administration was working hard to persuade India, China and Turkey, which represent more than a third of Iran’s oil export market, to reduce their purchases.

While all three countries have said publicly that they will continue to buy from Iran, Mrs. Clinton said, “in a number of cases, both on their government side and on their business side, they are taking actions that go further and deeper than perhaps their public statements might lead you to believe.”

Neal Soss, chief economist of Credit Suisse, said sustained high gasoline prices would definitely have an impact on the American economy. “As a rule of thumb, a penny a gallon is worth a bit over $1 billion in consumer purchasing power if it is maintained a whole year. A dollar more would be something in excess of $100 billion, which is about the size of the Social Security tax cut.”

Despite a fall in gasoline demand in the United States and Europe, global oil markets are tightening because demand for energy from Asian countries, particularly China and India, is rising at surprisingly strong rates even as output is declining from several important producing countries.

Gasoline futures are surging, spurred in part by recent refinery closings that may produce a shortage of motor fuel in the Northeast states by summer.

Oil prices have surged about 8 percent since Iran threatened to cut off oil imports to France, Spain, Italy and other European countries three weeks ago as a pre-emptive move against Western moves to tighten sanctions. The European Union has decided to place an embargo on Iranian oil and ban shipping and insurance on its cargoes. Washington has decided on banking sanctions to curtail Iran’s ability to earn money from its oil exports.

Middle East experts express doubts that Iran will follow through on its threats to stop supplying European customers or close the vital oil sea lanes of the Strait of Hormuz. But the saber-rattling from both sides is encouraging investors to buy oil futures contracts at higher and higher prices. Rising conjecture that Israel could launch a pre-emptive strike against Iranian nuclear facilities has heightened market jitters.

“The bankers are speculating, protecting themselves from higher prices by committing obligations to buy now, and that starts the ball rolling toward higher prices,” said Sadad Ibrahim al-Husseini, former head of exploration and production at Saudi Aramco, the state oil company.

He added that the escalating civil turmoil in Syria, a crucial ally of Iran, “is bound to increase price volatility and that will drive future speculation.”

The Japanese Foreign Ministry signaled on Wednesday that it was close to an agreement with Washington to further reduce shipments of oil from Iran, which have already declined about 20 percent since the beginning of the year.

But any success in tightening sanctions on Iran could squeeze global oil supplies, pushing up prices and causing serious economic repercussions at home and abroad.

“It’s a bind for Obama,” said Mr. Kloza at the Oil Price Information Service. “How do you get tough on Iran without getting tough on American wallets?”

    Tensions Raise Specter of Gas at $5 a Gallon, NYT, 29.2.2012,
    http://www.nytimes.com/2012/03/01/business/energy-environment/tensions-raise-specter-of-gas-at-5-a-gallon.html

A Million Jobs

February 25, 2012
The New York Times

The American economy was terrifyingly close to the brink in 2008 and 2009, and the impending collapse of General Motors and Chrysler threatened to be the final push. When the companies begged the federal government to save them from financial catastrophe, President George W. Bush and later President Obama ignored strong Republican objections, saving a signature American industry and the whole country from an even deeper crash.

Four years later, there are 1.45 million people who are working as a direct result of the $80 billion bailout, according to the nonpartisan Center for Automotive Research, both at the carmakers and associated businesses downstream in the economy. Michigan’s unemployment level is at its lowest level in three years. G.M. is again the world’s biggest automaker, and both companies are reporting substantial profits.

And yet Mitt Romney, along with the other Republican presidential candidates, has spent the days before the Michigan primary denouncing the bailout that has rescued his native state. Mr. Romney has been especially vociferous in his insistence that he would have allowed the carmakers to go bankrupt, and said he believes they could somehow have clawed their way back to profitability without a dollar of federal assistance.

“The president tells us that without his intervention things in Detroit would be worse,” he wrote recently in The Detroit News. “I believe that without his intervention things there would be better.”

This critique is detached from reality. Steven Rattner, who was Mr. Obama’s lead auto adviser, wrote in The Times on Friday that not a single dollar of private capital could be found to prop up the companies, despite desperate efforts, and he challenged Mr. Romney to name one investor who might differ. The Detroit News, which otherwise enthusiastically endorsed Mr. Romney in the primary, said he was dead wrong about the bailout. Only the government was in a position to save the auto industry from “the darkest hour of its history,” the newspaper’s editorial board wrote.

Mr. Romney slid into this quicksand in 2008 with an Op-Ed essay in The Times arguing against government help for Detroit. It included the memorable prediction that if the bailout were granted, “you can kiss the American automotive industry goodbye.” Having been criticized for his inconsistency on so many other issues, he apparently feels he cannot back away from this one — no matter that his argument has proved so wrong.

These days he has added a new trope: union-bashing. He is now calling the bailout “crony capitalism” because it was designed to save union jobs. He charges that Mr. Obama used the Treasury to help his political allies. “While a lot of workers and investors got the short end of the stick, Obama’s union allies — and his major campaign contributors — reaped reward upon reward, all on the taxpayer’s dime,” he wrote earlier this month.

High labor costs were undeniably part of Detroit’s problems. But his claim that the government did not do nearly enough to drive those costs down in the bailout is just flat-out wrong. Labor made substantial concessions.

After earlier agreeing to let newly hired workers make half the wage of current employees, unions consented in the bailout deal to give up cost-of-living increases, dental coverage, and some vacation benefits and work rules. Unions also took the gamble of accepting a company stock fund to pay for their health benefits, instead of cash.

Mr. Romney is oblivious to those givebacks, expressing anger that a health care fund for nearly half a million United Automobile Workers retirees (“union-boss controlled”) got a higher priority in the bailout than lenders to Chrysler.

In a speech on Friday, he continued to insist that the U.A.W. and federal fuel-economy standards were somehow imperiling the future of the industry, even though neither seems to have halted the carmakers’ current success.

Neither Mr. Romney nor any of the Republican candidates are able to admit that sometimes only the government can rescue a major sector of the economy. Any autoworker, however, can explain it to them.

    A Million Jobs, NYT, 25.2.2012,
    http://www.nytimes.com/2012/02/26/opinion/sunday/a-million-jobs.html

Confronting a Law Of Limits

February 24, 2012
The New York Times
By JAMES B. STEWART

These days, it’s hard to find a superlative that adequately describes Apple. But maybe simplest is best: biggest.

Measured by market capitalization, Apple is the world’s biggest public company. This week it solidified its lead over Exxon Mobil, the previous titleholder, as Apple’s shares hit a record high of $526.29, which gave it a market capitalization of just under $500 billion. Apple becomes only the 11th company to reach the top spot since 1926, according Howard Silverblatt, a senior index analyst for Standard & Poor’s.

Apple’s first-quarter earnings of more than $13 billion accounted for more than 6 percent of all earnings for the S.& P. 500, according to Mr. Silverblatt. Sales for the quarter that ended Dec. 31 included an astonishing 37.04 million iPhones and 15.43 million iPads and totaled $46.33 billion, up 73 percent from the year before. Earnings more than doubled. Compare that with this week’s earning from the tech giants Hewlett-Packard (down 44 percent) and Dell (down 18 percent).

Apple shares have surged 68 percent from their low point in June, and it’s not just Apple shareholders who have benefited. Apple is now such a large part of the S.& P. 500 and the Nasdaq 100 indexes that it has buoyed millions of investors who own shares of broad index funds and mutual funds. These investors account for an estimated half of the American population. This week the Nasdaq composite reached its highest level since 2000 and the S.& P. 500 hit levels not seen since before the financial crisis.

Here is the rub: Apple is so big, it’s running up against the law of large numbers.

Also known as the golden theorem, with a proof attributed to the 17th-century Swiss mathematician Jacob Bernoulli, the law states that a variable will revert to a mean over a large sample of results. In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger.

If Apple’s share price grew even 20 percent a year for the next decade, which is far below its current blistering pace, its $500 billion market capitalization would be more than $3 trillion by 2022. That is bigger than the 2011 gross domestic product of France or Brazil.

Put another way, to increase its revenue by 20 percent, Apple has to generate additional sales of more than $9 billion in its next fourth quarter. A company with $1 billion in sales has to come up with just another $200 million.

Robert Cihra, an analyst who covers Apple at Evercore Partners, told me this week that the law of large numbers as it applied to Apple had “been a concern for years now.” But, he said, “over the past couple of years, they have actually accelerated revenue growth. I don’t know that can continue indefinitely. If you extrapolate far enough out into the future, to sustain that growth Apple would have to sell an iPhone to every man, woman, child, animal and rock on the planet.”

The law of large numbers may explain why, even at its recent lofty stock price, Apple looks like a bargain by most measures. The ratio of its share price to its earnings, a common measure of a company’s stock value, is less than 11 based on earnings projections for this year. That is well below the market’s average P/E ratio of about 13. Apple shares are even being bought by so-called value investors, who are usually confined to stodgier, low-growth but arguably undervalued companies.

“The valuation on Apple stock right now is unjustifiably low,” Mr. Cihra said. “If it weren’t so big, the P/E multiple would be a lot higher. They almost doubled their earnings in calendar year 2011 and yet the stock is trading currently at a P/E multiple of less than 11. It’s trading way below the market average, even though it’s growing way above the market average. The multiple is being compressed simply because investors are asking how it can get bigger.”

There may be sobering reasons for that. Other companies that have reached the top appear to have been felled by Bernoulli’s law. Cisco Systems held the top position and hit a market capitalization of $557 billion — larger than Apple’s — in March 2000, at the peak of the technology bubble. Its market capitalization today is about $100 billion, and shares are down nearly 80 percent since March 2000. In contrast with Apple, Cisco’s market value and sky-high 120 P/E ratio were inflated by investor euphoria rather than actual results. But other titleholders have met a similarly disappointing fate, although far less drastic.

Exxon Mobil, recently displaced by Apple as the biggest company by market value, took over the top spot in 2006, seven years after the merger of Exxon and Mobil. At the end of that year, its market capitalization was $447 billion. Today it’s $35 billion lower. General Electric held the title for a number of years, most recently in 2005, when its market capitalization was $370 billion. Today, it’s just $205 billion. Microsoft was No. 1 in 2002 with a market capitalization of $276 billion. Today, it’s $262 billion.

Of recent titleholders, the only one that has gained is I.B.M., whose market capitalization of $65 billion ranked first in 1990. Today, it’s $229 billion. Over the intervening 22 years, that is a compound rate of return of 11.2 percent including dividends — impressive but hardly the growth rate Apple shareholders have come to expect. Over the same period, an S.& P. 500 index fund returned 8.7 percent.

Can Apple escape a similar fate?

After never being a dominant force in personal computers, Apple surged to the top of the S.& P. 500 by transforming the cellphone into a multitasking smartphone, arguably the single most important technological advance so far in the 21st century. It rolled over vaunted rivals like Nokia, Motorola and Research in Motion with a combination of brilliant technology, dazzling design and shrewd marketing backed by the singular vision of its late founder, Steve Jobs. “Everyone truly needs it,” Mr. Cihra said of the smartphone. “It’s the most transformative piece of technology in our lifetimes.”

Notwithstanding Apple’s huge size, Wall Street analysts are overwhelmingly positive on the company’s prospects. Of 57 analysts who cover the company, 52 have a strong buy or buy recommendation. Only one recommends selling: Edward Zabitsky, the chief executive and founder of ACI Research in Toronto, who specializes in telecommunications and has been Apple’s reigning Cassandra for years. He’s a favorite target of the Web’s “iPhone death watch,” which features negative (and thus far wrong) projections about Apple.

“In all my years as an analyst, I’ve never gotten the kind of attention I’ve gotten from my Apple call,” Mr. Zabitsky told me this week. “I’ve gotten e-mails from everyone from radiologists to car repair people from all over North America telling me I’m a fool. We’re just a research operation, so we’re not trying to get any business from Apple. If we were, I doubt we’d get any.”

“Apple has created a tremendous ecosystem where there was none,” Mr. Zabitsky acknowledges. But he says he thinks competition will erode Apple’s advantages as computing shifts to the cloud. “The question isn’t whether this will happen, but why and when. The company that understands this best is Microsoft. They’re betting the farm on Web apps. They’ll be competing with Apple on every product. Microsoft is big enough and motivated enough to make this happen.”

But Mr. Zabitsky remains a solitary voice.

“The reason Apple has been able to continue growing at a spectacular rate, even as its revenue base has surpassed $100 billion, is because it targets the world’s biggest markets,” Mr. Cihra said. He rates the stock a buy and projects revenue for calendar year 2012 at $165 billion. “The simple fact is that they still have a small share of huge markets — single-digit shares in both PCs and mobile phones.”

Global mobile phone subscriptions neared six billion in 2011, with Apple’s share of the handset market at 5.6 percent, according to the market intelligence firm IDC. “There’s no mathematical reason Apple can’t keep growing at a premium rate for at least several more years,” Mr. Cihra said. “At the end of the day, there’s no good reason for market cap to be a ceiling.”

Apple fans are eagerly awaiting Apple’s next big thing. A voice-activated television that upends TV the way Apple transformed music and cellphones? Maybe. And Mr. Cihra may well be right that Apple investors have at least several years of breathing room.

But history suggests that excessive enthusiasm can often precede a fall. At Cisco’s peak, every Wall Street analyst covering the company rated it a strong buy or buy. “Cisco continues to execute very well and demonstrates that it is in a class by itself,” Seth Spalding, an analyst at Epoch Partners, wrote, joining a chorus of analysts praising Cisco’s latest earnings — in November 2000.

    Confronting a Law Of Limits, NYT, 24.2.2012,
    http://www.nytimes.com/2012/02/25/business/apple-confronts-the-law-of-large-numbers-common-sense.html

Reform and Corporate Taxes

February 22, 2012
The New York Times

The corporate tax system is a mess. The United States has one of the highest corporate tax rates in the world, but too many businesses still don’t contribute their fair share of revenue, in large part because of numerous loopholes, subsidies and other opportunities for tax avoidance. While some industries and companies pay little or no tax because they qualify for generous breaks or have really good lawyers, others are taxed heavily.

There is no doubt that a system that is more competitive, more efficient — the current mind-numbing complexity makes planning far too difficult — and more fair would be a plus for the economy. President Obama’s framework for business tax reform, released on Wednesday, is a welcome start for a much-needed debate on comprehensive tax reform. But we already have two big concerns.

While the administration insists that business tax reform should not add to the deficit, the country needs to raise more revenue to care for an aging population, rebuild infrastructure, improve education and tackle the deficit. Corporations, which benefit from all of those, should, as a matter of necessity and fairness, pay more.

Our other concern is that like all tax reform, the potential for gaming the process is ever present and unless it is vigilantly managed could actually reduce revenue and add to the deficit.

Take the framework’s central reform: reducing the top corporate rate from 35 percent to 28 percent, while at the same time doing away with loopholes and subsidies. In theory, it is a sound approach, which would reduce complexity while bringing the rate in line with that of other advanced nations without busting the budget. But, even if they made it past the lobbyists, the specific loophole closers in Mr. Obama’s new framework — including ending subsidies for oil and gas exploration, corporate jets and private equity partners — are far too small to make up for dropping the top rate.

As for the big money subsidies that would have to be cut or ended to pay for a lower rate — including less generous depreciation and reduced deductibility of interest on corporate debt — the White House merely presents them as part of a menu of options for “consideration.”

The framework’s call for a minimum corporate tax on the foreign earnings of American companies is a step in the right direction. Under current law, various tax provisions and tactics allow companies to reduce or defer taxes by shifting ever more production and profits overseas. But the idea is blunted by the framework’s failure to say what the minimum tax rate should be.

Nor does the framework broach other reforms like taxing foreign profits when they are earned rather than when they are repatriated to the United States — that could ultimately be more effective in getting multinationals to pay more.

Even with its shortcomings, Mr. Obama’s proposal presents a needed contrast to the Republicans’ approach to corporate taxes. Last year, Dave Camp, the chairman of the House Ways and Means Committee, proposed a top corporate rate of 25 percent without saying how he would pay for the tax cut. Mitt Romney has done somewhat better, calling for a 25 percent rate to be coupled with “broadening” the corporate tax base, which generally means closing loopholes. But he has yet to say which tax breaks he would end.

Serious reform requires specific proposals, tough trade-offs and hard numbers attached. Without all of those, this effort could too easily be hijacked by powerful corporations and their high-paid lobbyists.

    Reform and Corporate Taxes, NYT, 22.2.2012,
    http://www.nytimes.com/2012/02/23/opinion/reform-and-corporate-taxes.html

Santorum’s Gospel of Inequality

February 17, 2012
The New York Times
By CHARLES M. BLOW

“Santorum Praises Income Inequality.”

That was Fox News’s headline about Rick Santorum’s speech at the Detroit Economic Club on Thursday. Santorum said, “I’m not about equality of result when it comes to income inequality. There is income inequality in America. There always has been and, hopefully, and I do say that, there always will be.”

Unbelievable. Maybe not, but stunning all the same.

Then again, Santorum is becoming increasingly unhinged in his public comments. Last week, he said that the president was arguing that Catholics would have to “hire women priests to comply with employment discrimination issues.”

Also last week, he suggested that liberals and the president were leading religious people into oppression and even beheadings. I kid you not. Santorum said: “They are taking faith and crushing it. Why? When you marginalize faith in America, when you remove the pillar of God-given rights, then what’s left is the French Revolution. What’s left is a government that gives you rights. What’s left are no unalienable rights. What’s left is a government that will tell you who you are, what you’ll do and when you’ll do it. What’s left in France became the guillotine.”

Yet for Santorum to champion income inequality in Detroit, of all places, is still incredibly tone-deaf.

Detroit has the highest poverty rate of any big city in America, according to data provided by Andrew A. Beveridge, a demographer at Queens College. Among the more than 70 cities with populations over 250,000, Detroit’s poverty rate topped the list at a whopping 37.6 percent, more than twice the national poverty rate. And according to the Census Bureau, median household income in Detroit from 2006-10 was just $28,357, which was only 55 percent of the overall U.S. median household income over that time.

This is a city that last year announced plans to close half its public schools and send layoff notices to every teacher in the system.

This is a city where the mayor’s pledge to demolish 10,000 abandoned structures was seen as only shaving the tip of the iceberg because, as The Wall Street Journal reported in 2010, “the city has roughly 90,000 abandoned or vacant homes and residential lots, according to Data Driven Detroit, a nonprofit that tracks demographic data for the city.”

This is not the place to praise income inequality. Last week, at a hearing before the Senate Budget Committee, Kent Conrad, the chairman of that committee, laid out the issue as many Americans see it:

“The growing gap between the very wealthy and everyone else has serious ramifications for the country. It hinders economic growth, it undermines confidence in our institutions, and it goes against one of the core ideals of this country — that if you work hard and play by the rules, you can succeed and leave a better future for your kids and your grandkids.”

This is arguably even more true of people in Michigan than for the rest of us. Even though income inequality in the Detroit area isn’t particularly high, looking at the issue as an urban one in the case of cities like Detroit is problematic. The whole region took a hit. The comparison for cities like Detroit may be more intra-city than inter-city.

As Willy Staley argued in 2010 in an online column for Next American City magazine: “In richer cities, the inequality is put side-by-side, in an uncomfortable, loathsome way; for cities left in the dust of deindustrialization, the inequality is presents (sic) as existing between cities, not within them. Gone is the city/suburb divide between rich and poor, income inequality manifests itself within wealthy cities and between cities.”

And it is this feeling of being left behind by the American economy and abandoned by Republicans that is pushing Michigan into the blue. Public Policy Polling, a Democratic polling company, found this week that Obama would handily defeat all the Republican candidates in head-to-head matchups in the state. The company’s president, Dean Debnam, said in a statement: “Michigan is looking less and less like it will be in the swing state column this fall.” He continued, “Barack Obama’s numbers in the state are improving, while the Republican field is heading in the other direction.”

Santorum went on to say about income inequality during his speech on Thursday: “We should celebrate like we do in the small towns all across America — as you do here in Detroit. You celebrate success. You build statues and monuments. Buildings, you name after them. Why? Because in their greatness and innovation, yes, they created wealth, but they created wealth for everybody else. And that’s a good thing, not something to be condemned in America.”

Santorum might want to take a walk around Detroit to see who’s celebrating and to see how many statues he can find to honor people who simply invented something and got rich.

Furthermore, as a newspaperman and a former Detroiter, I’d like to direct him to the James J. Brady Memorial. Detroit1701.org, maintained by a University of Michigan emeritus professor, calls it “one of the more attractive memorials in Detroit.” It pays tribute to Brady, a federal tax collector, who set out to address the issue of child poverty in the city by founding the Old Newsboys’ Goodfellows of Detroit Fund in 1914 — what is essentially a local welfare fund.

The group provides “warm clothing, toys, books, games and candy” to local children every Christmas in addition to sending poor children to summer camps, the dentist and to college.

Then again, charitable giving doesn’t appear to be high on Motor Mouth Santorum’s list of priorities. As The Washington Post pointed out, based on Santorum’s tax return disclosure this week, he has given the least amount to charity of the four presidential candidates who have disclosed their tax returns. (Ron Paul has not.) His charitable giving was just 1.8 percent of his adjusted gross income.

The Obamas were the highest, giving 14.2 percent, even though their income was second lowest.

Maybe that’s the imbalance we should praise.

    Santorum’s Gospel of Inequality, NYT, 17.2.2012,
    http://www.nytimes.com/2012/02/18/opinion/blow-santorum-exalts-inequality.html

The Big Money Behind State Laws

February 12, 2012
The New York Times

It is no coincidence that so many state legislatures have spent the last year taking the same destructive actions: making it harder for minorities and other groups that support Democrats to vote, obstructing health care reform, weakening environmental regulations and breaking the spines of public- and private-sector unions. All of these efforts are being backed — in some cases, orchestrated — by a little-known conservative organization financed by millions of corporate dollars.

The American Legislative Exchange Council was founded in 1973 by the right-wing activist Paul Weyrich; its big funders include Exxon Mobil, the Olin and Scaife families and foundations tied to Koch Industries. Many of the largest corporations are represented on its board.

ALEC has written model legislation on a host of subjects dear to corporate and conservative interests, and supporting lawmakers have introduced these bills in dozens of states. A recent study of the group’s impact in Virginia showed that more than 50 of its bills were introduced there, many practically word for word. The study, by the liberal group ProgressVA, found that ALEC had been involved in writing bills that would:

¶Prohibit penalizing residents for failing to obtain health insurance, undermining the individual mandate in the reform law. The bill, which ALEC says has been introduced in 38 states, was signed into law and became the basis for Virginia’s legal challenge to heath care reform.

¶Require voters to show a form of identification. Versions of this bill passed both chambers this month.

¶Encourage school districts to contract with private virtual-education companies. (One such company was the corporate co-chair of ALEC’s education committee.) The bill was signed into law.

¶Call for a federal constitutional amendment to permit the repeal of any federal law on a two-thirds vote of state legislatures. The bill failed.

¶Legalize use of deadly force in defending one’s home. Bills to this effect, which recently passed both houses, have been backed by the National Rifle Association, a longtime member of ALEC.

ALEC’s influence in the Virginia statehouse is pervasive, the study showed. The House of Delegates speaker, William Howell, has been on the board since 2003 and was national chairman in 2009. He has sponsored or pushed many of the group’s bills, including several benefiting specific companies that support ALEC financially, like one that would reduce a single company’s asbestos liability. At least 115 other state legislators have ties to the group, including paying membership dues, attending meetings and sponsoring bills. The state has spent more than $230,000 sending lawmakers to ALEC conferences since 2001.

Similar efforts have gone on in many other states. The group has been particularly active in weakening environmental regulations and fighting the Environmental Protection Agency. ALEC’s publication, “E.P.A.’s Regulatory Train Wreck,” outlines steps lawmakers can take, including curtailing the power of state regulators.

There is nothing illegal or unethical about ALEC’s work, except that it further demonstrates the pervasive influence of corporate money and right-wing groups on the state legislative process. There is no group with any comparable influence on the left. Lawmakers who eagerly do ALEC’s bidding have much to answer for. Voters have a right to know whether the representatives they elect are actually writing the laws, or whether the job has been outsourced to big corporate interests.

    The Big Money Behind State Laws, NYT, 12.2.2012,
    http://www.nytimes.com/2012/02/13/opinion/the-big-money-behind-state-laws.html

Education Gap Grows Between Rich and Poor, Studies Say

February 9, 2012
The New York Times
By SABRINA TAVERNISE

WASHINGTON — Education was historically considered a great equalizer in American society, capable of lifting less advantaged children and improving their chances for success as adults. But a body of recently published scholarship suggests that the achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.

It is a well-known fact that children from affluent families tend to do better in school. Yet the income divide has received far less attention from policy makers and government officials than gaps in student accomplishment by race.

Now, in analyses of long-term data published in recent months, researchers are finding that while the achievement gap between white and black students has narrowed significantly over the past few decades, the gap between rich and poor students has grown substantially during the same period.

“We have moved from a society in the 1950s and 1960s, in which race was more consequential than family income, to one today in which family income appears more determinative of educational success than race,” said Sean F. Reardon, a Stanford University sociologist. Professor Reardon is the author of a study that found that the gap in standardized test scores between affluent and low-income students had grown by about 40 percent since the 1960s, and is now double the testing gap between blacks and whites.

In another study, by researchers from the University of Michigan, the imbalance between rich and poor children in college completion — the single most important predictor of success in the work force — has grown by about 50 percent since the late 1980s.

The changes are tectonic, a result of social and economic processes unfolding over many decades. The data from most of these studies end in 2007 and 2008, before the recession’s full impact was felt. Researchers said that based on experiences during past recessions, the recent downturn was likely to have aggravated the trend.

“With income declines more severe in the lower brackets, there’s a good chance the recession may have widened the gap,” Professor Reardon said. In the study he led, researchers analyzed 12 sets of standardized test scores starting in 1960 and ending in 2007. He compared children from families in the 90th percentile of income — the equivalent of around $160,000 in 2008, when the study was conducted — and children from the 10th percentile, $17,500 in 2008. By the end of that period, the achievement gap by income had grown by 40 percent, he said, while the gap between white and black students, regardless of income, had shrunk substantially.

Both studies were first published last fall in a book of research, “Whither Opportunity?” compiled by the Russell Sage Foundation, a research center for social sciences, and the Spencer Foundation, which focuses on education. Their conclusions, while familiar to a small core of social sciences scholars, are now catching the attention of a broader audience, in part because income inequality has been a central theme this election season.

The connection between income inequality among parents and the social mobility of their children has been a focus of President Obama as well as some of the Republican presidential candidates.

One reason for the growing gap in achievement, researchers say, could be that wealthy parents invest more time and money than ever before in their children (in weekend sports, ballet, music lessons, math tutors, and in overall involvement in their children’s schools), while lower-income families, which are now more likely than ever to be headed by a single parent, are increasingly stretched for time and resources. This has been particularly true as more parents try to position their children for college, which has become ever more essential for success in today’s economy.

A study by Sabino Kornrich, a researcher at the Center for Advanced Studies at the Juan March Institute in Madrid, and Frank F. Furstenberg, scheduled to appear in the journal Demography this year, found that in 1972, Americans at the upper end of the income spectrum were spending five times as much per child as low-income families. By 2007 that gap had grown to nine to one; spending by upper-income families more than doubled, while spending by low-income families grew by 20 percent.

“The pattern of privileged families today is intensive cultivation,” said Dr. Furstenberg, a professor of sociology at the University of Pennsylvania.

The gap is also growing in college. The University of Michigan study, by Susan M. Dynarski and Martha J. Bailey, looked at two generations of students, those born from 1961 to 1964 and those born from 1979 to 1982. By 1989, about one-third of the high-income students in the first generation had finished college; by 2007, more than half of the second generation had done so. By contrast, only 9 percent of the low-income students in the second generation had completed college by 2007, up only slightly from a 5 percent college completion rate by the first generation in 1989.

James J. Heckman, an economist at the University of Chicago, argues that parenting matters as much as, if not more than, income in forming a child’s cognitive ability and personality, particularly in the years before children start school.

“Early life conditions and how children are stimulated play a very important role,” he said. “The danger is we will revert back to the mindset of the war on poverty, when poverty was just a matter of income, and giving families more would improve the prospects of their children. If people conclude that, it’s a mistake.”

Meredith Phillips, an associate professor of public policy and sociology at the University of California, Los Angeles, used survey data to show that affluent children spend 1,300 more hours than low-income children before age 6 in places other than their homes, their day care centers, or schools (anywhere from museums to shopping malls). By the time high-income children start school, they have spent about 400 hours more than poor children in literacy activities, she found.

Charles Murray, a scholar at the American Enterprise Institute whose book, “Coming Apart: The State of White America, 1960-2010,” was published Jan. 31, described income inequality as “more of a symptom than a cause.”

The growing gap between the better educated and the less educated, he argued, has formed a kind of cultural divide that has its roots in natural social forces, like the tendency of educated people to marry other educated people, as well as in the social policies of the 1960s, like welfare and other government programs, which he contended provided incentives for staying single.

“When the economy recovers, you’ll still see all these problems persisting for reasons that have nothing to do with money and everything to do with culture,” he said.

There are no easy answers, in part because the problem is so complex, said Douglas J. Besharov, a fellow at the Atlantic Council. Blaming the problem on the richest of the rich ignores an equally important driver, he said: two-earner household wealth, which has lifted the upper middle class ever further from less educated Americans, who tend to be single parents.

The problem is a puzzle, he said. “No one has the slightest idea what will work. The cupboard is bare.”

    Education Gap Grows Between Rich and Poor, Studies Say, NYT, 9.2.2011,
    http://www.nytimes.com/2012/02/10/education/education-gap-grows-between-rich-and-poor-studies-show.html

States Negotiate $26 Billion Deal for Homeowners

February 8, 2012
The New York Times
By NELSON D. SCHWARTZ and SHAILA DEWAN

After months of painstaking talks, government authorities and five of the nation’s biggest banks have agreed to a $26 billion settlement that could provide relief to nearly two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said. It is part of a broad national settlement aimed at halting the housing market’s downward slide and holding the banks accountable for foreclosure abuses.

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.

The final details of the pact were still being negotiated Wednesday night, including how many states would participate and when the formal announcement would be made in Washington. The two biggest holdouts, California and New York, now plan to sign on, according to the officials with knowledge of the matter who did not want to be identified because the negotiations were not completed.

The deal grew out of an investigation into mortgage servicing by all 50 state attorneys general that was introduced in the fall of 2010 amid an uproar over revelations that banks evicted people with false or incomplete documentation. In the 14 months since then, the scope of the accord has broadened from an examination of foreclosure abuses to a broad effort to lift the housing market out of its biggest slump since the Great Depression. Four million Americans have been foreclosed upon since the beginning of 2007, and the huge overhang of abandoned homes has swamped many regions, like California, Florida and Arizona.

In New York State, more than 46,000 borrowers will receive some form of benefit, with an estimated 21,000 expected to see what they owe reduced through a principal reduction, according to estimates by the Department of Housing and Urban Development.

The five mortgage servicers in the settlement — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — have largely set aside reserves for the expected cost of the accord and investors are likely to cheer its announcement because it removes one more legal worry for the industry, analysts said.

“I wouldn’t say it’s a panacea for the housing industry but it is good for the banks to get this behind them,” said Jason Goldberg, an analyst with Barclays.

As more and more states signed on this week, the negotiations with the banks became especially intense, said one participant, who wasn’t authorized to speak publicly. Two bank officials, Frank Bisignano of JPMorgan Chase and Mike Heid of Wells Fargo, played a critical role in the talks with Shaun Donovan, the secretary of Housing and Urban Development, and Thomas J. Perrelli, the associate attorney general at the Justice Department. Bank of America, which will make the largest payout as the nation’s biggest mortgage servicer, moved more cautiously, the participant said.

The settlement money will be doled out under a complicated formula that gives banks varying degrees of credit for different kinds of help. As a result, banks are incentivized to help harder-hit borrowers with homes worth far less than what they owe.

While the $26 billion figure is the one being cited in the negotiations, federal officials said they hope the eventual value for homeowners reaches up to $39 billion. However, mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, will not be covered under the deal, excluding about half the nation’s mortgages.

About one in five Americans with mortgages are underwater, which means they owe more than their home is worth. Collectively, their negative equity is almost $700 billion. On average, these homeowners are underwater by $50,000 each.

A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.

“I just don’t think it’s going to be a life-changing event for borrowers,” said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount.

Several billion dollars would cover the direct cash payments to foreclosure victims and provide money for states’ attorneys general to services like mortgage counseling and future investigations into mortgage fraud.

Though many economists identify the moribund housing market as the greatest drag on the recovery, it is not clear how much the settlement will help.

Christopher J. Mayer, a housing expert at Columbia Business School, said the accord could give banks more certainty that they can clear their large backloads of seized homes, restoring the flow of those homes into the market.

“It may be good for individual homeowners, but if you don’t do something to help the foreclosure process, it’s not going to help the housing market,” he said.

Mark Zandi, the chief economist for Moodys Analytics, said that while the settlement looked small compared with the scope of the problem, it was not necessary to erase all, or even most, of the nation’s negative equity to turn the market around.

About a third of houses on the market now are distressed, or have been through foreclosure, he said, and reducing that percentage by just a small amount could be enough to put a floor under housing prices.

More than the dollar figures, the settlement had been held up amid concern by New York’s attorney general, Eric T. Schneiderman, that it provided too broad of a release for banks for past misdeeds, making future investigations much more difficult.

Mr. Schneiderman was able to win significant concessions from the banks in recent days.

In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.

The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.

Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.

Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.

    States Negotiate $26 Billion Deal for Homeowners, NYT, 8.2.2012,
    http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-deal-for-homeowners.html

If Silicon Valley Costs a Lot Now,

Wait Until the Facebook Update

February 8, 2012
The New York Times
By MICHAEL COOPER

PALO ALTO, Calif. — Imagine looking for a house in San Francisco or one of the nicer parts of Silicon Valley, which are already among the most expensive parts of the country. Now imagine having to bid against a legion of newly minted Facebook millionaires.

“I’m kind of worried — a thousand millionaires are going to be buying houses!” Connie Cao said as she and her family toured a home in a good school district here.

Her husband, Jared Oberhaus, was more optimistic. “Maybe sellers are sitting on their houses now, waiting for Facebook, and they’ll all come on the market at the same time,” he said.

It will be some time before the first Facebook shares are sold to the public, and even longer before Facebook’s employees are able to turn their paper wealth into cash and officially take their places as the newest members of the 1 percent. But the mere anticipation of the event may pour a little kerosene onto what is already a fairly hot local real estate market.

When Ken DeLeon, a Silicon Valley real estate agent, recently sold an 8,000-square-foot house to a Facebook employee, he said, the movers showed up at the client’s old 1,000-square-foot home and asked, “Did you win the lottery?”

Silicon Valley has been good to Mr. DeLeon, a former lawyer, who said he sold $275 million worth of homes last year, and who is finishing up a memoir about overcoming illness, injury and loss that he calls “Why Do Bad Things Happen to Sexy People?”

Even after some of the air went out of the housing bubble in the Bay Area in recent years, prices in the most desirable parts of San Francisco and Silicon Valley stayed buoyant enough to remain out of reach for most people. A report on 2011 housing prices by Coldwell Banker, the real estate company, found that 8 of the nation’s 20 most expensive markets were in Silicon Valley or the Bay Area. Mr. DeLeon said Palo Alto, with its limited supply, had remained remarkably strong — and could hit new peaks this year.

In recent weeks, he said, there have been signs that the market has been heating up more: 10 homes in Palo Alto sold for more than their asking prices last month, some by large amounts. Now, with the long-expected Facebook public offering a step closer to reality, Mr. DeLeon said he expected to see several things happen: some sellers may keep their homes off the market until they judge the time is right, some speculators may snap up old houses to tear down and rebuild, and some buyers may feel pressure to make offers before the deluge hits.

A steady stream of would-be buyers walked through the open house Mr. DeLeon held here on Sunday — a 2,325-square-foot home with a small backyard and an asking price of nearly $1.8 million. They checked out the sunken Japanese-style dining room and the heated concrete floors with leaf inlays. Many got lattes from the barista stationed in the backyard.

Mr. DeLeon said he already had plans to market to Facebook employees. One strategy: he intends to buy ads on Facebook. “It’s amazing how you can target them,” he said.

    If Silicon Valley Costs a Lot Now, Wait Until the Facebook Update, NYT, 8.2.2012,
    http://www.nytimes.com/2012/02/09/us/california-housing-market-braces-for-facebook-millionaires.html

The Zuckerberg Tax

February 7, 2012
The New York Times
By DAVID S. MILLER

WHEN Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth. The $5 billion he will receive upon exercising those options will be treated as salary, and Mr. Zuckerberg will have a tax bill of more than $2 billion, quite possibly making him the largest taxpayer in history. He is expected to sell enough stock to pay his tax.

But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

Now compare Mr. Zuckerberg with Lady Gaga. Last year she told Ellen DeGeneres that she had to get “completely wasted” to sign her tax returns because she owed so much. Lady Gaga reportedly earned $90 million in 2010. Because she earns fees and royalties, she’s subject to the highest income-tax rate. So, assuming she’s just as successful this year, she will certainly pay more than $30 million in taxes and probably more than $45 million, which is infinitely more tax than Mr. Zuckerberg will pay on the $23 billion of Facebook stock he now holds.

Why is this?

Our tax system is based on the concept of “realization.” Individuals are not taxed until they actually sell property and realize their gains. But this system makes less sense for the publicly traded stocks of the superwealthy. A drastic change is necessary to fix this fundamental flaw in our tax system and finally require people like Warren E. Buffett, Mr. Ellison and others to pay at least a little income tax on their unsold shares. The fix is called mark-to-market taxation.

For individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities (representing the top 0.1 percent of families), the appreciation in their publicly traded stock and securities would be “marked to market” and taxed annually as if they had sold their positions at year’s end, regardless of whether the securities were actually sold. The tax could be imposed at long-term capital gains rates so tax rates would stay as they were.

We could call this tax the “Zuckerberg tax.” Under it, Mr. Zuckerberg would owe an additional $3.45 billion when Facebook went public (that’s 15 percent of the value of the roughly $23 billion of stock he owns). He could sell some shares to pay the tax (and would be left with over $20 billion of Facebook stock after tax), or borrow to pay the tax.

If his Facebook shares decline in value next year, he’d get a refund.

President Obama has proposed a “Buffett rule” that would require millionaires to pay tax at a 30 percent effective minimum rate. Under the rule, Mr. Buffett’s taxes might have doubled to $12 million in 2010, but this would represent only a trivial amount of additional tax for him. If the Buffett rule applied in 2010, Mr. Buffett’s effective tax rate would be only about 2/100 of 1 percent on the $8 billion in appreciation of his holdings. A Zuckerberg tax would be far better: under it Mr. Buffett would have paid $1.2 billion in tax in 2010.

A mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years. The new revenue could be used to lower payroll taxes, extend the George W. Bush tax cuts, repeal the alternative minimum tax, reduce the budget deficit, prevent military cuts or a combination of all of these.

This tax would not affect the middle class, or even most wealthy Americans. Nor would it affect small-business owners. It would affect only individuals who were undeniably, extraordinarily rich. Only publicly traded stock would be marked to market.

Some would argue that it is inherently unfair to tax “paper gains” before they are realized — Mr. Zuckerberg won’t receive $28 billion in cash; he holds only paper. Moreover, markets are inherently volatile; one year’s paper gains is another’s real losses. However, these arguments are far less credible when paper losses give rise to real tax refunds. Moreover, in a downturn, the mark-to-market tax would act as a fiscal stimulus — the cash refunds would offset a declining stock market.

This proposal follows the Ronald Reagan model by broadening the “base” of tax without increasing rates. In fact, Reagan was responsible for the last major reform of our antiquated realization system when he signed a law requiring taxpayers to pay a tax on interest that accrued on bonds but was not paid.

The most profound effect of a mark-to-market tax would be to level the playing field between wage earners, on one hand, and founders and investors on the other. Superwealthy holders of publicly traded securities could no longer escape tax on their vast wealth.

David S. Miller is a tax lawyer.

    The Zuckerberg Tax, NYT, 7.2.2012,
http://www.nytimes.com/2012/02/08/opinion/the-zuckerberg-tax.html

In Fuel Oil Country, Cold That Cuts to the Heart

February 3, 2012
The New York Times
By DAN BARRY

DIXFIELD, Me.

With the darkening approach of another ice-hard Saturday night in western Maine, the man on the telephone was pleading for help, again. His tank was nearly dry, and he and his disabled wife needed precious heating oil to keep warm. Could Ike help out? Again?

Ike Libby, the co-owner of a small oil company called Hometown Energy, ached for his customer, Robert Hartford. He knew what winter in Maine meant, especially for a retired couple living in a wood-frame house built in the 19th century. But he also knew that the Hartfords already owed him more than $700 for two earlier deliveries.

The oil man said he was very sorry. The customer said he understood. And each was left to grapple with a matter so mundane in Maine, and so vital: the need for heat. For the rest of the weekend, Mr. Libby agonized over his decision, while Mr. Hartford warmed his house with the heat from his electric stove’s four burners.

“You get off the phone thinking, ‘Are these people going to be found frozen?’ ” Mr. Libby said. No wonder, he said, that he is prescribed medication for stress and “happy pills” for equilibrium.

Two days later, Mr. Libby told his two office workers about his decision. Diane Carlton works the front desk while her daughter-in-law, Janis, handles accounts. But they share the job of worrying about Ike, whose heart, they say, is too big for his bantam size and, maybe, this business.

The Hartford case “ate him,” Janice Carlton recalled. “It just ate him.”

Mr. Libby drove off to make deliveries in his oil truck, a rolling receptacle of crumpled coffee cups and cigarette packs. Diane Carlton, the office’s mother hen, went home early. This meant that Janis Carlton was alone when their customer, Mr. Hartford, stepped in from the cold. He had something in his hand: the title to his 16-year-old Lincoln Town Car.

Would Hometown Energy take the title as collateral for some heating oil? Please?

Maine is in the midst of its Republican presidential caucus, the state’s wintry moment in the battle for the country’s future. But at this time of year, almost nothing matters here as much as basic heat.

While federal officials try to wean the country from messy and expensive heating oil, Maine remains addicted. The housing stock is old, most communities are rural, and many residents cannot afford to switch to a cleaner heat source. So the tankers pull into, say, the Portland port, the trucks load up, and the likes of Ike Libby sidle up to house after house to fill oil tanks.

This winter has been especially austere. As part of the drive to cut spending, the Obama administration and Congress have trimmed the energy-assistance program that helps the poor — 65,000 households in Maine alone — to pay their heating bills. Eligibility is harder now, and the average amount given here is $483, down from $804 last year, all at a time when the price of oil has risen more than 40 cents in a year, to $3.71 a gallon.

As a result, Community Concepts, a community-action program serving western Maine, receives dozens of calls a day from people seeking warmth. But Dana Stevens, its director of energy and housing, says that he has distributed so much of the money reserved for emergencies that he fears running out. This means that sometimes the agency’s hot line purposely goes unanswered.

So Mainers try to make do. They warm up in idling cars, then dash inside and dive under the covers. They pour a few gallons of kerosene into their oil tank and hope it lasts. And they count on others. Maybe their pastor. Maybe the delivery man. Maybe, even, a total stranger.

Hometown Energy has five trucks and seven employees, and is run out of an old house next to the Ellis variety store and diner. Oil perfumes the place, thanks to the petroleum-stained truckers and mechanics clomping through. Janis Carlton, 35, tracks accounts in the back, while Diane Carlton, 64, works in the front, where, every now and then, she finds herself comforting walk-ins who fear the cold so much that they cry.

Their boss, Mr. Libby, 53, has rough hands and oil-stained dungarees. He has been delivering oil for most of his adult life — throwing the heavy hose over his shoulder, shoving the silver nozzle into the tank and listening for the whistle that blows when oil replaces air.

Eight years ago, he and another Dixfield local, Gene Ellis, who owns that variety store next door, created Hometown Energy, a company whose logo features a painting of a church-and-hillside scene from just down the road. They thought that with Ike’s oil sense and Gene’s business sense, they’d make money. But Mr. Libby says now that he’d sell the company in a heartbeat.

“You know what my dream is?” Mr. Libby asked. “To be a greeter at Walmart.”

This is because he sells heat — not lumber, or paper, or pastries — and around here, more than a few come too close to not having enough. Sure, some abuse the heating-assistance program, he says, but many others live in dire need, including people he has known all his life.

So Mr. Libby does what he can. Unlike many oil companies, he makes small deliveries and waves off most service fees. He sets up elaborate payment plans, hoping that obligations don’t melt away with the spring thaw. He accepts postdated checks. And he takes his medication.

When the customer named Robert Hartford called on the after-hours line that Saturday afternoon, asking for another delivery, Mr. Libby struggled to do what was right. He cannot bear the thought of people wanting for warmth, but his tendency to cut people a break is one reason Hometown Energy isn’t making much money, as his understanding partner keeps gently pointing out.

“I do have a heart,” Mr. Libby said. But he was already “on the hook” for the two earlier deliveries he had made to the couple’s home. What’s more, he didn’t know even know the Hartfords.

Robert and Wilma Hartford settled into the porous old house, just outside of Dixfield, a few months ago, in what was the latest of many moves in their 37-year marriage. Mr. Hartford was once a stonemason who traveled from the Pacific Northwest to New England, plying his trade.

Those wandering days are gone. Mr. Hartford, 68, has a bad shoulder, Mrs. Hartford, 71, needs a wheelchair, and the two survive on $1,200 a month (“Poverty,” Mrs. Hartford says). So far this year they have received $360 in heating assistance, he said, about a quarter of last year’s allocation.

Mr. Hartford said he used what extra money they had to repair broken pipes, install a cellar door, and seal various cracks with Styrofoam spray that he bought at Walmart. That wasn’t enough to block the cold, of course, and the two oil deliveries carried them only into early January.

There was no oil to burn, so the cold took up residence, beside the dog and the four cats, under the velvet painting of Jesus. The couple had no choice but to run up their electric bill. They turned on the Whirlpool stove’s burners and circulated the heat with a small fan. They ran the dryer’s hose back into the basement to keep pipes from freezing, even when there were no clothes to dry.

And, just about every day, Mr. Hartford drove to a gas station and filled up a five-gallon plastic container with $20 of kerosene. “It was the only way we had,” he said. Finally, seeing no other option, Mr. Hartford made the hard telephone call to Hometown Energy. Panic lurked behind his every word, and every word wounded the oil man on the other end.

“I had a hard time saying no,” Mr. Libby said. “But I had to say no.”

When Mr. Hartford heard that no, he also heard regret. “You could tell in his voice,” he said.

Two days later, Mr. Hartford drove up to Hometown Energy’s small office in his weathered gray Lincoln, walked inside, and made his desperate offer: The title to his car for some oil.

His offer stunned Janis Carlton, the only employee present. But she remembered that someone had offered, quietly, to donate 50 gallons of heating oil if an emergency case walked through the door. She called that person and explained the situation.

Her mother-in-law and office mate, Diane Carlton, answered without hesitation. Deliver the oil and I’ll pay for it, she said, which is one of the ways that Mainers make do in winter.

    In Fuel Oil Country, Cold That Cuts to the Heart, NYT, 3.2.2012,
    http://www.nytimes.com/2012/02/04/us/maine-resident-struggles-to-heat-his-home.html

U.S. Jobless Rate Falls to 8.3 Percent, a 3-Year Low

February 3, 2012
The New York Times
By MOTOKO RICH

The United States economy gained momentum in January, as employers added 243,000 jobs, the second straight month of better-than-expected gains.

And in a separate measure, the unemployment rate fell to 8.3 percent, giving a cause for optimism as the economy shapes up as the central issue in the presidential election.

Measured by both the unemployment rate and the number of jobless — which fell to 12.8 million — it was the strongest signal yet that an economic recovery was spreading to the jobs market. The last time the figures were as good was February 2009, President Obama’s first full month in office.

The report sent stocks up by over 1 percent in trading on Wall Street.

The White House used the new numbers as a platform to appeal for an extension of the payroll tax cut and unemployment benefits. President Obama, speaking at a Washington-area firehouse to promote a jobs initiatives for veterans, and warned that more help was needed and called on Congress to aid with the economic recovery.

“These numbers will go up and down in the coming months, and there’s still far too many Americans who need a job or a job that pays better than the one they have now,” he said. “But the economy is growing stronger, the recovery is speeding up, and we have got to do everything in our power to keep it going.”

From the Republican side of the aisle, the House majority leader, Eric Cantor, welcomed the “encouraging” numbers but said there was still a need for “bold, pro-growth policies that reduce red tape and will help our nation’s small businesses to succeed, expand and create new jobs.” The House speaker, John Boehner, called for a “new approach” to replace “the same policies that simply haven’t worked as advertised.”

The job growth followed a December gain that was revised Friday to 203,000, from the original 200,000.

The private sector remained the engine of new job gains. While federal agencies and local governments continued to lay off workers, private-sector employers added 257,000 net new jobs in January. The industries with the biggest gains were manufacturing, professional and business services, and leisure and hospitality.

The promising numbers came as various economic indicators have painted an ambiguous picture of the recovery’s strength.

Layoffs appear to be slowing as fewer people are filing claims for unemployment benefits, and factory orders have picked up.

But while sales of existing homes have started to rise, home prices continue to fall. Consumer spending is still restrained, and could come under further pressure with gas prices edging higher over the last four months and as consumers revert to building up savings.

Economists were encouraged by the strong numbers for January and broad-based increases in private sector employment. Seasonal factors may have affected some industries, like restaurants or construction, that showed strong hiring numbers in January.

Nevertheless, said Steve Blitz, senior economist for ITG Investment Research, the report exhibited strong gains in both manufacturing and related job categories, like transportation and warehousing and wholesale trade.

“You’ve got to give credit when things are moving in the right direction,” said Mr. Blitz, who has been cautious in his assessment of the recovery. “This is not a process that is going to be done in a month or two months or a year. It could take five or 10 years to get there, but what you’re going to continue to see is what is inside this report, which is the manufacturing sector is improving.”

Others were not convinced that job growth would be sustained at this high level.

“The problem is that there is this bifurcation here in the numbers,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “On the one hand we see rather impressive job growth, but on the other hand we’re also seeing other economic indicators that are telling us that the economy is fundamentally weak.” Mr. Baumohl cited moderate consumer spending and an overall economic growth rate that typically does not support this level of hiring.

The strong job numbers certainly belied the much gloomier picture of the economy painted by the Federal Reserve last month, when it declared it would extend plans to hold down short-term interest rates near zero through the end of 2014. In its statement, the Fed described weak hiring, a depressed housing market and continuing concerns in Europe.

“We’re going to have to really very carefully dig deep below the surface for these and a lot of other economic statistics to find a consistency of what is happening in the U.S. economy,” Mr. Baumohl said.

Although the number of unemployed people has been falling, the number is still about equal to the entire population of Pennsylvania, and long-term unemployment is one of the most crushing legacies of this recent recession. According to an analysis of December’s Labor Department numbers released earlier this week by the Pew Fiscal Analysis Initiative, nearly a third of the people who are jobless have been unemployed for a year or more. In January, the Labor Department reported that 5.5 million people had been out of work for six months or more.

Underemployment is another stubborn problem. The number of people working part time because they could not find full-time work was 8.2 million in January. Including that group and those who have stopped looking for work altogether, the broader measure of unemployment was 15.1 percent.

“You have an interesting situation where you have some permanent part-time workers,” said John Silvia, chief economist at Wells Fargo. “These people are in jobs and the jobs are not likely to become full-time.” He added: “That’s just a new flavor of the labor market.”

Sandy Pochapin, a 54-year-old former marketing manager, was laid off for the second time last May from a small business in Newton, Mass. Just before the start of the year she picked up a part-time job as a media consultant at an advertising agency. Her husband, a real estate lawyer, has also experienced severe cutbacks in his income.

The couple, who are now paying three times what they were paying for health care before Ms. Pochapin lost her job, have cut back on dinners out, and Ms. Pochapin said that replacing her eight-year-old Toyota Highlander was “not on the cards.” More painfully, the couple have had to dip into their college-aged son’s educational fund to keep up with mortgage payments and other expenses.

Ms. Pochapin, a member of several networking groups, said she compiles job leads and recently sent out a list with more openings than she had ever seen. “I would say things are picking up,” she said. “But where they’re picking up is not where people who have been unemployed long-term have skills.” She noted that there were many job openings for jobs in mobile marketing or for digital media specialists.

Indeed, one of the perennial complaints of employers is that they cannot find workers with the skills they need. At Ancestry.com, a genealogy Web site in Provo, Utah, that wants to hire 150 engineers, data mining specialists and developers of mobile applications, Eric Shoup, a senior vice president, said that “while we find a lot of people who are unemployed, they are not the people who bring the skill sets we need for our business.”

He said that virtually all the hiring that the company is doing now is of people it recruits from other firms. “We have very low unemployment in these specialized skill areas, so we are always hiring them away from somebody else,” Mr. Shoup said.

Economists are beginning to worry about the self-fulfilling intransigence of long-term unemployment. “It’s almost starting to look like there are two job markets,” said Cliff Waldman, the economist at the Manufacturers Alliance, a trade group. “In spite of what is a nice fall in the unemployment rate for good reasons of employment gains and falls in unemployment, long-term unemployment is very sticky.”

The labor market may also be shifting toward a world in which an increasing number of people will be working on a contract basis. Kathy Kane, senior vice president for talent management at Adecco Group, a job placement group, said the company was increasingly handling contracts to run entire manufacturing lines, call centers or accounting divisions.

Ms. Kane said companies were focusing on hiring a core group of people and leaving more support services to groups of contract workers. She said companies preferred the flexibility that allowed them to change the size of their work forces quickly.

“If they have to fluctuate those staffing levels, it’s expensive for companies to lay people off and create severance packages or pay benefits,” she said. “So if they employ them through a company like us, it’s a good risk-management strategy.”

    U.S. Jobless Rate Falls to 8.3 Percent, a 3-Year Low, NYT, 3.2.2012,
    http://www.nytimes.com/2012/02/04/business/economy/
    us-economy-added-243000-jobs-in-january-unemployment-rate-is-8-3.html

New Treasury Rules Ease 401(k) Annuity Purchase

February 2, 2012
The New York Times
By MARY WILLIAMS WALSH

It is one of the biggest conundrums of an aging society: Americans have salted away $11 trillion in retirement plans, yet millions still risk running out of money in old age.

On Thursday the government said it had some new tools to deal with the problem. The Treasury issued several new regulations intended to make it easier, and maybe cheaper, for middle-class people in retirement to transfer the money they accumulated in their 401(k)s into an annuity that would guarantee monthly payments until they die.

“Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Timothy F. Geithner.

The Labor Department also said it had completed rules to let workers learn about the fees various financial firms charge for helping to run 401(k) plans. Labor officials said they thought employers could negotiate better terms if the details were more easily available.

The risk of outliving one’s assets has moved front and center in recent years, as companies have frozen or ended their traditional, defined-benefit pension plans and replaced them with 401(k) plans. Traditional pension plans offer what is, in fact, an annuity, a stream of guaranteed payments from retirement to death. But fewer and fewer employers want to be running an annuity business on the side.

Insurance companies, on the other hand, are eager to wade into what they consider a big and attractive market of graying Americans with I.R.A. and 401(k) balances and little idea of what to do with them. But they have held back, in part, because of tax rules, which Treasury is easing.

One of the changes proposed Thursday would make it easier for employers to work with annuity providers, so that workers can learn about their annuity options at work, rather than having to go to a financial planner or broker.

“I’m trying not to jump up and down in my office, actually,” said Jody Strakosch, national director of annuities for MetLife, who was asked about the new rules while she was reading the 47-page tome from Treasury.

She said MetLife had had suitable annuity contracts available since 2004, but had been selling them mostly to the retail market and not to employers who offer retirement savings plans.

J. Mark Iwry, an official at the Treasury department, said the department hoped in particular to foster a workplace market for “longevity insurance,” something much discussed in policy circles but that employers rarely make available to workers when they retire.

Longevity insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. That is the point where policy makers think many will need the money, because they will have exhausted their savings or developed costly health problems. The insurance would kick in and supplement Social Security. Like Social Security, the longevity insurance payments would keep coming every month until the retiree’s death. But because the policy would pay nothing in the first 15 to 20 years of a person’s retirement, it would cost much less than a conventional annuity.

A white paper by the Council of Economic Advisors estimated, for example, that a 65-year-old would have to pay $277,500 for a $20,000-a-year annuity that started immediately, but only $35,200 for one that started at age 85.

With a price so much lower than a conventional annuity, employees would be able to buy longevity insurance to cover their riskiest years with just a portion of their 401(k) account balance.

Most employers that offer annuities give retiring workers an either-or choice: the whole balance as a big check, or the whole thing to buy an annuity. Tax rules make it complicated to calculate the values if the amount is split, so those rules are being relaxed.

When the federal employees’ Thrift Savings Plan let people spend just part of their balance on longevity insurance, there was an increase in participation.

“They found a dramatic pickup in the number of people who were able to take a partial annuity,” said Ms. Strakosch. (MetLife provides the Thrift Savings Plan’s annuities.)

The Treasury also capped the maximum amount of retirement plan money that could be spent on longevity insurance at 25 percent of the account balance, up to $100,000. Mr. Iwry said that would keep high earners from improperly sheltering money, and minimize any effect of the changes on federal tax revenue.

Treasury is also changing the way of calculating required minimum distributions — the amounts that people over 70 are required to withdraw from their 401(k) plans every year. The new method would exclude any money that went to an insurance company to buy longevity insurance or an annuity.

Some of the rules take effect immediately; other changes are in the public comment period.

    New Treasury Rules Ease 401(k) Annuity Purchase, NYT, 2.2.2012,
    http://www.nytimes.com/2012/02/03/business/new-treasury-rules-ease-purchase-of-annuity-with-401-k.html

White House Offers Plan to Lure Jobs to America

February 2, 2012
The New York Times
By ANNIE LOWREY

WASHINGTON — In his State of the Union address, President Obama called for a wide-ranging package of policies to help create American manufacturing jobs, including trade enforcement measures, business tax breaks and worker training programs.

In many ways, the proposal is surprising, as few economists now consider manufacturing a potent engine for job growth in the United States. Manufacturers have added about 330,000 jobs in the country in the last two years. But the growth followed three decades of decline, during which companies like automakers and textile companies slashed payrolls by about 7.5 million. That has led many economists to say the recent turnaround might be nothing more than a correction from the depths of the recession.

But the administration argues that big trends — like rising wages in developing countries, falling wages in America and a weaker dollar — have made moving work to or keeping work in the United States a much more viable option. And they say that manufacturers will continue to add jobs domestically, especially with a little help from Washington.

“We have a huge opportunity, at this moment, to bring manufacturing back,” Mr. Obama said in his address to Congress. “But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

The proposal stems from a belief that after “a long period where people felt the wind was in our face, the wind is with us,” said Gene Sperling, director of the White House National Economic Council. “It’s not fighting against the trends. It’s actually working with them.”

Workers might command relatively high wages in the United States, but wages are climbing rapidly in countries like China and Brazil. High energy prices have increased shipping costs. And manufacturers argue that American workers frequently produce higher-quality goods and that American factories are closer to the markets for more sophisticated goods.

Those trends have led some companies to repatriate manufacturing jobs in the last few years, a development called on-shoring. General Electric has decided to move production of a water heater to Louisville, Ky., from China, for instance. NCR, a maker of self-service kiosks and automated teller machines, has shifted jobs to Columbus, Ga.

It is difficult to determine how many jobs American manufacturers are sending overseas or bringing back. But in a November survey by MFG.com, a site that connects manufacturers with suppliers, one in five North American manufacturers said they had brought production back from a “low-cost” country, up from about one in 10 manufacturers in early 2010.

Economists said that the administration could help sustain the trend. But they warned that the administration’s proposal seemed unlikely to lead to major job growth, and said that many businesses would still hire lower-cost workers overseas.

“We’re not going to get very labor-intensive, relatively low-skilled jobs in America, and I don’t think we want them,” said A. Michael Spence, a professor at New York University and Nobel laureate in economics. “But sometimes it makes sense to have a little help developing technologies that will make us competitive. And sometimes public support for upgrading workers’ skills makes sense.”

“The best we could possibly get is continued modest growth in manufacturing jobs,” said C. Fred Bergsten, director of the Peterson Institute for International Economics, a research group in Washington.

Mr. Bergsten noted that manufacturing continued to become more efficient, meaning companies needed fewer and fewer workers. American manufacturers produced roughly the same amount of goods in 2010 as they did a decade before, but they did so with six million fewer employees on their payrolls. Mr. Bergsten also argued that sending jobs to other countries continued to make sense for many global firms. “You’re trying to buck two major trends,” he said.

Some economists also questioned whether Washington should be giving manufacturing a hand at all.

“It’s totally implausible to think that there’s going to be a surge in manufacturing jobs,” said Lawrence F. Katz, an economist at Harvard. Broader measures to improve American infrastructure and education, he said, would be more effective in creating middle-class jobs.

But the White House says that manufacturing offers significant potential for new jobs — jobs that require more skills and offer better pay than the assembly lines 30 or 40 years ago. And it says that even modest incentives might make a difference.

To that end, the administration has put together a far-ranging set of proposals: cutting taxes for manufacturers that produce goods in the United States, taking away tax breaks for businesses that move jobs offshore, doubling a tax deduction for makers of high-tech goods, providing support to businesses investing in areas where factories are closing, expanding worker training programs and creating a new task force to better enforce trade rules and intellectual property rights. Closing a loophole that allows companies to shift profits abroad would pay for the tax credits, the White House says.

It all adds up to what economists might call an industrial policy, the out-of-favor practice of using tariffs, taxes and other measures to help a particular industry. The White House avoids the term because it implies that the government is picking winners and losers. It argues that its proposals are a moderate plan to aid businesses deciding whether to move jobs overseas.

Countries like Germany, Japan and China offer far larger tax breaks and financing support to their manufacturers, the administration argues. Such countries have “been in a bear hug” with manufacturers, said Fred P. Hochberg, president of the Export-Import Bank of the United States, a federal agency. “We’ve held them at arm’s length.”

Mr. Hochberg said a focus on manufacturing and exports might lead to more sustainable growth. “For the last three decades, we’ve relied on the U.S. consumer for growth,” he said. “But now we’re seeing growth coming from an investment in infrastructure happening in the emerging economies,” where American companies should be selling their wares and expertise.

The administration also called for a focus on manufacturing because of its spillover effects on the economy. “We do believe that manufacturing punches above its weight economically,” said Mr. Sperling of the National Economic Council. “Advanced manufacturing is critical to your innovative capacity as a country.”

    White House Offers Plan to Lure Jobs to America, NYT, 2.2.2012,
    http://www.nytimes.com/2012/02/03/business/economy/a-lure-to-keep-jobs-made-in-america.html

Deficit Tops $1 Trillion, but Is Falling

January 31, 2012
The New York Times
By ROBERT PEAR and JOHN H. CUSHMAN Jr.

WASHINGTON — The United States economy will remain sluggish for the next few years, with unemployment high, but budget deficits are starting to come down, the Congressional Budget Office said on Tuesday in its latest formal outlook.

The deficit in the current fiscal year is expected to be $1.1 trillion, the budget office said, the fourth year in which it would exceed $1 trillion.

But it just might be the last such year, at least for a while. Unless Congress passes new legislation changing the course on spending or taxation — changes that are a distinct possibility, but no basis for a forecast — projected deficits would “drop markedly” starting next year and for a decade to come.

That is because current laws would allow the Bush-era tax cuts to expire, the alternative minimum tax to reach ever more taxpayers and federal spending to decline modestly under newly imposed spending caps, at least until the aging of the population and rising costs for health care tilt the balance of spending upward again.

If Congress leaves current law unchanged, the report said, the deficit will fall to $585 billion in 2013 and $345 billion in 2014. In other words, doing nothing might be the most straightforward way for Congress to slash the deficit, a goal espoused by lawmakers in both parties.

However, the budget office said, such policy — implying higher taxes and constraints on spending — would crimp economic growth so that the unemployment rate, now 8.5 percent, would climb to 8.9 percent in the last quarter of this year and 9.2 percent in the final quarter of 2013.

Representative Eric Cantor of Virginia, the House Republican leader, called the deficit and unemployment news reason enough for a course change.

“We know that President Obama’s policies have failed to produce the economic growth needed to pay down these massive deficits that are creating uncertainty, preventing economic recovery, and harming job creation,” he said. “When something doesn’t work, you change it. Let’s try something new.”

The report’s economic outlook was a bit gloomier than a year ago both because the tax increases and spending cuts required under current law would dampen growth — and because economic troubles abroad may spill over to the U.S. economy.Douglas W. Elmendorf, director of the Congressional Budget Office, said that the fiscal tightening “will hold back economic growth” next year, but could add to the strength of the economy in the long run.

Assuming no change in current law, the budget office expects the economy to grow 2 percent this year and just 1.1 percent in 2013 (measured by the increase in the gross domestic product, after adjusting for inflation).

As a percentage of gross domestic product, this year’s deficit of $1.1 trillion, compared with last year’s $1.3 trillion shortfall, “will be 7.0 percent, which is nearly 2 percentage points below the deficit recorded last year but still higher than any deficit between 1947 and 2008,” the annual report said. “Over the next few years, projected deficits in C.B.O.’s baseline drop markedly, averaging 1.5 percent of G.D.P. over the 2013-2022 period.”

In the next few years, the deficit would still drop below $1 trillion and decline as a percentage of GDP even if Congress extended the Bush tax cuts and reversed other budget-balancing policies, according to the office’s alternative scenario, which uses assumptions other than the status quo. But the improvements would be less pronounced and would not endure as long.

The improving but still tepid performance of its baseline projection is reflected, too, in the share of the gross domestic product taken up by the national debt.

“With deficits small relative to the size of the economy, debt held by the public drops — from about 75 percent of G.D.P. in 2013 to 62 percent in 2022, which is still higher than in any year between 1952 and 2009.”

Some say that this year — or perhaps next year, after the election — changes are virtually certain to occur, one way or another.

Even under current law, the budget office said, the government will need to continue borrowing to fill the gap between spending and revenues, and the total federal debt — the accumulated total of such borrowing — will rise to $21.6 trillion in 2022, from its current level of $15.2 trillion. And net interest payments on the debt would nearly triple, to $624 billion, the report said.

The budget office said it would cost $5.4 trillion to continue major tax cuts enacted in 2001 and 2003 under President George W. Bush and scheduled to expire at the end of this year. President Obama and some Democrats want to continue many of those cuts for individuals with incomes under $200,000 a year and couples with incomes under $250,000 a year.

Many lawmakers say Congress must block impending cuts in Medicare payments to doctors, who face a 27 percent reduction in fees in March. Just to maintain Medicare payment rates at current levels, without an increase, would cost $372 billion over 10 years, compared with spending expected under current law, the budget office said.

The number of people receiving Social Security disability benefits has been increasing in recent years, and the budget office predicts that the disability trust fund will run out of money in 2016.

In addition, the budget office estimates that Medicare’s hospital insurance trust fund will be exhausted in 2022, two years earlier than the Obama administration predicted last May. Congress is considering a variety of steps to slow the growth of Medicare spending, but most provoke sharp disagreement between Republicans and Democrats.

    Deficit Tops $1 Trillion, but Is Falling, NYT, 31.1.2012,
    http://www.nytimes.com/2012/02/01/us/politics/deficit-tops-1-trillion-but-is-falling.html

The Great Divorce

January 30, 2012
The New York Times
By DAVID BROOKS

I’ll be shocked if there’s another book this year as important as Charles Murray’s “Coming Apart.” I’ll be shocked if there’s another book that so compellingly describes the most important trends in American society.

Murray’s basic argument is not new, that America is dividing into a two-caste society. What’s impressive is the incredible data he produces to illustrate that trend and deepen our understanding of it.

His story starts in 1963. There was a gap between rich and poor then, but it wasn’t that big. A house in an upper-crust suburb cost only twice as much as the average new American home. The tippy-top luxury car, the Cadillac Eldorado Biarritz, cost about $47,000 in 2010 dollars. That’s pricy, but nowhere near the price of the top luxury cars today.

More important, the income gaps did not lead to big behavior gaps. Roughly 98 percent of men between the ages of 30 and 49 were in the labor force, upper class and lower class alike. Only about 3 percent of white kids were born outside of marriage. The rates were similar, upper class and lower class.

Since then, America has polarized. The word “class” doesn’t even capture the divide Murray describes. You might say the country has bifurcated into different social tribes, with a tenuous common culture linking them.

The upper tribe is now segregated from the lower tribe. In 1963, rich people who lived on the Upper East Side of Manhattan lived close to members of the middle class. Most adult Manhattanites who lived south of 96th Street back then hadn’t even completed high school. Today, almost all of Manhattan south of 96th Street is an upper-tribe enclave.

Today, Murray demonstrates, there is an archipelago of affluent enclaves clustered around the coastal cities, Chicago, Dallas and so on. If you’re born into one of them, you will probably go to college with people from one of the enclaves; you’ll marry someone from one of the enclaves; you’ll go off and live in one of the enclaves.

Worse, there are vast behavioral gaps between the educated upper tribe (20 percent of the country) and the lower tribe (30 percent of the country). This is where Murray is at his best, and he’s mostly using data on white Americans, so the effects of race and other complicating factors don’t come into play.

Roughly 7 percent of the white kids in the upper tribe are born out of wedlock, compared with roughly 45 percent of the kids in the lower tribe. In the upper tribe, nearly every man aged 30 to 49 is in the labor force. In the lower tribe, men in their prime working ages have been steadily dropping out of the labor force, in good times and bad.

People in the lower tribe are much less likely to get married, less likely to go to church, less likely to be active in their communities, more likely to watch TV excessively, more likely to be obese.

Murray’s story contradicts the ideologies of both parties. Republicans claim that America is threatened by a decadent cultural elite that corrupts regular Americans, who love God, country and traditional values. That story is false. The cultural elites live more conservative, traditionalist lives than the cultural masses.

Democrats claim America is threatened by the financial elite, who hog society’s resources. But that’s a distraction. The real social gap is between the top 20 percent and the lower 30 percent. The liberal members of the upper tribe latch onto this top 1 percent narrative because it excuses them from the central role they themselves are playing in driving inequality and unfairness.

It’s wrong to describe an America in which the salt of the earth common people are preyed upon by this or that nefarious elite. It’s wrong to tell the familiar underdog morality tale in which the problems of the masses are caused by the elites.

The truth is, members of the upper tribe have made themselves phenomenally productive. They may mimic bohemian manners, but they have returned to 1950s traditionalist values and practices. They have low divorce rates, arduous work ethics and strict codes to regulate their kids.

Members of the lower tribe work hard and dream big, but are more removed from traditional bourgeois norms. They live in disorganized, postmodern neighborhoods in which it is much harder to be self-disciplined and productive.

I doubt Murray would agree, but we need a National Service Program. We need a program that would force members of the upper tribe and the lower tribe to live together, if only for a few years. We need a program in which people from both tribes work together to spread out the values, practices and institutions that lead to achievement.

If we could jam the tribes together, we’d have a better elite and a better mass.

    The Great Divorce, NYT, 30.1.2012,
    http://www.nytimes.com/2012/01/31/opinion/brooks-the-great-divorce.html

Banks Taketh, but Don’t Giveth

January 27, 2012
The New York Times
By DELIA EPHRON

BANKS are eating up all the real estate in my neighborhood. I live on a basically residential street, and within three and a half short blocks of my house are eight banks: two Chase, one Wells Fargo, one Citi, one HSBC, one Bank of America, one Sovereign and one Capital One. Go two more blocks and there are 10 banks (one more Chase and one more Citi).

Why are the banks paying only 0.4 percent interest on a savings account if they can afford to open offices on every other block in Greenwich Village?

The other day I was catching up on balancing my account and realized that, for the last six months, I had earned about $4 in interest but had been charged $35 a month for service.

I went to the bank at the corner (the southwest corner). “This is insane,” I said.

The banker explained that I had a service charge because I didn’t maintain a high enough balance.

“At this rate I will have no balance. Besides, what about my C.D.? I have a C.D. here.”

“Oh,” he said, looking it up on the computer. “Someone forgot to bundle that in.”

“Reverse the charges,” I said, and he said that they would reverse three months but not six. To get all six reversed I had to go to my originating branch.

“This is my originating branch,” I said.

“No, it isn’t.”

“Yes, it is. I opened my account here. I live down the block.”

“Sorry. You have to go to your originating branch at 79th and Broadway.”

“Just call them and tell them to reverse it.”

“You have to do it in person.”

Now, I had shut down an account on the Upper West Side about a decade ago and, after a six-year break, opened a new one when I moved downtown. But even if there was some justification for their confusion, that wasn’t the point.

“There are three branches within walking distance, but I have to take two subways to reverse my charges? That is insane.”

Insane is what I said, but actually it was fishy.

At that point I threatened to withdraw my meager savings from the bank. The bank manager appeared and reversed the charges for all six months, and gave me his card. “Let us invest for you,” he said.

“Why would I let you do that?”

“Because you’re not earning anything on your money.”

Not the next day, but practically, my husband went to his bank’s A.T.M. at the corner (the southeast corner) to withdraw money from his business account, and his card, which he hadn’t used for a while, was rejected. He went into his bank.

“You’re not on the account,” he was told.

“Who is?”

“No one,” said the banker. “But how is that possible?” said my husband. “I’ve had this account for 30 years. You won’t even open an account without a signatory.”

“The computer must have lost your name.”

“How?”

After pressing a few buttons on her keyboard and scrolling around, she gave up and speculated that this must have happened when Wells Fargo ate Wachovia. “You have to prove that the company is yours,” she said. “Until then, you can deposit money but you can’t withdraw.”

Proving it involved a call to his lawyer, who had to locate my husband’s articles of incorporation in storage, and a bill for $145, which — after my husband threatened to withdraw his money — the bank agreed to pay.

“This is insane,” he told them, but later pointed out that actually, from the bank’s point of view, it was brilliant: a bank where you can only deposit.

Which perhaps explains what all these new branches are for. Since no one actually needs to go into a bank to withdraw money, simply to the A.T.M., the banks must be in the business of taking our money but not in the business of giving it back.

I don’t have credit card debt because Suze Orman advises against it, but I was having lunch with a friend the other day, who was a wreck because her bank charges 18 percent interest. There was no way she could ever pay down her credit card debt. So I was thinking that all of us earning 0.4 percent could instead loan money to our friends at 0.5 percent. It was a bit odd thinking of myself as a benevolent loan shark, but, hey, my friend would get out of debt, I would earn $5 a month instead of $4, and the banks would make so much less money that they would have to close half their branches and give us our city back.

I mentioned the idea to my accountant, who told me it was insane.

“You can’t trust your friends,” he said.

Delia Ephron is the author of the forthcoming novel “The Lion Is In.”

    Banks Taketh, but Don’t Giveth, NYT, 27.1.2011,
    http://www.nytimes.com/2012/01/28/opinion/banks-taketh-but-dont-giveth.html

A Mortgage Investigation

January 25, 2012
The New York Times

In the State of the Union address, President Obama promised a fresh investigation into mortgage abuses that led to the financial meltdown. The goal, he said, is to “hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”

Could this be it, finally? An investigation that results in clarity, big fines and maybe even jail time?

There is good reason to be skeptical. To date, federal civil suits over mortgage wrongdoing have been narrowly focused and, at best, ended with settlements and fines that are a fraction of the profits made during the bubble. There have been no criminal prosecutions against major players. Justice Department officials say that it reflects the difficulty of proving fraud — and not a lack of prosecutorial zeal. That is hard to swallow, given the scale of the crisis and the evidence of wrongdoing from private litigation, academic research and other sources.

This new investigation could be the real thing. Eric Schneiderman, the New York State attorney general, will be a co-chairman of the group, and he has refused to support a settlement being worked out between big banks most responsible for foreclosure abuses and federal agencies and some state attorneys general.

He rightly objected to the fact that in exchange for providing some $20 billion worth of mortgage relief — mainly by reducing the principal on homeowners’ loans — the banks wanted release from legal claims that have never been fully investigated, including those related to potential tax, trust and securities violations in mortgage loans.

In the past year, the Obama administration has pushed back against Mr. Schneiderman, even as other attorneys general also left the settlement talks. By choosing him now to help run the investigation, the president appears to be embracing the call for a much broader inquiry that, properly executed, could result in a far bigger settlement.

For now, the administration is saying that the new investigation and the settlement talks will both proceed. It would be better to settle with the banks only after officials have a full picture of any and all violations.

There are reasons to be wary. Some of the federal officials who will also be involved with the investigation — including Eric Holder Jr., the United States attorney general, and Lanny Breuer, the leader of the Justice Department’s criminal division, who will be a co-chairman — have not distinguished themselves in the pursuit of mortgage fraud.

To win and retain public trust, both the administration and all the group’s co-chairmen — there are also four other officials from the Justice Department, the Securities and Exchange Commission and the Internal Revenue Service — must agree on several steps immediately.

The administration must ensure that the group has ample resources. The co-chairmen must hire a tough-as-nails prosecutor with a successful track record in financial fraud to drive the investigation forward. And the group must move quickly and vigorously, issuing subpoenas and filing cases. It is not starting from scratch; various agencies have all had separate investigations under way.

President Obama’s credibility is on the line. To restore public faith in the financial system, nothing less than a full investigation and full accountability will do.

    A Mortgage Investigation, NYT, 25.1.2012,
    http://www.nytimes.com/2012/01/26/opinion/a-mortgage-investigation.html

Is Our Economy Healing?

January 22, 2012
The New York Times
By PAUL KRUGMAN

How goes the state of the union? Well, the state of the economy remains terrible. Three years after President Obama’s inauguration and two and a half years since the official end of the recession, unemployment remains painfully high.

But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.

Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better, but we’ve already had several false dawns on that front. More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing.

On housing: as everyone now knows (but oh, the abuse heaped on anyone pointing it out while it was happening!), we had a monstrous housing bubble between 2000 and 2006. Home prices soared, and there was clearly a lot of overbuilding. When the bubble burst, construction — which had been the economy’s main driver during the alleged “Bush boom” — plunged.

But the bubble began deflating almost six years ago; house prices are back to 2003 levels. And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.

So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.

But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

That’s not what you hear in public debate, of course, where all the focus is on rising government debt. But anyone who has looked seriously at how we got into this slump knows that private debt, especially household debt, was the real culprit: it was the explosion of household debt during the Bush years that set the stage for the crisis. And the good news is that this private debt has declined in dollar terms, and declined substantially as a percentage of G.D.P., since the end of 2008.

There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute.

The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.

In particular, the European Central Bank has been worrying about inflation — even raising interest rates during 2011, only to reverse course later in the year — rather than worrying about how to sustain economic recovery. And fiscal austerity, which is supposed to limit the increase in government debt, has depressed the economy, making it impossible to achieve urgently needed reductions in private debt. The end result is that for all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive debt — whereas we are.

Back to the U.S. situation: my guarded optimism should not be taken as a statement that all is well. We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief, which could have moved us much more quickly to lower debt. And even if my hoped-for virtuous circle is getting under way, it will be years before we get to anything resembling full employment.

But things could have been worse; they would have been worse if we had followed the policies demanded by Mr. Obama’s opponents. For as I said at the beginning, Republicans have been demanding that the Fed stop trying to bring down interest rates and that federal spending be slashed immediately — which amounts to demanding that we emulate Europe’s failure.

And if this year’s election brings the wrong ideology to power, America’s nascent recovery might well be snuffed out.

    Is Our Economy Healing?, NYT, 22.1.2012,
    http://www.nytimes.com/2012/01/23/opinion/krugman-is-our-economy-healing.html

In Fight Over Piracy Bills, New Economy Rises Against Old

January 18, 2012
The New York Times
By JONATHAN WEISMAN

WASHINGTON — When the powerful world of old media mobilized to win passage of an online antipiracy bill, it marshaled the reliable giants of K Street — the United States Chamber of Commerce, the Recording Industry Association of America and, of course, the motion picture lobby, with its new chairman, former Senator Christopher J. Dodd, the Connecticut Democrat and an insider’s insider.

Yet on Wednesday this formidable old guard was forced to make way for the new as Web powerhouses backed by Internet activists rallied opposition to the legislation through Internet blackouts and cascading criticism, sending an unmistakable message to lawmakers grappling with new media issues: Don’t mess with the Internet.

As a result, the legislative battle over two once-obscure bills to combat the piracy of American movies, music, books and writing on the World Wide Web may prove to be a turning point for the way business is done in Washington. It represented a moment when the new economy rose up against the old.

“I think it is an important moment in the Capitol,” said Representative Zoe Lofgren, Democrat of California and an important opponent of the legislation. “Too often, legislation is about competing business interests. This is way beyond that. This is individual citizens rising up.”

It appeared by Wednesday evening that Congress would follow Bank of America, Netflix and Verizon as the latest institution to change course in the face of a netizen revolt.

Legislation that just weeks ago had overwhelming bipartisan support and had provoked little scrutiny generated a grass-roots coalition on the left and the right. Wikipedia made its English-language content unavailable, replaced with a warning: “Right now, the U.S. Congress is considering legislation that could fatally damage the free and open Internet.” Visitors to Reddit found the site offline in protest. Google’s home page was scarred by a black swatch that covered the search engine’s label.

Phone calls and e-mail messages poured in to Congressional offices against the Stop Online Piracy Act in the House and the Protect I.P. Act in the Senate. One by one, prominent backers of the bills dropped off.

First, Senator Marco Rubio of Florida, a rising Republican star, took to Facebook, one of the vehicles for promoting opposition, to renounce a bill he had co-sponsored. Senator John Cornyn of Texas, who leads the G.O.P.’s Senate campaign efforts, used Facebook to urge his colleagues to slow the bill down. Senator Jim DeMint, Republican of South Carolina and a Tea Party favorite, announced his opposition on Twitter, which was already boiling over with anti-#SOPA and #PIPA fever.

Then trickle turned to flood — adding Senators Mark Kirk of Illinois and Roy Blunt of Missouri, and Representatives Lee Terry of Nebraska and Ben Quayle of Arizona. At least 10 senators and nearly twice that many House members announced their opposition.

“Thanks for all the calls, e-mails, and tweets. I will be opposing #SOPA and #PIPA,” Senator Jeff Merkley, Democrat of Oregon, wrote in a Twitter message. Late Wednesday, Senator Charles E. Grassley of Iowa, the senior Republican on the Senate Judiciary Committee, withdrew his support for a bill he helped write.

The existing bill “needs more due diligence, analysis and substantial changes,” he said in a statement.

Few lawmakers even now question the need to combat pirates at Web sites in China, Russia and elsewhere who have offered free American movies, television shows, music and books almost as soon as they are released. Heavyweights like the Walt Disney Company secured the support of senators and representatives before the Web companies were even aware the legislation existed.

“A lot of people are pitching this as Hollywood versus Google. It’s so much more than that,” said Maura Corbett, spokeswoman for NetCoalition, which represents Google, Amazon.com, Yahoo, eBay and other Web companies. “I would love to say we’re so fabulous, we’re just that good, but we’re not. The Internet responded the way only the Internet could.”

For the more traditional media industry, the moment was menacing. Supporters of the legislation accused the Web companies of willfully lying about the legislation’s flaws, stirring fear to protect ill-gotten profits from illegal Web sites.

Mr. Dodd said Internet companies might well change Washington, but not necessarily for the better with their ability to spread their message globally, without regulation or fact-checking.

“It’s a new day,” he added. “Brace yourselves.”

Citing two longtime liberal champions of the First Amendment, Senator Patrick Leahy and Representative John Conyers Jr. of Michigan, Mr. Dodd fumed, “No one can seriously believe Pat Leahy and John Conyers can be backing legislation to block free speech or break the Internet.”

For at least four years, Hollywood studios, recording industry and major publishing houses have pressed Congress to act against offshore Web sites that have been giving away U.S. movies, music and books as fast as the artists can make them. Few lawmakers would deny the threat posed by piracy to industries that have long been powerful symbols of American culture and have become engines of the export economy. The Motion Picture Association of America says its industry brings back more export income than aerospace, automobiles or agriculture, and that piracy costs the country as many as 100,000 jobs.

The House response, SOPA, was drafted by a conservative Republican, Representative Lamar Smith of Texas, with the backing of 30 co-sponsors, from Representative Debbie Wasserman Schultz of Florida, the chairwoman of the Democratic National Committee, to mainline Republican Peter King of New York. The Senate’s version, written by Mr. Leahy, the Vermont Democrat who is chairman of the Senate Judiciary Committee chairman, attracted 40 co-sponsors from across the political spectrum and cleared his committee unanimously.

Then the Web rose up. Activists said the legislation would censor the Web, force search engines to play policemen for a law they hate and cripple innovation in one of the most vibrant sectors of the American economy.

Mr. Smith, the House Republican author, said opposition Web sites were spreading “fear rather than fact.”

“When the opposition is based upon misinformation, I have confidence in the facts and confidence that the facts will ultimately prevail,” Mr. Smith said.

Google, Facebook and Twitter have political muscle of their own, with in-house lobbying shops and trade associations just like traditional media’s. Facebook has hired the former Clinton White House press secretary Joe Lockhart. Google’s Washington operations are headed by Pablo Chavez, a former counsel to Senator John McCain, Republican of Arizona, and a veteran of the Senate Commerce Committee.

And for all the campaign contributions, Washington parties and high-priced lobbyists the old economy could muster, nothing could compare to the tentacles the new economy can reach into Americans’ everyday lives through sites like Wikipedia. Aides to Senator Harry Reid, the majority leader, say he will press forward with a vote Tuesday to open debate on the Protect I.P. bill. Negotiators from both parties are scrambling for new language that could assuage the concerns of the Internet community, but expectations are that the bill will now fail to get the 60 votes to move forward — a significant setback.

“The problem for the content industry is they just don’t know how to mobilize people,” said John P. Feehery, a former House Republican leadership aide who previously worked at the motion picture association. “They have a small group of content makers, a few unions, whereas the Internet world, the social media world especially, can reach people in ways we never dreamed of before.”

    In Fight Over Piracy Bills, New Economy Rises Against Old, NYT, 18.1.2012,
    http://www.nytimes.com/2012/01/19/technology/web-protests-piracy-bill-and-2-key-senators-change-course.html

Online Shoppers Are Rooting for the Little Guy

January 15, 2012
The New York Times
By STEPHANIE CLIFFORD and CLAIRE CAIN MILLER

Harold Pollack used to spend $1,000 a year on Amazon, but this fall started buying from small online retailers instead. The prices are higher, but Dr. Pollack says he now has a clear conscience.

“I don’t feel they behave in a way that I want to support with my consumer dollars,” Dr. Pollack, a professor in Chicago, said of the big Internet retailers.

Giant e-commerce companies like Amazon are acting increasingly like their big-box brethren as they extinguish small competitors with discounted prices, free shipping and easy-to-use apps. Big online retailers had a 19 percent jump in revenue over the holidays versus 2010, while at smaller online retailers growth was just 7 percent.

The little sites are fighting back with some tactics of their own, like preventing price comparisons or offering freebies that an anonymous large site can’t. And in a new twist, they are also exploiting the sympathies of shoppers like Dr. Pollack by encouraging customers to think of them as the digital version of a mom-and-pop shop facing off against Walmart: If you can’t shop close to home, at least shop small.

“Folks are exercising their desire to support local stores where local is not just in their town, but anywhere in the country,” said Michael Walden, a professor who studies regional economics at North Carolina State University. “A large number of Americans have a general suspicion of bigness in the economic world — they equate bigness with power, monopoly.”

Lacy Simons, owner of Hello Hello Books in Maine, a small store with an e-commerce site, says she is seeing customers “cement their determination to shop local” — which on the Internet, means shopping at the smaller vendors — even when the big sites offer lower prices.

“We know there’s only so much that we can do to compete against them, so you end up relying on what hopefully becomes an emotional or personal connection with the retailer online,” Ms. Simons said.

The battle between supersites and small online retailers became pitched this holiday season, as the big sites raked in the money. In November and December, the 25 biggest online retailers, including Amazon.com, Target.com and Walmart.com, received 70 percent of e-commerce dollars spent, an increase of three percentage points over last year, comScore said.

Amazon, the world’s biggest Internet retailer, has been the leader in aggressive promotions that small sites can’t afford to match — and has received the most criticism.

This holiday season, Amazon offered price cuts on almost all holiday gifts; it can do this in part because of its size and profits from other businesses, like cloud computing, analysts said. The company offered free overnight shipping on thousands of items, and advertised its price-checking app by giving shoppers 5 percent off items on Amazon that they scanned in a store.

Amazon says it is giving consumers what they want. But the price-check promotion drew special ire; Senator Olympia Snowe, Republican of Maine, called it “an attack on Main Street businesses.”

It is contributing to “a reputation as a bully,” said Sucharita Mulpuru, an e-commerce analyst at Forrester Research. Reflecting that, in a reaction similar to what occurs when Walmarts open in small towns, some consumers say they will not support supersites any longer. But the economics of that decision are not always sound, said Professor Walden of North Carolina State. If a small site is selling products from a national manufacturer, for example, to people scattered around the nation, it has little effect on local vitality, he said.

Dr. Pollack, the Chicago professor, says that even if he is not supporting Chicago retail with his online purchases, he is not supporting what he calls big business’s bullying ways.

Emily Powell, the chief executive of Powell’s Books in Portland, Ore., which has an e-commerce store, said she attracts some shoppers with similar attitudes. “People come because they want to support an independent and feel good about it,” she said, but especially in a recession, “you can only guilt people into coming to you for so long.”

That’s where the other strategies kick in.

Some stores respond by carrying exclusive items at their sites. Powell’s Books, for example, offers a subscription service through which it chooses a new book and includes an extra item like a related book or candy — personalized touches that it says big sites can’t match.

Other sites try to play hardball by refusing to carry what the big stores do, among other tactics.

“What I can’t compete with is one day, for whatever reason, Amazon will suddenly drop a price below wholesale cost,” said Ali Wing, the founder of the baby store Giggle. She has stopped carrying products, including a car seat and certain toys, when she can no longer compete. “I won’t take that brand damage and have you have a reason to think that Giggle is expensive.”

Lori Andre, owner of Lori’s Shoes, an online and physical store based in Chicago, is asking vendors to give the shoes that Lori’s carries different model names than it gives other stores, or to put a different label inside, so shoppers can’t compare prices with a Zappos. (That may not win over shoppers; Best Buy, when it created its own labels to prevent in-store price checks on electronics, drew criticism from consumers.)

Lesley Tweedie, the co-owner of Roscoe Village Bikes in Chicago, introduced an online marketplace for small retailers, Little Independent. “There’s been a response from people who value a different style of shopping,” she said.

Ms. Tweedie was so annoyed when she saw consumers using smartphone apps in her store that she began a “Buy It Where You Try It” campaign on Twitter and Facebook.

“I can’t tell you how often that happens in the store, where someone is asking my advice and then actually says out loud, ‘I wonder if I could find this on Amazon,’ ” she said. “I think that some people never really thought about the ethics.”

Amazon said it is helping small online businesses stay afloat by allowing them to sell on Amazon, through its Marketplace program, and take advantage of Amazon’s large customer base, technology and marketing. Sellers pay a percentage of revenue in return.

“For a lot of these small and medium businesses, this isn’t something they would be able to scale up and provide themselves,” said Peter Faricy, general manager of Amazon Seller Services. He added that third-party sellers’ items were included in promotions like Price Check.

Yet some small retailers with e-commerce sites say that no matter what consumers say, supersites’ prices are just unmatchable.

Mike Stewart opened Feather & Fly, a sporting-goods store in Chattanooga, Tenn., eight years ago. As online stores started to pull away his customers, Mr. Stewart began selling some products on the Web.

Online, he found, “there’s no way I could compete against a big-box type store that could have massive inventories or cut deals to get better rates,” he said.

“We did have good customer loyalty here,” said Mr. Stewart, as he boxed up the inventory left over after his going-out-of-business sale, “but the Internet is a killer.”

    Online Shoppers Are Rooting for the Little Guy, NYT, 15.1.2012,
    http://www.nytimes.com/2012/01/16/business/some-shoppers-rebel-against-giant-web-retailers.html

Downgrade of Debt Ratings Underscores Europe’s Woes

January 13, 2012
The New York Times
By LIZ ALDERMAN and RACHEL DONADIO

PARIS — Standard & Poor’s downgraded the credit ratings of France, Italy and seven other European countries on Friday, a move that may have more symbolic than fundamental financial impact but served as a reminder that Europe’s economic woes were far from over.

Another memory jog came Friday from Greece, the original source of Europe’s debt troubles. Talks hit a snag between the new Greek government and the banks and other private investors that Athens hopes will agree to take losses on their debt so that Greece can avoid a default.

Together, those developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that a new lending program by the European Central Bank might be easing financial market pressures.

S.& P. warned in December that it might downgrade many of the 17 nations that share the euro, largely because it said European politicians were moving too slowly to strengthen the monetary union and because the euro zone’s problems were propelling Europe toward its second recession in three years.

European politicians, in turn, criticized S.& P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis.

To some extent, the prospect of rating downgrades has already been priced into recent bond auctions by Italy, Spain and other countries. Italy, in fact, completed another fairly successful bond auction on Friday, even as rumors of the downgrades had begun to swirl.

But the downgrades may now add to the borrowing costs of the nations affected. Some commercial banks that are required to hold only the highest-rated government securities will have to replace French bonds with other assets, like bonds of Germany.

And the downgrades cannot help but add to the gloom pervading Europe’s economic climate.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S.&. P said.

Finance Minister François Baroin of France said Friday that the loss of his country’s pristine AAA rating, cut a notch to AA+, was “not good news” but was “not a catastrophe.” He insisted that the country was headed in the right direction and that no ratings agency would dictate the policies of France, which has Europe’s second-biggest economy, behind Germany’s.

But the downgrades pose fresh challenges for Europe’s political leaders, particularly President Nicolas Sarkozy of France, who is expected to run for re-election this spring and had long cited his country’s AAA credit rating as a badge of honor.

In August, when S.& P. cut the United States a notch from its top-rank AAA rating, markets briefly plunged. But bond investors have continued to flock to the debt of the United States, which as the world’s largest economy has retained the perception of a financial safe haven. That has kept the United States government’s interest rates at very low levels. But none of the countries downgraded on Friday can necessarily count on such a reaction.

After Friday, the only euro zone nations retaining their top AAA ratings are Germany, the Netherlands, Finland and Luxembourg.

Italy and Spain, which are considered the two big euro-zone economies most vulnerable to an escalation of debt problems, both were downgraded two notches, Italy to BBB+ and Spain to A.

“It will make it harder to erect firewalls around struggling euro zone economies and convince investors that things are more sustainable,” said Simon Tilford, the chief economist for the Center for European Reform in London.

Stocks were down broadly if not deeply in Europe and the United States on Friday, as rumors of the downgrades preceded S.& P.’s announcement, which came after the close of trading on Wall Street. And the euro fell to a 16-month low against the dollar.

Just as significant as the ratings downgrades may be the suspension on Friday of the creditor talks in Greece — whose debt S.& P. long ago gave junk status.

In October, the European Union pledged to write off 100 billion euros ($127.8 billion) of Greece’s debt if bondholders would agree to voluntarily accept 50 percent losses on their Greek holdings. Such an arrangement, known as private-sector involvement, or P.S.I., has been pushed by Chancellor Angela Merkel of Germany as a way of forcing banks, not only European taxpayers, to foot the bill for bailing out Greece.

But talks broke down on Friday between Greece and the commercial banks.

“Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach,” the Institute of International Finance, which negotiates on behalf of the banks, said in a statement on Friday, after its leader, Charles Dallara, left Athens.

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward,” the statement added, “has not produced a constructive consolidated response by all parties.”

The reference to a “voluntary approach” might be a not-so-subtle message that if Europe pushed too hard on this point, then the creditors could no longer accept the agreement as a voluntary one. That is crucial, because an involuntary debt revamping would be seen by creditors as a default — a step Greece and Europe are trying hard to avoid.

If Greece defaults, it could set off the activation of credit default swaps — a type of financial insurance. If the issuers of that insurance have to start paying up, many analysts fear the same sort of falling dominoes of i.o.u.’s that cascaded through the financial industry after the subprime mortgage market collapsed in the United States in 2007 and 2008.

Talks are expected to resume next week. If Greece fails to persuade enough bondholders to take voluntary losses, it may pass a law activating clauses in the bonds that would force creditors to take losses.

“We should be ready, if we don’t have 100 percent participation and if Europe doesn’t want to give us more money,” Christos Staikouras, a member of the Greek Parliament from the center-right New Democracy opposition party and its economic spokesman, said in an interview.

The tense negotiations over Greece’s debt come as the Greek government struggles to find a consensus to pass the budget reforms demanded by its so-called troika of lenders — the European Central Bank, European Union and International Monetary Fund — in exchange for releasing the next installment of bailout money, a 30 billion euro ($38.3 billion) payout scheduled to be released in March.

The Greek uncertainties only add to the regional doubt that helped set off the S.& P. downgrades. Europe’s economy, having barely clawed its way out of a recession three years ago, is again tipping into a new one. France, Spain, Greece and Portugal are already in recessions, and Italy is expected to head into one as a result of belt-tightening measures being pushed by its new prime minister, Mario Monti.

Austria, the other country whose AAA rating was cut a notch on Friday, could be in for trouble if the political turmoil in neighboring Hungary affects Austrian banks, S.& P. said.

Even mighty Germany, with most of its neighbors in a downturn, is also expected to slip into a shallow recession this year. On Friday, S.& P. kept Germany’s ratings untouched, citing its continued competitiveness and financial rigor. But it said it could lower Germany’s rating if its debt, now 80 percent of gross domestic product, reached 100 percent.

David Jolly and Steven Erlanger contributed reporting from Paris,

Landon Thomas Jr. from London and Gaia Pianigiani from Rome.

    Downgrade of Debt Ratings Underscores Europe’s Woes, NYT, 13.1.2012,
    http://www.nytimes.com/2012/01/14/business/global/euro-zone-downgrades-expected.html

Owner as Regulator, Like Oil and Water

January 13, 2012
The New York Times
By JAMES B. STEWART

Let’s say you’re the biggest owner of a global auto company. You take the company’s flagship new vehicle, twist it, crash it, poke it and leave it outside in the elements for weeks until its battery catches fire. Then you generate a storm of publicity and watch the share price and the value of your ownership stake decline.

This, essentially, is what the United States has done to General Motors and its signature new vehicle, the Chevy Volt.

If it wasn’t already obvious, at least one reason the government shouldn’t own controlling stakes in major companies is that ownership and regulation are inherently incompatible. This week, the Republican presidential candidate Mitt Romney defended his tenure as head of the private equity firm Bain Capital by comparing Bain’s role in troubled companies to the government’s rescue of G.M.

Rest assured that if Bain Capital owned G.M., it would not be subjecting the Volt to severe safety tests and trumpeting the negative results.

More than a year after G.M.’s return to public ownership, the government still owns just less than 30 percent of the company, or about 500 million shares. Of course, the government must hold G.M. to the same strict safety standards it applies to all auto manufacturers. The National Highway Traffic Safety Administration, or N.H.T.S.A., said in late November that it would assess the risk of fire in Volts after two incidents of fires following crash tests.

But some Republican congressmen questioned whether the Obama administration had concealed the results. And conspiracy theorists and others have taken to the Internet to argue that the agency has been too soft on G.M. and has a motive to soft-pedal or even distort the results because of the government’s ownership stake.

Safety Research and Strategies, a Massachusetts consulting firm, claimed the government’s Volt crash report was little more than a “sales pitch” for the plug-in hybrid vehicle.

Others have suggested that the agency was too tough, even if subliminally, in an effort to forestall any perception of a conflict, and that the danger of a Volt catching fire was remote.

Car and Driver magazine noted that the Volt’s batteries caught fire three weeks and one week after the crash tests, and said that “if you ask us, even just one day is plenty of time to safely exit a vehicle that’s in peril of burning.” The magazine noted that no Volts had caught fire in the real world and that only three safety complaints showed up in the government’s database for all of 2010 and 2011, none involving fire hazards. “No vehicle is completely and infallibly safe,” the magazine said. The risk of fire following a crash in an electric car also appears to be vastly less than in a conventional gas-powered vehicle.

Tim Massad, assistant Treasury secretary for financial stability, told me this week that Treasury, which oversees the government’s investment, “is not G.M. or Chrysler’s regulator and has no involvement with N.H.T.S.A.” I haven’t seen any evidence that the agency acted in anything but a professional and independent manner with respect to the Volt, but the controversy illustrates why even appearances of a conflict need to be avoided.

How much has the Volt controversy cost G.M.? One measure of the new G.M. is its aggressive, albeit expensive, response. The old G.M. might have dug in and fought the government. It could have appealed and stalled for years while losing the public relations war. This time, G.M. immediately offered a loaner vehicle to any existing Volt owner concerned about the vehicle’s safety. Since then, G.M. has announced that it will make structural enhancements and install a sensor to warn of any battery fluid leak.

Of course, what choice did G.M. have, given that its regulator is also its biggest owner?

Consumers seem to be reacting positively. N.H.T.S.A. has now awarded the Volt five stars, the top ranking, in its crash test results (a ranking that is also suspect to conspiracy theorists). G.M. said December was the best sales month ever for the Volt, but it’s still selling in small numbers, and it’s impossible to know how many potential customers were discouraged by the bad publicity. And the damage to G.M.’s image is also hard to quantify, but surely considerable. The Volt was expected to deliver a halo effect to all of G.M.’s brands and bolster its overall reputation, much as the Prius did for Toyota until the company ran into its own safety and quality issues. That effort has suffered at least a temporary setback. (A G.M. spokeswoman declined to comment.)

And it’s not just safety issues where the government’s interests conflict. Along with other bailout recipients who remain under government oversight, G.M. is subject to executive pay restrictions. No private equity owner would agree to such limitations on its ability to attract and keep management talent. The pay constraints apply to the top five executive offices and extend deep into the ranks to include the 20 most highly compensated employees.

At this week’s North American International Auto Show in Detroit, Ford was showing off Lincoln’s new design director, Max Wolff, who took to the stage to unveil the boldly redesigned Lincoln MKZ. Ford poached Mr. Wolff from G.M.’s Cadillac division in 2010, and design directors are some of the most highly paid people in the industry. The G.M. spokeswoman wouldn’t comment on whether G.M. could match or top Ford’s offer, but said that the company continued to attract top talent because of its “iconic” status and because people wanted to be part of “an incredible comeback story.” Still, G.M.’s chief executive, Dan Akerson, has said he’d like to see pay restrictions eased.

(G.M. got approval to pay Mr. Akerson $9 million for 2011, which was in the lower quarter of chief executive pay at the nation’s largest companies, the automaker said.)

“The pay issue is a legitimate concern,” Adam Jonas, a Morgan Stanley auto analyst, told me this week just after returning from the auto show in Detroit. “There’s a race for talent. Management has to attract and retain people outside Detroit, design talent and engineering talent. I’m concerned about that.”

Mr. Massad of Treasury noted that the pay restrictions are embedded in the bailout legislation and could only be removed by Congress. Otherwise, “We’re not in any way involved in the day-to-day management of the company,” he said, which was confirmed by G.M. officials I spoke to.

The Obama administration also has a political agenda that often conflicts with ownership interests. It wants to keep unions happy, promote the environment and lift employment, among other goals, which may conflict with maximizing returns to taxpayers. Anything having to do with G.M. is likely to be a hot-button issue during an election year.

The Bush and Obama administrations can rightly hail their rescue of the auto industry as a success — a rejuvenated G.M. has spent $5 billion in capital investment and added 15,000 jobs, and the Treasury estimates the rescue saved more than a million jobs in the United States, including those in the supply chain. G.M. has hit many impressive milestones on the road to recovery, including its November 2010 public offering and seven consecutive profitable quarters.

But continued government ownership has not bolstered the stock price. Auto company shares have been battered by many factors beyond the control of the Obama administration, including the debt crisis in Europe and the Japanese tsunami. But G.M. went public at $33 a share, and after trading as high as $39, this week shares were barely above $24. With benefit of hindsight, the government could have gotten out at a much higher price.

A problem should the government decide to sell now is that many analysts believe G.M. is undervalued. Its price-to-earnings ratio, a popular valuation measure, was a mere 5.4 this week, compared with an average for the Standard & Poor’s 500-stock index of nearly 15. “In terms of straight valuation, I’d advise the government not to sell,” Mr. Jonas said. “I tell clients the same thing. The stock is worth $45 in our view. It’s one of our top picks. You have to be patient, and it may be a jagged journey, but it’s very undervalued.”

But one of the reasons it may be undervalued is that the government owns so much of it, and the longer that continues, the worse G.M.’s competitive position is likely to become.

Mr. Massad said: “The government should not generally be in the business of owning shares in private companies. At the same time, we have to balance that with the goal of maximizing returns to taxpayers. We’re prepared to be patient.”

The administration has not unveiled any exit strategy, but in my view, it needs one. The Treasury Department is no Bain Capital, nor should it try to be a private equity investor. So far, the Treasury’s sense of market timing doesn’t seem any more successful than that of most money managers. It’s been more than three years since the Bush administration stepped in to save the auto industry. It’s time to declare victory and liberate G.M. from the onus of continuing government ownership.

    Owner as Regulator, Like Oil and Water, NYT, 13.1.2012,
    http://www.nytimes.com/2012/01/14/business/government-ownership-and-gm-regulation-dont-mix.html

Survey Finds Rising Perception of Class Tension

January 11, 2012
The New York Times
By SABRINA TAVERNISE

Conflict between rich and poor now eclipses racial strain and friction between immigrants and the native-born as the greatest source of tension in American society, according to a survey released Wednesday.

About two-thirds of Americans now believe there are “strong conflicts” between rich and poor in the United States, a survey by the Pew Research Center found, a sign that the message of income inequality brandished by the Occupy Wall Street movement and pressed by Democrats may be seeping into the national consciousness.

The share was the largest since 1992, and represented about a 50 percent increase from the 2009 survey, when immigration was seen as the greatest source of tension. In that survey, 47 percent of those polled said there were strong conflicts between classes.

“Income inequality is no longer just for economists,” said Richard Morin, a senior editor at Pew Social & Demographic Trends, which conducted the latest survey. “It has moved off the business pages into the front page.”

The survey, which polled 2,048 adults from Dec. 6 to 19, found that perception of class conflict surged the most among white people, middle-income earners and independent voters. But it also increased substantially among Republicans, to 55 percent of those polled, up from 38 percent in 2009, even as the party leadership has railed against the concept of class divisions.

The change in perception is the result of a confluence of factors, Mr. Morin said, probably including the Occupy Wall Street movement, which put the issue of undeserved wealth and fairness in American society at the top of the news throughout most of the fall.

Traditionally, class has been less a part of the American political debate than it has been in Europe. Still, the concept has long existed for ordinary Americans.

“Americans have always acknowledged that there are Rockefellers and the lunch-bucket guy,” said Tom W. Smith, director of the General Social Survey at the National Opinion Research Center, based at the University of Chicago. “But they believe it is not a permanent caste, but a transitory condition. The real game-changer would be if they give up on that.”

Going by the survey’s results, they have not. Forty-three percent of those surveyed said the rich became wealthy “mainly because of their own hard work, ambition or education,” a number unchanged since 2008.

The survey’s main question — “In America, how much conflict is there between poor people and rich people?” — was based on language used by Mr. Smith’s center at the University of Chicago, Mr. Morin said.

Mr. Smith said the question was often understood to mean, “Do the rich and the poor get along?” and “Do they have the same objectives?”

The issue has also become a prominent part of the political debate. President Obama has pressed the case that income inequality is rising as election season has gotten under way.

It has even crept into the Republican presidential primary race. At a debate in New Hampshire last Saturday, Rick Santorum criticized Mitt Romney for using the phrase “middle class,” dismissing the words as Democratic weapons to divide society. And conservatives have been wringing their hands over Newt Gingrich’s recent attacks on Mr. Romney’s past in private equity, saying they are a misguided assault on free-market capitalism.

Independents, whose votes will be fought over by both parties, showed the single largest increase in perceptions of conflicts between rich and poor, up 23 percentage points, to 68 percent, compared with an 18-point rise among Democrats and a 17-point rise for Republicans. Sixty-eight percent of independents believe there are strong class conflicts, just below the 73 percent of Democrats who do. (The survey’s margin of sampling error is plus or minus three percentage points for results based on the total sample.)

“The story for me was the consistency of the change,” Mr. Morin said. “Everyone sees more conflict.”

The demographics were surprising, experts said. While blacks were still more likely than whites to see serious conflicts between rich and poor, the share of whites who held that view increased by 22 percentage points, more than triple the increase among blacks. The share of blacks and Hispanics who held the view grew by single digits.

What is more, people at the upper middle of the income ladder were most likely to see conflict. Seventy-one percent of those who earned from $40,000 to $75,000 said there were strong conflicts between rich and poor, up from 47 percent in 2009. The lowest income bracket, less than $20,000, changed the least.

The grinding economic downturn may be contributing to the heightened perception of conflict between rich and poor, said Christopher Jencks, a professor of social policy at the John F. Kennedy School of Government at Harvard University.

“Rich and poor aren’t terribly distinct from secure and unemployed,” he said.

The survey attributed the change, in part, to “underlying shifts in the distribution of wealth in American society,” citing a finding by the Census Bureau that the share of wealth held by the top 10 percent of the population increased to 56 percent in 2009, from 49 percent in 2005.

“There are facts behind it,” Mr. Smith said of the findings. “It’s not just rhetoric.”

Robert Rector, a fellow at the conservative Heritage Foundation, took issue with that, arguing that government data routinely undercounted aid to the poor and taxes taken from everyone else.

To him, the findings did not mean much, “other than that the topic has been in the press for the last two years.”

    Survey Finds Rising Perception of Class Tension, NYT, 11.1.2012,
    http://www.nytimes.com/2012/01/12/us/more-conflict-seen-between-rich-and-poor-survey-finds.html

The Corporate Candidates

January 9, 2012
The New York Times

The more Mitt Romney pretends to empathize with the millions of Americans who are struggling in this economy, the less he seems to understand their despair. And the rest of the Republican field seems to have no more insight into the concerns of most voters than he does.

Mr. Romney claims his background as a businessman provides him with an understanding of the economy and the ability to fix it. His opponents — particularly Newt Gingrich, Rick Santorum, Ron Paul and Rick Perry — say their political experience provides the same advantage. In truth, none have offered anything but tired or extremist economic prescriptions, providing little evidence that they can relate to those at the middle or bottom of the ladder.

The problem with Mr. Romney’s pitch is the kind of businessman he was: specifically, a buyer of flailing companies who squeezed out the inefficiencies (often known as employees) and then sold or merged them for a hefty profit. More than a fifth of them later went bankrupt, The Wall Street Journal reported on Monday. This kind of leveraged capitalism, which first caught fire in the 1980s, is one of the reasons for the growth in the income gap, tipping the wealth in the economy toward the people at the top.

Mr. Romney doesn’t like to talk about the precise nature of his business experience. Instead, he prefers to claim his occupation as a leveraged buyout king actually benefited ordinary workers, even casting himself as one of them. “I know what it’s like to worry whether you’re going to get fired,” Mr. Romney said, astonishingly, on Sunday. “There were a couple of times I wondered whether I was going to get a pink slip.” Mr. Romney, the son of privilege and power, has never known personal economic fear, and said later that he was referring to his early days at Bain Capital, the investment firm he would later run.

He has, however, been responsible for issuing many a pink slip while leading Bain. The firm bought Dade International, a medical supplier, and collected eight times its investment but laid off 1,700 workers, The New York Times has reported. Reuters reported last week that a steel mill in Kansas City, Mo., was shuttered less than a decade after Bain bought it, and its 750 laid-off workers got no severance pay.

Mr. Romney dismisses these layoffs, and thousands more, as the cost of capitalism. He claims that, over all, Bain’s investments produced a net gain of 100,000 jobs. But his campaign and his former firm have refused to provide any documentation for that number, showing exactly how many people were laid off and how many hired as a result of Bain’s investments during his period there. The claim cannot be taken seriously until he does so.

Mr. Gingrich and Mr. Perry have sharply criticized Mr. Romney for his buyout work, but some of those attacks ring hollow. Mr. Gingrich himself was on an advisory board for Forstmann Little, another private equity firm with a business model similar to Bain’s. Mr. Perry simply seems opportunistic. He criticized Mr. Romney for ruthlessly practicing modern-day capitalism a day after he called Mr. Obama “a socialist.”

Mr. Gingrich and Mr. Santorum have avoided talking about their own financial histories, having become multimillionaires by peddling their influence to big corporations after leaving Congressional office. For voters worried about the economy, neither a past record of buyouts nor lobbying should inspire any confidence.

    The Corporate Candidates, NYT, 9.1.2012,
    http://www.nytimes.com/2012/01/10/opinion/the-corporate-candidates.html

White House Mutes Applause Over Data

January 6, 2012
The New York Times
By DAVID LEONHARDT

Friday’s jobs report, after weeks of other good data, makes it reasonable to wonder whether the economy may turn out to be less of a drag on President Obama’s re-election campaign than has long been expected.

The economy has added 1.5 million jobs over the last year, and the pace seems to be picking up. The unemployment rate last month, 8.5 percent, was at its lowest level since February 2009, Mr. Obama’s first full month in office.

Of course, the economy has been here before, only to fall back again. In both early 2010 and early 2011, job growth picked up briefly, before the continuing global financial crisis — including Europe’s problems — again reasserted itself.

The White House made the mistake of reacting too quickly and positively to some of that earlier news. It went so far as to refer to the summer of 2010 as “recovery summer.”

In recent weeks, Mr. Obama and his aides have mostly opted for a more subdued strategy. They note the good news, though they say there is a long way to go, and urge Congress to extend the payroll tax cut and pass other parts of the president’s jobs bill.

“Today’s employment report provides further evidence that the economy is continuing to heal from the worst economic downturn since the Great Depression,” Alan B. Krueger, chairman of the White House Council of Economic Advisers, said in a statement Friday morning. But, he added, “as the Administration always stresses, it is important not to read too much into any one monthly report.”

And the economy clearly remains a problem for Mr. Obama. Shortly after the release of the jobs report, Mitt Romney, the winner of this week’s Republican caucus in Iowa, said at a campaign stop in South Carolina, “This president doesn’t understand how the economy works.”

The big question is whether the economy will continue to improve. The recent job growth, on its own, is not enough to keep unemployment falling at a significant pace.

But there is some reason for optimism. The Labor Department conducts two surveys each month, one of households and one of businesses. The business survey produces the widely cited number on job changes — 200,000 in December.

The household survey, although usually more volatile, can sometimes provide a more accurate estimate at turning points. It often captures jobs at new companies that are not included in the business survey.

Over the past six months, the household survey shows an average monthly gain of about 230,000, compared with a gain of only 142,000 in the business survey. Normal population growth means that the economy needs to add between 125,000 and 150,000 a month to keep unemployment from rising.

If the household survey is really the more accurate one, the good news on jobs may well continue, complicating a central point in the Republican case against Mr. Obama.

On the other hand, some of the recent strength comes from the restocking of warehouses, which will not continue. Europe still has not solved its problems. The troubles in Iran could cause oil prices to jump. And American businesses and consumers, still scarred by the financial crisis, are probably still easy to scare.

No one knows what the economy is going to do in 2012, but the chances of it improving markedly are higher than they were a couple of months ago.

Susan Saulny contributed reporting from Conway, S.C.

    White House Mutes Applause Over Data, NYT, 6.1.2012,
    http://www.nytimes.com/2012/01/07/us/politics/what-the-latest-jobless-figures-mean-for-obama.html

U.S. Economy Gains Steam as 200,000 Jobs Are Added

January 6, 2012
The New York Times
By SHAILA DEWAN

Maybe it is time to start calling the glass half full.

The United States added 200,000 new jobs last month, the Labor Department said Friday, a robust number that came on the heels of a flurry of heartening economic news. Consumer confidence lifted, factories stepped up production and small businesses showed signs of life. The nation’s unemployment rate fell to 8.5 percent, its lowest level in nearly two years.

It was the sixth consecutive month that the economy showed a net gain of more than 100,000 jobs — not enough to restore employment to pre-recession levels but enough, perhaps, to cheer President Obama as he enters the election year.

The sustained run of positives had economists like Markus Schomer, of PineBridge Investments, feeling much more optimistic than they did back in August, after a spring and summer of lost economic ground and a demoralizing debate over the debt ceiling.

At that time, Mr. Schomer thought, as many did, that government dysfunction was paralyzing the economy. Now, he is ratcheting up his growth forecast for 2012.

“The improving trend in the U.S. labor markets is not just a temporary blip, but seems to be something quite sustainable,” he said, adding that the improvement had come despite continued Washington gridlock.

Among the pieces of good news in Friday’s report: The drop in the jobless rate came largely from real gains, not from discouraged workers giving up the job hunt. The new jobs were spread broadly across industries, with transportation and warehousing, retail, manufacturing and restaurants all adding jobs.

In addition, average wages ticked up by 4 cents an hour, though over the year wages have not kept pace with inflation. And government downsizing, which has been a drag on the jobs numbers, slowed in December, with only 12,000 public jobs lost. The private sector added 212,000 jobs.

In another positive sign, the unemployment rate seemed to be dropping at a faster rate than the number of new jobs would imply, perhaps because new businesses and the newly self-employed are less likely to be captured by the Labor Department’s survey of businesses, from which the job numbers are drawn, than by its survey of households, from which the unemployment rate is calculated.

Economists continued to warn of potential dangers ahead, including disaster in the euro zone, increased tensions with Iran leading to higher gas prices, and the expiration of the Bush tax cuts. Congress may yet decline to continue extensions of the payroll tax break and unemployment benefits that have given spending a boost. Money, in the form of loans, is still hard to come by, and home prices have continued to fall.

There is also a sense of déjà vu, since hopes were similarly buoyed by good news last year at this time. Those hopes, Mr. Schomer pointed out, were soon dashed by the earthquake in Japan. “I’m a little bit concerned that Iran could be this year’s Japan,” he said.

Still, context is everything. The same modest upward trends that a few months ago were dismissed as far too anemic to do much are now being greeted with tentative praise. “People were very much thinking that the sky was falling,” said Tom Porcelli, an economist at RBC Capital Markets. “It’s no small victory that we’re up here, even with all these headwinds.”

Economists ventured to suggest that the good news and consumer confidence might feed off each other, leading to further increases in spending that, they hope, will be followed by the wage increases necessary to sustain that spending.

Bullish types were quick to trumpet the American economy’s resilience. “This is the real thing,” said Ian Shepherdson of High Frequency Economics. “This is finally the economy throwing off the shackles of the credit crunch.”

The Labor Department numbers were foreshadowed Thursday in a report by ADP, the payroll processing company, that showed a whopping gain of 325,000 private-sector jobs in December. ADP’s reports do not always correlate with the Labor Department’s findings, but they can provide additional insight. Diane Swonk, an economist with Mesirow Financial, said most of the new jobs in the ADP report were at small businesses and that generally only newer small businesses use a payroll company.

“It’s one of those things where you look at that and say, ‘That would be really cool if that continues,’ ” Ms. Swonk said. “It’s not just small business — it’s new business formation.”

Other factors, like seasonal adjustment, could be making the economy look better than it is. Seasonal adjustments are calculated based on the patterns of recent years. Because the recession began in December 2007, a drop-off at that time of year is now part of the pattern, and anything else looks better by comparison.

The seasonal adjustments may not wholly account for trends like online shopping, which boosted hiring of couriers and messengers by 42,000, a gain that economists expect to be reversed now that the holiday season has ended.

But there is more to the good news than statistical flukes, said Ellen Zentner, an economist with Nomura, pointing to the big jump in consumer confidence in December. “People do not feel more upbeat for no reason,” she said.

This article has been revised to reflect the following correction:

Correction: January 6, 2012

Because of an editing error, an earlier version of this article, and an e-mail alert,

misstated the unemployment figure for November.

Although it was initially given a month ago as 8.6 percent,

it was revised Friday to 8.7 percent.

    U.S. Economy Gains Steam as 200,000 Jobs Are Added, NYT, 6.1.2012,
    http://www.nytimes.com/2012/01/07/business/economy/us-adds-200000-jobs-unemployment-rate-at-8-5.html

Manufacturing Is Surprising Bright Spot in U.S. Economy

January 5, 2012
The New York Times
By FLOYD NORRIS

For the first time in many years, manufacturing stands out as an area of strength in the American economy.

When the Labor Department reports December employment numbers on Friday, it is expected that manufacturing companies will have added jobs in two consecutive years. Until last year, there had not been a single year when manufacturing employment rose since 1997.

And this week the Institute for Supply Management, which has been surveying American manufacturers since 1948, reported that its employment index for December was 55.1, the highest reading since June. Any number above 50 indicates that more companies say they are hiring than say they are reducing employment.

There were new signs Thursday that the overall jobs climate was improving, as the Labor Department reported that new claims for unemployment benefits fell last week and a payroll company’s report showed strong growth in private-sector jobs in December.

As stores have filled with inexpensive imports from China and other Asian countries, the perception has risen that the United States no longer makes much of anything. Certainly there has been a long decline in manufacturing employment, which peaked in 1979 at 19.6 million workers. Now even with hiring over the last two years, the figure is 11.8 million, a decline of 40 percent from the high.

But those numbers obscure the fact that the United States remains a manufacturing power, albeit one that has been forced to specialize in higher-value items because its labor costs are far above those in Asia. The value of American manufactured exports over a 12-month period peaked at $1.095 trillion in the summer of 2008, just before the credit crisis caused world trade volumes to plunge. At the low, the 12-month figure fell below $800 billion, but it has since climbed back to $1.074 trillion. Those figures are not adjusted for inflation.

In total exports, including manufactured goods as well as other commodities like agricultural products, the United States ranked second in the world in 2010, behind China but just ahead of Germany. For the first 10 months of 2011, Germany is slightly ahead of the United States.

The United States is particularly strong in machinery, chemicals and transportation equipment, which together make up nearly half of the exports. Exports of computers and electronic products are growing, but are well below their precrisis levels. Production of cheaper computers and parts shifted to Asia long ago.

Just how long the rise in manufactured exports can last depends, in part, on the health of other economies. The euro zone no longer takes as large a share of American exports as it once did, but it is still a major customer. A recession there this year, as has been widely forecast, would hurt all major exporters, including the United States.

Similarly, the strong exports provide a stark reminder of how vulnerable this country could be to protectionist trade wars. The Doha round of world trade talks, which was supposed to result in the lowering of more trade barriers, has stalled. And last month China imposed punitive duties on imports of American large cars and sport utility vehicles, which total about $4 billion a year.

That move was seen as retaliation for United States requests that the World Trade Organization rule that Chinese subsidies for its solar and poultry industries violated international law. The Chinese denounced those requests as protectionist.

The American government denies that, of course. “Part of a foundation of a rules-based system is dispute settlement," said Ron Kirk, the United States trade representative, in an interview with Reuters after the Chinese announced the new tariffs. "That’s what we think is so important about the W.T.O. How China reacts to that is up to China. But I just cannot buy into the argument that our standing and protecting the rights of our exporters and workers is somehow igniting a trade war or being protectionist.”

Since employment in the United States hit its recent low, in February 2010, the economy has added 2.4 million jobs through November, of which 302,000 were in manufacturing. With government payrolls shrinking, and financial services jobs also lower, manufacturing employment has played an important role in keeping the economy growing. It also is helping that construction employment appears to have hit bottom. In the first 11 months of 2011, it is up a small amount.

To be sure, the gains in manufacturing employment and exports have come after sharp declines during the recession and credit crisis. There are still 6 percent fewer manufacturing jobs than there were when President Obama took office at the beginning of 2009, and it seems very unlikely that he will be the first president since Bill Clinton, in his first term, to preside over growing manufacturing employment during a four-year term.

During George W. Bush’s two terms, the number of manufacturing jobs fell by 17 percent in the first four years and by 12 percent in the following four years. The number declined by 1 percent in Mr. Clinton’s second term.

The Institute for Supply Management survey of manufacturers has shown more companies planning to hire than to fire in every month since October 2009. That string of 27 months is the longest such string since 1972, but remains well behind the longest one, 36 months, which ended in December 1966.

Over all, that survey has indicated that a plurality of companies has believed business is getting better for 29 consecutive months, and December’s reading of 53.9 was the strongest since June.

This summer, one widely watched part of the I.S.M. survey showed that a small plurality of companies reported new orders were falling, a fact that helped to stimulate talk of a double-dip recession. But the latest reading, of 57.6, indicates widespread strength in new orders.

In an economy where there is widespread concern over consumer spending, and in which government spending and payrolls are under heavy pressure, manufacturing has become a bright spot. It is not enough to produce a strong rebound, and it remains vulnerable to weakness overseas. But it has helped to keep a weak economic recovery from turning into a new recession.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

    Manufacturing Is Surprising Bright Spot in U.S. Economy, NYT, 5.1.2012,
    http://www.nytimes.com/2012/01/06/business/us-manufacturing-is-a-bright-spot-for-the-economy.html

Harder for Americans to Rise From Lower Rungs

January 4, 2012
The New York Times
By JASON DePARLE

WASHINGTON — Benjamin Franklin did it. Henry Ford did it. And American life is built on the faith that others can do it, too: rise from humble origins to economic heights. “Movin’ on up,” George Jefferson-style, is not only a sitcom song but a civil religion.

But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage.

Former Senator Rick Santorum of Pennsylvania, a Republican candidate for president, warned this fall that movement “up into the middle income is actually greater, the mobility in Europe, than it is in America.” National Review, a conservative thought leader, wrote that “most Western European and English-speaking nations have higher rates of mobility.” Even Representative Paul D. Ryan, a Wisconsin Republican who argues that overall mobility remains high, recently wrote that “mobility from the very bottom up” is “where the United States lags behind.”

Liberal commentators have long emphasized class, but the attention on the right is largely new.

“It’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries,” said Isabel V. Sawhill, an economist at the Brookings Institution. “I don’t think you’ll find too many people who will argue with that.”

One reason for the mobility gap may be the depth of American poverty, which leaves poor children starting especially far behind. Another may be the unusually large premiums that American employers pay for college degrees. Since children generally follow their parents’ educational trajectory, that premium increases the importance of family background and stymies people with less schooling.

At least five large studies in recent years have found the United States to be less mobile than comparable nations. A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) — a country famous for its class constraints.

Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes.

Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths.

By emphasizing the influence of family background, the studies not only challenge American identity but speak to the debate about inequality. While liberals often complain that the United States has unusually large income gaps, many conservatives have argued that the system is fair because mobility is especially high, too: everyone can climb the ladder. Now the evidence suggests that America is not only less equal, but also less mobile.

John Bridgeland, a former aide to President George W. Bush who helped start Opportunity Nation, an effort to seek policy solutions, said he was “shocked” by the international comparisons. “Republicans will not feel compelled to talk about income inequality,” Mr. Bridgeland said. “But they will feel a need to talk about a lack of mobility — a lack of access to the American Dream.”

While Europe differs from the United States in culture and demographics, a more telling comparison may be with Canada, a neighbor with significant ethnic diversity. Miles Corak, an economist at the University of Ottawa, found that just 16 percent of Canadian men raised in the bottom tenth of incomes stayed there as adults, compared with 22 percent of Americans. Similarly, 26 percent of American men raised at the top tenth stayed there, but just 18 percent of Canadians.

“Family background plays more of a role in the U.S. than in most comparable countries,” Professor Corak said in an interview.

Skeptics caution that the studies measure “relative mobility” — how likely children are to move from their parents’ place in the income distribution. That is different from asking whether they have more money. Most Americans have higher incomes than their parents because the country has grown richer.

Some conservatives say this measure, called absolute mobility, is a better gauge of opportunity. A Pew study found that 81 percent of Americans have higher incomes than their parents (after accounting for family size). There is no comparable data on other countries.

Since they require two generations of data, the studies also omit immigrants, whose upward movement has long been considered an American strength. “If America is so poor in economic mobility, maybe someone should tell all these people who still want to come to the U.S.,” said Stuart M. Butler, an analyst at the Heritage Foundation.

The income compression in rival countries may also make them seem more mobile. Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.

Even by measures of relative mobility, Middle America remains fluid. About 36 percent of Americans raised in the middle fifth move up as adults, while 23 percent stay on the same rung and 41 percent move down, according to Pew research. The “stickiness” appears at the top and bottom, as affluent families transmit their advantages and poor families stay trapped.

While Americans have boasted of casting off class since Poor Richard’s Almanac, until recently there has been little data.

Pioneering work in the early 1980s by Gary S. Becker, a Nobel laureate in economics, found only a mild relationship between fathers’ earnings and those of their sons. But when better data became available a decade later, another prominent economist, Gary Solon, found the bond twice as strong. Most researchers now estimate the “elasticity” of father-son earnings at 0.5, which means if one man earns $100,000 more than another, his sons would earn $50,000 more on average than the sons of the poorer man.

In 2006 Professor Corak reviewed more than 50 studies of nine countries. He ranked Canada, Norway, Finland and Denmark as the most mobile, with the United States and Britain roughly tied at the other extreme. Sweden, Germany, and France were scattered across the middle.

The causes of America’s mobility problem are a topic of dispute — starting with the debates over poverty. The United States maintains a thinner safety net than other rich countries, leaving more children vulnerable to debilitating hardships.

Poor Americans are also more likely than foreign peers to grow up with single mothers. That places them at an elevated risk of experiencing poverty and related problems, a point frequently made by Mr. Santorum, who surged into contention in the Iowa caucuses. The United States also has uniquely high incarceration rates, and a longer history of racial stratification than its peers.

“The bottom fifth in the U.S. looks very different from the bottom fifth in other countries,” said Scott Winship, a researcher at the Brookings Institution, who wrote the article for National Review. “Poor Americans have to work their way up from a lower floor.”

A second distinguishing American trait is the pay tilt toward educated workers. While in theory that could help poor children rise — good learners can become high earners — more often it favors the children of the educated and affluent, who have access to better schools and arrive in them more prepared to learn.

“Upper-income families can invest more in their children’s education and they may have a better understanding of what it takes to get a good education,” said Eric Wanner, president of the Russell Sage Foundation, which gives grants to social scientists.

The United States is also less unionized than many of its peers, which may lower wages among the least skilled, and has public health problems, like obesity and diabetes, which can limit education and employment.

Perhaps another brake on American mobility is the sheer magnitude of the gaps between rich and the rest — the theme of the Occupy Wall Street protests, which emphasize the power of the privileged to protect their interests. Countries with less equality generally have less mobility.

Mr. Salam recently wrote that relative mobility “is overrated as a social policy goal” compared with raising incomes across the board. Parents naturally try to help their children, and a completely mobile society would mean complete insecurity: anyone could tumble any time.

But he finds the stagnation at the bottom alarming and warns that it will worsen. Most of the studies end with people born before 1970, while wage gaps, single motherhood and incarceration increased later. Until more recent data arrives, he said, “we don’t know the half of it.”

    Harder for Americans to Rise From Lower Rungs, NYT, 4.1.2012,
    http://www.nytimes.com/2012/01/05/us/harder-for-americans-to-rise-from-lower-rungs.html

Oil Price Would Skyrocket if Iran Closed the Strait of Hormuz

January 4, 2012
The New York Times
By CLIFFORD KRAUSS

HOUSTON — If Iran were to follow through with its threat to blockade the Strait of Hormuz, a vital transit route for almost one-fifth of the oil traded globally, the impact would be immediate: Energy analysts say the price of oil would start to soar and could rise 50 percent or more within days.

An Iranian blockade by means of mining, airstrikes or sabotage is logistically well within Tehran’s military capabilities. But despite rising tensions with the West, including a tentative ban on European imports of Iranian oil announced Wednesday, Iran is unlikely to take such hostile action, according to most Middle East political experts.

United States officials say the Navy’s Fifth Fleet, based in nearby Bahrain, stands ready to defend the shipping route and, if necessary, retaliate militarily against Iran.

Iran’s own shaky economy relies on exporting at least two million barrels of oil a day through the strait, which is the only sea route from the Persian Gulf and “the world’s most important oil choke point,” according to Energy Department analysts.

A blockade would also punish China, Iran’s most important oil customer and a major recipient of Persian Gulf oil. China has invested heavily in Iranian oil fields and has opposed Western efforts to sanction Iran over its nuclear program.

Despite such deterrents to armed confrontation, oil and foreign policy analysts say a miscalculation is possible that could cause an overreaction from one side or the other.

“I fear we may be blundering toward a crisis nobody wants,” said Helima Croft, senior geopolitical strategist at Barclays Capital. “There is a peril of engaging in brinksmanship from all sides.”

Various Iranian officials in recent weeks have said they would blockade the strait, which is only 21 miles wide at its narrowest point, if the United States and Europe imposed a tight oil embargo on their country in an effort to thwart its development of nuclear weapons.

That did not stop President Obama from signing legislation last weekend imposing sanctions against Iran’s Central Bank intended to make it more difficult for the country to sell its oil, nor did it dissuade the European Union from moving toward a ban on Iranian oil imports.

Energy analysts say even a partial blockage of the Strait of Hormuz could raise the world price of oil within days by $50 a barrel or more, and that would quickly push the price of a gallon of regular gasoline to well over $4 a gallon. “You would get an international reaction that would not only be high, but irrationally high,” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation.

Just the threat of such a development has helped keep oil prices above $100 a barrel in recent weeks despite a return of Libyan oil to world markets, worries of a European economic downturn and weakening American gasoline demand. Oil prices rose slightly on Wednesday as the political tensions intensified.

American officials have warned Iran against violating international laws that protect commercial shipping in international waters, adding that the Navy would guarantee free sea traffic.

“If the Iranians chose to use their modest navy and antiship missiles to attack allied forces, they would see a probable swift devastation of their naval capability,” said David L. Goldwyn, former State Department coordinator for international energy affairs. “We would take out their frigates.”

More than 85 percent of the oil and most of the natural gas that flows through the strait goes to China, Japan, India, South Korea and other Asian nations. But a blockade would have a ripple effect on global oil prices.

Since Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates all rely on the strait to ship their oil and natural gas exports, a blockade might undermine some of those governments in an already unstable region.

Analysts say that a crisis over the Strait of Hormuz would most likely bring China and the United States into something of an alliance to restore shipments, although Mr. Goldwyn said China would more likely resort to private diplomacy instead of military force.

Europe and the United States would probably feel the least direct impact because they have strategic oil reserves and could get some Persian Gulf oil through Red Sea pipelines. Saudi Arabia has pipelines that could transport about five million barrels out of the region, while Iraq and the United Arab Emirates also have pipelines with large capacities.

But transportation costs would be higher if the strait were blocked, and several million barrels of oil exports would remain stranded, sending energy prices soaring on global markets.

“To close the Strait of Hormuz would be an act of war against the whole world,” said Sadad Ibrahim Al-Husseini, former head of exploration and development at Saudi Aramco. “You just can’t play with the global economy and assume that nobody is going to react.”

The Iranians have struck in the strait before. In the 1980s, Iran attacked Kuwaiti tankers carrying Iraqi oil, and the Reagan administration reflagged Kuwaiti ships under American flags and escorted them with American warships. Iran backed down, partially, but continued to plant mines.

In 1988, an American frigate hit an Iranian mine and nearly sank. United States warships retaliated by destroying some Iranian oil platforms. Attacks and counterattacks continued for months, and a missile from an American warship accidentally shot down an Iranian passenger aircraft, killing 290 passengers.

Energy experts say a crisis in the strait would most likely unfold gradually, with Iran using its threats as a way to increase oil prices and shipping costs for the West as retaliation against the tightening of sanctions. So far, energy experts say, insurance companies have not raised prices for covering tankers, but shipping companies are already preparing to pay bonuses for crews facing more hazardous duties.

“My guess is this is a lot of threats,” said Michael A. Levi, an energy expert at the Council on Foreign Relations, “but there is no certainty in this kind of situation.”

    Oil Price Would Skyrocket if Iran Closed the Strait of Hormuz, NYT, 4.1.2012,
    http://www.nytimes.com/2012/01/05/business/oil-price-would-skyrocket-if-iran-closed-the-strait.html

U.S. Auto Sales Ended 2011 With Strong Gains

January 4, 2012
The New York Times
By NICK BUNKLEY

DETROIT — Automakers finished 2011 on the upswing, with strong December sales in the United States and expectations for further growth this year.

For Chrysler, December was the best month in nearly three years, as passenger-car deliveries more than doubled and total sales rose 37 percent. Chrysler’s sales for all of 2011 were up 26 percent.

General Motors reported a 5 percent increase in December and a 13 percent gain for the year.

At the Ford Motor Company, sales were up 10 percent in December and 11 percent for the year. Sales by Ford’s namesake brand totaled 2.06 million, the most by any automotive brand since 2007.

“The year finished on a high note, with industry sales momentum strengthening as the year came to a close,” Ken Czubay, Ford’s vice president for United States marketing, sales and service, said in a statement. “We saw Ford sales strengthen as well, posting our best December retail sales month since 2005 and closing the year as America’s best-selling brand.”

Nissan posted a 15 percent increase for the full year, as its primary brand set a record, despite some disruptions after the earthquake and tsunami struck Japan in March. The company also reported an all-time high for December with a 7 percent increase.

Volkswagen reported gains of 36 percent for December and 26 percent for the year, its best since 2002.

Other carmakers were scheduled to report December and full-year sales later Wednesday.

For all of 2011, analysts said the industry sold about 12.8 million cars and trucks, a 10 percent increase from the 11.6 million sold in 2010.

Sales are expected to climb further this year. The automotive research Web site Edmunds.com is forecasting 2012 sales of 13.6 million, while another site, TrueCar.com, expects 13.8 million. Either figure would represent the industry’s best year since 2007, when sales totaled 16.1 million. G.M. forecast 2012 industry sales of 13.5 million to 14 million.

“Over the course of the fourth quarter of 2011, clear signs emerged that U.S. consumers are more confident and that other underpinnings of our economy are either stable or slowly improving,” Don Johnson, G.M.’s vice president of United States sales operations, said in a statement. “When we add improving economic fundamentals to pent-up demand and an aging vehicle fleet, it’s now clear that auto sales should continue to grow in 2012.”

The research firm J. D. Power & Associates said December was the first month in which sales to individual consumers — a figure that excludes bulk deliveries to businesses and government buyers — topped 1 million for the first time since the August 2009 spike during the federal cash-for-clunkers trade-in program.

“The industry has managed through another series of external shocks and is in a healthier position as the year closes,” said John Humphrey, senior vice president of global automotive operations at J. D. Power.

    U.S. Auto Sales Ended 2011 With Strong Gains, 4.1.2012,
    http://www.nytimes.com/2012/01/05/business/chrysler-sales-climbed-26-last-year.html

Bring Back Boring Banks

January 3, 2012
The New York Times
By AMAR BHIDÉ

Medford, Mass.

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

The establishment of the Fed in 1913 as a lender of last resort that would temporarily replace the cash withdrawn by fleeing depositors was an important advance toward banking stability. But although the Fed could ameliorate the consequences of panics, it couldn’t prevent them. The system wasn’t stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act.

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits. Since the 2008 financial crisis, governments and central bankers have been seriously overstretched. The next time a panic starts, markets may just not believe that the Treasury and Fed have the resources to stop it.

Deposit insurance was also a long shot in 1933 — President Franklin D. Roosevelt, the Treasury secretary, the comptroller of the currency and the American Bankers Association opposed it. Somehow advocates rallied public opinion. The public mood is no less in favor of radical reform today. What’s missing is bold, thoughtful leadership.

Amar Bhidé, a professor at Tufts’s Fletcher School of Law and Diplomacy,

is the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy.”

    Bring Back Boring Banks, NYT, 3.1.2012,
    http://www.nytimes.com/2012/01/04/opinion/bring-back-boring-banks.html

For 2012, Signs Point to Tepid Consumer Spending

January 2, 2012
The New York Times
By MOTOKO RICH and STEPHANIE CLIFFORD

American consumers are running out of tricks.

As the weak economy has trudged on, they have leaned on credit cards to pay for holiday gifts, many bought at discounts. They are dipping into savings to cover spikes in gas, food and rent. They are substituting domestic vacations for international trips, squeezing more life out of their washing machines and refrigerators and switching to alternatives as meat prices have risen.

That leaves little room for a big increase in spending in 2012, economists say, a shaky foundation for the most important pillar of the American economy.

“The consumer is far from healthy,” said Steve Blitz, senior economist for ITG Investment Research.

Even the seemingly robust holiday shopping season is raising concern. After a strong start on Thanksgiving weekend, a pronounced lull followed, causing retailers to mark down products heavily in the week before Christmas. While final numbers for the season are not in, analysts say they are worried that retailers had to eat into profits to generate high revenues.

Consumer spending makes up 70 percent of the economy, so until it ignites, general growth is likely to be sluggish.

Macroeconomic Advisers, a forecasting company, projects growth of around 2 percent for the first half of this year, down from an estimate of 3.6 percent in the fourth quarter of 2011 and just 1.8 percent in the third quarter.

For consumers, the reasons for the sluggishness are clear: incomes are essentially flat, job growth is modest, and more than 40 percent of the new jobs in the last two years have been in low-paying sectors like retail and hospitality.

While consumer spending is not “going to collapse,” said Joel Prakken, senior managing director at Macroeconomic Advisers, “there are some headwinds there.”

Sarah M. Manley, a marketing consultant with two young sons in Waconia, Minn., has developed coping strategies in the last few years. Laid off in 2008, she started a business. She and her husband can make their mortgage payments and are paying off debts from when a storm damaged their roof.

“It’s not necessarily that I’m saving more money, but I’m paying off some of the debts that were amassed during the last three years, just trying to make headway,” Ms. Manley said.

To do that, she has changed habits. She uses the app GasBuddy to check prices at nearby stations before she buys gas for her car. She buys seasonal food on sale and freezes it — for Valentine’s Day, she plans to prepare crab legs she bought and froze last summer — and she is stocking up on holiday hams. She has switched from buying milk in gallon containers to buying it for less in plastic bags from the local gas station.

For big purchases, like the laptop she bought last summer, Ms. Manley still relies on credit, but is careful. She opens credit card accounts offering an introductory rate of no interest, then closes them just before the annual percentage rate kicks in.

“Everybody’s learned how to be frugal in the last two or three years,” she said.

Economic indicators suggest that, while things may not get worse for consumers this year, they will not get much better. In the third quarter of 2011, the most recent period for which figures are available, consumer spending rose slightly more than 1 percent, according to the Commerce Department.

Although housing sales have recently shown signs of recovery, prices are still falling and mortgage lenders are cautious. In November, contracts represented by 33 percent of members of the National Association of Realtors did not close, up from just 9 percent a year ago.

And with more than one in every five borrowers still owing more than their homes are worth, many homeowners feel too pressed to spend on much more than the essentials.

The stock market did not help consumers, either. Because of turmoil in the markets in the late summer and early fall, household wealth declined by $2.4 trillion in that period, a contraction likely to make people think twice about big purchases.

Adding to the uncertainty, financial weakness in Europe, and the potential expiration of the payroll tax cut and unemployment insurance benefits in two months, could further soften spending.

“I used to say people will always beg, borrow or steal to spend,” said Allen Sinai, chief global economist at Decision Economics, a consulting firm. He has changed his mind. He is forecasting “firmer” spending in 2012, but said the economy would “not grow anywhere near our growth in previous postrecession periods.”

Some signs suggest borrower distress. Credit card delinquencies increased for the first time in almost two years in the third quarter, according to credit bureau TransUnion, though the delinquency rates are still very low. And mortgage delinquencies were about 6 percent at the end of 2011, down a little from a year ago but higher than earlier last year, compared with the prerecession rate of 1.5 to 2 percent.

“That’s a long way to go to get us back to a steady state,” said Steve Chaouki, group vice president for financial services for TransUnion.

Another crucial factor holding back the American consumer is that many people who borrowed heavily during the boom to buy cars or appliances, or take vacations, are still repaying debt and cannot win approval for new loans, so they must find other ways to pay for things.

Though shopping has remained relatively strong, the level of consumer debt in October was at its highest in two years, meaning people are buying on credit rather than with income. And the savings rate in November was 3.5 percent, the lowest since 2007, which suggests shoppers are also buying with savings.

“We don’t think this is sustainable and expect slowing spending growth going forward,” Colin McGranahan, an analyst at Sanford C. Bernstein, wrote in a note to clients that reviewed numbers for November.

In Copley, Ohio, a suburb of Akron, Lynette Paudel, 39, said that some things are looking up: her husband, Govind, received a raise in September when he was recruited to a mechanical engineering job in Akron at a French company.

But she said she was likely to use that extra income to establish a cushion in their savings account and pay off credit card balances. She said it would also ease the strain of sending money to her husband’s family in Nepal each month.

“I know we’re lucky,” said Ms. Paudel, a high school English teacher who said neither she nor her husband lost their jobs in the downturn or its aftermath. But, she said, “we’re naturally fairly frugal” and plan to remain that way. She said the family will camp during summer vacation and will not replace her 2003 minivan “until it breaks.”

Even some growth areas in the economy can be explained by tapped-out consumers. Take auto sales, which rose about 10 percent nationwide in 2011 from a year earlier.

“People can only hold onto their cars for so long,” said Romolo Debottis, new-car sales manager at Mike Bass Ford in Sheffield Village, a suburb of Cleveland. He said sales at the dealership should increase this year to 2007 levels, the prerecession peak. “A lot of them have done that above and beyond what they normally would, and they’re just ready to spend money and buy a new vehicle.”

    For 2012, Signs Point to Tepid Consumer Spending, NYT, 2.1.2012,
    http://www.nytimes.com/2012/01/03/business/for-2012-signs-point-to-retreat-in-consumer-spending.html

Nobody Understands Debt

January 1, 2012
The New York Times
By PAUL KRUGMAN

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least.

Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

But Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

Nobody Understands Debt, NYT, 1.1.2012,
    http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html