History > 2012 > USA > Economy (III)

Science Is the Key to Growth

October 28, 2012
The New York Times
By NEAL F. LANE

Houston

MITT ROMNEY said in all three presidential debates that we need to expand the economy. But he left out a critical ingredient: investments in science and technology.

Scientific knowledge and new technologies are the building blocks for long-term economic growth — “the key to a 21st-century economy,” as President Obama said in the final debate.

So it is astonishing that Mr. Romney talks about economic growth while planning deep cuts in investment in science, technology and education. They are among the discretionary items for which spending could be cut 22 percent or more under the Republican budget plan, according to the Center on Budget and Policy Priorities.

According to the American Association for the Advancement of Science, the plan, which Mr. Romney has endorsed, could cut overall nondefense science, engineering, biomedical and technology research by a quarter over the next decade, and energy research by two-thirds.

Mr. Romney seems to have lost sight of the critical role of research investments not only in developing new medicines and cleaner energy sources but also in creating higher-skilled jobs.

The private sector can’t do it alone. We rely on companies to translate scientific discoveries into products. But federal investment in research and development, especially basic research, is critical to their success. Just look at Google, which was started by two graduate students working on a project supported by the National Science Foundation and today employs 54,000 people.

Richard K. Templeton, chief executive of Texas Instruments, put it this way in 2009: “Research conducted at universities and national labs underpins the new innovations that drive economic growth.”

President Bill Clinton, for whom I served as science adviser from 1998 to 2001, understood that. In those years, we balanced the federal budget and achieved strong growth, creating about two million jobs a year. A main reason was the longstanding bipartisan consensus on investing in science. With support from Congress, Mr. Clinton put research funding on a growth path, including a doubling over five years (completed under President George W. Bush) of the budget for the National Institutes of Health.

In 2010, the federal government invested about $26.6 billion in N.I.H. research; those investments led to $69 billion in economic activity and supported 485,000 jobs across the country, according to United for Medical Research, a nonpartisan group.

Moreover, the $3.8 billion taxpayers invested in the Human Genome Project between 1988 and 2003 helped create and drive $796 billion in economic activity by industries that now depend on the advances achieved in genetics, according to the Battelle Memorial Institute, a nonprofit group that supports research for the industry.

So science investments not only created jobs in new industries of the time, like the Internet and nanotechnology, but also the rising tax revenues that made budget surpluses possible.

American science has not been faring so well in recent budgets. President Obama has repeatedly requested steady increases for scientific research, aimed at putting the budgets of three key science agencies — the National Science Foundation, the Department of Energy’s Office of Science, and the National Institute of Standards and Technology — on a path to double, by 2016, the combined $10 billion they received in 2006. But a polarized Congress has not delivered at that rate, and the goal could be nullified if next year sees the beginning of draconian cuts.

Meanwhile, the frontiers of science continue to expand. President Obama is proposing that the United States boost its overall national research and development investments — including private enterprise and academia as well as government — to 3 percent of gross domestic product — a number that would still lag behind Israel, Sweden, Japan and South Korea, in that order.

In an increasingly complex world, that should be only a start. If our country is to remain strong and prosperous and a land of rewarding jobs, we need to understand this basic investment principle in America’s future: no science, no growth.

Neal F. Lane, a professor of physics and astronomy at Rice University,

was director of the National Science Foundation

and the chief science and technology adviser to President Bill Clinton.

    Science Is the Key to Growth, NYT, 28.10.2012,
    http://www.nytimes.com/2012/10/29/opinion/want-to-boost-the-economy-invest-in-science.html

U.S. Growth Rate Picks Up to 2%

October 26, 2012
The New York Times
By NELSON D. SCHWARTZ

More optimistic consumers are propelling the economy forward, even as businesses pull back.

The pickup in spending by consumers, along with a burst of defense orders and a stronger housing market, helped the economy expand at an annual rate of 2 percent in the third quarter, a slightly better pace than had been anticipated, according to government data released Friday. In the previous quarter, economic growth had dipped to a rate of just 1.3 percent.

While growing more confident that the housing market has stabilized, households have been buoyed by lower energy prices, until recently a rising stock market and a slight improvement in employment. After years of shedding debt, there are also signs that consumers are starting to borrow again.

“Consumers are feeling wealthier so they are still out there spending,” said Joshua Dennerlein, an economist with Bank of America Merrill Lynch.

Still, the pace of economic activity is short of what’s needed to substantially reduce the unemployment rate, now at 7.8 percent and also well below the level of growth typical in this stage of a recovery after a sharp downturn.

What’s more, fears are growing that the economy could slow again in the fourth quarter. Companies are preparing for the possibility of steep tax increases and sharp spending cuts if Congress cannot agree on a deal to reduce the deficit after the election, a combination of factors frequently referred to as the fiscal cliff.

In fact, a series of disappointing earnings reports from the nation’s biggest companies this week, along with a handful of layoff announcements from corporate bellwethers, suggest businesses have already begun to retrench.

With the presidential campaign entering the final, desperate dash to Election Day, there was plenty of fodder in Friday’s report for both candidates to cite as they spar over the direction of the economy.

For President Obama, the best news was that consumer spending grew at an annual rate of 2 percent last quarter, up from 1.5 percent in the second quarter, while residential investment increased at an annual rate of 14.4 percent, compared with 8.5 percent in the second quarter.

The business snapshot was much dimmer. The report showed that business investment fell 1.3 percent, a reversal from the 3.6 percent increase recorded in the second quarter, and a sign businesses are indeed clamping down on spending ahead of the fiscal cliff.

Inventories also were a notable factor with the summer drought in the Midwest shaving overall growth 0.4 percentage point as farm inventories dropped.

In addition to the uncertainty about government policy, corporate performance has been hurt by a recession in parts of Europe and weaker demand from China. Some economists fear that all these factors will keep a lid on growth in the final quarter of 2012 and the first quarter of next year.

The Commerce Department data showed exports decreased by 1.6 percent in the latest quarter, compared with a 5.3 percent increase in the second quarter. It was the first time exports had fallen since the first quarter of 2009, when the global economy was reeling from the collapse of Lehman Brothers and the ensuing financial crisis in the United States.

At a campaign appearance in Iowa, Mitt Romney, the Republican presidential candidate, termed Friday’s report “discouraging,” adding, “slow economic growth means slow job growth and declining take-home pay.”

The new figure, released by the Commerce Department, is the government’s first estimate of growth in the third quarter. Slightly better than the 1.8 percent increase economists had been forecasting, it showed the nation rebounding to the growth it had in the first quarter of the year after a spring slump.

“The report highlights the fact that businesses have already begun to react to the looming fiscal cliff while consumers march steadily ahead,” said Mr. Dennerlein. Noting the jump in residential spending, he added that the slowly recovering housing sector is a bright spot.

Housing values and stock values certainly contribute to consumers’ sense of financial well-being. And despite the hesitancy among businesses, optimism among consumers continues to rise. A separate survey released Friday showed consumer sentiment at its highest level in more than five years, with the Thomson Reuters/University of Michigan index rising to 82.6 in October from 78.3 in September, though it was lower than a preliminary October reading of 83.1 that had been previously reported.

To be sure, the latest growth in consumer spending was still well below the rate of increase in the first half of the last decade, when easy credit and a boom in home prices fueled growth in the 3 percent range.

But it was a crucial antidote to gloom pervading the business sector, experts said. “We’d really be in trouble if consumer attitudes were deteriorating like business attitudes,” said Nigel Gault, chief United States economist for IHS Global Insight.

Mr. Gault warned, however, that the outlook among consumers could erode if political leaders in Washington cannot break the deadlock over tax and budget policy. “Consumers are not so forward-looking as businesses,” Mr. Gault said. “So there are two ways this can go. Either we clear up the uncertainty, or consumers start focusing on the fiscal cliff and we see consumer spending hurt as well.”

In recent days, government data and a steady drumbeat of disappointing earnings reports from corporate bellwethers have underscored the threat to the job market posed by softness in sectors more dependent on exports, like manufacturing and chemicals.

Dow Chemical and DuPont announced job cuts earlier in the week, and that list grew Friday with Newell Rubbermaid, which makes commercial and consumer products like Calphalon and Paper Mate pens, announcing plans to cut more than 1,900 workers, or just over 10 percent of its work force. And Rockwell Collins, an aviation and defense giant, said it was considering eliminating up to 1,250 positions, equivalent to roughly 6 percent of its employees.

The latest data suggest a tug-of-war between countervailing economic forces that could shift at any time. For example, growth last quarter was unexpectedly bolstered by a 13 percent jump in military spending that few economists expect to be repeated in the fourth quarter.

Without the increase from military spending, the economy would have grown at an annual rate of 1.4 percent, said Steve Blitz, chief economist at ITG Investment Research.

“Going forward, consumers might be able to continue at the current pace of spending but they’re not going to be able to drive the growth rate higher,” said Mr. Blitz. “And 2 percent isn’t enough to get unemployment down.”

    U.S. Growth Rate Picks Up to 2%, NYT, 26.10.2012,
    http://www.nytimes.com/2012/10/27/business/economy/us-economy-grew-at-2-rate-in-3rd-quarter.html

Romney’s Economic Model

October 24, 2012
The New York Times
By NICHOLAS D. KRISTOF

Mitt Romney’s best argument on the campaign trail has been simple: Under President Obama, the American economy has remained excruciatingly weak, far underperforming the White House’s own projections.

That’s a fair criticism.

But Obama’s best response could be this: If you want to see how Romney’s economic policies would work out, take a look at Europe. And weep.

In the last few years, Germany and Britain, in particular, have implemented precisely the policies that Romney favors, and they have been richly praised by Republicans here as a result. Yet these days those economies seem, to use a German technical term, kaput.

Is Europe a fair comparison? Well, Republicans seem to think so, because they came up with it. In the last few years, they’ve repeatedly cited Republican-style austerity in places like Germany and Britain as a model for America.

Let’s dial back the time machine and listen up:

“Europe is already setting an example for the U.S.,” Representative Kenny Marchant, a Texas Republican, said in 2010. (You know things are bad when a Texas Republican is calling for Americans to study at the feet of those socialist Europeans.)

The same year, Karl Rove praised European austerity as a model for America and approvingly quoted the leader of the European Central Bank as saying: “The idea that austerity measures could trigger stagnation is incorrect.”

Representative Steve King of Iowa, another Republican, praised Chancellor Angela Merkel of Germany for preaching austerity and said: “It ought to hit home to our president of the United States. It ought to hit all of us here in this country.”

“The president should learn a lesson from the ‘German Miracle,’ ” Representative Joe Wilson of South Carolina, a Republican, urged on the House floor in July 2011.

Also in 2011, Senator Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, denounced Obama’s economic management and said: “We need a budget with a bold vision — like those unveiled in Britain and New Jersey.”

O.K. Let’s see how that’s working out.

New Jersey isn’t overseas, but since Sessions and many other Republicans have hailed it as a shining model of austerity, let’s start there. New Jersey ranked 47th in economic growth last year. When Gov. Chris Christie took office in 2010 and began to impose austerity measures, New Jersey ranked 35th in its unemployment rate; now it ranks 48th.

Senator Sessions, do we really aspire for the same in America as a whole?

Something similar has happened internationally. The International Monetary Fund this month downgraded its estimates for global economic growth, with only one major bright spot in the West. That would be the United States, expected to grow a bit more than 2 percent this year and next.

In contrast, Europe’s economy is expected to shrink this year and have negligible growth next year. The I.M.F. projects that Germany will grow less than 1 percent this year and next, while Britain’s economy is contracting this year.

Karl Rove, that sounds a lot like stagnation to me.

All this is exactly what economic textbooks predicted. Since Keynes, it’s been understood that, in a downturn, governments should go into deficit to stimulate demand; that’s how we got out of the Great Depression. And recent European data and I.M.F. analyses underscore that austerity in the middle of a downturn not only doesn’t help but leads to even higher ratios of debt to economic output.

So, yes, Republicans have a legitimate point about the long-term need to curb deficits and entitlement growth. But, no, it isn’t reasonable for Republicans to advocate austerity in the middle of a downturn. On that, they’re empirically wrong.

If there were still doubt about this, we’ve had a lovely natural experiment in the last few years, as the Republicans in previous years were happy to point out. All industrialized countries experienced similar slowdowns, and the United States under Obama chose a massive stimulus while Germany and Britain chose Republican-endorsed austerity.

Neither approach worked brilliantly. Obama’s initial economic stimulus created at least 1.4 million jobs, according to the nonpartisan Congressional Budget Office. But that wasn’t enough, and it was partly negated by austerity in state and local governments.

Still, America’s economy is now the fastest growing among major countries in the West, and Britain’s is shrinking. Which would you prefer?

I’m not suggesting Obama distribute bumper stickers saying: “It Could Be Worse.” He might want to stick with: “Osama’s Dead and G.M. Is Alive.”

Yes, there are differences between Europe and America. But Republicans were right to call attention to this empirical experiment.

The results are in. And, as Representative King suggested, the lessons “ought to hit all of us here in this country.”

    Romney’s Economic Model, NYT, 24.10.2012,
    http://www.nytimes.com/2012/10/25/opinion/kristof-romneys-economic-plan.html

The Austerity Trap

October 23, 2012
The New York Times

In Monday night’s presidential debate, Mitt Romney echoed other Republican politicians, saying that under President Obama’s economic policies, the United States is “heading toward Greece.” Mr. Romney was invoking Greece apparently to make the point that deep and swift budget cuts are needed in the United States to avoid a debt crisis.

That bizarre comment, sadly, is no surprise in a campaign that has parted ways with the facts. The president’s budget, as scored by the Congressional Budget Office, would stabilize the ratio of federal debt to the economy over 10 years.

What is more disturbing is that the comment displays willful ignorance about the lessons of Greece, and such ignorance can only lead to bad policy decisions at home. The lesson that should be learned from Greece is that its fiscal mess has been made far worse by severe budget cuts.

New data from the European Union, released on Monday and analyzed in The Times by Landon Thomas Jr. and David Jolly, show that countries that have most ruthlessly cut their budgets — Greece, especially — have seen their overall debt loads increase as a share of the economy.

The data provide objective support for what has been clear to just about everyone except pro-austerity German officials and deficit-crazed Republican politicians. Namely, deep government budget cuts at a time of economic weakness are counterproductive, complicating, if not ruining, the chances for economic growth.

The new European statistics also dovetail with a recent analysis by economists from the International Monetary Fund. They found that budget cutbacks are much more damaging to economies recovering from recession than has been previously believed. The reason is that with interest rates stuck near zero, there is no room to lower them when fiscal policy is tightened, and thus no way to offset the pain of budget cutbacks.

If governments push ahead anyway with deep spending cuts, the result is only more economic weakness without the hoped for budget improvement. That has been the case in Greece and other nations of Europe, like Ireland, Portugal, Spain and Britain. If Republican policies to slash government programs while excessively cutting taxes were carried out here, the United States would experience a similar effect.

Taken together, the Greek experience and the recent European research, show that for the United States, a “grand bargain” on the deficit should include two main parts: spending in the near term to boost the recovery, coupled with tax increases, and spending cuts to reduce the deficit as the economy regains its health.

Mr. Obama is better positioned than Mr. Romney to deliver that agenda. Mr. Obama could make his jobs plan, introduced last September but blocked by Congressional Republicans, part of the budget package to be negotiated after the election, when politicians must agree on tax increases and spending cuts to avoid the so-called fiscal cliff.

Mr. Romney’s agenda is missing a direct focus on jobs, foolishly relying instead on high-end tax cuts and deregulation to help the recovery. And he and his party continue to insist on premature deficit reduction that, in a fragile economy, is the real road to Greece.

    The Austerity Trap, NYT, 23.10.2012,
    http://www.nytimes.com/2012/10/24/opinion/the-austerity-trap.html

Getting More Bang for the Fed’s Buck

October 23, 2012
The New York Times
By JOSEPH A. GRUNDFEST, MARK A. LEMLEY and GEORGE G. TRIANTIS

Stanford, Calif.

IN September, the Federal Reserve announced that it would begin purchasing $40 billion of mortgage-backed bonds every month until the outlook for the labor market improved substantially or inflation reared its ugly head.

The Fed hopes that these purchases will lower mortgage rates, boost new construction, prop up home values, lift stock prices and otherwise energize the moribund job market.

Experts disagree on whether these purchases will stimulate employment and promote recovery, or trigger an inflationary spiral and saddle the Fed with substantial losses if interest rates spike before the Fed can unwind its position.

We don’t intend to weigh in on these debates — but we do want to start a different one: is the mortgage market really the smartest place to spend all this money? Wouldn’t the Fed get more employment bang for its monetary buck by purchasing state and municipal bonds?

Instead of a third round of so-called “quantitative easing,” known in the financial markets as QE3, maybe it’s time for a QE-Muni. Here’s why.

State and municipal bonds help finance new infrastructure projects like roads and bridges, as well as pay for some government salaries and services, by borrowing against future tax receipts. With about $3.7 trillion in debt outstanding, it’s a big and sprawling marketplace for bonds. But even at that size, it’s less than half as large as the securitized mortgage market.

So every Fed dollar spent in the muni market would absorb a larger percentage of outstanding debt and is likely to have a greater effect on reducing the bonds’ interest rates than the same expenditure in the mortgage market. The greater the effect in reducing borrowing costs in either market, the more powerful the impact on employment is likely to be.

In addition, while the current Fed program helps keep mortgage rates low, its effect on the economy isn’t direct. Rock-bottom rates, naturally, will prompt some to buy homes or spend more on renovations — both of which spur job creation. But some homeowners will simply refinance to increase their savings, which has a less immediate stimulus effect. In contrast, lowering the borrowing costs for states, cities and counties should not only forestall tax increases (which dampen individual spending), but also make it easier for local governments to pay for police officers, firefighters, teachers and infrastructure improvements.

Finally, while the private sector is hiring (with a net gain of 4.7 million jobs since February 2010), the public sector continues to lay off workers. We’ve lost a million government jobs since 2010. Republicans and Democrats alike have been decrying the failure to stimulate the economy through the infrastructure improvements that are necessary to keep our economy competitive. But shrinking tax revenues and limited debt service capacity have tied the hands of state and local governments.

To be sure, our proposal raises pragmatic, political and legal challenges. For starters, the muni bond market is highly fragmented, and many bond issues are illiquid. Having the Fed train billions of dollars of buying firepower on this market could roil the pricing of individual bond offerings.

This problem could be addressed, we think, by having the Fed announce the amount and quality of muni debt that it’s willing to buy in a given month; sellers could then choose whether or not to come to the table. (That would also allow the Fed to sidestep the politically loaded question of which state’s bonds to buy: the market can make that decision.)

From a political perspective, some will object that our plan would unfairly bail out states and municipalities that have been profligate in the past, a problem economists call moral hazard.

Such an objection might be addressed, in part, by restricting the Fed to purchases of bonds that pay for critical infrastructure or hiring rather than, say, new sports stadiums.

A still bigger problem with our proposal is simple. It is illegal, at least as the law currently stands. The Federal Reserve Act prohibits the Fed from purchasing muni debt with a maturity of more than six months, and none of the beneficial effects we predict from QE-Muni can occur unless the Fed is able to buy longer-dated muni paper.

But after the elections, Congress will head into the mother of all negotiation sessions as it tries to avoid the fiscal cliff. All options will be on the table. And as both Republicans and Democrats look for strategies that create the greatest number of jobs at the lowest cost to the public treasury, wouldn’t it make sense to give the Fed another tool to help it spend our money more effectively?

Yes, we can and should debate whether another round of quantitative easing is the medicine that the economy needs now. But if it’s the medicine we’re destined to get, shouldn’t we do all we can to assure that it works as best it can?

Joseph A. Grundfest, Mark A. Lemley and George G. Triantis are professors

at Stanford Law School.

Mr. Grundfest was a commissioner of the Securities and Exchange Commission

from 1985 to 1990.

    Getting More Bang for the Fed’s Buck, NY10.2012,
    http://www.nytimes.com/2012/10/24/opinion/why-the-fed-should-buy-munis-not-mortgages.html

The Myth of Job Creation

October 21, 2012
The New York Times

The headlines from the last presidential debate focused on President Obama challenging Mitt Romney on issue after issue. There was a less noticed, but no less remarkable, moment when Mr. Obama agreed with Mr. Romney on something — and both were entirely wrong.

The exchange began with a question about the offshoring of American jobs. Part of Mr. Obama’s answer was that federal investments in education, science and research would help to ensure that companies invest and hire in the United States. Mr. Romney interrupted. “Government does not create jobs,” he said. “Government does not create jobs.”

It was a decidedly crabbed response to a seemingly uncontroversial observation, and yet Mr. Obama took the bait. He said his political opponents had long harped on “this notion that I think government creates jobs, that that somehow is the answer. That’s not what I believe.” He went on to praise free enterprise and to say that government’s role is to create the conditions for everyone to have a fair shot at success.

So, they agree. Government does not create jobs.

Except that it does, millions of them — including teachers, police officers, firefighters, soldiers, sailors, astronauts, epidemiologists, antiterrorism agents, park rangers, diplomats, governors (Mr. Romney’s old job) and congressmen (like Paul Ryan).

First, the basics. At last count, government at all levels — federal, state and local — employed 22 million Americans, with the largest segment working in public education. Is that too many? No. Since the late 1980s, the number of public-sector workers has averaged about 7.3 for every 100 people. With the loss of 569,000 government jobs since June 2009, that ratio now stands at about 7 per 100.

Public-sector job loss means trouble for everyone. Government jobs are crucial to education, public health and safety, environmental protection, defense, homeland security and myriad other functions that the private sector cannot fulfill. They are also critical for private-sector job growth in two fundamental ways. First, the government gets its supplies from private-sector companies, which is why Republican senators like John McCain have been frantically warning about the dire effects on job creation if Congress moves ahead with planned military spending cuts. (Republicans insisted upon the cuts as part of their ill-advised showdown over the debt ceiling.) Second, government spending on supplies and salaries reverberates strongly through the economy, increasing demand and with it, employment.

That means the economy suffers when government cuts back. A report by the Economic Policy Institute examined the effect of recent cutbacks at the state and local level — including direct loss of government jobs and indirect loss of suppliers’ jobs; the jobs that should have been added to keep up with population growth; and the reduction in purchasing power from other cutbacks. If not for state and local budget austerity, the report found, the economy would have 2.3 million more jobs today, half of which would be in the private sector.

The government does not create jobs? It most certainly does. And at this time of state budgetary hardship, a dose of federal fiscal aid to states and localities could create more jobs, in both the public and private sectors.

    The Myth of Job Creation, NYT, 21.10.2012,
    http://www.nytimes.com/2012/10/22/opinion/the-myth-of-job-creation.html

2 From U.S. Win Nobel in Economics

October 15, 2012
The New York Times
By CATHERINE RAMPELL

Two Americans, Alvin E. Roth and Lloyd Shapley, were awarded the Nobel Memorial Prize in Economic Science on Monday for their work on market design and matching theory, which relate to how people and companies find and select one another in everything from marriage to school choice to jobs to organ donations.

Their work primarily relates to markets that do not have prices. In classical economics, prices are the main mechanism through which resources are allocated. The laureates’ innovations involve figuring out how to properly assign people and things to stable matches when prices are not available to help buyers and sellers agree on matches.

Mr. Roth, 60, has put these theories to practical use, in his work on a program that matches new doctors to hospitals and more recently for a project matching up kidney donors. Public school systems in New York, Boston, Chicago and Denver, among other cities, use an algorithm based on his work to help assign students to schools. A professor at Harvard, he recently accepted a new position at Stanford.

“Al has spent the last 30 years trying to make economics more like an engineering discipline,” said Parag Pathak, an economics professor at M.I.T. who has worked on school matching systems with Mr. Roth. “The idea is to try to diagnose why resource allocation systems are not working, and how they can be engineered to produce something better.”

Mr. Shapley, 89, a mathematician and economist long associated with game theory, is a professor emeritus at the University of California, Los Angeles. He made some of the earliest theoretical contributions to research on market design and matching, in the 1950s and 1960s. He looked at why, in a free market, it was sometimes difficult for individuals to come to an agreement about proper matches.

In a paper with David Gale in 1962, Mr. Shapley explained how individuals can be paired together in a stable match even when they disagree about what qualities make the right match. The paper focused on the puzzle of marriage: that is, how mates find one another in a fair and stable way, so that no one who is already married would want (and be able to) break off and pair up with someone else who is already married.

In the 1980s, Mr. Roth applied this work to matches for medical residency programs and eventually school choice. He was interested in how to keep matches fair and how to keep more sophisticated players from manipulating the system to their advantage.

In older matching systems, a student would apply to his first choice school, which was often popular. If the student did not get in, then the application would be sent on to the student’s second choice. But if that was also a popular choce, then that school’s program would have already filled up by the time the application was even considered, and the process would repeat itself with his third choice school and so on.

Even if students were qualified to get into one of their top schools, they could be shut out because they did not rank their preferences strategically. All this gave an incentive for students to try to game the system by listing a less-popular school as their first choice — even if they really preferred somewhere else — because that way they figured they would at least have a chance of getting in somewhere.

Mr. Roth’s innovation was to develop and apply matching theory so that students would have an incentive to tell the truth about where they wanted to go. A centralized system could then assign them to a school best suited for them, based both on their own preferences and the preferences of the schools they were applying to.

The school systems he helped create use a “deferred acceptance algorithm,” which was developed by Mr. Shapley.

The algorithm works by tentatively accepting students to their top-choice school. It holds off on the final assignment until going through all the other applications to make sure there are not other students who have a higher claim to a spot at that given school (because those other students might have higher test scores, a sibling at the school, or whatever other criteria the school prioritizes) even if those students happened to rank the school lower on their list of preferences.

“The idea is to level the playing field,” said Mr. Pathak. “You want to make sure that not only do sophisticated players not have to spend the time learning the strategies and different heuristics that will get them ahead, but also that unsophisticated players are not hurt by the fact that they are not aware of all this information.”

This same sort of system is used to match new medical school graduates to medical residency programs, which was once a messy process that led to a lot of unhappy candidates. Now all residency assignments are posted simultaneously. Mr. Roth later tweaked the system to help figure out how to match married couples who were jointly looking for jobs at hospitals, an additional complication that was not accounted for in the original Gale-Shapley literature.

Mr. Roth has also helped build a system that assigns kidney donation swaps, to better allocate the scarce resources of organs and save lives.

For example, a husband in Boston may need a kidney, and his wife is willing to donate one of hers but she is not a match. Across the country there is a couple in the same position, and it turns out that the wives are a match for the husbands in the opposite couple. In this simple case, the two couples essentially barter their kidneys: wife A gives her kidney to husband B, and wife B gives her kidney to husband A. Two patients who might not have otherwise found a generous donor are saved.

It is rare that two couples will serendipitously match each other’s kidney donation needs this way, and there are often more pairs of donor-recipients involved. The longest chain of kidney recipients and donors involved 60 people, or 30 pairs.

But hospitals prefer to limit, if possible, the number of pairs involved in organ exchanges, since they cannot handle an infinite number of transplants simultaneously. Mr. Roth’s system helps find the most efficient exchange of organs so that the most patients can be saved with the fewest number of pairs involved in a given trade.

    2 From U.S. Win Nobel in Economics, NYT, 15.10.2012,
    http://www.nytimes.com/2012/10/16/business/
    economy/alvin-roth-and-lloyd-shapley-win-nobel-in-economic-science.html

Truth About Jobs

October 7, 2012
The New York Times
By PAUL KRUGMAN

If anyone had doubts about the madness that has spread through a large part of the American political spectrum, the reaction to Friday’s better-than expected report from the Bureau of Labor Statistics should have settled the issue. For the immediate response of many on the right — and we’re not just talking fringe figures — was to cry conspiracy.

Leading the charge of what were quickly dubbed the “B.L.S. truthers” was none other than Jack Welch, the former chairman of General Electric, who posted an assertion on Twitter that the books had been cooked to help President Obama’s re-election campaign. His claim was quickly picked up by right-wing pundits and media personalities.

It was nonsense, of course. Job numbers are prepared by professional civil servants, at an agency that currently has no political appointees. But then maybe Mr. Welch — under whose leadership G.E. reported remarkably smooth earnings growth, with none of the short-term fluctuations you might have expected (fluctuations that reappeared under his successor) — doesn’t know how hard it would be to cook the jobs data.

Furthermore, the methods the bureau uses are public — and anyone familiar with the data understands that they are “noisy,” that especially good (or bad) months will be reported now and then as a simple consequence of statistical randomness. And that in turn means that you shouldn’t put much weight on any one month’s report.

In that case, however, what is the somewhat longer-term trend? Is the U.S. employment picture getting better? Yes, it is.

Some background: the monthly employment report is based on two surveys. One asks a random sample of employers how many people are on their payroll. The other asks a random sample of households whether their members are working or looking for work. And if you look at the trend over the past year or so, both surveys suggest a labor market that is gradually on the mend, with job creation consistently exceeding growth in the working-age population.

On the employer side, the current numbers say that over the past year the economy added 150,000 jobs a month, and revisions will probably push that number up significantly. That’s well above the 90,000 or so added jobs per month that we need to keep up with population. (This number used to be higher, but underlying work force growth has dropped off sharply now that many baby boomers are reaching retirement age.)

Meanwhile, the household survey produces estimates of both the number of Americans employed and the number unemployed, defined as people who are seeking work but don’t currently have a job. The eye-popping number from Friday’s report was a sudden drop in the unemployment rate to 7.8 percent from 8.1 percent, but as I said, you shouldn’t put too much emphasis on one month’s number. The more important point is that unemployment has been on a sustained downward trend.

But isn’t that just because people have given up looking for work, and hence no longer count as unemployed? Actually, no. It’s true that the employment-population ratio — the percentage of adults with jobs — has been more or less flat for the past year. But remember those aging baby boomers: the fraction of American adults who are in their prime working years is falling fast. Once you take the effects of an aging population into account, the numbers show a substantial improvement in the employment picture since the summer of 2011.

None of this should be taken to imply that the situation is good, or to deny that we should be doing better — a shortfall largely due to the scorched-earth tactics of Republicans, who have blocked any and all efforts to accelerate the pace of recovery. (If the American Jobs Act, proposed by the Obama administration last year, had been passed, the unemployment rate would probably be below 7 percent.) The U.S. economy is still far short of where it should be, and the job market has a long way to go before it makes up the ground lost in the Great Recession. But the employment data do suggest an economy that is slowly healing, an economy in which declining consumer debt burdens and a housing revival have finally put us on the road back to full employment.

And that’s the truth that the right can’t handle. The furor over Friday’s report revealed a political movement that is rooting for American failure, so obsessed with taking down Mr. Obama that good news for the nation’s long-suffering workers drives its members into a blind rage. It also revealed a movement that lives in an intellectual bubble, dealing with uncomfortable reality — whether that reality involves polls or economic data — not just by denying the facts, but by spinning wild conspiracy theories.

It is, quite simply, frightening to think that a movement this deranged wields so much political power.

    Truth About Jobs, NYT, 7.10.2012,
    http://www.nytimes.com/2012/10/08/opinion/krugman-truth-about-jobs.html

Drop in Jobless Figure Gives Jolt to Race for President

October 5, 2012
The New York Times
By SHAILA DEWAN and MARK LANDLER

The jobless rate abruptly dropped in September to its lowest level since the month President Obama took office, indicating a steadier recovery than previously thought and delivering another jolt to the presidential campaign.

The improvement lent ballast to Mr. Obama’s case that the economy is on the mend and threatened the central argument of Mitt Romney’s candidacy, that Mr. Obama’s failed stewardship is reason enough to replace him.

Employers added a modest 114,000 jobs last month, the Labor Department reported on Friday, but estimates for what had been disappointing gains in July and August were revised upward to more respectable levels.

Unemployment fell to 7.8 percent from 8.1 percent, crossing what had become a symbolic threshold in the campaign. Mr. Romney was deprived of a favorite line of attack, mocking the president for “43 straight months with unemployment above 8 percent.”

The new numbers may have less economic than political import, since they represent only one month of data that can be quite volatile and give little indication that the plodding recovery has accelerated.

“We’ve been amazingly resilient thus far in the face of all these headwinds,” said Ellen Zentner, the senior United States economist for Nomura Securities International, referring to global obstacles like the slowdown in China and domestic ones like the looming expiration of tax breaks. “But it’s awfully hard to see getting significantly above that growth range given that these headwinds are still in place.”

Still, an energized Mr. Obama seized on the statistics as he campaigned in Virginia and Ohio, seeking to regain his footing after a listless performance in the first debate this week. Mr. Romney, whose muscular showing in Denver had emboldened his campaign, scrambled to play down the report, saying it merely confirmed that millions of Americans had given up looking for work.

In back-to-back rallies in Virginia, the president declared, “This country has come too far to turn back.” His Republican challenger then insisted, “We don’t have to stay on the path we’ve been on. We can do better.”

Some Romney backers, led by the former chief executive of General Electric, John F. Welch Jr., suggested that the White House had massaged the Labor Department data to make it more favorable. The Obama administration, economic experts and some Republicans dismissed that notion as a groundless conspiracy theory.

The jobs report was preceded by other signs of growing economic strength, including a jump in consumer confidence, the strongest auto sales in four years, rallying stock prices and, at long last, a stabilization of housing prices.

According to the monthly survey of employers, the bulk of the gains came from service jobs, particularly in education and health care. Though government downsizing has been a drag on the recovery, government over all added 10,000 jobs in September, the third consecutive month of gains.

The nation’s employers have added an average of 146,000 jobs a month in 2012, just ahead of the numbers that are considered necessary to absorb new workers into the labor force. “This is not what a real recovery looks like,” Mr. Romney said in a statement.

Areas of weakness included manufacturing, one of the bright spots that Mr. Obama has showcased throughout the re-election campaign. It lost 16,000 jobs after a revised 22,000 drop in August in the face of a global slowdown. The number of temporary jobs, usually considered a harbinger of future growth, fell 2,000. Speaking to a rain-soaked crowd of 9,000 at Cleveland State University, Mr. Obama said, “Today’s news should give us some encouragement. It shouldn’t be an excuse for the other side to talk down the economy just to try to score some political points.”

“We’ve made too much progress to return to the policies that led to this crisis in the first place,” the president said to cheers.

The nation now has nearly the same number of jobs as when Mr. Obama took office in January 2009. Since the economy stopped hemorrhaging jobs in February 2010, there has been an increase of more than 4.3 million. A mere 61,000-job increase would allow Mr. Obama to claim a net gain in jobs over his tenure.

The White House has already made that claim based on one measurement. In an annual recalibration last month, the Bureau of Labor Statistics said 400,000 more jobs were added in the 12 months that ended in March than previously thought. Such revisions are common, but the adjustment process is slow — that new benchmark will not be incorporated into the monthly jobs figures until early next year.

Mr. Romney, on other hand, said the lower rate spoke to a nation short of hope. The rate, he asserted, would be about 11 percent if the same percentage of people were looking for work now as on the day Mr. Obama was elected.

“If you just dropped out of the labor force, if you just give up and say, ‘Look, I can’t go back to work, I’m just going to stay home,’ if you just drop out altogether, why, you’re no longer part of the employment statistics, so it looks like unemployment is getting better,” Mr. Romney said at a farm equipment dealership in Abingdon, Va.

That was true in August, when the rate dropped to 8.1 percent, from 8.3 percent. But this time, the statistics showed that more people were working, not that discouraged job seekers had stopped looking for work.

The jobs report is based on two surveys, one of businesses and one of households, that can present different pictures.

While the survey of businesses showed mediocre growth, the household survey had a whopping increase of 873,000 people working in September. The household survey is much more volatile and prone to sampling error, but it captures aspects of the labor market that the business survey does not, like self-employment and household workers. Economists said that this month’s household survey probably overstated the improvement, but that its credibility was bolstered by an unexpectedly robust rise in consumer confidence.

The polling firm Gallup pinpointed the improvement in consumer confidence last month to the first day of the Democratic National Convention and attributed it almost entirely to increased optimism among Democrats, while confidence among Republicans remained at low levels. But Gallup could not say whether politics or economic conditions had driven the change.

The employment gains were not spread equally. While for older workers, the unemployment rate was the lowest in years, the unemployment rate for black men improved only 0.1 percentage point and the portion of all black men with jobs actually fell, to 57.5 percent.

There was no movement between August and September in a broader measure of underemployment, which includes the jobless who have stopped looking for work and those who work part time but would like to work full time. That stayed at 14.7 percent, though it is down from 16.4 percent a year earlier.

And 4.8 million people are in the group that has had the toughest time finding work — those who have been unemployed for longer than six months.

Sarah Thurman, a civil engineer in Kansas City, Mo., has been looking since May 2010. “The smaller firms are starting to post job openings, and that hasn’t been like that for over two years, but there’s so many of us without jobs that there’s so much competition,” she said. “I’m hearing from the headhunters that it’s going to be opening up, it’s going to be opening up — but when?”

Like Republicans and Democrats, consumers and businesses have divergent views of the economic situation. Consumers have brightened along with the better outlook for employment, calmer stock markets and whispers of rising home values.

Business leaders have been hanging back, more focused on a global slowdown and domestic concerns. They say they are uncertain what the election will mean for the business climate and are waiting in part for a resolution of the host of tax increases and budget cuts that will be set off at the end of the year if Congress fails to act.

The discrepancy between consumers’ mood and companies’ outlook can be easily explained, economists said. “Businesses are much more forward-looking,” said Ms. Zentner at Nomura.

In a survey of 400 chief financial officers conducted this summer, Grant Thornton, a management consulting firm, found that only 37 percent foresaw the possibility of adding workers while 18 percent said they expected to shrink over the next six months.

Harry Kazazian, the chief executive of Exxel Outdoors, a maker of camping equipment based in Alabama, said the election, the fiscal cliff and rapidly shifting regulations had put him in a cautious mood.

With sales on the rise, Exxel has slowly resumed a capital investment plan that it suspended three years ago. “We’re moving forward, but we’re doing it in steps rather than being much more aggressive and putting ourselves out there,” Mr. Kazazian said. “I wouldn’t be surprised if things start turning the other way, meaning down.”

But at a Walmart in Atlanta, shoppers were loosening the reins a bit, buying what they described as small indulgences like scented candle oil and seasonal beer.

Michael Peacock, 43, said that although his house was in foreclosure, he could sense enough activity in his chosen field, online marketing, that he could afford to turn down some work outside his specialty. “I’m not superconfident in the economy. But in my line of work, things have been getting better. There seems to be some improvement.”

John H. Cushman Jr. contributed reporting.

This article has been revised to reflect the following correction:

Correction: October 5, 2012

An earlier version of this article misstated the increase in jobs since February 2010 and the number of jobs needed for President Obama to claim an increase during his tenure. More than 4.3 million jobs have been added since February 2010, not more than 400,000, and an increase of 61,000 jobs, not 62,000, would allow Mr. Obama to claim a net gain. The earlier version also misidentified the city where Sarah Furman lives. She lives in Kansas City, Mo., not Kansas City, Kan.

    Drop in Jobless Figure Gives Jolt to Race for President, NYT, 6.10.2012,
    http://www.nytimes.com/2012/10/06/business/economy/us-added-114000-jobs-in-september-rate-drops-to-7-8.html

Attacks on 6 Banks Frustrate Customers

September 30, 2012
The New York Times
By NICOLE PERLROTH

Six major American banks were hit in a wave of computer attacks last week, by a group claiming Middle Eastern ties, that caused Internet blackouts and delays in online banking.

Frustrated customers of Bank of America, JPMorgan Chase, Citigroup, U.S. Bank, Wells Fargo and PNC, who could not get access to their accounts or pay bills online, were upset because the banks had not explained clearly what was going on.

“It was probably the least impressive corporate presentation of bad news I’ve ever seen,” said Paul Downs, a small-business owner in Bridgeport, Pa. “This is extremely disconcerting.”

The banks suffered denial of service attacks, in which hackers barrage a Web site with traffic until it is overwhelmed and shuts down. Such attacks, while a nuisance, are not technically sophisticated and do not affect a company’s computer network — or, in this case, funds or customer bank accounts. But they are enough to upset customers.

A hacker group calling itself Izz ad-Din al-Qassam Cyber Fighters — a reference to Izz ad-Din al-Qassam, a Muslim holy man who fought against European forces and Jewish settlers in the Middle East in the 1920s and 1930s — took credit for the attacks in online posts.

The group said it had attacked the banks in retaliation for an anti-Islam video that mocks the Prophet Muhammad. It also pledged to continue to attack American credit and financial institutions daily, and possibly institutions in France, Israel and Britain, until the video is taken offline. The New York Stock Exchange and Nasdaq were also targeted.

On Friday, PNC became the latest bank to experience delays and fall offline. Customers said they had been unable to get access to PNC’s online banking site, and those that visited the bank’s physical locations were told it was because PNC, and many others, had been hacked.

Fred Solomon, a PNC spokesman, said Friday afternoon that the bank’s Web site was back online, but that it was still working to restore online bill payment. Asked why the bank was not better able to withstand such an attack, he said that while PNC had systems in place to prevent delays and disruption from hacker attacks, in this case “the volume of traffic was unprecedented.”

Representatives for other banks also confirmed that they had experienced slow Internet performance and intermittent downtime because of an unusually high volume of traffic.

Security researchers said the attack methods were too basic to have taken so many American bank sites offline. The hackers appeared to be enlisting volunteers for the attacks with messages on various sites. On one blog, they called on people to visit two Web addresses that would cause their computers to flood banks with hundreds of data requests a second. They asked volunteers to attack banks according to a timetable: Wells Fargo on Tuesday, U.S. Bancorp on Wednesday and PNC on Thursday.

But experts said it seemed implausible that this method would create an attack of this scale. “The number of users you need to break those targets is very high,” said Jaime Blasco, a security researcher at AlienVault who has been investigating the attacks. “They must have had help from other sources.”

Those sources, Mr. Blasco said, would have to be a group with money, like a nation, or botnets — networks of infected computers that do the bidding of criminals. Botnets can be rented through black market schemes that are common in the Internet underground, or lent out by criminals or governments.

Last week, Senator Joseph I. Lieberman of Connecticut, chairman of the Senate Homeland Security Committee, said in an interview on C-Span that he believed Iran’s government had sponsored the attacks in retaliation for Western economic sanctions. The hacker group rejected that claim. In an online post, it said the attacks had not been sponsored by a country and that its members “strongly reject the American officials’ insidious attempts to deceive public opinion.”

The hackers maintained that they were retaliating for the online video. “Insult to the prophet is not acceptable, especially when it is the last Prophet Muhammad,” they wrote.

It is very difficult to trace such attacks back to a particular country, security experts say, because they can be routed through different Internet addresses to mask their true origin.

But experts said they had seen an increase in such activity from Iran and in the number of so-called hacktivists, hackers who attack for political purposes rather than for profit, based in Iran.

“We absolutely have seen more activity from the Middle East, and in particular Iran has been increasingly active as they build up their cyber capabilities,” said George Kurtz, the president of CrowdStrike, a computer security company, and former chief technology officer at McAfee. “There is also a strong activist movement underfoot, which should be concerning to many large companies. The threat is real, and what we are seeing now is only the tip of the iceberg.”

James A. Lewis, a computer security expert at the Center for Strategic and International Studies, said that in this case, the attack methods used were “pretty basic” to have been state-sponsored. But he added that even if the attacks were not the work of Iran’s government, the state would be aware of them because Iran monitors its networks extensively.

For Mr. Downs, the small-business owner in Pennsylvania, such half explanations were of little consolation.

“A major bank has a problem and gives no indication of what’s happening, when it started or when it will stop,” he said. “That’s pretty freaky if it’s your own business’s money and you need to do things with it.”

    Attacks on 6 Banks Frustrate Customers, NYT, 30.9.2012,
    http://www.nytimes.com/2012/10/01/business/cyberattacks-on-6-american-banks-frustrate-customers.html

How to Erase a Debt That Isn’t There

September 29, 2012
The New York Times
By GRETCHEN MORGENSON

GREETINGS, unhappy homeowners! Here’s some wonderful news:

“We are canceling the remaining amount you owe Chase!” says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. “You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America.

Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

What’s going on?

Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.

So, to the ire of customers who couldn’t get banks to work with them before, banks are now forgiving debts that no longer exist.

“When I got this letter that said they were going to relieve our debt, I just about fell over,” Ms. Esposito said last week. “You can’t forgive a debt that you’re legally unable to collect.”

Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.

Neil Crane is a lawyer in Hamden, Conn., who represented Ms. Esposito and her husband in their bankruptcy. He says four of his other clients have recently received letters from banks claiming to forgive discharged debt.

“I never thought in my wildest dreams that the banks would do this properly,” Mr. Crane said last week. “But I think it’s really wrong to be foreclosing on mortgages you don’t own and relinquishing debt you don’t own.”

It’s bad enough that these letters are inaccurate. But even worse are the tax problems that they may create for people like Ms. Esposito. In most cases, the Internal Revenue Service considers debt that is forgiven to be taxable income. One exception occurs in bankruptcy; when a debt is discharged, it is not taxable.

But the letters sent by Chase and Bank of America clearly warn that the forgiveness will be reported to the I.R.S. If so, these borrowers may have to prove that the banks erred in claiming to have forgiven the debts.

I ASKED spokesmen for Chase and Bank of America how they could forgive debts that no longer existed. Both gave the same unsatisfying answer. Very similar letters had been sent, both banks said, to two very different types of borrowers. One set of borrowers has outstanding debt that the banks are offering to forgive. The other set has had their debts discharged in bankruptcy, but the bank still holds a lien against their properties. Releasing the liens provides a benefit to borrowers when they go to sell their homes, and both banks said the letters were intended to notify borrowers whose liens were being released.

Why not take care to write letters specifically tailored to each borrower’s situation?

Dan Frahm, a Bank of America spokesman, said the bank would work on clarifying what was in the letters to borrowers. And, late Friday, the bank put a more extensive description of the forgiveness and lien release program on its Web site. Not a bad idea, since nowhere does Bank of America’s letter discuss releasing the lien. Mr. Frahm estimated that 12,000 Bank of America customers whose debts had been discharged had received these letters.

Tom Kelly, a Chase spokesman, conceded that the bank “may have caused some confusion for customers.” Its letter does note that the bank is releasing the lien on the property.

But even this is incorrect in Ms. Esposito’s case, Mr. Crane said. Her lien was actually eliminated back in 2009, during her bankruptcy proceeding.

All of this made me wonder: are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

But Chase appears to be claiming to release a lien on Ms. Esposito’s property that it does not hold. And under the mortgage settlement, it could receive a credit.

So I asked Joseph A. Smith Jr., a former banking regulator in North Carolina who is monitoring the settlement, how he planned to vet the banks’ claims of relief provided and credit earned. For example, how will he ensure that institutions do not receive credit for releasing liens that have been eliminated?

“We will review compliance with this requirement as we will with all of the consumer relief requirements,” Mr. Smith said, “through review of the corporate records relating to such transactions.”

Good luck with that.

AS for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.

Chase won’t help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.

“There is no chance that this group of institutions can help homeowners,” Mr. Crane said. “They should not be in charge of fixing problems they helped create.”

    How to Erase a Debt That Isn’t There, NYT, 29.9.2012,
    http://www.nytimes.com/2012/09/30/business/when-banks-erase-a-debt-that-isnt-there.html

Ammunition for a Trade War Between U.S. and Mexico

September 27, 2012
The New York Times
By STEPHANIE STROM and ELISABETH MALKIN

Estimates are that nearly one out of two tomatoes eaten in the United States comes from Mexico — a statistic Florida growers would like to change, even at the risk of a trade war.

On Thursday, they got a reason to hope.

The United States Department of Commerce signaled then that it might be willing to end a 16-year-old agreement between the United States and some Mexican growers that has kept the price of Mexican tomatoes relatively low for American consumers. American tomato growers say the price has been so low that they can barely compete.

Within hours of the American action, Mexico threatened to retaliate, claiming that the Obama administration was trying to placate farmers in an important swing state. The Mexican government has support from seemingly unlikely backers in the United States: the big box stores like Walmart, which fear they will have to raise their prices, and other commodity producers, who worry that their products will be caught in a trade war.

“It will be very unfortunate if this devolves into a shooting war because this becomes a tit-for-tat and in the end, nobody wins,” said John Keeling, chief executive of the National Potato Council.

As part of a complex arrangement dating to 1996, the United States has established a minimum price at which Mexican tomatoes can enter the American market. Over the years, Florida’s tomato sales have dropped as low as $250 million annually, from as much as $500 million, according to Reggie Brown, executive vice president of the Florida Tomato Exchange, which has led the push to rescind the agreement. The state is the country’s largest producer of fresh market tomatoes, followed by California.

In the meantime, Bruno Ferrari, the economy minister of Mexico, said the value of Mexico’s tomato exports to the United States had more than tripled to $1.8 billion since the agreement was signed, and the tomato industry there supports 350,000 jobs. Producers of other commodities and big retailers still have stark memories of the high tariffs Mexico slapped on United States producers of potatoes, pork and toilet paper — $2.4 billion worth of goods — during a trade fight over trucking that began in 2009 and ended last year.

In the first year of the trucking fight, potato exports to Mexico fell more than 35 percent and growers lost $64 million in revenue as Mexicans shifted buying to Canada, Mr. Keeling said.

An analysis by an economist at Iowa State suggests that pork producers, who also lost money during the trucking trade fight, would lose about $14 an animal if Mexico imposed similar tariffs on pork now, said Nick Giordano, vice president at the National Pork Producers Council.

“We’re already having one of the worst financial periods ever because of high grain prices, and if we were to lose a major market like Mexico, it would be like Armageddon,” Mr. Giordano said.

Mr. Ferrari said Mexico was prepared to take all retaliatory measures available under the law. He warned that a final ruling against Mexico could also jeopardize talks over other trade disputes between the two countries.

The Mexicans say they fear that ending the agreement will clear the way for American growers to file formal complaints accusing the Mexicans of unfair trade practices, which they did repeatedly before the agreement.

Thursday’s announcement came as Mexican tomato producers prepared to meet with officials at the Commerce Department on Friday to propose new terms to sweeten the agreement. The growers have said they are willing to accept a higher floor price for their tomatoes, expand the number of growers in the agreement and establish new measures to enforce the deal.

“We’re disappointed. We’re confused. We’re frustrated. We’re angry,” said Martin Ley, vice president of Del Campo Supreme, a family business that exported $60 million in tomatoes to the United States and Canada last year. “We don’t understand where this is going and where this is coming from.”

Robert S. LaRussa, a lawyer who represents Mr. Ley and other growers from Sinaloa, the largest exporting state, said it was an “insult” for the Commerce Department to make its announcement a day before their meeting. He noted that more than 300 letters had been filed in favor of maintaining the agreement.

“They need to take into account much more than the interests of five or six families in Florida,” Mr. LaRussa said.

The Mexicans argue that they are under attack for producing a better product. They say they have invested heavily in new types of tomatoes, in greenhouses and in sophisticated agricultural techniques to improve productivity and quality.

The Mexicans say Florida tomatoes are picked green and then gassed with ethylene to turn them red, but tomatoes grown in Sinaloa ripen on the vine, which accounts for the explosion in vine-ripened tomatoes sold in American grocery stores.

The risk of hurricanes in Florida makes it harder for growers there to set up greenhouse cultivation, though growers elsewhere do not have that concern.

Mr. Brown, of the Florida Tomato Exchange, said he could not envision anything that the Mexicans could offer that would make the agreement palatable to the American growers.

The Commerce Department will have 40 days after Thursday’s announcement is printed in the Federal Register, probably sometime next week, to make a final decision. The Mexicans — and many others — speculated that Florida’s role in the coming elections may have had something to do with the timing.

“This is a debate being fought out in the context of this presidential election, and Florida is one of those swing states,” said Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics and a former deputy assistant secretary for international trade and investment policy at the Treasury Department. “But we also have a lot of fish to fry with Mexico, a lot of reasons to maintain better relations there.”

The 1996 agreement suspended an investigation that began as a result of a dumping complaint filed by tomato growers in the United States against their Mexican counterparts in 1996, after the North American Free Trade Agreement eliminated tariffs on Mexican tomatoes. The complaint accused the Mexican growers of selling tomatoes at an unfair price. Antidumping regulations forbid an exporter to sell products abroad at so low a price that the producer loses money while the goods flood another country’s market.

The Commerce Department will decide whether to lift the suspension permanently, ending the investigation and the agreement.

The agreement, which has been amended since it was struck, sets the floor price for Mexican tomatoes at 17 cents a pound in the summer and 21.6 cents in the winter. American growers say they cannot compete at that price.

Mr. Hufbauer said American companies typically sought to end such agreements because they planned to file new dumping charges, hoping for better terms.

“The only strategy we have right now is to get out of a deal that is the only trade agreement I know of in history where the restricted party is more concerned with it staying in place than the domestic industry,” Mr. Brown said.

    Ammunition for a Trade War Between U.S. and Mexico, NYT, 27.9.2012,
    http://www.nytimes.com/2012/09/28/business/global/
    tomatoes-are-ammunition-for-a-trade-war-between-us-and-mexico.html

United States Economy Still Weak, but More Feel Secure

September 27, 2012
The New York Times
By ANNIE LOWREY

Both economists and the Romney campaign are puzzling over the same paradox: The recovery has flagged and yet the country’s mood appears to be improving.

Despite months of disappointing-to-dismal economic reports — capped by a Commerce Department release Thursday showing the economy had expanded at an annual pace of just 1.3 percent in the second quarter, barely above stall speed — a closely watched measure of consumer confidence surged to its highest level since February.

Economic experts pointed to several trends to explain how Americans were feeling better about the economy even though growth in jobs and the overall economy had weakened. First, the election is having a strong effect on economic perceptions. Second, though the recovery is weak, it has persisted, with employment and wages rising and some households feeling more secure.

Though the unemployment rate has been stuck between 8.1 and 8.3 percent all year, employers have continued to add workers to their payrolls. Wages and consumer spending have strengthened.

The housing sector’s nascent recovery foretells rising employment in the construction, real estate and mortgage finance sectors, as well as rising household wealth.

“There is a recovery. There are jobs. There is more income. There is some improvement,” said Lawrence Mishel, a labor market expert at and president of the liberal Economic Policy Institute. “But the improvement is obviously disappointing,” he added, a sentiment that many economists echoed.

Moreover, Labor Department data released on Thursday suggested that job growth in the 12 months through March 2012 might have been significantly stronger than government economists first expected.

In a standard revision of its jobs numbers, the department said that the economy added nearly 400,000 more jobs during that period than originally thought.

“The pattern of revisions suggest that the recession that began at the end of 2007 was deeper than initially reported, and the jobs recovery over the last 2.5 years has been a bit stronger than initially reported, although much work remains to be done to return to full employment,” Alan B. Krueger, the head of the White House’s Council of Economic Advisers said in a statement.

In the first quarter of the year, the economy added, on average, 134,000 jobs a month. Over the last three months, the rate of job growth has fallen to 79,000 a month. Similarly, economic growth was 2 percent in the first quarter before dropping to 1.3 percent in the second, largely because of the effects of the nation’s worst drought in 50 years.

According to Macroeconomic Advisers, a widely respected forecasting firm, growth is tracking at 1.7 percent for the third quarter. Moreover, rising gas and food prices have cut into workers’ wallets.

The economic data has grown so dismal that Federal Reserve this month announced a major new bond-buying effort to resuscitate the recovery once more. “The Federal Reserve is basically saying that we don’t have a recovery,” said Representative Paul D. Ryan of Wisconsin, Mitt Romney’s running mate. “Obamanomics didn’t work.”

Earlier this year, the conventional wisdom held that numbers like these should have meant trouble for the Obama campaign. Yet, even as job growth has fallen far below 100,000 a month, the American people appear to be growing more confident in both the economy and the president.

On Tuesday, the Conference Board’s measure of consumer confidence surged to a seven-month high, trouncing economists’ expectations. Respondents in particular had a more favorable view of the job market going forward — with more consumers expecting employers to add positions in the coming months.

The recovery seems to have jelled with voters, too. A recent New York Times/CBS News poll found that 40 percent of respondents think the country is on the right track, up from 23 percent a year ago. Moreover, 31 percent of respondents described the economy as very or fairly good, up from 14 percent a year ago.

Just as opinions about the economy have driven opinions about the campaign, it seems that opinions about the campaign are driving opinions about the economy.

Democrats have become much more optimistic, pulling the national numbers up with them. A new Pew poll, for instance, shows that just 15 percent of Democrats say that recent economic news is mostly bad, while 60 percent of Republicans say the same. A year ago, they held similar opinions.

“Right now, politics is playing an inordinately large role in the behavioral economic data,” wrote Lydia Saad and Dennis Jacobe, of Gallup, in an analysis of the surge in consumer confidence. “This suggests that the period between now and the election is a particularly hazardous time to apply traditional behavioral economic and political interpretations to key economic measures.”

Economists and political experts described the recovery as a “Rorschach test,” with both sides’ arguments compelling to voters.

“It’s a challenging messaging environment,” said Lynn Vavreck, a political scientist at the University of California, Los Angeles. “President Obama is in this strange situation of wanting to go out there and own this growth when people are saying, ‘That’s nothing to be proud of!’ ”

“If it were just the economy, the president would be in a lot of trouble based on how voters have reacted to numbers like the ones we’re seeing now,” said Nigel Gault, the chief United States economist at IHS Global Insight, an economic forecasting firm.

Mr. Gault said he believed that Mr. Obama’s significantly higher likability and favorability numbers — and the Romney campaign’s recent decision to talk about other things besides the economy — helped to explain Mr. Obama’s lead in the polls.

Professor Vavreck, though, said that the fact that the economy was growing gave Mr. Obama a powerful leg up, even given voters’ queasiness about the economy.

“Incumbents in growing economies, even slow ones, are hard to beat,” she said.

Others noted that the time for Mr. Romney to make his case and have it sink in had grown short.

“The economy’s not going to change much between now and the election,” said Mr. Gault of IHS Global Insight. “The economy is what it is. And if the economy hasn’t tilted the race in favor of Romney by now, you wonder whether it ever will.”

    United States Economy Still Weak, but More Feel Secure, NYT, 27.9.2012,
    http://www.nytimes.com/2012/09/28/business/economy/economy-still-weak-but-more-feel-secure.html

Good News and Bad in New Data on Economy

September 27, 2012
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — New economic data painted a mixed picture on Thursday of the nation’s economy.

Demand for long-lasting manufactured goods fell, and slightly fewer people signed contracts to buy homes. The job market looked only a little better.

Taken together, the reports suggested the economy was growing only modestly and not quickly enough to spur hiring.

“The economy over all has only weak forward momentum,” Nigel Gault, the chief United States economist at IHS Global Insight, said in a note to clients. “The news from housing may be improving, but manufacturing is struggling now.”

Most of the data seemed discouraging on the surface, but a closer inspection of the details offered some promise.

Companies cut orders for long-lasting goods by 13.2 percent in August, the Commerce Department said. That was the biggest drop in more than three years, but it was largely influenced by a large decline in aircraft orders. Excluding transportation equipment, orders fell only 1.6 percent. And in a positive sign, orders that reflect business investment plans rose 1.1 percent, the first increase since May.

The overall economy grew at a 1.3 percent annual rate in the April-June quarter, much lower than the 1.7 percent the government had estimated. About half of the downward revision stemmed from the severe drought in the Midwest, which cut overall farm output. But growth also fell because exports and consumer spending expanded at a slower pace.

The number of Americans who signed contracts to buy previously occupied homes fell in August from a two-year high in July. The National Association of Realtors said its index of sales agreements declined 2.6 percent, to 99.2. That was just below the reading of 100 that is considered healthy. Still, the index was 10.7 percent higher than a year ago.

Economists expected growth to hover near or below 2 percent for the rest of the year. Typically, that is too weak to create enough jobs to lower the jobless rate.

One report appeared to offer some hope that the job market will improve. Weekly applications for unemployment benefits fell 26,000 to a seasonally adjusted 359,000, the lowest level in two months, the Labor Department said. The four-week average, a less volatile measure, fell to 374,000.

Applications are a measure of the rate of layoffs. When they consistently fall below 375,000, it typically indicates that hiring is strong enough to lower the unemployment rate.

The last few reports on applications for unemployment benefits “suggest no significant acceleration or deceleration in employment growth,” said Jim O’Sullivan, an economist at High Frequency Economics.

    Good News and Bad in New Data on Economy, NYT, 27.9.2012,
    http://www.nytimes.com/2012/09/28/business/economy/manufacturing-and-housing-dip-but-job-market-bumps-up.html

Romney and the Forbes 400

September 24, 2012
The New York Times
By JOE NOCERA

Last week, sandwiched between Monday’s leak of the video in which Mitt Romney dismissed “the 47 percent” and Friday’s release of the Romneys’ 2011 tax returns — showing that they had paid an effective tax rate of 14 percent — Forbes magazine published its annual list of the 400 wealthiest Americans.

There weren’t a lot of surprises on the Forbes 400. Bill Gates, with an estimated net worth of $66 billion, remains the wealthiest man in the country. He is a whopping $20 billion richer than his pal Warren Buffett, who came in at No. 2, according to Forbes. All the usual suspects were there: Michael Bloomberg; George Soros; the Koch brothers; various descendants of Sam Walton, the founder of Walmart; and on and on.

What was illuminating was not so much who was on the list but what they collectively told us about the state of the richest of the rich. Thirty years ago, when Forbes published its first Forbes 400, a net worth of $75 million would get you on the list. Today it takes $1.1 billion. In the last year alone, the cumulative net worth of the wealthiest 400 people, by Forbes’s calculation, rose by $200 billion. That compares with a 4 percent drop in median household income last year, according to the Census Bureau. One would be hard pressed to find a clearer example of how powerfully income inequality has taken root.

Like Romney, Forbes magazine is a little defensive about this — and, like Romney, Forbes has adopted a self-justifying narrative. Luisa Kroll, one of the magazine’s “wealth editors,” nods toward “concerns” about income inequality in her introduction to the list, but she goes on to write that “a deeper analysis instills confidence that the American dream is still very much alive.” In fact, it does nothing of the sort.

The fundamental reason the Romneys pay so little in taxes is that the bulk of their income comes from investments and thus is taxed at the capital gains rate of 15 percent. Although Romney himself isn’t close to being rich enough to join the Forbes 400, his reliance on capital gains is a trait he shares with most of the ultrawealthy. It is the thread that ties together the Forbes 400.

Financiers, who make up a large percentage of the Forbes 400, long ago found ways to convert their compensation to capital gains, for instance. Romney, of course, did the same thing when he was running Bain Capital, a private equity firm. But even those who are not on Wall Street rely on capital gains. A large number of the Forbes 400 — “roughly 40 percent,” according to a group called United for a Fair Economy — inherited their wealth. Many others on the list — people who started companies that they’ve since left — are classified by Forbes as investors.

Even many of the corporate executives on the Forbes 400 are likely paying a lower tax rate. Many of them get minimal cash compensation and rely on stock options for the bulk of their wealth. Or they maneuver to take their companies through a leveraged buyout, which reaps them huge potential capital gains. In 2009, according to recent Congressional testimony by Leonard E. Burman, a professor at Syracuse University, the 400 highest-income taxpayers reaped an astounding 16 percent of all capital gains.

All of which would be justifiable if the country got some benefit in return. On “60 Minutes” Sunday night, when Romney was asked about the justification for his low tax rate, he said what most conservatives say, that a low capital gains rate is “the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.”

This is also what Forbes means when it links its list to “the American dream.” Except that there is no evidence that it’s true. In 1986, when Ronald Reagan was president, the differential between capital gains and ordinary income was eliminated — and the economy soared. The capital gains rate was higher during the Bill Clinton years than in the George W. Bush years, yet the economy did better under Clinton than under Bush.

In the printed copy of his Congressional testimony, Burman has a chart that plots the ups and downs of the economy since the 1950s with changes in the capital gains rate. There is no correlation between the two. The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.

The American dream exists not because of the capital gains differential but in spite of it. It is the tax break that most glaringly exists to benefit the wealthy. If you have any doubts about that, all you need to do is read the latest Forbes 400.

    Romney and the Forbes 400, NYT, 24.9.2012,
    http://www.nytimes.com/2012/09/25/opinion/nocera-romney-and-the-forbes-400.html

Chicago’s Next School Crisis: Pension Fund Is Running Dry

September 19, 2012
The New York Times
By MARY WILLIAMS WALSH

One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

“There’s a huge crisis,” said Laurence Msall, president of the Civic Federation, a nonpartisan research organization in Chicago that works on fiscal issues. “The problem does not get easier by waiting. The problem gets bigger, and starts to become an insurmountable obstacle.”

Having skipped its pension contributions for many years, Chicago is supposed to start tripling them in another year under state law. But the school district has drained its reserves. And it cannot easily turn to the local taxpayers, because of a cap on property taxes. Borrowing the money would be difficult and expensive as well, because of a credit downgrade this summer. One of the few remaining choices would be to make deep cuts in other services.

Like Chicago, many cities and school districts now face pension pressure after reducing their contributions in recent years to save money. Among the funds for different types of workers, teachers’ plans tend to be shortchanged more often, according to research done by the Center for Retirement Research at Boston College for The New York Times.

The reasons are unclear, but in many states — California, New Jersey, Rhode Island and Illinois, among others — pension contributions must be set by state legislators every year. And since teachers’ pension costs are blended with other education spending, lawmakers sometimes decide to withhold money from pensions to allow more direct state spending on the schools. The teachers’ pension fund for the State of Illinois is in even worse shape than the Chicago teachers’ fund.

What many Chicago residents may not realize is that their school district also has been paying $130 million a year to cover most of the pension contributions required of the teachers, a practice known as a “pickup,” which became a flash point last year in the collective bargaining battle in Wisconsin. Wisconsin’s public workers have agreed to make their own contributions, as a concession.

Officials in Chicago know they have a pension problem, even though it has not been front and center in the strike. Mayor Rahm Emanuel has focused on trying to improve the quality of public education, with a longer school day and more meaningful teacher evaluations. The Chicago Teachers’ Union, meanwhile, has been intent on reinstating a 4 percent pay increase, and protecting those who are laid off when failing schools are closed.

Mr. Emanuel has made it clear that he wants to address teachers’ pensions, too. Earlier this year, he tried to curb at least some of Chicago’s ballooning costs by seeking to raise retirement ages, increase employee contributions and trim the 3 percent yearly pension increases that the city’s retirees now receive. He called those increases “the single greatest threat to the retirement security of city employees,” because they drain money from pension funds very quickly.

The State Legislature, which must approve such changes, has said pensions must wait until next year. But Mr. Emanuel says the system is broken and he is not willing to make any increased contributions until it has been fixed. The mayor said earlier this year that making the larger contributions would lead to “direct cuts in our classrooms.”

“Those cuts mean the average class size will jump to approximately 55 students,” he warned.

The teachers union has blasted Chicago for failing to set aside enough money for the pensions, but it has reassured workers and retirees that their benefits are protected by the State Constitution and cannot be reduced. A state law bars strikes in Chicago over pension issues.

Retirees say they are dismayed at the way their fund has been neglected, though they generally believe their benefits are safe.

“In the State Constitution of Illinois, it says that once you receive a pension, it can never be changed to be lower,” said Claire J. Murray, 69, who retired in 2002 with a pension of about $42,000 a year, based on 34 years as a teacher and middle-school counselor.

If the money in the fund ever ran out, “the State of Illinois would have to pay our pensions,” she said. “We’re not just a pension fund, we’re part of the State Constitution.”

Ms. Murray pointed out that teachers in Chicago, as in many cities, do not earn Social Security credit for their years in the classroom. Their pension plan is intended to replace the federal benefit.

She also said it would be unfair to penalize retired teachers for the school district’s failure to set aside enough money for their benefits.

“It’s the Board of Education who kept on taking all these funding holidays,” she said.

Indeed, the State Legislature granted the Chicago school district a break from its pension contributions, starting in 1995. Since then, the city has never contributed the required amount; for many years it put in nothing. All the while, the teachers kept building up their benefits.

Pension fund documents say the teachers continuously made their share of the contributions, 9 percent of each paycheck. But in fact, the teachers have been putting in just 2 percent of their pay, while the school district has been making up the rest of what is called the “employee contribution” every year. The practice began under an agreement reached in the early 1980s that was supposed to reduce future pay raises, keep money in the fund and take advantage of a federal tax break.

Such pickups were not widely known until Gov. Scott Walker of Wisconsin began his push to make public employees pay more for their benefits and to bar them from bargaining for anything besides base pay. Wisconsin law calls for public workers and their employers to split the cost of pension contributions, but in practice, state and local governments were picking up almost all of the employees’ share. Local and state workers have contended that they sacrificed current pay increases and the pickup should not be considered a giveaway.

Chicago does not have the state’s only pickup. While Illinois says that teachers outside Chicago send in 9.4 percent of every paycheck for the separate state fund, the state really pays most of that too.

Gov. Pat Quinn of Illinois and Mr. Emanuel have both called for public workers to increase the amounts they pay toward their pensions. Forcing the Chicago teachers to make their full contributions, of course, would erode much of the salary increases they fought for during the strike.

    Chicago’s Next School Crisis: Pension Fund Is Running Dry, NYT, 19.9.2012,
    http://www.nytimes.com/2012/09/20/business/teachers-pension-a-big-issue-for-chicago.html

Cleaning Up the Economy

September 6, 2012
The New York Times
By PAUL KRUGMAN

Bill Clinton’s speech at the Democratic National Convention was a remarkable combination of pretty serious wonkishness — has there ever been a convention speech with that much policy detail? — and memorable zingers. Perhaps the best of those zingers was his sarcastic summary of the Republican case for denying President Obama re-election: “We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in.”

Great line. But is the mess really getting cleaned up?

The answer, I would argue, is yes. The next four years are likely to be much better than the last four years — unless misguided policies create another mess.

In saying this, I’m not making excuses for the past. Job growth has been much slower and unemployment much higher than it should have been, even given the mess Mr. Obama inherited. More on that later. But, first, let’s look at what has been accomplished.

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble.

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal.

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish.

Now, you may have noticed that in telling this story about a disappointing recovery I didn’t mention any of the things that Republicans talked about last week in Tampa, Fla. — the effects of high taxes and regulation, the lack of confidence supposedly created by Mr. Obama’s failure to lavish enough praise on “job creators” (what I call the “Ma, he’s looking at me funny!” theory of our economic problems). Why the omission? Because there’s not a shred of evidence for the G.O.P. theory of what ails our economy, while there’s a lot of hard evidence for the view that a lack of demand, largely because of excessive household debt, is the real problem.

And here’s the good news: The forces that have been holding the economy back seem likely to fade away in the years ahead. Housing starts have been at extremely low levels for years, so the overhang of excess construction from the bubble years is long past — and it looks as if a housing recovery has already begun. Household debt is still high by historical standards, but the ratio of debt to G.D.P. is way down from its peak, setting the stage for stronger consumer demand looking forward.

And what about business investment? It has actually been recovering rapidly since late 2009, and there’s every reason to expect it to keep rising as businesses see rising demand for their products.

So, as I said, the odds are that barring major mistakes, the next four years will be much better than the past four years.

Does this mean that U.S. economic policy has done a good job? Not at all.

Bill Clinton said of the problems Mr. Obama confronted on taking office, “No one could have fully repaired all the damage that he found in just four years.” If, by that, he meant the overhang of debt, that’s very much the case. But we should have had strong policies to mitigate the pain while households worked down their debt, as well as policies to help reduce the debt — above all, relief for underwater homeowners.

The policies we actually got were far from adequate. Debt relief, in particular, has been a bust — and you can argue that this was, in large part, because the Obama administration never took it seriously.

But, that said, Mr. Obama did push through policies — the auto bailout and the Recovery Act — that made the slump a lot less awful than it might have been. And despite Mitt Romney’s attempt to rewrite history on the bailout, the fact is that Republicans bitterly opposed both measures, as well as everything else the president has proposed.

So Bill Clinton basically had it right: For all the pain America has suffered on his watch, Mr. Obama can fairly claim to have helped the country get through a very bad patch, from which it is starting to emerge.

    Cleaning Up the Economy, NYT, 6.9.2012,
    http://www.nytimes.com/2012/09/07/opinion/krugman-cleaning-up-the-economy.html

The Better Economic Question

September 5, 2012
The New York Times

Democrats have been nervous about the inevitable election-year question, “Are you better off than you were four years ago?” Gov. Martin O’Malley of Maryland even stumbled over it a few days ago, saying “no,” before quickly blaming President George W. Bush.

There is really no reason for any hesitancy. The country is unquestionably better off than it was in 2008. The economy has added 4.5 million private-sector jobs since January 2010; even if you subtract the vast job losses in the early months of President Obama’s term, before his policies went into effect, the country is still ahead by 332,000 private-sector jobs.

That level of job growth is close to the recovery following the 1990s recession, and it is actually stronger than after the early-2000s recession. But it doesn’t feel strong because the original hole was so deep and so many people are still suffering: 12.8 million remain unemployed.

The contradiction between the plain facts of the data and the tepid feel of the recovery suggests that the recession created a more important question than the simplistic “are you better off?” Voters should ask themselves — and their leaders — how to keep this and future generations better off. How to prevent future recessions. How to design a tax code that promotes fairness and reduces inequality. How to make sure a safety net is in place for those who inevitably need more help.

And when the question is phrased like that — looking forward rather than backward — it becomes obvious that the Republicans’ answer is inadequate.

“When we vote in this election, we’ll be deciding what kind of country we want to live in,” former President Bill Clinton told the convention Wednesday night. “If you want a winner-take-all, you’re-on-your-own society, you should support the Republican ticket.”

The damage Mr. Obama faced when he took office was far greater than any president, current or past, could repair in four years, Mr. Clinton said, yet Mitt Romney wants to return to the policies that caused it. “They want to cut taxes for high-income Americans, even more than President Bush did,” he said.“They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts.”

At every step, when Mr. Obama and Democrats have proposed measures to reduce the risk of the kind of recession still haunting the economy, Republicans have opposed them. Mitt Romney regularly sneers at the most fundamental protections against Wall Street excesses and promises to repeal them.

House Republicans, including Representative Paul Ryan, have passed budgets that gutted the Commodity Futures Trading Commission, hoping to prevent it from regulating toxic derivatives that undermined the economy in 2008. They have voted to withhold money needed by the Securities and Exchange Commission to enforce the Dodd-Frank financial reform bill.

They have sent a clear signal to the corporate executives spending hundreds of millions to elect Mr. Romney that they need not worry about restrictions on their behavior, no matter how destructive to the economy or the lives of millions still struggling to get back on their feet.

As Elizabeth Warren, the Democratic candidate for the United States Senate in Massachusetts, told the convention: “Mitt Romney wants to give billions in breaks to big corporations, but he and Paul Ryan would pulverize financial reform, voucherize Medicare and vaporize Obamacare.”

Mr. Obama could have demanded even stronger regulation of the banks, but he at least clearly supports the need for government to step in when the financial industry threatens the rest of the economy.

Voters should remember the days when the country was hemorrhaging jobs by the millions, but it is far more important to make certain they never have to remember another financial crisis.

    The Better Economic Question, NYT, 5.9.2012,
    http://www.nytimes.com/2012/09/06/opinion/the-better-economic-question.html

Mr. Bernanke’s Next Task

September 3, 2012
The New York Times

It will be another week — at a meeting of the Federal Reserve policy-making committee on Sept. 12 and 13 — before anyone knows for sure what Ben Bernanke thinks the Fed should do, if anything, to stimulate the weak economy. What is known is that, without more help, the economy is likely to remain weak, or grow weaker, through the rest of this year.

In his speech on Friday at the annual meeting on monetary policy in Jackson Hole, Wyo., Mr. Bernanke said that past Fed interventions had been a plus for the economy, raising growth enough to add an estimated two million jobs, but that economic conditions are still “obviously far from satisfactory.” Then he said that more help would be forthcoming “as needed.”

But, by his own analysis, help is needed now.

Mr. Bernanke said that national unemployment, at 8.3 percent, is unacceptably high and that much faster growth will be needed to bring that number down. But the economy, instead of accelerating, has slowed, from 4.1 percent in the last quarter of 2011, to 2 percent in the first quarter of 2012 and to 1.7 percent in the second quarter.

Mr. Bernanke also stressed that persistently high unemployment risks bringing on irreversible economic damage as the long-term unemployed become the permanently unemployable. Even as overall unemployment has declined from a peak of 10 percent in October 2009, the share of jobless workers out of work for more than six months has remained stubbornly high.

According to Mr. Bernanke, the economy is being held back by a sluggish housing market; counterproductive fiscal policy, as both the federal government and the states cut spending in the face of weak growth; and the euro crisis, which hurts the United States because of trade and financial links to Europe.

All this is true and reflected in slumping consumer confidence, heightened business uncertainty and a recent slowdown in manufacturing. Unfortunately, meaningful progress on housing and fiscal policy requires Congress to act. Congressional Republicans, however, have long resisted efforts to revive growth on the theory that a weak economy will help them regain the White House. As for the euro crisis, there is nothing much that American policy makers can do.

That leaves the Fed the only entity with the autonomy and the power to take action. Admittedly, its tools — various ways to reduce borrowing costs and spur lending — are not ideal for the problems that Mr. Bernanke has identified. It would be better, for example, for lawmakers to bolster federal spending in the near term to create jobs than for the Fed to indirectly attempt to boost activity through more lending. It would also be better for Congress to provide more debt relief for underwater homeowners, as the Fed keeps mortgage rates low for new buyers.

But that is too logical for these times. Mr. Bernanke has laid out the problem, including the economic drag caused by political dysfunction. But he has also risked becoming part of the dysfunctional dynamic, exhorting and waiting for others to act when they are clearly unable or unwilling to do so.

Here’s hoping that will change at the Fed meeting next week. And here’s hoping that any help is not too little, too late.

    Mr. Bernanke’s Next Task, NYT, 3.9.2012,
    http://www.nytimes.com/2012/09/04/opinion/ben-bernankes-next-task.html

Democrats Say U.S. Is Better Off Than Four Years Ago

September 3, 2012
The New York Times
By JIM RUTENBERG

CHARLOTTE, N.C. — A day after fumbling a predictable and straightforward question posed by Mitt Romney last week — are Americans better off than they were four years ago — the Obama campaign provided a response on Monday that it said would be hammered home during the Democratic convention here this week: “Absolutely.”

The focus on the campaign’s handling of the question, after halting and contradictory responses from Democrats on Sunday, complicated the White House’s effort to begin striking a set of themes the president intends to highlight here and carry through the general election.

That effort starts with an argument that Mr. Romney, the Republican nominee, would raise taxes on the middle class while cutting them for the wealthy. It seeks to pitch forward to the next four years the case that Mr. Obama and his allies have made over the spring and summer — that Mr. Romney’s business career showed him intent on profit even at the expense of workers and that his wealth has given him tax advantages not enjoyed by regular people.

“The problem is everybody’s already seen his economic playbook,” Mr. Obama said at a campaign stop in Ohio before a Labor Day audience largely consisting of United Auto Workers union members. “On first down he hikes taxes by nearly $2,000 on the average family with kids in order to pay for a massive tax cut for multimillionaires.”

The Obama campaign began running a new commercial making the same point, and asserting, “The middle class is carrying a heavy load in America, but Romney doesn’t see it.”

As delegates streamed in for the opening of the convention on Tuesday, Mr. Obama and his team were putting the finishing touches on a program that requires a different kind of political daring from the one they showed four years ago, when Mr. Obama gave his speech in a stadium on a stage compared by some to a Greek temple.

This week Mr. Obama is planning to undertake a tricky two-step of convincing wavering supporters being aggressively courted by Mr. Romney that they made the right decision in choosing him four years ago and that he has the country on its way to a sustainable recovery even if they do not always feel it. He will make the argument in an outdoor stadium again, on Thursday night under the threat of rain, but aides say there will be no Greek columns.

Obama campaign aides indicated they were moving into a new phase, applying their case that Mr. Romney has no history of looking out for the middle class to the question of what the next four years would look like under a Romney presidency.

But Republicans showed that they were not going to give Mr. Obama a free ride this week, with Mr. Romney’s running mate, Representative Paul D. Ryan, coming to North Carolina to keep the focus on the last four years.

“The president can say a lot of things, and he will, but he can’t tell you that you’re better off,” Mr. Ryan said on Monday at a rally in Greenville, N.C. “Simply put, the Jimmy Carter years look like the good old days compared to where we are right now.”

Mr. Obama’s aides initially appeared to stumble when television interviewers asked them to respond to Mr. Romney’s charge in his nomination acceptance speech Thursday night that Americans were not better off under Mr. Obama.

On Fox News Channel, Mr. Obama’s top strategist, David Axelrod, said, “We’re in a better position than we were four years ago in our economy.” But Gov. Martin O’Malley of Maryland, a Democrat, answered “no” on CBS’s “Face the Nation,” though he blamed Republicans. Other aides equivocated.

Mr. O’Malley provided another answer on Monday on CNN: “We are clearly better off as a country because we’re creating jobs rather than losing them. We have not recovered all that we lost in the Bush recession. That’s why we need to continue to move forward.”

In fact, on Monday the campaign settled on a definitive answer of, as the deputy campaign manager Stephanie Cutter put it, “Absolutely.”

Followed down a hallway by a local news crew asking the “better off” question in the convention center here, Ms. Cutter described the economic scene four years ago — the auto companies teetering near bankruptcy, bank failures — and said, “Does anyone want to go back to 2008? I don’t think so.”

Speaking in Detroit on Monday, Vice President Joseph R. Biden Jr. said during a union rally, “You want to know whether we’re better off?” He answered: “I’ve got a little bumper sticker for you: Osama bin Laden is dead and General Motors is alive.”

Aides said that over the next three days they would show video testimonials of people who have been helped by Mr. Obama’s policies, hammering home the success of his auto bailout and the benefits of his health care overhaul.

“We’re not running from our record, which we’re proud of,” Mr. Axelrod said in an interview.

But, he added, “We’re also going to burnish the choice — it’s fair to say there will be more discussion of their ideas at our convention than there was at theirs.”

While Democrats pointed to polls showing that Mr. Romney appeared to get little polling “bounce” out of his convention, some Democratic strategists here conceded that Republicans had succeeded in muddying the waters on a traditional Democratic strong point, Medicare.

Mr. Romney and Mr. Ryan support a plan that would change the program into one in which beneficiaries would get a fixed amount of money from the government each year to use to purchase private health insurance or traditional Medicare, a shift that Democrats say would leave the elderly vulnerable to rising health care costs. Many Democrats had assumed the issue would be a major political help to them, but some Democratic strategists said Republican claims that Mr. Obama had cut $716 billion from the program had at least partly neutralized the Democratic advantage and constrained their ability to emphasize Medicare in their campaign message.

In a brief interview, the minority leader in the House, Representative Nancy Pelosi of California, seemed to acknowledge as much when she said of Republicans, “Confusion is the name of their game,” though she added that the Democrats could regain the advantage. “We don’t agonize over that, so we’re organized to make sure the truth is known by the public.”

Democrats here expressed relief that Mr. Obama took some potentially contentious issues out of the intraparty debate here — supporting gay marriage, ending the military policy known as “don’t ask, don’t tell,” and easing the threat of deportation for many young immigrants in the country illegally — and those were expected to be highlighted here, as well.

Produced by the same team that put on Mr. Obama’s last convention — the strategists Jim Margolis and Erik Smith — the program this week will include a video version of Mr. Obama’s logo, now overlaid with silhouettes of people, which loomed over the empty Time Warner Cable Arena on Monday. The theme emblazoned on the hall is “Americans Coming Together.”

In a nod to austerity, there will be no band, but, rather, a DJ — more specifically, Deejay Cassidy, a favorite of the Obamas.

Where the main priority for Mr. Obama’s team four years ago was to prove he could be president, this year it is to show that he is connected to the middle class.

So, organizers said, the stages in the arena and the Bank of America Stadium, where Mr. Obama speaks Thursday night, will be smaller and “intimate,” allowing speakers “to be surrounded by delegates,” Theo LeCompte, the chief operations officer of the convention, said in a statement.

But this convention will be less about stagecraft than about the argument Mr. Obama will make to woo back straying supporters and recast his presidency in a light of accomplishment amid often gloomy monthly job reports. The next report is to come out Friday, less than 10 hours after Mr. Obama finishes speaking.

Jackie Calmes contributed reporting.

    Democrats Say U.S. Is Better Off Than Four Years Ago, NYT, 3.9.2012,
    http://www.nytimes.com/2012/09/04/us/politics/democrats-say-us-is-better-off-than-4-years-ago.html

Stuck in Place

August 3, 2012
The New York Times

With 163,000 new jobs created, July’s employment growth topped both analysts’ expectations and the meager job gains in May and June. While that growth was not enough to reduce the jobless rate — now 8.3 percent — it was enough to boost the stock market. For investors, the job tally was just high enough to be a pleasant surprise and low enough to give them hope that the Federal Reserve would soon intervene to juice the economy.

The market’s reaction aside, the report actually shows how bad things are and highlights what needs to be done to improve conditions.

July’s job-growth figure brings the monthly average tally for 2012 to 151,000, compared with a monthly average in 2011 of 153,000. At that tepid pace, it would take roughly 10 more years to regain the jobs that were lost — or never created — as a result of the Great Recession.

The month’s jobless rate brings the average for 2012 to 8.2 percent, compared with an average in 2011 of 9 percent, though most of the “improvement” is because of a shrinking labor force, not more hiring. The average hourly wage in 2012, adjusted for inflation through June, has been $23.39; the average in 2011 was $23.44.

The picture that emerges is of a job market that is stuck. Broader measures reinforce that conclusion: In the first half of this year, economic growth averaged 1.7 percent; in 2011, it was 1.8 percent. For all the up and down of monthly and quarterly economic data, the economy lacks forward momentum.

When consumption and investment are not powering the economy, the government sector has to fill the gap with stimulus to boost consumer demand. Much of the economy’s flat performance since 2011 reflects insufficient stimulus, reinforcing insufficient demand. That means sluggish job growth, lackluster pay and persistently weak demand. It’s not a downward spiral, but it is self-reinforcing stagnation.

Politics, however, has gotten in the way of even basic moves to push the economy upward.

Responding to the latest employment report, the White House noted correctly that major areas of job weakness — including positions in construction and teaching — are precisely those that would have been the subject of the jobs bill proposed in 2011 by President Obama. That legislation was blocked by Congressional Republicans.

Mitt Romney responded to the July report by saying that the numbers reflect the failure of Mr. Obama’s policies when, in reality, they reflect the success of the Republican obstructionism.

That leaves the Federal Reserve to try to boost the economy. But what’s needed is direct intervention in the form of more federal spending on education, infrastructure, clean energy, basic research and job training. Until then, we’re stuck.

    Stuck in Place, NYT, 3.8.2012,
    http://www.nytimes.com/2012/08/04/opinion/the-economy-is-stuck-in-place.html

A Budget Crisis Averted, for Now

August 1, 2012
The New York Times

Members of Congress used to be embarrassed when they could not perform their basic job of passing spending bills and instead had to finance the government with a series of short-term resolutions. But such patchwork has now become commonplace, and it is a sign of Washington’s profound dysfunction that the short-term agreement reached on Tuesday came as a relief to both sides.

House and Senate leaders settled on a deal to keep the government running through March, preventing it from shutting down when the fiscal year ends on Sept. 30. With Congress polarized and paralyzed by the coming election, no regular appropriations bills have been enacted, and none will be before the deadline.

The prospect of a shutdown was a real one because House Republicans broke an agreement that they had reached with the Senate last year on the size of the federal budget for the 2013 fiscal year. In settling the debt-ceiling crisis last year, the two chambers passed a measure setting discretionary spending at $1.047 trillion for 2013. But to make one of its periodic points about excessive spending, the House recklessly chopped $20 billion off that amount in March, much of which would have come out of Head Start, Pell grants and state aid.

At the time, many House conservatives said that they relished a confrontation with the Senate, hoping the threat of a shutdown would give them the cuts they wanted. After all, it worked the year before when Republicans cynically used the deadline to wring nearly $40 billion in cuts from the 2012 budget. The withdrawal of that much spending helped neutralize the stimulative effects of the previous year’s payroll tax cut, keeping the economy stagnant.

The difference this year is the November election. Wiser Republican leaders knew that a shutdown crisis in September would leave a bad taste with voters, many of whom (correctly) tend to blame these kinds of things on their party. So the lawmakers agreed on a continuing resolution that will keep the spending limit at $1.047 trillion — far lower than it should be when the economy needs a boost, but at least it’s not making things worse. The White House signed on, and the resolution is supposed to be passed after the August recess.

Both parties are hoping the outcome of the election will give them an advantage when the agreement has to be renegotiated next year. But stalemate is still the most likely outcome as long as voters keep electing Republican lawmakers who are unwilling to compromise on spending and taxes. Representative Steven LaTourette of Ohio, one of the few moderate Republicans left in the House, made that clear on Tuesday when he said he couldn’t take it anymore and would not seek re-election after nine terms.

“There are people on the right and the left who think that if you compromise you’re a coward, you’re a facilitator, you’re an appeaser,” he said, adding that “people are more interested in fighting with each other than they are in getting the no-brainers done and governing.”

That kind of common sense will be missed.

    A Budget Crisis Averted, for Now, NYT, 1.8.2012,
    http://www.nytimes.com/2012/08/02/opinion/after-budget-deal-no-government-shutdown-this-year.html

Corn for Food, Not Fuel

July 30, 2012
The New York Times
By COLIN A. CARTER and HENRY I. MILLER

IT is not often that a stroke of a pen can quickly undo the ravages of nature, but federal regulators now have an opportunity to do just that. Americans’ food budgets will be hit hard by the ongoing Midwestern drought, the worst since 1956. Food bills will rise and many farmers will go bust.

An act of God, right? Well, the drought itself may be, but a human remedy for some of the fallout is at hand — if only the federal authorities would act. By suspending renewable-fuel standards that were unwise from the start, the Environmental Protection Agency could divert vast amounts of corn from inefficient ethanol production back into the food chain, where market forces and common sense dictate it should go.

The drought has now parched about 60 percent of the contiguous 48 states. As a result, global food prices are rising steeply. Corn futures prices on the Chicago exchange have risen about 60 percent since mid-June, hitting record levels, and other grains such as wheat and soybeans are also sharply higher. Livestock and dairy product prices will inevitably follow.

More than one-third of our corn crop is used to feed livestock. Another 13 percent is exported, much of it to feed livestock as well. Another 40 percent is used to produce ethanol. The remainder goes toward food and beverage production.

Previous droughts in the Midwest (most recently in 1988) also resulted in higher food prices, but misguided energy policies are magnifying the effects of the current one. Federal renewable-fuel standards require the blending of 13.2 billion gallons of corn ethanol with gasoline this year. This will require 4.7 billion bushels of corn, 40 percent of this year’s crop.

Other countries seem to have a better grasp of market forces and common sense. Brazil, another large ethanol producer, uses sugar instead of corn to make ethanol. It has flexible policies that allow the market to determine whether sugar should be sold on the sugar market or be converted to fuel. Our government could learn from the Brazilian approach and direct the E.P.A. to waive a portion of the renewable-fuel standards, thereby directing corn back to the marketplace. Under the law, the E.P.A. would first have to determine that the program was causing economic harm. That’s a no-brainer, given the effects of sharply higher grain prices that are already rippling through the economy.

The price of corn is a critical variable in the world food equation, and food markets are on edge because American corn supplies are plummeting. The combination of the drought and American ethanol policy will lead in many parts of the world to widespread inflation, more hunger, less food security, slower economic growth and political instability, especially in poor countries.

If the E.P.A. were to waive the rules for this year and next, the ethanol industry and corn farmers, who have experienced a years-long windfall, would lose out. Wheat and soybean farmers would also lose, because the prices of those crops have also been driven up: corn competes with soybeans for acreage and is substituted for wheat in some feed rations.

Any defense of the ethanol policy rests on fallacies, primarily these: that ethanol produced from corn makes the United States less dependent on fossil fuels; that ethanol lowers the price of gasoline; that an increase in the percentage of ethanol blended into gasoline increases the overall supply of gasoline; and that ethanol is environmentally friendly and lowers global carbon dioxide emissions.

The ethanol lobby promotes these claims, and many politicians seem intoxicated by them. Corn is indeed a renewable resource, but it has a far lower yield relative to the energy used to produce it than either biodiesel (such as soybean oil) or ethanol from other plants. Ethanol yields about 30 percent less energy per gallon than gasoline, so mileage drops off significantly. Finally, adding ethanol actually raises the price of blended fuel because it is more expensive to transport and handle than gasoline.

As the summer drags on, the drought is only worsening. Last week the International Grains Council lowered its estimate of this year’s American corn harvest to 11.8 billion bushels from 13.8 billion. Reducing the renewable-fuel standard by a mere 20 percent — equivalent to about a billion bushels of corn — would offset nearly half of the expected crop loss due to the drought.

All it would take is the stroke of a pen — and, of course, the savvy and the will to do the right thing.

Colin A. Carter is a professor of agricultural and resource economics

at the University of California, Davis. Henry I. Miller, a physician,

is a fellow in scientific philosophy and public policy at the Hoover Institution.

    Corn for Food, Not Fuel, NYT, 30.7.2012,
    http://www.nytimes.com/2012/07/31/opinion/corn-for-food-not-fuel.html

Behind eBay’s Comeback

July 27, 2012
The New York Times
By JAMES B. STEWART

Remember Myspace, Friendster, eToys, Webvan, Urban Fetch, Pets.com? Like meteors, they burned with dazzling brilliance before turning shareholder dollars to ash. EBay, Yahoo and AOL, the dominant Internet triumvirate circa 2004, seemed destined for a similar fate. The conventional wisdom has been that once decline sets in at an Internet company, it’s irreversible.

But that was before eBay’s latest earnings surprise, which sent its stock soaring and had analysts scrambling to raise their projections. “Can Internet companies ever turn around? The answer has been no,” Ken Sena, Internet analyst at Evercore, told me this week. “But now, there’s eBay. The answer may turn out to be yes.”

If so, eBay’s success has big implications for struggling companies like Yahoo and AOL, not to mention more recent sensations that have already lost some luster, like Zynga, Groupon and even Facebook, whose shares tumbled this week after its first earnings report as a public company disappointed investors. “EBay has demonstrated that it’s possible to turn the corner even against long odds,” said David Spitz, president and chief operating officer of ChannelAdvisor, an e-commerce consulting company.

EBay shares hit a peak of over $58 in 2004 and made its chief executive, Meg Whitman, a Silicon Valley celebrity. But by November 2007, when she stepped down to enter politics, the telltale signs of decline had set in. Its stock was slumping. Its dominant online auction business had matured, and growth had slowed. Sellers complained about higher fees and poor support. That year, eBay wrote off $1.4 billion on its poorly conceived $2.5 billion acquisition of the calling service Skype, recording its first loss as a public company. Analysts worried that eBay had lost its quirky soul, and was abandoning the flea market auction model that had made it distinctive and dominant in online auctions. By early 2009, its stock was barely over $10, down over 80 percent from its peak.

Ms. Whitman was succeeded by a former Bain & Company managing director, John Donahoe. “One of the unique things about the Internet is a company can be a white-hot success and become a global brand and reach global scale in just a few years — that’s the good news,” he told me this week. “But then somebody can turn around and do it to you. There’s constant disruption. One of the first things I had to do here was face reality. EBay was getting disrupted.”

Little more than four years after taking charge, a buoyant Mr. Donahoe sounded like the chief executive of a surging start-up when he announced eBay’s latest results on July 18. So thoroughly has eBay been transformed that he didn’t even mention its traditional auction business. “Our multiyear effort is paying off,” he said. Profit more than doubled and revenue jumped 23 percent. “EBay is revitalized. We believe the best is yet to come.” In a stock market struggling with recession fears and the European debt crisis, eBay stock this week hit a six-year high.

How has eBay done it when so many others have failed?

Excitement about eBay’s prospects has little to do with its traditional auction business, or even its core e-commerce operations, although its marketplace division posted solid results and had its best quarter since 2006, the company said. Most of its growth came from mobile retailing and its PayPal online payments division, a business it acquired in 2002 for what now looks like a bargain $1.5 billion.

As consumers embrace shopping on their smartphones, “mobile continues to be a game-changer,” Mr. Donahoe said. He noted that 90 million users had downloaded eBay’s mobile app and that 600,000 customers made their first mobile purchase during the most recent quarter. “A woman’s handbag is purchased on eBay mobile every 30 seconds,” he said. “Mobile is revolutionizing how people shop and pay.”

“It’s hard to think of many companies that benefit from mobile,” Mr. Sena said. “Usually it means more competition. But clearly, eBay is one of them. EBay is offering a one-click payment solution. You don’t have to type in a credit card number or PIN. It’s just one click on your mobile phone.”

Mr. Spitz said he was recently stopped at a traffic light and the sun was bothering his eyes. By the time the light turned green, he had used his phone to order and pay for sunglasses. “This is what commerce anytime, anywhere means,” he said. “It’s here.”

Mr. Donahoe deserves credit not only for recognizing that smartphones would change the shopping experience, but for acting on it, Mr. Spitz said. “EBay under Mr. Donahoe pivoted hard in this direction,” he said.

Mr. Donahoe confirms that, saying: “We saw the mobile revolution early and we made a big bet across the entire company. We saw that mobile was an important factor for our customers. It was becoming the central control device in their lives. We didn’t worry if it cannibalized our existing business, because we knew it was what our customers wanted.”

The smartphone “has blurred the line between e-commerce and off-line retail,” Mr. Donahoe continued. “Four years ago, you had to be in front of a laptop or desktop to shop online. Now you can do it seven days, 24 hours. We’re going to have to drop the ‘e’ from e-commerce.”

Retailers have warmed to the new eBay. “They’re a great partner,” Gerald L. Storch, chairman and chief executive of Toys “R” Us, told me this week. “In an omni-channel retail world, mobile, social, Internet, physical stores — they’re all linked. Customers want to interact with our brand at every level. EBay is especially strong in mobile and payment systems, but they address all those areas and help us compete. We do everything with them.”

Amazon was supposed to have crushed eBay by now with its bigger scale and state-of-the-art inventory and delivery systems. That didn’t happen, but Amazon remains eBay’s biggest competitive threat. Amazon continues to invest in its delivery systems and it, too, has an effective mobile app and one-click payment system.

Even so, many analysts see plenty of room for both Amazon and eBay, and perhaps even more competitors. “When you look at e-commerce as a share of overall consumer spending, it’s not even 10 percent worldwide,” Mr. Spitz said. “There’s plenty of room for growth.”

Mr. Donahoe agreed. “We’ve never viewed the world as a zero-sum game with Amazon,” he said. “There’s plenty of room for multiple winners.”

Moreover, eBay is likely to benefit from its global reach and scale as e-commerce expands. “Consumers aren’t going to download 30 apps from individual retailers, but they will download both eBay and Amazon,” Mr. Spitz said. EBay and PayPal apps already rank among the top 10 mobile apps, eBay said.

And it’s obviously in retailers’ interests to prevent Amazon from becoming an e-commerce monopoly. EBay stresses, without mentioning Amazon by name, that it doesn’t compete with its retail customers. Some sellers have complained that when Amazon spots a hot product, it starts promoting and selling it itself at lower prices.

As Mr. Storch put it: “We do sell Kindle Fires and other Amazon products, but when it comes to retail, eBay helps us succeed. Amazon is the competition.”

The dynamics of e-commerce aside, several broad themes emerge from eBay’s turnaround:

¶ EBay had to break with its past and seize new opportunities. “It was clear the world had innovated around eBay and eBay had stayed with the same formula,” Mr. Donahoe said. “Saying that was considered heresy. With any company that’s been this successful, there’s enormous momentum to keep doing what you’ve been doing and hope the world will go back to what it used to be.”

At the same time, EBay didn’t entirely abandon its roots — it’s still an e-commerce company. But “we had to make changes that were unpopular with subsets of our customers and other people. You have to have the conviction to do what you know is right,” Mr. Donahoe said. “We spent three years fixing the fundamentals and tried not to worry about what everyone else was saying.”

¶ Technological innovation is critical. “We stepped on the gas with innovation,” Mr. Donahoe said. “We’re more technology- and innovation-driven than we’ve ever been. Mobile gave us the opportunity to start with a clean slate from a technology perspective.” Less than two years ago, eBay acquired Critical Path Software, which was helping to develop eBay’s mobile apps. “We thought they were the best, so we bought them and got a couple hundred of the best software developers in the world working exclusively for us,” Mr. Donahoe said.

The resulting mobile apps have been hugely successful with customers. “They’re a nice, clean, elegant solution, a very pleasant experience,” Mr. Spitz said. “Many people are encountering eBay on a mobile device and coming away with a great first impression.”

New products are in the pipeline. Mr. Donahoe said PayPal Here, a new payment system, would allow customers to “check in” in advance at a shop, be greeted by name when they arrive, complete transactions without a mobile device or credit card and get a text message as a receipt.

¶ Management change is necessary and inevitable. Mr. Donahoe has been chief for just over four years, and has replaced most of eBay’s top management. “A significant change in senior leadership was necessary to take eBay to the next level,” he said. He built a team of managers who shared his dedication “to building a great and enduring company, a company that will last,” as he put it. “No one else has really done that on the Internet, and we’re excited by the possibility.” At the same time, he said, “We can’t take anything for granted. We’re almost paranoid. We get up every morning and we’re focused on delivering for our customers and continuing to innovate. It’s a fast-changing world.”

    Behind eBay’s Comeback, NYT, 27.7.2012,
    http://www.nytimes.com/2012/07/28/business/ebays-turnaround-defies-convention-for-internet-companies.html

Amazon Delivers on Revenue but Not on Profit

July 26, 2012
The New York Times
By DAVID STREITFELD

SAN FRANCISCO — Leaping revenue, little profit.

That is the long-established Amazon story, and those who expected to hear it again Thursday were not disappointed.

The company reported sales of $12.8 billion, up 29 percent, in the second quarter while it eked out net income of $7 million, or a penny a share.

Those results essentially matched expectations. Analysts had estimated the Seattle-based retailer would earn 2 cents a share, down from 41 cents a share in the second quarter of 2011.

In what is becoming a routine warning, Amazon said that profit in the current quarter would remain elusive. Revenue might grow as much as 31 percent, the company said, but it was expecting a loss. Losses at Amazon were routine in its early years but in recent years it has made a profit, albeit a small one.

This would be devastating news from some Internet companies. But Amazon bulls were unfazed, saying the retailer was investing, as always, in the future.

“If they keep this up, there’s a good possibility that you’re looking at shopping malls going the way of the record store and the bookstore and the video rental store,” said Jason Moser, who covers Amazon for the Motley Fool investment site.

Amazon shares Thursday were up $3 to $220 during regular trading. The stock is trading only about 10 percent below its record high, with a stratospheric price-to-earnings ratio of about 170. In after-hours trading, shares continued rising.

Since its founding in 1994, Amazon has been focused on broadening its product and customer bases, not pumping up its profit margins. And the growth has been tremendous — it is now one of the country’s largest retailers. Even in North America, its most established market, it has been growing consistently more than twice as fast as the e-commerce market as a whole, a Forrester Research report released Thursday noted.

Amazon is building 18 new fulfillment centers around the world this year. In the United States, many of them are close to major cities, including New York City, San Francisco and Los Angeles. In a conference call with analysts, Thomas J. Szkutak, Amazon’s chief financial officer, said, “We’re investing certainly for the long term.”

In the past, Amazon declined to build warehouses in states where it had many customers, because it would then have to collect sales taxes from them. Now the promise of offering these areas even faster delivery seems to be more of an imperative than continuing to fight the tax issue.

Amazon fans probably dream of ordering books or bagels and getting them the same day. But Mr. Szkutak indicated this would remain a dream. “We don’t really see a way to do same-day delivery on a broad scale economically,” he cautioned.

Six of the new warehouses are already open. Getting some of the others ready for the all-important holiday season helps explain the predicted absence of profit in the third quarter. The centers are a large factor in Amazon’s accelerating head count, which is up 60 percent over the last year to 60,000 employees.

One word that was little mentioned during the call by either Mr. Szkutak or the analysts: Kindle. Amazon’s tablet, the Kindle Fire, was introduced last fall in an ocean of hype. New models are seen by some as overdue.

“We’re excited about the road map we have” for e-readers and e-books, Mr. Szkutak said. He declined to say what that map was.

    Amazon Delivers on Revenue but Not on Profit, NYT, 26.7.2012,
    http://www.nytimes.com/2012/07/27/technology/amazon-delivers-on-revenue-but-not-on-profit.html

Anna Schwartz,

Economist Who Collaborated With Friedman,

Dies at 96

June 21, 2012
The New York Times
By ROBERT D. HERSHEY Jr.

Anna J. Schwartz, a research economist who wrote monumental works on American financial history in collaboration with the Nobel laureate Milton Friedman while remaining largely in his shadow, died on Thursday at her home in Manhattan. She was 96.

Her death was confirmed by her daughter Naomi Pasachoff.

Mrs. Schwartz, who earned her Ph.D. in economics at the age of 48 and dispensed policy appraisals well into her 90s, was often called the “high priestess of monetarism,” upholding a school of thought that maintains that the size and turnover of the money supply largely determines the pace of inflation and economic activity.

The Friedman-Schwartz collaboration “A Monetary History of the United States, 1867-1960,” a book of nearly 900 pages published in 1963, is considered a classic. Ben S. Bernanke, the Federal Reserve chairman, called it “the leading and most persuasive explanation of the worst economic disaster in American history.”

The authors concluded that policy failures by the Fed, which largely controls the money supply, were one of the root causes of the Depression.

Mr. Bernanke acknowledged as much when he spoke at a 90th birthday celebration for Mr. Friedman in 2002. “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right, we did it,” he said. “We’re very sorry, but thanks to you we won’t do it again.”

Mrs. Schwartz was widely known in the profession as the co-author of much of the work that led to Mr. Friedman’s Nobel in economic science in 1976. Her supporters thought the prize might have justly been awarded jointly.

“Anna did all of the work, and I got most of the recognition,” Mr. Friedman said on one occasion.

After Mr. Friedman’s death in 2006, Mrs. Schwartz “became the standard-bearer” of Friedman monetarism, said Michael D. Bordo, a professor of economics at Rutgers University and for decades a Schwartz collaborator himself.

Though “not a deep theorist,” he said, Mrs. Schwartz was “probably the best woman economist of the 20th century.”

During the financial collapse that began in 2008, she was one of the few economists with a firsthand recollection of the Depression. After praising early moves by Mr. Bernanke, she wrote, at age 93, a bitingly critical Op-Ed article for The New York Times in July 2009 opposing the reappointment of the Fed chairman who had been so influenced by her work.

She contended that Mr. Bernanke had erred in producing “extreme ease” in monetary policy and in failing to warn investors that new financial instruments were difficult to price.

Mrs. Schwartz also held that the government had been a bigger contributor to the crisis than had been widely realized. By her measure, the government had oversold the benefits of homeownership, pushing Fannie Mae and Freddie Mac, the government-backed mortgage finance giants, to lend increasingly to lower-income borrowers and fostering exceptionally low mortgage rates.

A leading financial historian, Mrs. Schwartz was also an expert on the monetary and banking statistics of Britain and the United States. Besides her collaborations, she had a large body of work in her own name.

Her most visible public role was in 1981, when she agreed to be executive director of the 17-member United States Gold Commission, a Washington panel that was charged with recommending the future role of gold in the nation’s monetary system.

With little interest in a return to any form of gold standard, she and most other members of the panel, consisting mostly of political appointees, limited their recommendations to urging the government to mint gold coins.

Mrs. Schwartz was born Anna Jacobson on Nov. 11, 1915, in the Bronx, the third of five children of Hillel Jacobson and the former Pauline Shainmark, Jewish immigrants from Eastern Europe.

She was drawn to economics while still at Walton High School in the Bronx — “I found it more exciting than literature or foreign languages,” she said — and graduated from Barnard College at 18.

She worked for the Agriculture Department in 1936, the year she married Isaac Schwartz, whom she had met at a Hebrew summer camp. The couple raised four children. Mr. Schwartz, who was the financial officer for a Manhattan import company and had earned a master’s degree in classics from Columbia, died in 1999.

Besides Ms. Pasachoff, Mrs. Schwartz is survived by another daughter, Paula Berggren; her sons, Jonathan and Joel; seven grandchildren; and six great-grandchildren.

After five years at Columbia University’s Social Science Research Council, Mrs. Schwartz joined the National Bureau of Economic Research in New York in 1941 and continued to work there for more than 70 years. But she maintained her ties to Columbia, earning a Ph.D. there in her middle years.

It was at the National Bureau, a private, nonpartisan research organization that has been the nation’s semiofficial arbiter of business cycles, that Mrs. Schwartz met Mr. Friedman and his wife, Rose Director Friedman, who was also an economist. Rose Friedman had heard from mutual friends that the Schwartzes might have a baby carriage to lend.

Arthur F. Burns, the president of the National Bureau and a future chairman of the Federal Reserve, suggested that Mrs. Schwartz and Mr. Friedman work together.

The two of them — she in New York and he at the University of Chicago — formed a close relationship based on exchanges of drafts and ideas by mail. “I’ll write something and send it to him, and he’ll criticize it, and he’ll do the reverse,” she told a reporter for The Times in 1970 on the publication of their second major work, “Monetary Statistics of the United States: Estimates, Sources, Methods.” “The wonderful thing about this relationship is that neither of us takes offense if the other says it’s no good.”

Mrs. Schwartz did take offense, however, when Paul Krugman, an economist and an Op-Ed columnist for The Times, attacked the Friedman legacy in an article in The New York Review of Books in 2007.

She responded angrily that Mr. Krugman had mischaracterized the work and made “inaccurate forays into economic history” by attributing the Depression to a liquidity trap, a situation in which monetary policy fails to stimulate the economy by either lowering interest rates or expanding the money supply.

“She went ballistic,” Mr. Bordo said.

Even after breaking a hip in 2009 and having a stroke, Mrs. Schwartz, by then using a wheelchair, collaborated with Mr. Bordo and Owen Humpage, an economist at the Cleveland Fed, on a project tracing the history of governmental intervention in currency markets. “Anna never stopped,” Mr. Bordo said.

She often spoke about her successful collaboration with Mr. Friedman on their “Monetary History of the United States,” expressing elation that they had taken on an economic establishment with little regard for theories based on the importance of money.

Decades afterward, writing in The Cato Journal, a publication of the Cato Institute, the conservative public policy research organization, she quoted Wordsworth:

“Bliss was it in that dawn to be alive,/But to be young was very heaven!”

    Anna Schwartz, Economist Who Collaborated With Friedman, Dies at 96, NYT, 21.6.2012,
    http://www.nytimes.com/2012/06/22/business/anna-schwartz-economist-who-worked-with-friedman-dies-at-96.html

Economy’s Mixed Blessing: Commodity Prices Fall

June 13, 2012
The New York Times
By CLIFFORD KRAUSS

HOUSTON — Mark Juull, a construction contractor for public and residential housing, has something to be thankful for in this sluggish economy: With global commodity prices falling, he’s saving $200 a week on fuel for his three trucks and finding deals on aluminum, lumber and roof shingles, which are typically made from petroleum.

But he says he thinks prices for his raw materials could easily shoot right back up, so he is not passing any of his savings on to his customers. “When the economy hit me bad, I actually lost money,” he said. “So with prices going down, I am recouping.”

Businesses big and small are getting a break these days as the European financial crisis and slowing growth in China, India and the United States have pushed down the prices of a wide array of commodities in recent weeks. If the trend continues, businesses and consumers are likely to reap benefits through cheaper prices for goods ranging from cotton shirts to copper wiring and coffee beans. So far, however, businesses seem to be benefiting a lot more than their customers.

Over the last month, global oil prices have declined by about 12 percent, while corn, copper, lead, cocoa and coffee have all dropped by 5 percent or more. Prices of corn, cocoa, oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel are all more than 20 percent lower than a year ago.

Gasoline prices are falling precipitously, too, down nearly 20 cents over the last month alone, to a national average of $3.54 a gallon on Wednesday. That is nearly 45 cents below the high for the year reached in early April. The average household consumes 1,200 gallons of gasoline a year, so every dime shaved off the price of gas translates into a $120 annual savings, according to the Oil Price Information Service.

“The world economy is in risk of a recession and on that possibility, commodity prices weaken,” said Allen L. Sinai, chief global economist for Decision Economics, a consulting firm. “Lower inflation comes with weakening economies.”

Oil is among the commodities that have fallen in price the fastest despite continuing tensions in the Middle East and the tightening sanctions on Iran. OPEC production has been soaring in recent months because of mushrooming crude exports from Iraq, an almost total resumption of exports from Libya since the fall of the Qaddafi dictatorship, and a concerted drive by Saudi Arabia to push up production. At a meeting in Vienna on Thursday, OPEC is expected to decide to keep production steady despite weakening prices.

In the United States, a glut of natural gas has led to a price drop of about 10 percent over the last month and more than 50 percent over the last year. Since much of the nation’s electricity is produced by burning natural gas, that should ease summer air-conditioning expenses for consumers. It will also help manufacturers, especially those who make plastics, fertilizers and other products that use natural gas as a feedstock.

But while consumers are pleased by lower fuel prices, they say they have yet to see much relief in the prices of other products linked to commodities.

“I don’t feel food is going down,” said Connie Shanley, a homemaker shopping at a Whole Foods store this week in West University Place, Tex. “Paper towels, deodorant, soap, cleaning products seem to be going up. The total bill seems to be more.”

Libba Letton, a Whole Foods spokeswoman, conceded that there were limited benefits for consumers in the short term.

“Typically these market fluctuations do not immediately affect Whole Foods Market because we have long-term contracts with our suppliers,” she said.

Other businesses also acknowledge that prices for raw materials go up and down far faster than the prices their customers pay for finished goods. Clothing retail executives have said they need to sell off inventory purchased when textile prices were higher before consumers can take full advantage of falling cotton prices, while car parts retailers say they are still paying high shipping costs that have not fallen along with lower fuel costs.

Paul J. Chakmak, executive vice president and chief operating officer of Boyd Gaming, a national chain of hotels and casinos, said his company was benefiting from lower jet fuel prices since it operates four weekly charter flights to shuttle tourists from Honolulu to Las Vegas. Lower natural gas prices help reduce the cost of cooking at hotel restaurants and of heating the shower water in 11,500 rooms. But he said the energy savings were marginal compared with labor and marketing costs, so customers would not see lower prices.

“It is a little soon,” Mr. Chakmak said, to predict any long-lasting impact.

More than anything else, economists say, the steep drop in prices reflects deepening worries about a global economic slowdown as Greece prepares for elections next weekend that could lead to its withdrawal from the euro currency union, with financial repercussions across Europe and beyond. A sharp drop in European consumer demand, especially in Italy and Spain, has already reduced global trade in many goods.

But economists say that while manufacturers and retailers tend to pass higher costs on to their customers, they do not always pass along their savings when wholesale prices go down.

“Producers or stores tend to keep prices the same, and take a larger profit,” said Michael P. Niemira, chief economist for the International Council of Shopping Centers.

Commodity prices are still generally high, and well above levels nearly four years ago, when the global financial panic reversed a seven-year bull market.

The decline in commodity prices varies widely depending on the raw material. Cotton prices are down nearly 50 percent over the last year, and have actually been recovering a bit in recent weeks. Copper, a metal that is viewed by many economists as a barometer for economic activity, is down by nearly 20 percent for the year. Gold, normally a commodity that soars with economic uncertainty, is higher but only by about 3 percent over the last year.

“Gold has behaved in line with risky assets, and the heightened uncertainty globally has not rallied the same support gold garnered on previous occasions,” according to a recent research note from Barclays commodities.

Some analysts say that commodities have sold off so steeply that they are bound to turn around and resume the bull market that was spurred by growing demand from emerging middle classes in the developing world.

In an investment note this week, Goldman Sachs argued that oil and some other commodities were poised for a rebound. “Although the macroeconomic backdrop still remains uncertain, particularly in Europe,” the bank said, “we believe that the price risks are now shifting more to the upside.”

Some analysts note that China is still growing and importing large amounts of oil, and can be expected to be a steady importer of raw materials.

“The fact that China is moving from an export model to an internal consumption model may be positive for some commodities such as energy and agricultural products,” said Nelson Louie, global head of commodities at Credit Suisse’s asset management division.

    Economy’s Mixed Blessing: Commodity Prices Fall, NYT, 13.6.2012,
    http://www.nytimes.com/2012/06/14/business/economy/weak-economys-mixed-blessing-falling-commodity-prices.html

Pink Slips

June 12, 2012
The New York Times

The school district in Reading, Pa. — the nation’s poorest city — laid off 110 teachers last week, along with hundreds of other employees. As elementary students watched in shock, many of their favorite teachers were pulled out of an assembly one by one and given the bad news by district officials, The Reading Eagle reported.

The layoffs will mean larger classes and an end to public prekindergarten in the city. Many special-education students will lose their mentors. A city where only 8 percent of the residents have a bachelor’s degree (compared with the national average of 28 percent) will fall further behind, largely because Pennsylvania’s Republican governor, Tom Corbett, chose not to find state money to replace $900 million in federal aid that ran out after the stimulus expired. Instead, he further drained his public coffers by cutting business taxes by $250 million this year.

Across the country, many states like Pennsylvania that happily accepted stimulus money to pay for existing employees are laying off those workers now that Congress has turned off the spigot. Over the last three years, at least 700,000 state and local government employees have lost their jobs, including teachers, sanitation workers and public safety personnel, contributing a full percentage point to the unemployment rate.

That seems to be just fine with Mitt Romney, who, like many Republicans, does not consider a job to be economically significant unless it is in the private sector. Last week, he attacked President Obama for proposing to help states hire more teachers and other workers, saying the president doesn’t understand that Americans don’t want to hire “more firemen, more policemen, more teachers.” Only right-wing ideologues make that distinction; most Americans know driving a bus or picking up trash is just as important economically as working in a big-box store.

Mr. Romney tried to retreat from those comments on Monday, saying that local-government hiring was not a federal issue, but obviously it is. The federal government provided about 10 percent of K-12 education budgets before the stimulus, and that share increased in the last three years. The stimulus money helped save 400,000 education jobs. Since the stimulus began in 2009, Washington has provided more than a third of state budgets, supporting as many as half-a-million other jobs, but that wasn’t enough to prevent layoffs, which have only increased since the money began running out.

There have been at least 100,000 education employees laid off nationwide in the last three years; the White House puts the figure at 250,000. California has lost 32,000 teacher jobs — 11 percent of the work force. Pennsylvania laid off nearly 9,000 teachers and other school workers last year, largely because of Governor Corbett’s cuts.

In some cases, states have been forced to cut public employees because of unduly high pension benefits, and we have supported state efforts to reduce those pensions. But putting educators and others back to work ultimately depends on Congress, where Republicans are blocking vital legislation to bolster a faltering economy. For desperate cities like Reading, time is running out.

    Pink Slips, NYT, 12.6.2012,
    http://www.nytimes.com/2012/06/13/opinion/the-beleaguered-middle-class-pink-slips.html

Sunday Dialogue: Financing Social Security

June 9, 2012
The New York Times

More income should be taxed, a writer says. Readers react.

The Letter

To the Editor:

In a nation that prides itself on fair play and equal opportunity, it seems incongruous that people with wealth-based income — interest, dividends, capital gains, rent — are excused from paying Social Security (traditionally 12.4 percent) and Medicare taxes (2.9 percent) on that income. Equally odd, they do not pay Social Security tax on wages above $110,100. Shouldn’t these taxes be paid on all income? Taxing the “earned” and not the “unearned” seems rather un-American, doesn’t it?

The two preferences hark back to Social Security’s 1930s groundbreaking origins. Without these exclusions, would there have been a political consensus to create Social Security? Maybe, maybe not, but no decision is fixed forever.

If these preferences were eliminated and the economy recovered to mirror a positive year like 2007, the Social Security Trust Fund would nearly double its annual revenue. We could expect to see an additional $500 billion for Social Security and $100 billion for Medicare. The additional Social Security inflow would almost cover the annual outflow, leaving most of the current revenue as a surplus to accommodate the baby boomers.

Virtually all income of the bottom 50 percent is “earned” and fully taxed for Social Security and Medicare. Many people are unaware that wealthy taxpayers are entitled to exempt much, if not most, of their wages, as well as investment income. Ending those exemptions would allow a major reduction in Social Security and Medicare tax rates.

Alternatively, if tax rates stayed at or near current levels, Congress could use half the new revenue to strengthen Social Security, Medicare, food stamps, unemployment and other support programs. The other half could be used to abolish the corporate income tax, which has averaged about $224 billion in annual revenues over the last decade.

Such a “grand bargain” would make the funding of the safety net fairer and eliminate the double taxation of dividends. Abolishing the corporate income tax would also make American companies more competitive internationally.

JAMES ABERT
Lancaster, Pa., June 4, 2012

The writer is a retired faculty member at the McDonough School of Business, Georgetown University.

 

Readers React

Mr. Abert argues for imposing Social Security taxes on all income on the grounds that this nation prides itself on fair play. But the people of this nation also pride themselves on self-reliance.

Social Security gained its great popularity precisely because it is not a welfare program. People pay into it from the money they earn during their working years. The amount of benefits they receive is calculated based on lifetime earnings. No one feels guilty about getting Social Security because “it’s my own money I’m getting back.”

Mr. Abert’s proposal would change all that. While the amount of income taxed would no longer be capped at $110,100, or at all, the maximum payments presumably would be limited. Thus, many Americans would pay taxes on income not included in the calculation of the benefits they will receive on retirement. In short, wealthier Americans will be subsidizing the retirement of the less wealthy. No one would any longer be able to say, “I’m just getting my own money back.”

Franklin D. Roosevelt believed that Social Security could never be repealed because all workers invested in it and all shared an interest in its continuation. Breaking the link between taxes and benefits would destroy that sense of self-reliance that has long sustained the program. Turning Social Security into a welfare program would be the first step on the way to its eventual demise.

CHARLES W. SNYDER
Savannah, Ga., June 6, 2012

The writer is a lawyer.

 

I agree with some things Mr. Abert says and disagree with others. The most upsetting is using the excess revenues for things other than Social Security.

Revenues from the payroll tax do not go into the general fund. Sure, the surplus is invested in Treasury bonds, with proceeds going toward financing general government spending until the bonds mature and get paid back, but no Social Security money is used for anything other than Social Security. That is one key factor that gives Social Security such widespread support.

Increasing or abolishing the ceiling on earned income subject to Federal Insurance Contributions Act, or F.I.C.A., contributions would alone finance Social Security in perpetuity, and the rate may even be lowered after the baby boom generation passes through the system.

The biggest problem Social Security has is that most Americans do not understand it. Participants (involuntarily, I’ll grant you) make contributions to the fund while they are working, then withdraw from it when they retire. If the money just sat there, there would be no accumulation for population bulges, like the baby boom, and no increase for inflation. Therefore, it is invested in Treasury bonds, where it collects interest and allows the government to borrow domestically from its own citizens instead of sending interest payments to foreigners. The money is completely accounted for, and the government is obliged to pay the promised benefits.

It is an ingenious system, and we must do everything we can to preserve it.

SCOTT KOCHMAN
Brooklyn, June 6, 2012

 

Mr. Abert’s letter points out the enormous inequity in our tax system that is heavily skewed in favor of the wealthy. I also agree with him that a tax code that treats “unearned income” more favorably than “earned income” is toxic in a society that still professes to have at least a modicum of commitment to equal rights and equal opportunity.

What I don’t understand is the rationale for his proposal to abolish corporate income taxes. Don’t the laws of the United States already treat corporations more favorably than ordinary mortals?

During the 1950s, corporations paid about 49 percent of their profits in taxes, yet the economy grew and the middle class expanded and prospered. By 2011, corporations paid taxes at about half that rate, as they outsourced American jobs, destroyed unions, deindustrialized the economy and hollowed out the middle class. Corporations should not be rewarded for their irresponsible behavior.

More important, Mr. Abert’s proposed “grand bargain” needs to be viewed in the context of current political realities. The enormous concentration of wealth in a minuscule income group has spawned an incredibly influential elite who have gamed this country’s dysfunctional political system and are able to shape it to serve their needs. Until this problem is addressed, no proposals that compel the wealthy to pay higher taxes, however meritorious, have a chance of ever being enacted into law.

PAUL L. NEVINS
Boston, June 6, 2012

The writer is a lawyer.

There are several points I take issue with in Mr. Abert’s letter.

There is a limit on Social Security payments in retirement. So if we raise the current cap on F.I.C.A. taxes from $110,100 to infinity, should we also raise the maximum Social Security retirement benefit? If not, then where is the “fairness” in that?

Mr. Abert’s references to a “positive year like 2007” would be more accurately translated as “bubble year.” The economy in 2012 is most likely the new normal, so the additional revenue Mr. Abert cites is highly suspect.

There are many retirees who, after working 30 to 40 years, have amassed a “golden years” nest egg. As the Federal Reserve maintains record low interest rates, many retirees have found their income decimated. To add an F.I.C.A. tax on the earned interest, even at a reduced level, would add insult to injury.

While I agree with Mr. Abert that abolishing the corporate income tax would make American companies more competitive internationally, the current political reality will keep that a distant fantasy. Until our multitrillion-dollar national debt is pared down, corporations should not be let off the hook.

JOHN LAIDO
Brooklyn, June 7, 2012

Eight decades ago it was a new notion, but Social Security has been the most popular government program for many decades. Mr. Ebert’s suggestions regarding caps and unearned income are ripe for pursuing. We should go beyond “saving Social Security” to both strengthening the Trust Fund and increasing benefits.

We could include in the proposal to increase the Trust Fund’s income some increases in benefits. This is particularly attractive nowadays as people are conscious of two new threats to their old-age security: employer-provided pensions have been eliminated or reduced, and individual savings have been crippled by the recession.

It would not be as expensive as might, at first, appear. Our Social Security income is taxable, and the proceeds circulate back to the Trust Fund. Raise our benefits and we pay a bit more taxes — to the benefit of the Trust Fund.

It is politically possible. Recall that eliminating the cap on Medicare “taxes” occurred during Bill Clinton’s presidency with barely a whimper. Few even know that it occurred.

RAMELLE MaCOY
MARTIN MORAND
Mifflintown, Pa., June 7, 2012

The writers are retired professors of industrial and labor relations at Indiana University of Pennsylvania.

Social Security was designed as a payroll tax, not a second income tax, so it is not appropriate to include unearned income in the tax base. The system is intended to partly replace earnings after retirement, not investment income.

While the income level on which taxes are levied is capped at $110,100, so too are benefits. Moreover, the benefits formula is redistributive, heavily favoring low-income earners.

In 2012, benefit recipients receive 90 percent of their first $767 of monthly earnings, 32 percent of their next $3,857 of monthly earnings, and only 15 percent of their monthly earnings in excess of $4,624 (up to the cap). It is hard to see why this is so unfair to the poor.

MICHAEL SESNOWITZ
Henrico, Va., June 7, 2012

The writer is a professor of economics at Virginia Commonwealth University.

 

The Writer Responds

Responding to Mr. Kochman, I envision that all revenues from the expanded “safety net tax” would be designated for specific safety-net-related programs. Social Security and disability insurance would grow somewhat. Other safety net programs, such as food stamps, would be swept out of the regular budget to new trust funds supported by the safety net tax. This swap allows for the corporate tax relief part of the bargain.

Mr. Nevins is right. Any legislation that raises taxes paid by the rich faces stiff opposition. But there would be considerable compensation. Elimination of the corporate tax should increase corporate profits, repatriate overseas income, increase dividends and drive up stock prices.

Mr. Laido asks if the maximum Social Security payout should increase since the amount of taxed income — earned plus unearned — would increase. No. These payments are intended to provide a safety net. They are more insurance than investment. The Social Security payout should provide a reasonable standard of living to those who have little, not a supplementary payment to those who have much.

I agree with Mr. Snyder that most Americans favor self-reliance and feel guilty if forced to seek welfare. I only wish that those who have turned “entitlement” into a code word for freeloaders would agree as well.

JAMES ABERT
Lancaster, Pa., June 8, 2012

    Sunday Dialogue: Financing Social Security, NYT, 9.6.2012,
    http://www.nytimes.com/2012/06/10/opinion/sunday/sunday-dialogue-financing-social-security.html

Forced to Early Social Security,

Unemployed Pay a Steep Price

June 9, 2012
The New York Times
By MOTOKO RICH

PALM SPRINGS, Calif. — This retirement oasis in the desert has long beckoned those who want to spin out their golden years playing golf and sitting by the pool in the arid sunshine.

But for Clare Keany, who turned 62 last fall and cannot find work, it feels more like a prison. Just a few miles from the gated estates of corporate chieftains and Hollywood stars, Ms. Keany lives in a tiny mobile home, barely getting by on little more than $1,082 a month from Social Security.

“I would rather be functioning and having a job somewhere,” said Ms. Keany, whose pixie haircut, trim build and crinkling smile suggest someone much younger than her years. “I really don’t enjoy living like this. I’ve got too much to do still.”

Even as most Americans are delaying retirement to bolster their savings accounts, the recession and its protracted aftermath have forced many older people who are out of work to draw Social Security much earlier than they had planned.

According to an analysis by Steve Goss, chief actuary for the Social Security Administration, about 200,000 more people filed initial claims in 2009 and 2010 than the agency had predicted before the recession and he said the trend most likely continued in 2011 and 2012, though that is harder to quantify. The most likely reason is joblessness.

Ms. Keany had always expected to work into her 70s and add to her retirement cushion. But after losing her job as an executive assistant at an advertising agency in 2008, she searched fruitlessly for full-time work and exhausted her unemployment benefits. For a while, she strung together odd jobs and lived off her 401(k) retirement and profit-sharing accounts. Then, this year, with her savings depleted and no job offers in sight, she reluctantly applied for Social Security.

Gazing out the window where the Santa Rosa mountains rise behind the mobile home park, she said, “It just seems a waste of a life, to be honest.”

Drawing Social Security early has repercussions that will be hard to overcome even if the economy — and her work prospects — improve. By collecting four years shy of her full retirement age, Ms. Keany will receive a reduced monthly benefit for the rest of her life. Those who collect early get 20 to 30 percent less a month than they would get if they waited until full retirement age, which varies by year of birth. People in Ms. Keany’s age bracket are expected to live an average of close to 23 more years.

“The most potent lever that individuals can pull in trying to get themselves a secure retirement income is to postpone claiming” Social Security, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

As recently as a decade ago, half of those eligible claimed Social Security at 62. But that share has been falling because people are living longer and still want to work as well as shore up retirement funds. That makes it even more galling for those who are forced to claim early because of unemployment. Several people interviewed mentioned blows to their self-esteem along with abandoned dreams of a more comfortable old age.

According to an analysis by Richard W. Johnson, director of the retirement policy program at the Urban Institute, 37 percent of older workers who lost their jobs between 2008 and 2011 and did not return to work ended up claiming Social Security as soon as they turned 62.

Ms. Keany, who was born in Britain, was making $64,000 a year as an administrative manager for a boutique advertising agency in Santa Monica when the firm lost two of its biggest clients in one week. She has nearly three decades of experience in the United States. She has managed offices, arranged visits by foreign dignitaries, composed employee handbooks and finessed demanding bosses. She said she had also run errands for movie producers, organized home offices and coordinated the administrative details of a drug study.

Those years of experience now work against her, she thinks. “I’m overly qualified, overly skilled,” she said.

Her age is also most likely an impediment. After they lose a job, older workers tend to have a much harder time finding another than younger workers.

A Government Accountability Office report found that just under a third of those 55 to 64 who lost their jobs from 2007 through 2009 had found full-time work by January 2010, compared with 41 percent of people 25 to 54. The median duration of unemployment for those 55 and older was 34.1 weeks in May, according to the Labor Department, in contrast to 22 weeks for all jobless people over 16.

Ms. Keany, who is single and has no children, tried a change of geography. Because the economy in California was so weak, she moved in with friends in Charlotte, N.C., three years ago in hopes of having better luck there. She signed up with employment offices and volunteered, but did not find paying work.

Another friend invited her to stay on the Outer Banks of North Carolina, where Ms. Keany eventually began work at a women’s recovery house in exchange for room and utilities. Then Hurricane Irene hit last August and damaged the house. Ms. Keany could not afford to stay.

In a panic, she used the last of her savings to move to Palm Springs last October and buy a $19,000 one-bedroom mobile home in the same park where friends lived two doors down.

“I was so frantic at that point and I was at my wit’s end,” said Ms. Keany, saying she still planned to find a job. “I thought at least with Palm Springs it’s a retirement resort community and I know there’s a lot of business here as well.”

She scoured Craigslist for affluent residents seeking personal assistants. She took a one-month job in Los Angeles, chauffeuring the principal actor on a movie. She applied for a job as a concierge at a Marriott Hotel, but withdrew after hearing it offered only eight hours a week.

Finally, in January, she gave in and filed for Social Security. Her monthly check covers the $336 mobile home park fee plus utilities, her cellphone bill, insurance and a satellite dish. She is also paying $100 a month in credit card debt. To save money, she has canceled the data plan on her BlackBerry and cut back on fresh fruits and vegetables.

After a wind storm blew out a window, she covered it with a tarp because she could not afford to replace the glass.

Ms. Keany is still hoping to find work. Social Security recipients younger than full retirement age can earn up to $14,640 a year without sacrificing any of their monthly benefit. At Ms. Keany’s age, for every $2 earned over that amount, Social Security deducts $1 in benefits.

This month, she flew back to the Outer Banks to stay with friends and work part time in two gift shops over the summer. If she cannot find permanent work in North Carolina, she plans to return to Palm Springs in the fall.

She is discouraged by what she sees as youth-obsessed employers. “We’re already has-beens, which is so sad,” Ms. Keany said. “Some of us are still pretty productive.”

    Forced to Early Social Security, Unemployed Pay a Steep Price, NYT, 9.6.2012,
    http://www.nytimes.com/2012/06/10/business/forced-to-retire-early-jobless-pay-a-steep-price.html

Slowdown in Growth Could Reshape Fight for Presidency

June 1, 2012
The New York Times
By JONATHAN WEISMAN and MARK LANDLER

WASHINGTON — The weak employment report on Friday held the potential to reshape the presidential campaign, members of both parties said, lifting Mitt Romney’s efforts to make the race all about President Obama’s handling of the economy and making it harder for Democrats to break through in their efforts to define Mr. Romney on their terms.

On Capitol Hill, the signs of a slowdown focused new attention on the economic implications of the partisan standoff over tax and spending policy. On the campaign trail, both sides saw the news as a potential turning point in a critical battle at this stage. The race may be a referendum on Mr. Obama, as Republicans want, or, as Democrats prefer, a choice between a president nursing the economy back to health and a challenger who represents the failed policies that caused the crisis in the first place.

Democrats in particular were left off balance, sensing that most of their policy ammunition has been spent and that Republicans have nothing to gain politically from lending a hand on a compromise that could spur economic growth this year.

“It’s going to be a close election. Everybody’s worried,” said Representative Jim Cooper, Democrat of Tennessee. “We’ve already floored the accelerator. We’ve already gripped the steering wheel. I’m not sure they’re attached to anything anymore.”

At a stop in Minneapolis, Mr. Obama renewed his call on Congress to enact measures to revive the economy, warning that they were needed not only to shake the United States out of its torpor, but to act as a buffer against storm clouds in Europe.

“Our economy is still facing some serious headwinds” from high gas prices and the financial crisis in Europe, he said from a factory floor at Honeywell International. Europe, in particular, he said, is “having an impact worldwide and is starting to cast a shadow on our own” recovery.

Mr. Romney fired back that the president was simply finding a new way to deflect blame for an economic malaise that his policies were prolonging. His campaign said that Mr. Romney’s core message that it was time for a change in economic stewardship would resonate more clearly among voters.

“This is the race that we came ready to run,” said Stuart Stevens, Mr. Romney’s chief strategist. “This is the race that we believed we would be in.”

The signs that the recovery is being derailed could further complicate maneuvering over the fiscal cliff the federal government faces at the end of the year. The government faces nearly $8 trillion in higher taxes and automatic spending cuts when all of the Bush-era tax cuts expire at the same time that $1.2 trillion of automatic spending cuts on military and domestic programs go into force in January.

Republicans have called for an extension of all those tax cuts and a cancellation of the military cuts, and said Friday that a weaker economy would make it all the more urgent to avoid tax increases this year. Mr. Obama and Congressional Democrats favor allowing tax cuts for the rich to expire and have stood firm on the automatic cuts.

“Instead of another campaign speech, the president might want to engage with Democrats and Republicans here on Capitol Hill to handle the big policies that are affecting our economy,” the House speaker, John A. Boehner of Ohio, said, citing the looming tax increases and spending cuts and the growing national debt.

Representative Nancy Pelosi of California, the House minority leader, said Friday that she saw no reason for Democrats to drop their insistence on allowing the Bush-era tax cuts to expire for upper-income households.

“Take the matter at hand and deal with it,” she said of the expiring tax cuts. “End the high-end tax cuts. They are deepening the deficit. They are not creating jobs. They have to go.”

Democrats are clearly worried. Senate and House Democratic strategists say many of their candidates in tough races cannot win if the president loses, and they said Mr. Obama’s message had drifted too often away from the economy toward issues intended to appeal to narrow groups, like the Violence Against Women Act, student loan subsidies and gay marriage.

Democrats said that Mr. Obama needed to refocus on job creation and amplify the message that much of his jobs program had been thwarted by Republicans.

“He needs to call the Republicans out,” said Representative Chris Van Hollen, Democrat of Maryland. “He needs to remind people he got zero help rescuing the economy when he came to office, and on these new jobs bills, the Republicans are simply trying to run out the clock.”

Representative Gerald E. Connolly, Democrat of Virginia, said Mr. Obama would have to work harder to make his case that the economy was recovering, even if the recovery is less robust than everyone had hoped.

“This is a contest of how we frame the economic question. The Republicans want to frame it one way; the White House wants to do it another way,” Mr. Connolly said. “There are going to be bumps along the way, no question about it. This month is a bump.”

Senate Democrats, seeking to amplify the White House message or keep it on track, have laid out their own plans to stay focused on jobs. This month, they will try to pass a tailored tax cut for small businesses that hire new workers or expand existing payrolls as a counter to a House-passed 20 percent tax cut for nearly all businesses. Then just before the July 4 recess, they will press for a measure to close off tax breaks they say benefit businesses that ship jobs overseas.

“We want to see the response by our Republican colleagues,” said Senator Charles E. Schumer, Democrat of New York. “They blame the president for not creating jobs, then they block everything he proposes.”

But some conservative Democrats are clearly shifting away from their leaders’ agenda. Representative Jim Matheson of Utah, one of the most endangered Democratic incumbents this fall, said he would press to increase oil and gas production on federal lands, a crucial talking point of Republican leaders. And later this month, he is likely to vote for extension of all the Bush-era tax cuts that are set to expire Jan. 1.

“Having more certainty would be much better for job creation,” he said.

The frustration extended beyond endangered conservatives.

“We’ve really got ourselves to blame,” said Jared Bernstein, former chief economic adviser to Vice President Joseph R. Biden Jr., referring to the gridlock between the White House and Congress. “This could have been avoided if they took out some insurance against precisely this kind of anemic, fits-and-starts recovery,” Mr. Bernstein said.

David Axelrod, a senior strategist for the Obama campaign, said Republicans risked “overplaying their hand” if they appeared to welcome bad news. But weak hiring, rising unemployment and a plunging stock market might as well have been heaven sent. Steven Law, the president of Crossroads GPS, a Republican “super PAC” working against Mr. Obama, said that in focus groups, swing voters who backed Mr. Obama in 2008 said they were already dubious about whether the president could do anything to repair the economy.

“Voters are near a point in concluding that President Obama simply can’t get it done on the economy,” Mr. Law said. “If they conclude that, it becomes very hard to erase and even harder to paint his adversary as an unacceptable alternative.”

Jonathan Weisman reported from Washington

and Mark Landler from Golden Valley, Minn.

Michael D. Shear contributed reporting from Washington.

Slowdown in Growth Could Reshape Fight for Presidency, NYT, 1.6.2012,
    http://www.nytimes.com/2012/06/02/business/weak-job-growth-could-alter-presidential-campaign.html