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History > 2013 > USA > Economy (I)




A World Without Work


February 23, 2013
The New York Times


IMAGINE, as 19th-century utopians often did, a society rich enough that fewer and fewer people need to work — a society where leisure becomes universally accessible, where part-time jobs replace the regimented workweek, and where living standards keep rising even though more people have left the work force altogether.

If such a utopia were possible, one might expect that it would be achieved first among the upper classes, and then gradually spread down the social ladder. First the wealthy would work shorter hours, then the middle class, and finally even high school dropouts would be able to sleep late and take four-day weekends and choose their own adventures — “to hunt in the morning,” as Karl Marx once prophesied, “fish in the afternoon, rear cattle in the evening, criticize after dinner ...”

Yet the decline of work isn’t actually some wild Marxist scenario. It’s a basic reality of 21st-century American life, one that predates the financial crash and promises to continue apace even as normal economic growth returns. This decline isn’t unemployment in the usual sense, where people look for work and can’t find it. It’s a kind of post-employment, in which people drop out of the work force and find ways to live, more or less permanently, without a steady job. So instead of spreading from the top down, leisure time — wanted or unwanted — is expanding from the bottom up. Long hours are increasingly the province of the rich.

Of course, nobody is hailing this trend as the sign of civilizational progress. Instead, the decline in blue-collar work is often portrayed in near-apocalyptic terms — on the left as the economy’s failure to supply good-paying jobs, and on the right as a depressing sign that government dependency is killing the American work ethic.

But it’s worth linking today’s trends to the older dream of a post-work utopia, because there are ways in which the decline in work-force participation is actually being made possible by material progress.

That progress can be hard to appreciate at the moment, but America’s immense wealth is still our era’s most important economic fact. “When a nation is as rich as ours,” Scott Winship points out in an essay for Breakthrough Journal, “it can realize larger absolute gains than it did in the past ... even if it has lower growth rates.” Our economy may look stagnant compared to the acceleration after World War II, but even disappointing growth rates are likely to leave the America of 2050 much richer than today.

Those riches mean that we can probably find ways to subsidize — through public means and private — a continuing decline in blue-collar work. Many of the Americans dropping out of the work force are not destitute: they’re receiving disability payments and food stamps, living with relatives, cobbling together work here and there, and often doing as well as they might with a low-wage job. By historical standards their lives are more comfortable than the left often allows, and the fiscal cost of their situation is more sustainable than the right tends to admits. (Medicare may bankrupt us, but food stamps probably will not.)

There is a certain air of irresponsibility to giving up on employment altogether, of course. But while pundits who tap on keyboards for a living like to extol the inherent dignity of labor, we aren’t the ones stocking shelves at Walmart or hunting wearily, week after week, for a job that probably pays less than our last one did. One could make the case that the right to not have a boss is actually the hardest won of modern freedoms: should it really trouble us if more people in a rich society end up exercising it?

The answer is yes — but mostly because the decline of work carries social costs as well as an economic price tag. Even a grinding job tends to be an important source of social capital, providing everyday structure for people who live alone, a place to meet friends and kindle romances for people who lack other forms of community, a path away from crime and prison for young men, an example to children and a source of self-respect for parents.

Here the decline in work-force participation is of a piece with the broader turn away from community in America — from family breakdown and declining churchgoing to the retreat into the virtual forms of sport and sex and friendship. Like many of these trends, it poses a much greater threat to social mobility than to absolute prosperity. (A nonworking working class may not be immiserated; neither will its members ever find a way to rise above their station.) And its costs will be felt in people’s private lives and inner worlds even when they don’t show up in the nation’s G.D.P.

In a sense, the old utopians were prescient: we’ve gained a world where steady work is less necessary to human survival than ever before.

But human flourishing is another matter. And it’s our fulfillment, rather than the satisfaction of our appetites, that’s threatened by the slow decline of work.

    A World Without Work, NYT, 23.3.2013,






Major Banks Aid in Payday Loans Banned by States


February 23, 2013
The New York Times


Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin M. Lawsky, who heads New York State’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.

For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is. The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily. “Technology has taken a lot of these scams online, and it’s time to crack down,” Mr. Merkley said in a statement when the bill was introduced.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their account. Still, some borrowers say their banks do not heed requests to stop the loans.

Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.

Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.

“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.

A spokeswoman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.

Payday lenders have been dogged by controversy almost from their inception two decades ago from storefront check-cashing stores. In 2007, federal lawmakers restricted the lenders from focusing on military members. Across the country, states have steadily imposed caps on interest rates and fees that effectively ban the high-rate loans.

While there are no exact measures of how many lenders have migrated online, roughly three million Americans obtained an Internet payday loan in 2010, according to a July report by the Pew Charitable Trusts. By 2016, Internet loans will make up roughly 60 percent of the total payday loans, up from about 35 percent in 2011, according to John Hecht, an analyst with the investment bank Stephens Inc. As of 2011, he said, the volume of online payday loans was $13 billion, up more than 120 percent from $5.8 billion in 2006.

Facing increasingly inhospitable states, the lenders have also set up shop offshore. A former used-car dealership owner, who runs a series of online lenders through a shell corporation in Grenada, outlined the benefits of operating remotely in a 2005 deposition. Put simply, it was “lawsuit protection and tax reduction,” he said. Other lenders are based in Belize, Malta, the Isle of Man and the West Indies, according to federal court records.

At an industry conference last year, payday lenders discussed the benefits of heading offshore. Jer Ayler, president of the payday loan consultant Trihouse Inc., pinpointed Cancún, the Bahamas and Costa Rica as particularly fertile locales.

State prosecutors have been battling to keep online lenders from illegally making loans to residents where the loans are restricted. In December, Lori Swanson, Minnesota’s attorney general, settled with Sure Advance L.L.C. over claims that the online lender was operating without a license to make loans with interest rates of up to 1,564 percent. In Illinois, Attorney General Lisa Madigan is investigating a number of online lenders.

Arkansas’s attorney general, Dustin McDaniel, has been targeting lenders illegally making loans in his state, and says the Internet firms are tough to fight. “The Internet knows no borders,” he said. “There are layer upon layer of cyber-entities and some are difficult to trace.”

Last January, he sued the operator of a number of online lenders, claiming that the firms were breaking state law in Arkansas, which caps annual interest rates on loans at 17 percent.

Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders. In supporting the bill, Lisa McGreevy, the group’s chief executive, said: “A federal charter, as opposed to the current conflicting state regulatory schemes, will establish one clear set of rules for lenders to follow.”

    Major Banks Aid in Payday Loans Banned by States, NYT, 23.2.2012,






Why Taxes Have to Go Up


February 21, 2013
The New York Times


Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 unless Republicans agree to President Obama’s demand to a legislative package that combines spending reductions and tax increases. As of Thursday, with the deadline a week off, Republicans seemed determined to say no to any new tax increases.

“Spending is the problem,” declared the House speaker, John Boehner. “Spending must be the focus.” Reflecting the views of many of her Republican colleagues, Representative Martha Roby said Wednesday that Mr. Obama “already got his tax increase” as part of the January agreement over the “fiscal cliff” and that no further increases were necessary.

Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

On the spending side, Republicans are resisting cuts to defense. That implies brutalizing cuts in nondefense discretionary areas, like education and environment, which are already set to fall to their lowest level as a share of the economy since the 1950s.

As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined. Clearly then, there is both ample room and justification to reduce the deficit by curbing tax breaks at the high end, as Mr. Obama has proposed and Republicans have rejected.

Raising taxes at the top is neither punitive nor gratuitous. It is a needed step, both to achieve near-term budget goals and to lay the foundation for a healthy budget in the future. As the economy strengthens and the population ages, more taxes will be needed from further down the income scale, both to meet foreseeable commitments, especially health care, as well as unforeseeable developments, from wars to technological challenges. But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time.

    Why Taxes Have to Go Up, NYT, 21.2.2013,






Immigration Reform and Workers’ Rights


February 20, 2013
The New York Times


Members of Congress and President Obama have been working in earnest to deliver on their promise to overhaul immigration this year. Mr. Obama would clearly prefer a bipartisan bill, and last week the Senate Judiciary Committee held its first hearing on possible changes in immigration law. News reports last weekend suggested that the White House would fashion its own bill should negotiations between Republican and Democratic supporters of reform collapse.

Yet, in all the talk of providing a path to citizenship for millions of undocumented workers while tightening border security, one important issue has, so far, received only passing mention: stronger protections for immigrant workers against exploitation and abuse. Such protections, essential to any reform plan, would help rid the system of bottom-feeding employers who hire and underpay and otherwise exploit cheap immigrant labor, dragging down wages and workplace standards for everyone.

Such abuses are easily visited on immigrant workers by unscrupulous employers who use the threat of deportation to force their victims into silence. This imbalance of power harms workers who toil in the shadows. But the system that recruits legal temporary workers is also a mess. In the event that an immigration overhaul greatly expands the number of guest workers — even hard-line Republicans have been talking about adding temporary visas in agriculture and in high-tech industries — it is crucial to avoid making the mess even bigger.

A new report by a coalition of labor, immigrant and human-rights groups has identified and examined “disturbingly common patterns” of abuse in America’s guest-worker programs. They are an alphabet-soup of visas with names like H-1B, H-2A, H-2B, J-1 and A-3, all having their own rules and little in common except, the report said, workers who are frequently victimized by “fraud, discrimination, severe economic coercion, retaliation, blacklisting and, in some cases, forced labor, indentured servitude, debt bondage and human trafficking.”

The abuses begin overseas, where workers pay recruiters steep fees and start their new lives in deep debt. Unable to leave abusive employers and with little access to the legal system, they suffer in silence. Those who do speak out are threatened, fired, deported, blacklisted. They have little opportunity to complain about unsafe working conditions, to sue for stolen wages or to assert their rights to overtime and time off.

Overhauling visa programs to ensure workers’ rights should be in the thick of the immigration discussion. For one thing, it’s a way to move past the deep divisions that have stalled reform. Labor unions have been wary of bills that include guest-worker programs because they don’t want the competition. But in a promising shift, the A.F.L.-C.I.O. and Service Employees International Union have joined forces with an old adversary, the Chamber of Commerce, in the current push for reform. The unions recognize that deporting 11 million undocumented immigrants is a delusion, and that the benefits of legalizing them far outweigh keeping them outside the law.

And if immigrant workers are free to assert their rights without fear, to bargain collectively and blow the whistle on bad employers, American workers can only benefit, too.

    Immigration Reform and Workers’ Rights, NYT, 20.2.103,






North Carolina Approves Steep Benefit Cuts

for Jobless in Bid to Reduce Debt


February 13, 2013
The New York Times


North Carolina lawmakers approved deep cuts to benefits for the jobless on Wednesday, in a state that has one of the nation’s highest unemployment rates.

In a debt-reducing effort, the Republican-controlled legislature voted to cut maximum weekly benefits to $350 from $535, a 35 percent drop; reduce the maximum number of weeks for collecting benefits to between 12 and 20 weeks from 26 weeks; and tighten requirements to qualify. The cuts would begin with new jobless claims on July 1.

If the bill is signed by Gov. Pat McCrory, as expected, North Carolina would be the eighth state to roll back jobless benefits under the growing financial burden of the recession.

The measure’s sponsors said it would spur job growth by paying down $2.5 billion in debt to the federal government. The bill passed the State Senate by a vote of 36 to 12.

“North Carolina owes the federal government $2.5 billion because of a broken unemployment insurance system,” said Mr. McCrory, a Republican. “We’re going to pay down that debt, make the system solvent and provide an economic climate that allows businesses, large and small, to put people back to work.

But critics warned of dangerous consequences. The state has the nation’s fifth-highest unemployment rate, at 9.2 percent, compared with the national average of 7.9 percent.

“We have a jobs crisis — there are about three unemployed workers for every job,” said Bill Rowe, the director of advocacy for the North Carolina Justice Center, which aids low income workers. “We’re turning down money to make cuts for what are not really legitimate reasons.”

The bill also disqualifies 170,000 unemployed people — 39 percent of the 438,000 jobless — from federal emergency extended benefits because it reduces the number of weeks people can receive benefits to below 26. The federal government has set 26 weeks as the national requirement for receiving federal funds.

“Families struggling to secure their place in the middle class will suffer a grievous blow, and the state’s economy will lose $780 million in federal funds that are vital to reducing North Carolina’s high unemployment rate,” said Seth D. Harris, the acting labor secretary.

Since the recession began, seven other states have reduced unemployment benefits: Arkansas, Florida, Georgia, Illinois, Michigan, Missouri and South Carolina. But North Carolina’s cuts would be the “harshest yet,” according to the National Employment Law Project, an employment-rights advocacy group, since the reduction in benefits is bigger than in other states.

North Carolina was forced to borrow $2.5 billion from the federal government starting in 2008, after its unemployment fund went bankrupt. The bill would allow the fund to be out of debt by 2015 instead of 2018.

    North Carolina Approves Steep Benefit Cuts for Jobless in Bid to Reduce Debt, NYT, 13.2.2013,






The Conscience of a Corporation


February 10, 2013
The New York Times


DAVID GREEN, who built a family picture-framing business into a 42-state chain of arts and crafts stores, prides himself on being the model of a conscientious Christian capitalist. His 525 Hobby Lobby stores forsake Sunday profits to give employees their biblical day of rest. The company donates to Christian counseling services and buys holiday ads that promote the faith in all its markets. Hobby Lobby has been known to stick decals over Botticelli’s naked Venus in art books it sells.

And the company’s in-house health insurance does not cover morning-after contraceptives, which Green, like many of his fellow evangelical Christians, regards as chemical abortions.

“We’re Christians,” he says, “and we run our business on Christian principles.”

This has put Hobby Lobby at the leading edge of a legal battle that poses the intriguing question: Can a corporation have a conscience? And if so, is it protected by the First Amendment.

The Affordable Care Act, a k a Obamacare, requires that companies with more than 50 full-time employees offer health insurance, including coverage for birth control. Churches and other purely religious organizations are exempt. The Obama administration, in an unrequited search for compromise, has also proposed to excuse nonprofit organizations such as hospitals and universities if they are affiliated with religions that preach the evil of contraception. You might ask why a clerk at Notre Dame or an orderly at a Catholic hospital should be denied the same birth control coverage provided to employees of secular institutions. You might ask why institutions that insist they are like everyone else when it comes to applying for federal grants get away with being special when it comes to federal health law. Good questions. You will find the unsatisfying answers in the Obama handbook of political expediency.

But these concessions are not enough to satisfy the religious lobbies. Evangelicals and Catholics, cheered on by anti-abortion groups and conservative Obamacare-haters, now want the First Amendment freedom of religion to be stretched to cover an array of for-profit commercial ventures, Hobby Lobby being the largest litigant. They are suing to be exempted on the grounds that corporations sometimes embody the faith of the individuals who own them.

“The legal case” for the religious freedom of corporations “does not start with, ‘Does the corporation pray?’ or ‘Does the corporation go to heaven?’ ” said Kyle Duncan, general counsel of the Becket Fund for Religious Liberty, which is representing Hobby Lobby. “It starts with the owner.” For owners who have woven religious practice into their operations, he told me, “an exercise of religion in the context of a business” is still an exercise of religion, and thus constitutionally protected.

The issue is almost certain to end up in the Supreme Court, where the betting is made a little more interesting by a couple of factors: six of the nine justices are Catholic, and this court has already ruled, in the Citizens United case, that corporations are protected by the First Amendment, at least when it comes to freedom of speech. Also, we know that at least four members of the court don’t think much of Obamacare.

In lower courts, advocates of the corporate religious exemption have won a few and lost a few. (Hobby Lobby has lost so far, and could eventually face fines of more than $1 million a day for defying the law. The company’s case is now before the Court of Appeals for the 10th Circuit.)

You can feel some sympathy for David Green’s moral dilemma, and even admire him for practicing what he preaches, without buying the idea that la corporation, c’est moi. Despite the Supreme Court’s expansive view of the First Amendment, Hobby Lobby has a high bar to get over — as it should.

For one thing, under Title VII of the Civil Rights Act — which was enacted at the behest of religious groups — companies cannot impose religious tests on their employees. They can’t hire only Catholics, or refuse to hire Catholics. They cannot oblige you to practice the same faith their owners do. Companies are, by legal design, zones of theological diversity and tolerance. So Green, whose company is privately held, can spend his own money to promote his faith, but it would be an act of legal overreach to say that he can impose his faith on his employees by denying them benefits the government has widely required.

“If an employer can craft a benefits system around his religious beliefs, that’s a slippery slope,” said Marci Hamilton, a professor at the Benjamin N. Cardozo School of Law and a critic of religious exemptions. “Can you deny treatment of AIDS victims because your religion disapproves of homosexuals? What if your for-profit employer is a Jehovah’s Witness, who doesn’t believe in blood transfusions?”

Also, courts tend to distinguish between laws that make you do something and laws that merely require a financial payment. In the days of the draft, conscientious objectors were exempted from conscription. A sincere pacifist could not be obliged to kill. But a pacifist is not excused from paying taxes just because he or she objects to the money being spent on war. Doctors who find abortions morally abhorrent are not obliged to perform them. But you cannot withhold taxes because some of the money goes to Medicaid-financed abortion.

“Anybody who pays taxes can find something deeply offensive in what the government does,” said Robert Post, a First Amendment expert at Yale Law School. “ ‘I’m not paying my taxes because of torture at Guantánamo.’ ‘I’m not paying my taxes because of drones.’

“People can’t pick and choose their taxes, because you couldn’t have a functioning tax system.”

I don’t know what the courts will say, but common sense says the contraception dispute is more like taxation than conscription. Nothing in the Obamacare mandate obliges anyone to use contraception if, for example, she is in the tiny minority of American Catholics who take the church’s doctrine on birth control seriously. And Hobby Lobby’s policy doesn’t prevent the use of morning-after pills: it just assures that if an employee does use emergency contraception, she pays for it out of her Hobby Lobby paycheck rather than her Hobby Lobby insurance.

Douglas Laycock, a law professor at the University of Virginia who often sides with proponents of broader religious liberty, has taken to warning his friends that their aggressive positions on abortion, gay rights and now contraception are undermining the longstanding American respect for free exercise of religion.

“The religious community cannot take religious liberty for granted,” he said in a speech before the contraceptive issue blew up. “It needs to expend a lot more energy defending the right to religious liberty, and it would help to spend a lot less energy attacking the liberty of others.”

Cases like Hobby Lobby, he told me, have compounded his worry.

“Interfering with someone else’s sex life is a pretty unpopular thing to do,” he said. “These disputes are putting the conservative churches on the losing side of the sexual revolution. I think they are taking a risk of turning large chunks of the population against the idea of religious exemptions altogether.”

But Laycock’s is a lonely voice among advocates of religious exemptions. More typical is Rick Warren, the evangelical megachurch pastor, who says the battle to preserve religious liberty “in all areas of life” may be “the civil rights movement of this decade.” Warren goes on to say — I am not making this up — that “Hobby Lobby’s courageous stand, in the face of enormous pressure and fines,” is the equivalent of the Birmingham bus boycott.

When I read that kind of rhetoric from our country’s loftier pulpits, I understand why the fastest-growing religious affiliation in America is “none.”

    The Conscience of a Corporation, NYT, 10.2.2013,






A Tax to Pay for War


February 10, 2013
The New York Times



NOW that Congress has discarded the idea that taxes can never be raised, we must change how we pay for the wars we ask our military to fight. We should institute a war tax.

With leading officials calling for action in Syria, and the American military providing support for France’s intervention in Mali, the need for such a tax is urgent. And President Obama’s call for tax reform as the next round of budget negotiations begins offers a perfect opportunity to enact it.

Military spending has been declining since 2009, easing the conflict between pursuing our national security interests and solving our fiscal crisis. But if we undertake new military interventions, that tension will come roaring back.

Those who look at our military spending as a percent of gross domestic product and argue that we could spend more are right. At our current level of $646 billion, we are spending roughly 4 percent of G.D.P. on national defense, well below cold war averages. The missing part of their argument is whether we can afford to pay for it now or would have to borrow, adding to the national debt. After all, war spending — like all government spending — wrecks public finances only when more money is spent than is brought in.

This simple equation is nothing new. Three years ago, the Senate Budget Committee adopted a bipartisan amendment requiring that wars be paid for. The Simpson-Bowles deficit-reduction commission and Senator Al Franken, Democrat of Minnesota, both proposed doing much the same thing. None of these proposals resolved the question of whether to pay for future wars through spending cuts or raising more revenue. Now that Congress has finally passed legislation letting taxes increase, we must make a choice and require a tax surcharge to pay for any military operation.

War traditionally has motivated major changes in tax policy. The Civil War brought the first income tax. World War I made the federal income tax permanent. World War II brought tax withholding. In 1969, at the height of the Vietnam War, the United States ran a budget surplus because of a tax surcharge Congress forced President Lyndon B. Johnson to accept.

Today’s budget negotiations offer a similar opportunity to make a surcharge permanent. President Obama called for counting as savings the money that will not be spent as the war in Afghanistan winds down. Many decried the scheme as playing with funny money because he plans to exit Afghanistan in 2014 anyway; the savings only exist because of an accounting trick in Congressional budgeting. But if those savings were associated with an actual policy change, they would start looking more real.

Since the Budget Control Act already caps military spending, there is an easy way to implement the surcharge: any spending over the caps would require it. If we felt the need to use the military and could do so under the spending caps, as the Obama administration did in 2011 responding to the earthquake in Japan and the uprising in Libya, no surcharge would be necessary. But if military action required supplemental financing, any amount over the caps would be offset with new revenue raised by an automatic surcharge on taxes.

By tying military action to additional revenue, the president would actually have a freer hand in deciding when to use force. Every argument the Obama administration makes for military action would explicitly include a call for increased taxes, forcing the question of whether the stakes in the military situation are worth the cost. If the American people agree they are worth it, the president will get both the political support and financing he needs.

Syria is the most immediate example. We now know that some top officials have argued for arming the rebels, as the secretaries of state and defense and the chairman of the Joint Chiefs of Staff did last year. Others argue for an even more robust military response, while detractors insist that we should learn from Iraq and not get involved at all.

Such decisions should not be divorced from economic considerations, but neither should we allow our finances to prevent us from pursuing vital American security interests. Putting in place a permanent tax surcharge to pay for wars would ensure that we could achieve our interests throughout the world without further worsening our finances.

If military action is worth our troops’ blood, it should be worth our treasure, too — not just in the abstract, but in the form of a specific ante by every American.


R. Russell Rumbaugh, an Army veteran and a former analyst

at the Central Intelligence Agency and the Senate Budget Committee,

is a senior associate at the Stimson Center,

studying federal spending on military and foreign affairs.

    A Tax to Pay for War, NYT, 10.2.2013,






Quietly Killing a Consumer Watchdog


February 10, 2013
The New York Times


If you’d like to know why Republicans are trying to shut down the Consumer Financial Protection Bureau, take a look at three things the agency has already accomplished in its first 18 months:

¶It called a halt to predatory practices by mortgage lenders, ensuring that borrowers are not saddled with loans they can’t afford and preventing brokers from earning higher commissions for higher interest rates.

¶It won an $85 million settlement from American Express, which it accused of deceptive and discriminatory marketing and billing practices.

¶It opened an investigation into questionable marketing practices by banks and credit card companies on college campuses, which often take place after undisclosed financial arrangements are made with universities.

The consumer bureau has taken seriously its mandate to protect the public from the kinds of abuses that helped lead to the 2009 recession, and it has not been intimidated by the financial industry’s army of lobbyists. That’s what worries Republicans. They can’t prevent the bureau from regulating their financial supporters. Having failed to block the creation of the bureau in the 2010 Dodd-Frank financial reform bill, they are now trying to take away its power by filibuster, and they may well succeed.

The bureau cannot operate without a director. Under the Dodd-Frank law, most of its regulatory powers — particularly its authority over nonbanks like finance companies, debt collectors, payday lenders and credit agencies — can be exercised only by a director. Knowing that, Republicans used a filibuster to prevent President Obama’s nominee for director, Richard Cordray, from reaching a vote in 2011. Mr. Obama then gave Mr. Cordray a recess appointment, but a federal appeals court recently ruled in another case that the Senate was not in recess at that time because Republicans had arranged for sham sessions.

That opinion, if upheld by the Supreme Court, is likely to apply to Mr. Cordray as well, which could invalidate the rules the bureau has already enacted. The president has renominated Mr. Cordray, but Republicans have made it clear that they will continue to filibuster, using phony arguments to keep the agency from operating.

Earlier this month, 43 Senate Republicans wrote a letter to the president, vowing to block any nominee until “key structural changes” are made, including a bipartisan commission to run the bureau instead of one director, and Congressional control of its appropriations. (It is now financed with bank fees paid to the Federal Reserve.)

These arguments are designed solely to give Congress more opportunities to stop financial regulation. A board evenly divided between the parties would quickly reach a stalemate and become inoperative, much as the Federal Election Commission has become. Besides, board members can be filibustered as easily as a director.

Other bank regulators, like the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, are not subject to the appropriations process, as a shield against political interference. Congress does, however, control the budgets of the Securities and Exchange Commission and the Commodity Futures Trading Commission, and House Republicans have voted to strip those agencies of money needed to regulate derivatives and curb abuses. The consumer bureau was enacted by law, and now Republicans are using backdoor methods to destroy it. There is no greater argument for Senate Democrats to ban filibusters of presidential nominees, particularly when the future of an entire agency is at stake.

    Quietly Killing a Consumer Watchdog, NYT, 10.2.2013,






Standard & Poor’s Stands Accused


February 5, 2013
The New York Times


The financial crisis could never have happened without the credit-ratings agencies issuing stellar ratings on toxic mortgage securities that inflated the bubble. Before the Justice Department filed civil fraud charges this week against Standard & Poor’s, the nation’s largest credit-ratings agency, it seemed as if the entire ratings industry — which reaped record profits in the boom years — was going to escape, unrepentant and unpunished. That may now change.

But the underlying problem — a lack of proper regulation of the industry — remains unresolved. Nearly three years after the passage of the Dodd-Frank financial reform law, there is no sign that federal regulators are willing to propose, let alone finalize, tough rules to reform the agencies. Worse, regulators have repeatedly asserted legal positions that shield the agencies from investor lawsuits, despite questions of misrepresentation, negligence and fraud in the rating of mortgage investments.

Still, the suit against S.&P. and its parent, McGraw-Hill Companies, is a move toward accountability. It alleges that, from September 2004 through October 2007, S.&P. “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities, and that the agency falsely represented that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

What sets the case apart is that the government brought the case rather than water down a settlement to suit S.&P.’s demands. The government originally sought a penalty in excess of $1 billion and an admission to a least one count of fraud. When S.&P. balked, the government sued and now is seeking a $5 billion penalty. Too often, the government has accepted settlements with fines that are too small compared with the harm done and allowed the defendants to neither admit nor deny the charges.

The Justice Department brought the case not under federal securities law, which has proved difficult to apply, but under a 1989 banking law intended to protect taxpayers from frauds against federally insured financial institutions. The government faces a lower burden of proof when the victims are federally insured banks, and, in contrast to private securities’ lawsuits, can quickly issue subpoenas to gather more evidence. This is the sort of aggressive legal theorizing that has been missing in the government’s approach to potential civil and criminal cases stemming from the financial crisis.

For many years, the ratings agencies have defended themselves in civil lawsuits by private parties by saying that their ratings are independent opinions, protected by the First Amendment. A court ruling has found that the questionable ratings are not opinions, but misrepresentations. The government’s case will benefit from that view. By charging S.&P. with violating its own standards in issuing top ratings for trashy securities, the government has lifted the allegations out of the realm of shoddy practices and into the realm of fraud — where they belong.

    Standard & Poor’s Stands Accused, NYT, 5.2.2013,






U.S. Growth Halted

as Federal Spending Fell in 4th Quarter


January 30, 2013
The New York Times


The federal government helped bring the economic recovery to a virtual halt late last year as cuts in military spending and other factors overwhelmed the Federal Reserve’s expanded campaign to stimulate growth.

Disappointing data released Wednesday underscore how tighter fiscal policy may continue to weigh on growth in the future as government spending, which increased steadily in recent decades and expanded hugely during the recession, plays a diminished role in the United States economy.

Significant federal spending cuts are scheduled to take effect March 1, and most Americans are also now paying higher payroll taxes with the expiration of a temporary cut in early January.

The economy contracted at an annual rate of 0.1 percent in the last three months of 2012, the worst quarter since the economy crawled out of the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary government figures indicated on Wednesday. The Fed, in a separate appraisal, said economic activity “paused in recent months.”

Still, economists said the seemingly bleak gross domestic product report was not a sign that another recession was looming. The preliminary data showed relatively strong spending by consumers and businesses, even as military spending posted its sharpest quarterly drop in 40 years.

Forecasters expect that growth this year will rebound to a still-anemic 1.5 percent, a little lower than the pace it has managed over the last three years.

“This is the tip of the iceberg on fiscal austerity from Washington,” said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch. “It was exaggerated this quarter by the unusually large drop in defense spending, but that and higher taxes will start hurting” in the coming months.

The drop in American exports stemmed in part from a decline in economic growth in Europe, where governments have also been cutting spending in a bid to balance budgets. The parallel contractions are likely to provide fodder for economists who argue that austerity efforts have gone too far in many developed economies.

The surprisingly weak numbers could also force politicians to limit the cuts that are scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks and strengthen the argument that deficit reduction is a lesser concern than job creation.

“Our economy is facing a major headwind, and that’s Republicans in Congress,” said the White House spokesman Jay Carney.

Republicans said the White House was not advancing concrete plans for creating new jobs and stimulating the economy.

“The bad GDP news makes it even more unbelievable that Obama has been ignoring job growth in his 2nd term agenda,” Reince Priebus, chairman of the Republican National Committee, posted on Twitter.

The Fed said Wednesday that it would continue its efforts to revive growth by holding short-term interest rates near zero and increasing its holdings of Treasury securities and mortgage-backed securities by $85 billion a month. Those policies aim to reduce borrowing costs for businesses and consumers.

“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” the Fed said in a statement.

Unemployment has not declined since the Fed started its latest round of purchases in September. The rate was 7.8 percent in December, the same as three months earlier. The government will report the rate for January on Friday.

Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative G.D.P. number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009, although revisions in February and March could alter the figure.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan.

Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.

The 22.2 percent drop in military spending, along with the drop in inventories and exports, outweighed more positive indicators in the private sector, he said. For example, residential investment jumped 15.3 percent, a sign that the housing sector continued to recover. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies were still spending.

For the entire year, the economy grew by 2.2 percent, a slight improvement from the 1.8 percent annual rate in 2011.

Despite the unexpected contraction, investors reacted mildly to the news, with the Standard & Poor’s 500-stock index falling less than half a percent.

If it were not for the drop in total government spending, the economy would have expanded at an annual rate of 1.2 percent in the fourth quarter, said Nigel Gault, chief United States economist at IHS Global Insight.

Alan Krueger, chairman of the president’s Council of Economic Advisers, wrote in a blog post that “a likely explanation” for the plunge in military spending was concern among contractors about the automatic spending cuts, which were set to take effect on Jan. 1 but were rescheduled for March 1. The decline in federal spending follows an earlier drop in state and local spending, which fell by 3.4 percent in 2011 and 1.3 percent in 2012.

The compromise between President Obama and Congress earlier this month allowed a temporary cut in Social Security taxes to expire, which is also expected to crimp growth in the first quarter. The change will cost a worker earning $50,000 a year an extra $1,000 annually.

A consumer confidence survey released Tuesday by the Conference Board showed a sharp downturn in January, which economists attributed in part to financial anxiety arising from the reduction in take-home pay.

In the long term, government’s share of economic output “is a question of values and choices and what size you think the government should be,” Mr. Gault said. But in the short term, he said, steep cutbacks make for risky economic policy.

“We’re being more austere than we need to be,” he said. “The economy isn’t growing that fast and you don’t want to be taking away stimulus now.”

    U.S. Growth Halted as Federal Spending Fell in 4th Quarter, NYT, 30.1.2013,






The Rise of the Permanent Temp Economy


January 26, 2013
3:41 pm
The New York Times
A Gathering of Opinion From Around the Web


Politicians across the political spectrum herald "job creation," but frightfully few of them talk about what kinds of jobs are being created. Yet this clearly matters: According to the Census Bureau, one-third of adults who live in poverty are working but do not earn enough to support themselves and their families.

A quarter of jobs in America pay below the federal poverty line for a family of four ($23,050). Not only are many jobs low-wage, they are also temporary and insecure. Over the last three years, the temp industry added more jobs in the United States than any other, according to the American Staffing Association, the trade group representing temp recruitment agencies, outsourcing specialists and the like.

Low-wage, temporary jobs have become so widespread that they threaten to become the norm. But for some reason this isn't causing a scandal. At least in the business press, we are more likely to hear plaudits for "lean and mean" companies than angst about the changing nature of work for ordinary Americans.

How did we arrive at this state of affairs? Many argue that it was the inevitable result of macroeconomic forces - globalization, deindustrialization and technological change - beyond our political control. Yet employers had (and have) choices. Rather than squeezing workers, they could have invested in workers and boosted product quality, taking what economists call the high road toward more advanced manufacturing and skilled service work. But this hasn't happened. Instead, American employers have generally taken the low road: lowering wages and cutting benefits, converting permanent employees into part-time and contingent workers, busting unions and subcontracting and outsourcing jobs. They have done so, in part, because of the extraordinary evangelizing of the temp industry, which rose from humble origins to become a global behemoth.

The story begins in the years after World War II, when a handful of temp agencies were started, largely in the Midwest. In 1947, William Russell Kelly founded Russell Kelly Office Service (later known as Kelly Girl Services) in Detroit, with three employees, 12 customers and $848 in sales. A year later, two lawyers, Aaron Scheinfeld and Elmer Winter, founded a similarly small outfit, Manpower Inc., in Milwaukee. At the time, the future of these fledgling agencies was no foregone conclusion. Unions were at the peak of their power, and the protections that they had fought so hard to achieve - workers' compensation, pensions, health benefits and more - had been adopted by union and nonunion employers alike.

But temp leaders were creating a new category of work (and workers) that would be exempt from such protections.

To avoid union opposition, they developed a clever strategy, casting temp work as "women's work," and advertising thousands of images of young, white, middle-class women doing a variety of short-term office jobs. The Kelly Girls, Manpower's White Glove Girls, Western Girl's Cowgirls, the American Girls of American Girl Services and numerous other such "girls" appeared in the pages of Newsweek, Business Week, U.S. News & World Report, Good Housekeeping, Fortune, The New York Times and The Chicago Daily Tribune. In 1961 alone, Manpower spent $1 million to put its White Glove Girls in the Sunday issue of big city newspapers across the country.

The strategy was an extraordinary success. Not only did the Kelly Girls become cultural icons, but the temp agencies grew and grew. By 1957, Kelly reported nearly $7 million in sales; in 1962, with 148 branches and $24 million in sales, it went public. Meanwhile, by 1956 Manpower had 91 branches in 65 cities (and 10 abroad) and, with sales at $12 million annually, employed some 4,000 workers a day. In 1962, Manpower also went public, boasting 270 offices across four continents and over $40 million in sales.

The temp agencies' Kelly Girl strategy was clever (and successful) because it exploited the era's cultural ambivalence about white, middle-class women working outside the home. Instead of seeking to replace "breadwinning" union jobs with low-wage temp work, temp agencies went the culturally safer route: selling temp work for housewives who were (allegedly) only working for pin money. As a Kelly executive told The New York Times in 1958, "The typical Kelly Girl... doesn't want full-time work, but she's bored with strictly keeping house. Or maybe she just wants to take a job until she pays for a davenport or a new fur coat."

Protected by the era's gender biases, early temp leaders thus established a new sector of low-wage, unreliable work right under the noses of powerful labor unions. While greater numbers of employers in the postwar era offered family-supporting wages and health insurance, the rapidly expanding temp agencies established a different precedent by explicitly refusing to do so. That precedent held for more than half a century: even today "temp" jobs are beyond the reach of many workplace protections, not only health benefits but also unemployment insurance, anti-discrimination laws and union-organizing rights.

By 1967 Manpower employed more workers than corporate giants like Standard Oil of New Jersey and the U.S. Steel Corporation. Manpower and the other temp agencies had gained a foothold, and temporary employment was widely considered a legitimate part of the economy. Now eyeing a bigger prize - expansion beyond pink-collar work - temp industry leaders dropped their "Kelly Girl" image and began to argue that all employees, not just secretaries, should be replaced by temps. And rather than simply selling temps, they sold a bigger product: a lean and mean approach to business that considered workers to be burdensome costs that should be minimized.

For example, in 1971 the recently renamed Kelly Services ran a series of ads in The Office, a human resources journal, promoting the "Never-Never Girl," who, the company claimed: "Never takes a vacation or holiday. Never asks for a raise. Never costs you a dime for slack time. (When the workload drops, you drop her.) Never has a cold, slipped disc or loose tooth. (Not on your time anyway!) Never costs you for unemployment taxes and Social Security payments. (None of the paperwork, either!) Never costs you for fringe benefits. (They add up to 30% of every payroll dollar.) Never fails to please. (If your Kelly Girl employee doesn't work out, you don't pay.)"

Around the same time, the New York agency Olsten Temporary Help Services announced a new product: "The Semi-Permanent Employee." Comparing its innovation to the wireless, the phonograph and the telephone, company leaders presented the "Semi-Permanent" as "a new kind of temporary employee...not for days or even weeks, but for two- and three-month periods to help your business grow more profitably." This new "invention," Olsten told businesses, would boost profits by shrinking the payroll (to "a slim, trim personnel budget, not one which chokes profitability"); by smoothing over the ebb and flow of the business cycle ("you needn't carry 'dead wood' for months when business is slow"); and by cutting training costs (employers would get "trained personnel without having to engage in expensive and unprofitable retraining").

By peddling products like the "Semi-Permanent Employee," the "Never-Never Girl" and more, temp industry leaders promoted a model in which permanent employees were a "costly burden," a "headache" that needed relief. "Stop paying help you don't use," Western Services advised in 1969. It even urged employers to convert their own permanent employees to temps, as in a 1971 advertisement in The Personnel Journal: "Just say goodbye... then shift them to our payroll and say hello again!"

According to the temp industry, workers were just another capital investment; only the product of the labor had any value. The workers themselves were expendable.

Paradoxically, this model ran counter to the conventional management wisdom of the day. The same year that the "Never-Never Girl" appeared in the pages of national business journals, one of the best-selling management books was "Up the Organization: How to Stop the Organization From Stifling People and Strangling Profits," in which the former Avis Rent-a-Car president Robert Townsend argued for treating workers as valuable assets rather than headaches to be squelched. The "human relations" school of management touted employee satisfaction as the best route to boosting profits.

But temp industry leaders continued to encourage companies to "rent" workers rather than "buy" them. And perhaps even more persuasive than their arguments were the practical tools they were able to offer: thousands of low-cost temps, without the hassle of having to hire, train, supervise and fire them. Becoming lean and mean had never been easier, and thousands of companies began to go the temping route, especially during the deep economic recessions of the 1970s. Temporary employment skyrocketed from 185,000 temps a day to over 400,000 in 1980 - the same number employed each year in 1963. Nor did the numbers slow when good times returned: even through the economic boom of the '90s, temporary employment grew rapidly, from less than 1 million workers a day to nearly 3 million by 2000.

The temp industry's continued growth even in a boom economy was a testament to its success in helping to forge a new cultural consensus about work and workers. Its model of expendable labor became so entrenched, in fact, that it became "common sense," leaching into nearly every sector of the economy and allowing the newly renamed "staffing industry" to become sought-after experts on employment and work force development. Outsourcing, insourcing, offshoring and many other hallmarks of the global economy (including the use of "adjuncts" in academia, my own corner of the world) owe no small debt to the ideas developed by the temp industry in the last half-century.

A growing number of people call for bringing outsourced jobs back to America. But if they return as shoddy, poverty-wage jobs - jobs designed for "Never-Never Girls" rather than valued employees - we won't be better off for having them. If we want good jobs rather than just any jobs, we need to figure out how to preserve what is useful and innovative about temporary employment while jettisoning the anti-worker ideology that has come to accompany it.

Erin Hatton, an assistant professor of sociology

at the State University of New York, Buffalo,

is the author of "The Temp Economy:

From Kelly Girls to Permatemps in Postwar America."

    The Rise of the Permanent Temp Economy, NYT, 26.1.2013,






For Obama’s New Term, Start Here


January 23, 2013
The New York Times


Point to a group of toddlers in an upper-middle-class neighborhood in America, and it’s a good bet that they will go to college, buy nice houses and enjoy white-collar careers.

Point to a group of toddlers in a low-income neighborhood, and — especially if they’re boys — they’re much more likely to end up dropping out of school, struggling in dead-end jobs and having trouble with the law.

Something is profoundly wrong when we can point to 2-year-olds in this country and make a plausible bet about their long-term outcomes — not based on their brains and capabilities, but on their ZIP codes. President Obama spoke movingly in his second Inaugural Address of making equality a practice as well as a principle. So, Mr. President, how about using your second term to tackle this most fundamental inequality?

For starters, this will require a fundamental rethinking of antipoverty policy. American assistance programs, from housing support to food stamps, have had an impact, and poverty among the elderly has fallen in particular (they vote in high numbers, so government programs tend to cater to them). But, too often, such initiatives have addressed symptoms of poverty, not causes.

Since President Lyndon Johnson declared a “war on poverty,” the United States has spent some $16 trillion or more on means-tested programs. Yet the proportion of Americans living beneath the poverty line, 15 percent, is higher than in the late 1960s in the Johnson administration.

What accounts for the cycles of poverty that leave so many people mired in the margins, and how can we break these cycles? Some depressing clues emerge from a new book, “Giving Our Children a Fighting Chance,” by Susan Neuman and Donna Celano.

Neuman and Celano focus on two neighborhoods in Philadelphia. In largely affluent Chestnut Hill, most children have access to personal computers and the shops have eight children’s books or magazines on sale for each child living there.

Take a 20-minute bus ride on Germantown Avenue and you’re in the Philadelphia Badlands, a low-income area inhabited mostly by working-class blacks and Hispanics. Here there are few children’s books, few private computers and only two public computers for every 100 children.

On top of that, there’s a difference in parenting strategies, the writers say. Upper-middle-class parents in America increasingly engage in competitive child-rearing. Parents send preschoolers to art classes and violin lessons and read “Harry Potter” books to bewildered children who don’t yet know what a wizard is.

Meanwhile, partly by necessity, working-class families often take a more hands-off attitude to child-raising. Neuman and Celano spent 40 hours monitoring parental reading in the public libraries in each neighborhood. That was easy in the Badlands — on an average day “not one adult entered the preschool area in the Badlands.”

When I was a third-grader, a friend struggling in school once went with me to the library, and my mother helped him get a library card. His grandmother then made him return it immediately, for fear that he would run up library fines.

The upshot is that many low-income children never reach the starting line, and poverty becomes self-replicating.

Maybe that’s why some of the most cost-effective antipoverty programs are aimed at the earliest years. For example, the Nurse-Family Partnership has a home-visitation program that encourages new parents of at-risk children to amp up the hugging, talking and reading. It ends at age 2, yet randomized trials show that those children are less likely to be arrested as teenagers and the families require much less government assistance.

Or take Head Start. Critics have noted that the advantage its preschoolers gain in test scores fades by third grade, but scholars also have found that Head Start has important impacts on graduates, including lessening the chance that they will be convicted of a crime years later.

James Heckman, a Nobel Prize-winning economist, argues that the most crucial investments we as a country can make are in the first five years of life, and that they pay for themselves. Yet these kinds of initiatives are underfinanced and serve only a tiny fraction of children in need.

We don’t have any magic bullets. But randomized trials and long-term data give us a better sense of what works — and, for the most part, it’s what we’re not doing, like improved education, starting with early childhood programs for low-income families. Job-training for at-risk teenagers also has an excellent record. Marriage can be a powerful force, too, but there’s not much robust evidence about which programs work.

So, President Obama, to fulfill the vision for your second term, how about redeploying the resources we’ve spent on the war in Afghanistan to undertake nation-building at home — starting with children so that they will no longer be limited by their ZIP codes.

    For Obama’s New Term, Start Here, NYT, 23.1.2013,






Share of the Work Force in a Union

Falls to a 97-Year Low, 11.3%


January 23, 2013
The New York Times


The long decline in the number of American workers belonging to labor unions accelerated sharply last year, according to data reported on Wednesday, sending the unionization rate to its lowest level in close to a century.

The Bureau of Labor Statistics said the total number of union members fell by 400,000 last year, to 14.3 million, even though the nation’s overall employment rose by 2.4 million. The percentage of workers in unions fell to 11.3 percent, down from 11.8 percent in 2011, the bureau found in its annual report on union membership. That brought unionization to its lowest level since 1916, when it was 11.2 percent, according to a study by two Rutgers economists, Leo Troy and Neil Sheflin.

Labor specialists cited several reasons for the steep one-year decline in union membership. Among the factors were new laws that rolled back the power of unions in Wisconsin, Indiana and other states, the continued expansion by manufacturers like Boeing and Volkswagen in nonunion states and the growth of sectors like retail and restaurants, where unions have little presence.

“These numbers are very discouraging for labor unions,” said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “It’s a time for unions to stop being clever about excuses for why membership is declining, and it’s time to figure out how to devise appeals to the workers out there.”

Labor unions have boasted of their political successes in helping re-elect President Obama and in helping Democrats pick up seats in Congress.

But the figures announced by the bureau point to grave problems for the future of organized labor. The portion of private sector workers in unions fell to just 6.6 percent last year, from 6.9 percent in 2011, causing some labor specialists to question whether private sector unions were sinking toward irrelevance. Private sector union membership peaked at around 35 percent in the 1950s.

The report showed particular drops in union membership in two groups where unions have long been strong: local government employees and manufacturing workers.

Union membership showed sharp drops in Wisconsin, which passed a law in 2011 curbing the collective bargaining rights of many public employees, and in Indiana, which enacted a right-to-work law last February that may have prompted many workers to drop their union membership.

Such laws prohibit requiring employees at unionized workplaces to pay union dues or fees. The bureau’s report showed that union membership fell by 13 percent last year in Wisconsin and by 18 percent in Indiana — both unusually large numbers for a single year.

Barry T. Hirsch, a labor economist at Georgia State University, said an analysis he conducted found that the number of government employees in Wisconsin belonging to a union slid by 48,000 last year, to 139,000 from 187,000, as many public sector workers evidently decided to quit their unions after the Republican-led legislature stripped them of most of their bargaining rights.

Speaking about the nation as a whole, Professor Hirsch said: “I am really surprised that the drop in unionization was as large as it is in a single year, and it was particularly big in the public sector. It does seem you are seeing reductions in some of the states that you might expect.”

For instance, in Indiana, where the right to work law took effect last March, unionization dropped to 9.1 percent from 11.3 percent in 2011. Michigan enacted a similar law last month.

The bureau said union membership in the public sector — long a labor stronghold — fell to 35.9 percent in 2012, from 37 percent the previous year. The number of government workers in unions fell by 234,000, as many teachers, police officers and others lost their jobs. There were 7.3 million public employees in unions, compared with seven million private sector workers.

William Spriggs, the A.F.L.-
C.I.O.’s chief economist, took a more upbeat approach to the report, noting that the bureau had found increased union membership in California, Georgia, North Carolina, Oklahoma and Texas.

“It’s not a simple story that we don’t have our act together,” Mr. Spriggs said. “I would be more concerned if union membership was down among Latinos and Asian-Americans, because that’s a growing demographic, but it’s up.”

He acknowledged that unions were doing poorly in manufacturing, retail and elsewhere in the private sector, which has been adding jobs even as union membership continued a slide that has lasted for decades.

“Our labor laws do not favor unions organizing,” Mr. Spriggs said. “It would be one thing to say we’re bellyaching, but the Republican Party is really being vindictive against unions, and employers campaign very hard against workers unionizing.”

But Professor Chaison said now would seem a good time for unions to attract workers. “Workers should be looking to unions because of job insecurity and stagnant wages, but they’re not.”

In recent months, there has been an uptick in labor militancy as evidenced by recent protests at Walmarts across the nation and the one-day strike by fast-food workers in New York City last November. Both of those actions against nonunion employers protested what workers said were low wages and meager benefits. Union officials acknowledge that it is often hard to persuade a majority of employees at a big-box store or other workplaces to vote to unionize.

Glenn Spencer, vice president of the Workforce Freedom Initiative of the United States Chamber of Commerce, said Wednesday’s report “has some alarm bells ringing at union headquarters across Washington.”

With workers no longer spending their entire career at one employer and often switching jobs, he said workers no longer felt as attracted to unions.

“Unions have fundamentally had a hard time conveying to workers what their value proposition is, how they’re really going to make workers’ lives better,” Mr. Spencer said. “And if you look at union contracts and their rigid work rules, there is no incentive for employers to embrace unions either.”

According to the report, North Carolina has the lowest unionization rate, 2.9 percent, followed by Arkansas, at 3.2 percent. New York had the highest unionization rate, 23.2 percent, with Alaska second, at 22.4 percent.

The bureau said that among full-time workers, union members had median weekly earnings of $943 last year (about $49,000 annually), compared with $742 (about $38,600 annually), for comparable nonunion workers.

    Share of the Work Force in a Union Falls to a 97-Year Low, 11.3%, NYT, 23.1.2013,






Buying the N.Y.S.E., in One Shot


January 19, 2013
The New York Times


WHEN nearly all else had failed, Jeffrey C. Sprecher flew to New York City and crashed at his sisters’ apartment, a cramped walk-up on the Upper West Side, one flight above a noisy bar.

It was January 2000, and Mr. Sprecher had been cold-calling Wall Street for weeks. He was searching desperately for someone to back his small company in Atlanta, a business that was eating up his money and years of his life.

That’s when a black limousine pulled up in front of the bar, Jake’s Dilemma. The limo had been sent by the mighty Goldman Sachs to fetch Mr. Sprecher, and as he sank into the back seat that winter day, he set off on an improbable journey that has since taken him to the pinnacle of American finance.

Today Mr. Sprecher, a man virtually unknown outside of financial circles, is poised to buy the New York Stock Exchange. Not one of the 2,300 or so stocks traded on the New York Stock Exchange (combined value of those shares: about $20.1 trillion). No, Jeff Sprecher is buying the entire New York Stock Exchange.

It sounds preposterous. A businessman from Atlanta blows into New York and walks off with the colonnaded high temple of American capitalism. But if all goes according to plan, his $8.2 billion acquisition, announced a few days before Christmas, will close later this year. And with that, 221 years of Wall Street history will come to an end. No more will New York be the master of the New York Stock Exchange. Instead, from its bland headquarters 750 miles from Wall Street, Mr. Sprecher’s young company, IntercontinentalExchange, will run the largest stock exchange in the nation and the world.

Mr. Sprecher, 57, certainly plays the role of a wily upstart. He may wear power suits and a Patek Philippe watch, but he comes across as unusually casual and self-deprecating for a man in his position. He pokes fun at himself for his shortcomings — “I don’t know how to manage people,” he says — and his love of obscure documentaries.

How the New York Stock Exchange fell into Mr. Sprecher’s hands is, at heart, a story of the disruptive power of innovation. ICE, as IntercontinentalExchange is known, did not even exist 13 years ago. It has no cavernous trading floor, no gilded halls, no sweaty brokers braying for money on the financial markets. What it has is technology.

Like many young companies that are upending the old order in business, ICE has used computer power to do things faster and cheaper, if not always better, than people can. Its rapid ascent reflects a new Wall Street where high-speed computers now dominate trading, sometimes with alarming consequences. New, electronic trading systems have greatly reduced the cost of buying and selling stocks, thus saving mutual funds — and, by extension, ordinary investors — countless millions. But they have also helped usher in a period of hair-raising volatility.

Mr. Sprecher (pronounced SPRECK-er) has probably done more than anyone else to dismantle the trading floors of old and replace human brokers with machines. Along the way, he and ICE have traced an arc through some of the defining business stories of our time — from the rise and fall of Enron, to the transformation of old-school investment banks into vast trading operations, to the Wall Street excesses that not long ago helped derail the entire economy. Now, after a series of bold acquisitions, he is about to become the big boss of the Big Board.

Does it really matter who owns the New York Stock Exchange and its parent company, NYSE Euronext? For most people, stock exchanges are probably a bit like plumbing. Most of us don’t think much about them — until something goes wrong. But lately, some things have gone spectacularly wrong.

One sign of trouble came in 2010, when an errant trade ricocheted through computer networks and touched off one of the most harrowing moments in stock market history. The Dow Jones industrial average plunged 900 points in a matter of minutes, and a new phrase entered the lexicon: flash crash.

Since then, flash crashes in individual stocks have been remarkably common, as the centuries-old system of central exchanges has given way to a field of competing electronic systems.

ICE wasn’t involved in any of these problems. In fact, it has been praised as one of the first exchanges to put limits on lightning-quick, high-frequency trading. This points to Mr. Sprecher’s deftness in piloting his company through periods of regulation, deregulation and now re-regulation.

While many banking executives have clashed with Washington, Mr. Sprecher has sensed the changing winds and tacked accordingly. He also stays close — some say too close — to the powerful Wall Street firms that are his customers.

It is perhaps unsurprising that some of the people who make their living on the Big Board’s floor are a bit nervous about the exchange’s new boss. But Mr. Sprecher says they have nothing to fear. His friends and business associates say he could actually turn out to be the best hope for restoring trust in the stock market. After all, he has beaten the odds before.

“There were a number of times when the odds were long, but he wasn’t deterred from stepping in,” says James Newsome, who was Mr. Sprecher’s regulator at the Commodity Futures Trading Commission before becoming his competitor as chief executive of the New York Mercantile Exchange. “A lot of people, if they don’t think they will win, they won’t participate. Jeff doesn’t operate like that.”

For now, Mr. Sprecher is still spending much of his time at ICE’s headquarters in suburban Atlanta. The contrast with the New York Stock Exchange is striking. Behind its neoclassical face, the Big Board is a sprawling labyrinth of historic oil paintings, gilded leather chairs, stained wood and elegant dining rooms — all set amid crowds of gawking tourists.

ICE, meanwhile, occupies a few floors of an anodyne black-glass cube surrounded by trees and parking lots. The employees share their cafeteria with the building’s other tenants. The walls are lined with dry-erase boards.

On a recent weekday, the whiteboard in Mr. Sprecher’s modest corner office was filled with columns of scribbled numbers. They were leftovers from the all-night sessions that led to the deal for the Big Board.

One column was labeled “Yankees,” ICE’s code name for the New York Stock Exchange. Another was labeled “Braves,” a shorthand for ICE. On the margins was a doodle of a tree with a cat hanging from one of the branches, in a hang-in-there-baby vein. It was done, Mr. Sprecher says, by his wife, Kelly Loeffler, who also happens to be his director of investor relations.

“This negotiation had fits and starts,” Mr. Sprecher says. “There were days when we just wanted to throw each other out of the window.”

But Mr. Sprecher didn’t blink, not even at the billions of dollars lined up under the Yankees column.

“It’s not about the value of what you paid for, because you are going to change the underlying business to begin with,” he says. “You acquire companies at moments in time when there’s an inflection point and you can change the trajectory of the company and the industry.”

THE New York taxi driver asked: “What brings you to this concrete hellhole?”

He was talking to Mr. Sprecher, then a young man visiting New York for the first time from his home in Wisconsin.

“I was terrified,” Mr. Sprecher recalls of that visit, in the 1970s.

At the time, Mr. Sprecher was still a small-town kid, the son of an insurance salesman and a medical technician in Madison, Wis. It was decades before ICE existed, before it owned exchanges on three continents and before it became a venue to trade everything from Midwestern wheat to Brazilian coffee to Scandinavian oil.

Back then, he stayed with his sister Jill Sprecher, who had come to New York to study filmmaking. According to her, Mr. Sprecher was the archetype of the older brother: confident, competent and protective, the type whom all the teachers remember and judge younger siblings against. His most distinguishing trait was his knack for taking things apart and putting them back together — and for making money.

“Everything he touched always made money, where everything I touched lost money,” says Ms. Sprecher, who writes and directs independent films with their sister, Karen.

But not even Jill Sprecher would have guessed that her brother would one day stand atop the New York Stock Exchange.

“What has happened to him since 2000 is beyond my comprehension,” she says.

Mr. Sprecher’s first job after college was as a salesman for the industrial company Trane, a job he says he got thanks to good grades and a reputation for being the life of the party at Sigma Alpha Epsilon. He accepted the job because it took him to Southern California.

“It was the ticket to the beach and palm trees and girls on roller skates, and I was like, ‘That’s what I want to do in life,’ ” he recalls.

While at Trane, he made an early sales pitch to William Prentice, an entrepreneur who was developing power plants. It was 1983, and the nation’s electricity market had just been deregulated, allowing entrepreneurs to start their own power plants, which only utilities had been allowed to do in the past. Mr. Prentice, impressed that Mr. Sprecher recognized the industry was in the middle of big changes, almost immediately offered him a job at his new company, the Western Power Group.

“He had already internalized the whole concept of creative destruction,” Mr. Prentice says.

Western Power got off to a rocky start. It almost failed when a Canadian company threatened to corner its local energy supply: cow manure. Others at the Western Power Group grew despondent. Mr. Sprecher and Mr. Prentice spent weeks in a motel in California’s Imperial Valley, trying to persuade the suppliers to change their minds.

“We called it ‘the manure wars,’ ” Mr. Prentice says. “Neither myself nor Jeff questioned the need to go and fight. There was never any second-guessing — it was just go do it and win.”

Win they did. After Mr. Prentice sold his stake in the company a few years later, Mr. Sprecher continued building the Western Power Group until another round of electricity deregulation occurred in 1996. Then he pounced.

Previously, power plant owners who wanted to buy and sell surplus electricity had to call one another and agree on a price. Mr. Sprecher saw opportunity in an Atlanta company that provided an electronic trading network. He bought that company, the Continental Power Exchange, with his own money; he ended up putting $4 million into it.

Although Mr. Sprecher kept his company in California and his house in Beverly Hills, he spent every spare hour trying aggressively to sign up utility companies for the Atlanta exchange. His team made many visits to Enron, where they met with top executives like Jeffrey Skilling, who is now serving time in prison. Those meetings ended one day when the Enron executives began asking a number of technical questions about Mr. Sprecher’s system.

“We sat there in the meeting and we realized, these guys are building this themselves, and we are educating them,” Mr. Sprecher recalls.

Shortly thereafter, Enron started its own electricity trading platform, which quickly came to dominate the industry. It looked as if the Continental Power Exchange was done. But Enron made one big mistake. Rather than providing a place for buyers and sellers to meet, Enron itself bought from every seller and sold to every buyer.

This angered Wall Street banks that were among the biggest traders of energy products. When Mr. Sprecher showed up in New York to stay with his two sisters in 2000, nearly ready to give up on his own system, he didn’t know that Morgan Stanley and Goldman Sachs had been looking for someone just like him, who could provide an alternative to Enron.

As Mr. Sprecher shuttled between meetings at the two banks, the bankers were trading phone calls and buzzing.

“We were all thinking, ‘This is the guy we want,’ ” recalls John A. Shapiro, who was involved in the talks at Morgan Stanley. “We had already talked to a number of people, and the difference was night and day.”

The difference wasn’t the Atlanta exchange’s technology, say people who were involved. It was Mr. Sprecher himself.

“At some point, you said: ‘O.K., this guy has got something going for him. Maybe it’s hard to put your finger on it. But you know it when you see it,’ ” Mr. Shapiro recalls.

On the other side, it was the perfect time to be hooking up with Wall Street, as banks were focusing increasingly on trading. In the negotiations that followed, Mr. Sprecher used what would become a trademark strategy: giving up part of the ownership of his company in exchange for a promise that the recipients would use his platform. In this case, he gave up 80 percent of the ownership to the two banks. The banks soon turned around and gave part of their own stakes to several of the largest power companies, including Shell, Total and British Petroleum, which committed to using what was soon rechristened as IntercontinentalExchange.

When Enron collapsed in scandal, the business began pouring in.

BY their own account, Mr. Sprecher and his wife, Ms. Loeffler, live for ICE. He has some hobbies, and his sister Jill wonders how he finds the time to watch cooking shows and reality television. But he and his wife have no children. Ms. Loeffler, the more serious of the two, says the thing that brought them together was their willingness, and desire, to do their jobs around the clock.

“We both just work all the time and enjoy work,” Ms. Loeffler says.

Both revel in the brinkmanship that has marked ICE’s climb. Two days before Mr. Sprecher and his Wall Street backers announced the creation of ICE in 2000, they offered the New York Mercantile Exchange, or Nymex, a 10 percent stake in the new business if Nymex would share some of its back-office services.

While Mr. Sprecher was giving his presentation to the board, a director said, “Who the hell brought this guy into our board meeting?”

Mr. Sprecher recalled, “Then the room went silent.” The next thing he knew, a guard was escorting him out of the building.

ICE was confronting a trading world that had ossified into an almost ritualistic society. The exchanges were owned by their traders, who made the rules. The traders themselves were rough-and-tumble men who used their fists as computers. From the beginning of ICE, Mr. Sprecher was seen by the old-time traders as a tool of Wall Street banks that wanted to supplant local traders at the exchanges — a reputation he has never managed to shake fully.

For his part, Mr. Sprecher rarely showed deference to traditional powers.When Nymex was bidding for the International Petroleum Exchange in London in 2001, ICE doubled Nymex’s offer and won. Within a few years, ICE had shut down the historic trading pits at the London exchange in favor of computerized trading.

Next up in 2006 was the New York Board of Trade, where financial contracts tied to agricultural products like sugar and cocoa were bought and sold. Mr. Sprecher says people looked askance at him when he offered a billion dollars for it. “I really believed there was a fundamental change going on in the globalization of commodities,” he says.

People involved in the deal say Mr. Sprecher was initially attentive to the concerns of the floor traders.

“He had the capability to disarm people — you might even say charm people — into accepting his soft-spoken demeanor,” says Frederick W. Schoenhut, who was the chairman of the New York Board of Trade.

But as soon as the deal went through, Mr. Sprecher was seldom seen. What’s more, he put a manager in his 30s in charge of the New York operations. Mr. Sprecher says that was intentional.

“I wanted to show that market that there was a much younger, aggressive guy here who really wanted to fundamentally change that company,” he says.

ICE didn’t have to do much to initiate that change. It allowed customers to choose between trading on the floor or on ICE’s electronic system. Within months, most customers had migrated to the screen. The situation caused so much job loss and unhappiness that when ICE made its next takeover bid, for the Chicago Board of Trade, a crew of New York Board of Trade traders took out newspaper ads warning the Chicago traders to “watch their backs.” ICE ultimately lost that battle, but only after almost derailing a rival bid by slipping an offer under a hotel room door.

ICE also attracted the ire of a number of Democratic senators, who said it was encouraging speculation that caused fluctuations in the price of essential commodities like oil. But Mr. Sprecher proved adept at defanging his political opponents by bending to their will.

“Tell me what the rules are and I’ll figure out how we can make money around them,” is one of his common lines when talking to regulators in Washington.

Since the financial crisis, Mr. Sprecher has used that attitude to position himself to take advantage of changes being brought by the Dodd-Frank financial overhaul. Soon, Wall Street firms will have to move trading in many opaque financial products to exchanges, and ICE is in a perfect position to profit.

THE clear attraction of the deal for NYSE Euronext is that it will create a global force in futures trading, an area set to benefit from Dodd-Frank reforms. In the United States, ICE is now the second-most-important futures trading company, after the Chicago Mercantile Exchange. NYSE Euronext owns one of the most important futures exchanges in Europe.

The future of the New York Stock Exchange, on the other hand, is less clear. For someone who is buying a stock exchange, Mr. Sprecher is very critical of the state of stock markets.

“There are so many places where you say, fundamentally something does not feel good to the average investor on what used to be the greatest capital markets in the world,” he says. But all of this is what makes stock trading an attractive industry for him — it is one that is ripe for change. He is already speaking out about a need to reform the rules governing stock markets.

At the exchange itself last Wednesday, the 900-some men and women who work on the Big Board’s floor filed through the doors at 11 Wall Street in trading jackets of blue, red and green. Over the years, their number has dwindled steadily as computerized trading put many out of work.

Even before ICE swooped in, some wondered how long the Big Board’s floor, the scene of so many triumphs and failures, could endure.

Mr. Sprecher says the floor will survive. The American stock market, and the nation, need it.

“The pendulum of electronification of markets went too far in the case of U.S. equities — to the point that people want to know there’s a human being watching over their trades,” he says.

But that’s now. And Jeff Sprecher hasn’t gotten to where he is by keeping things as they are.

    Buying the N.Y.S.E., in One Shot, NYT, 19.1.2013,






Financial Collapse: A 10-Step Recovery Plan


January 19, 2013
The New York Times


HEGEL once wrote, “What experience and history teaches us is that people and governments have never learned anything from history.” Actually, I think people do learn. The problem is that they forget — sometimes amazingly quickly. That seems to be happening today, even though recovery from the economic debacle of 2008-9 is far from complete.

Evidence of this forgetting is everywhere. The public has lost interest in the causes of the crisis; many, of course, are just struggling to get by. Unrepentant financiers whine about “excessive” regulation and pay lobbyists to battle every step toward reform. Conservatives bemoan “big government” and yearn to return to laissez-faire deregulation. Higher international standards for bank capital and liquidity have been delayed. I could go on.

Instead, let me try to encapsulate what we must remember about the financial crisis into 10 financial commandments, all of which were brazenly violated in the years leading up to the crisis.

1. Remember That People Forget

Treasury Secretary Timothy F. Geithner lamented last year that before the crisis, “There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up.” He was right. As the renegade economist Hyman Minsky knew, it is normal for speculative markets to go to extremes. A key reason, Minsky believed, is that, unlike elephants, people forget. When the good times roll, investors expect them to roll indefinitely. When bubbles burst, they are always surprised.

2. Do Not Rely on Self-Regulation

Self-regulation of financial markets is a cruel oxymoron. We need zookeepers to watch over the animals. The government must not outsource this function to “market discipline” (another oxymoron) or to for-profit companies like credit-rating agencies. The Dodd-Frank Act of 2010 isn’t perfect, but it has the potential to change regulation for the better. But most of its reforms are still being phased in, and as the rules are being drafted, the industry (here and abroad) is fighting them tooth and nail and often prevailing.

3. Honor Thy Shareholders

Boards of public corporations are supposed to protect the interests of shareholders, partly by monitoring the behavior of top executives, who are employees, not emperors. In the years before the crisis, too many directors forgot those responsibilities, and both their companies and the broader public suffered from the malign neglect. Will they now remember? Some will — for a while. But sanctions on directors for poor performance are minimal.

4. Elevate Risk Management

One bitter lesson of the crisis is that, when it comes to risk taking, what you don’t know can hurt you. Too many C.E.O.’s let their subordinates ride roughshod over risk managers, tipping the balance toward greed and away from fear. The primary responsibility for keeping risk-management systems up to snuff rests with top executives and boards of directors. But the Federal Reserve and other regulators are now watching and mustn’t let up.

5. Use Less Leverage

Excessive leverage — otherwise known as over-borrowing — was one of the chief foundations of the house of cards that collapsed so violently in 2008. Overpaid investment “geniuses” used leverage to manufacture extraordinary returns out of ordinary investments. Bankers and investors (not to mention home buyers) deluded themselves into thinking they could earn high returns without assuming big risks. But leverage is like alcohol: a little bit has health benefits, but too much can kill you. The banks’ near-death experiences, plus preparation for higher capital requirements to come, are temporarily keeping them sober. But watch for the binge drinking to return.

6. Keep It Simple, Stupid

Modern finance profits from complexity, because befuddled customers are more profitable ones. But do all those fancy financial instruments actually do the economy any good? Paul A. Volcker, the former Fed chairman, once said the A.T.M. was the only beneficial financial innovation in the recent past. He may have exaggerated, but he had a point. Who needs credit default swaps on collateralized debt obligations, and other such concoctions?

7. Standardize Derivatives and Trade Them on Exchanges

Derivatives acquired a bad name in the crisis. But if they are straightforward, transparent, well collateralized, traded in liquid markets by well-capitalized counterparties and sensibly regulated, derivatives can help investors hedge risks. It is the customized, opaque, “over the counter” derivatives that are the most dangerous — and the ones more likely to serve the interests of the dealers than their customers. Dodd-Frank pushed some derivatives toward greater standardization and transparent trading on exchanges, but not enough. The industry is pushing to keep more derivatives trading out of the sunshine.

8. Keep Things on the Balance Sheet

Before the crisis, some banks took important financial activities off their balance sheets to hide how much leverage they had. But the joke was on them. The crisis revealed that some chief executives were only dimly aware of the off-balance-sheet entities their banks held. These “masters of the universe” hadn’t mastered their own books. Dodd-Frank specifies that “capital requirements shall take into account any off-balance-sheet activities of the company.” That’s a welcome step toward making off-balance-sheet entities safe and rare. Now regulators must make the rule work.

9. Fix Perverse Compensation

Offering traders monumental rewards for success, but a mere slap on the wrist for failure, encourages them to take excessive risks. Chief executives and corporate directors should “claw back” pay when putative gains turn into losses. If they don’t, we may need the heavy hand of government to do it.

10. Watch Out for Consumers

The meek won’t inherit their fair share of the earth if they are constantly being fleeced. What we learned in the crisis is that failure to protect unsophisticated consumers from financial predators can undermine the whole economy. That surprising lesson mustn’t be forgotten. The Consumer Financial Protection Bureau should institutionalize it.

Mark Twain is said to have quipped that while history doesn’t repeat itself, it does rhyme. There will be financial crises in the future, and the next one won’t be a carbon copy of the last. Neither, however, will it be so different that these commandments won’t apply. Financial history does rhyme, but we’re already forgetting the meter.


Alan S. Blinder is a professor of economics and public affairs at Princeton,

a former vice chairman of the Federal Reserve

and the author of “After the Music Stopped:

The Financial Crisis, the Response and the Work Ahead.”

    Financial Collapse: A 10-Step Recovery Plan, NYT, 19.1.2013,






Investing in Guns


January 18, 2013
The New York Times


In 2006, Cerberus Capital Management, the private equity firm run by the secretive financier Steven Feinberg, set out to raise $6.5 billion in a new fund called Cerberus Institutional Partners Series IV. Feinberg’s reputation for extracting value from troubled companies — by replacing management, shuttering facilities and creating “efficiencies” — was such that by May 2007, when the fund was finally closed, it had gotten commitments for nearly $1 billion more than it had sought.

Cerberus Institutional Partners Series IV is the fund that took over Chrysler in 2007. It bought General Motors’ financing arm, now called Ally Financial. It gobbled up hospitals, purchased bus companies, and even bought the raunchy magazine Maxim.

It is also the fund that bought Bushmaster Firearms, the company that made the assault weapon used by Adam Lanza to massacre 20 children and seven adults in Newtown, Conn., last month. It bought Remington Arms, the maker of the pump-action shotgun that was among the guns James Holmes used to kill 12 people and wound 58 in Aurora, Colo. It bought a handful of other firearms companies, which it then merged into a new parent company, Freedom Group. At which point, Cerberus was the largest manufacturer of guns and ammunition in the country.

Not long ago, I obtained a partial list of the institutional investors that committed money to the Cerberus fund. One of the investors, the California State Teachers’ Retirement System, which put in $500 million, has already announced that it will divest its gun holdings. “We shouldn’t be investing in things like that,” says Bill Lockyer, the California state treasurer. He noted that assault weapons are illegal in California.

Most of the other big investors, however, have kept their heads down. TIAA-CREF, the financial services giant, committed $147.8 million to the Series IV fund. (“No comment,” said a spokesman.) The State of Wisconsin Investment Board put up $100 million. The University of Texas endowment made a $75 million commitment; the Regents of the University of California kicked in $40 million; the University of Missouri endowment was an investor. So were the Los Angeles Fire and Police Pension system, the Indiana Public Retirement System, and the Pennsylvania Public School Employees’ Retirement System (which kicked in $400 million). And plenty of others.

When I called these investors to ask their rationale for investing in a fund that financed a gun “roll-up,” as the Cerberus strategy is called, I got three main responses. The first was that the percentage of their investment that went to Freedom Group was minuscule. “We have a very small investment in Bushmaster, which translates to about $1 million,” said Dianne Klein, a spokeswoman for the University of California system. (She added that the California system was going to divest its gun holdings.) Jennifer Hollingshead at the University of Missouri told me that the endowment’s exposure was less than $450,000 — “which represents about 0.01 percent of our total portfolio.”

The second response was that, as limited partners, the institutional investors didn’t have a say in how Cerberus invested the money. The fact that Feinberg decided to buy companies whose guns have repeatedly been used for mass slaughter was, in effect, his decision to make.

The third was that the core duty of a pension fund or university endowment is to maximize returns. Nobody made this point more vehemently than Bruce Zimmerman, a spokesman for the University of Texas Investment Management Company. “We have no plans to divest,” he said. “We invest strictly on economic considerations, and we do not take into account social and political consideration.”

Cerberus never tried to hide what it was doing. And why would it? It was proud of its gun strategy. It held annual meetings with its investors and talked freely about Freedom Group. Investors were also aware that in 2010, Cerberus had tried (and failed) to take Freedom Group public.

But until Newtown, none of the investors gave the business a second’s thought. Aurora, Fort Hood, Wisconsin — and dozens of other mass slaughters — came and went, and the investors stuck with Cerberus.

Newtown, it is often said, has changed that dynamic, sensitizing the country to the insanity of its gun laws, and giving gun control advocates hope that reform might finally be possible. But with the tragedy barely a month old, you can already feel the pushback. Supporters of the National Rifle Association in Congress are vowing to resist any effort to tighten the nation’s gun laws. Gun-friendly state legislators are pushing absurd laws aimed at pre-empting federal gun legislation. And then there are the investors, who have a unique ability to push companies to change, if they so choose. (Just recall the South African boycott.)

What I learned this week is that, Newtown notwithstanding, too many of them have other priorities. Making money is still more important that saving lives.

    Investing in Guns, NYT, 18.1.2013,






Days Before 2007 Crisis,

Fed Officials Doubted Need to Act


January 18, 2013
The New York Times


WASHINGTON — Federal Reserve officials in August 2007 remained skeptical that housing foreclosures could cause a financial crisis, just days before the Fed was jolted into action, according to transcripts that the central bank published Friday.

Worries about the health of financial markets dominated a meeting of the Fed’s policy-making committee on Aug. 7, but officials decided there was not yet sufficient evidence that the problems were affecting the growth of the broader economy.

Just three days later, the Fed’s chairman, Ben S. Bernanke, convened an early-morning conference call to inform them that the central bank had been forced to start pumping money into a financial system that was suddenly seizing up. More than five years later, the system remains heavily dependent on those pumps.

“The market is not operating in a normal way,” Mr. Bernanke said on that August call, in a moment of historic understatement. “It’s a question of market functioning, not a question of bailing anybody out. That’s really where we are right now.”

The actual conversations from the Fed’s meetings are released once a year after a five-year delay. With a wealth of detail beyond the terse statements and formal minutes issued in the hours and weeks after the meetings, the transcripts provide fresh insights into the debates, actions and judgment of policy makers.

August 2007 was the month that the Fed began its long transformation from somnolence to activism. Mr. Bernanke and his colleagues would continue to wrestle with misgivings about the extent of the Fed’s powers, and about the limits of appropriate action. At times they would hesitate or move slowly. At times they even would reverse course, most importantly in standing by as Lehman Brothers collapsed the following year. But it is now widely accepted that their efforts helped to arrest the economic chaos unleashed by the financial crisis.

Some of what followed might have been predicted by close readers of Mr. Bernanke’s work as an academic. He had long argued that the big lesson of the Great Depression was that a central bank should never allow its financial system to run short of money. Even more than its efforts to reduce borrowing costs, the Fed’s policy over the coming years would be defined by its determination to provide the funding private investors were withholding.

But in the face of an unprecedented crisis, Mr. Bernanke also would set aside his own work. He had long argued that the Fed should strive to respond to economic circumstances as transparently and predictably as possible, a break from the intuitive and unpredictable style of his predecessor, Alan Greenspan.

By the end of 2007, even as the available economic data remained fairly strong, Mr. Bernanke and his colleagues instead concluded that they could see the future, that they did not like what they saw, and that it was time to act.

“Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,” Mr. Bernanke said in an October 2007 speech that marked the beginning of his public embrace of the need for pre-emptive action.

The Fed’s most dramatic steps did not begin until December 2007, when it created the Term Auction Facility, the first in a series of new programs intended to pump money into the financial system, and arranged to pump dollars into the European financial system in partnership with the European Central Bank.

And by January 2008, the Fed’s response to the crisis was in full swing.

The Fed began 2007 still deeply immersed in complacent disregard for problems in the housing market. Fed officials knew that people were losing their homes. They knew that subprime lenders were blinking out of business with every passing week. But they did not understand the implications for the broader economy.

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Mr. Bernanke said in Congressional testimony in March.

The mortgage industry was imploding by the time the Fed’s policy-making committee met on Aug. 7. American Home Mortgage, a leading subprime lender, had filed for bankruptcy the previous day. One week earlier, the investment bank Bear Stearns had liquidated a pair of mortgage-focused hedge funds. But officials did not cut interest rates. The economy, they said, “seems likely to continue to expand.” The statement did not even mention the housing market.

The transcripts show that many Fed officials at the August meeting remained deeply skeptical about the likely economic impact of those problems.

“My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy,” William Poole, president of the Federal Reserve Bank of St. Louis, told the committee on Aug. 7.

That was a Tuesday. The image of calm would last exactly two more days. By Thursday morning, the European Central Bank was offering emergency loans to Continental banks and the Fed was following suit. And Mr. Poole and his board voted that day to ask for the Fed to reduce the interest rate on such loans, becoming the first official arm of the central bank to push for stronger action.

Two weeks later, at 6 p.m. on a Thursday, Fed officials dialed in to an emergency conference call where they agreed to adopt the St. Louis Fed’s proposal.

The central bank began to make it easier for strapped financial companies to borrow money, an effort that would expand dramatically over the coming years as the crisis intensified and private investors withdrew funding.

The first steps seemed relatively modest. The Fed cut the interest rate on loans from its discount window by half a percentage point, to 5.75 percent, and allowed banks to borrow for up to 30 days, rather than reapplying every day. Then it arranged for four of the nation’s largest banks — Bank of America, Citigroup, JPMorgan Chase and Wachovia — to take what it called symbolic loans of $500 million.

Mr. Bernanke was eager to avoid broader action, according to the transcripts, because he did not want to give the impression that the Fed was engaged in a bailout of investors, banks or borrowers that had made bad decisions.

“My own feeling is that we should try to resist a rate cut until it is really very clear from economic data and other information that it is needed,” Mr. Bernanke said. “I’d really prefer to avoid giving any impression of a bailout or a put, if we can.”

JPMorgan and Wachovia returned most of the money the next day; Bank of America and Citigroup, already in trouble, kept the loans for a month. But banks did not begin borrowing on a large scale until the following year.

Private funding sources were beginning to dry up. The premium banks paid to borrow from other banks, without pledging collateral, widened from 0.1 percentage point in mid-August to 0.85 percentage point by mid-September.

And the broader economy also was beginning to show signs of weakness. Employment declined in August, the first monthly fall in seven years. At the end of the month, Mr. Bernanke used his annual speech at the Fed’s conference in Jackson Hole, Wyo., to declare that the central bank “stands ready” to do more.

Three weeks later, the Fed did, opening a second front in its expanding campaign. The central bank announced that it would reduce its benchmark interest rate for the first time since 2003. To punctuate the decision, it cut rates by half a percentage point rather than the more typical quarter-point cut.

And this time the Fed mentioned the housing crisis.

The policy-making committee cut rates by another quarter point at each of the two remaining meetings in 2007 even as its members began to divide over the need for a stronger response. Some, like Frederic S. Mishkin, a Fed governor, argued that the Fed was moving too slowly. Others argued that the Fed was overreacting. Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, dissented from the decision to cut interest rates at the October meeting of the policy-making committee.

But by December there was a growing consensus within the Fed that stronger action was needed. When the committee voted to reduce rates again at its final meeting of the year, there was another dissent, this time from Eric S. Rosengren, president of the Federal Reserve Bank of Boston, but this time in favor of even stronger action.

The Fed still was far from grasping the coming crisis. In January 2008 it cut interest rates by 1.25 percentage points in a pair of dramatic actions. But that was also the month Bank of America announced its acquisition of Countrywide Financial, the nation’s largest mortgage lender. A few months later, the Fed gave its blessing.

Over the course of the following year, the financial system would crash and the economy would plunge to recession before the Fed helped to arrest the fall.

Still, events ultimately would bear out the Mr. Mishkin’s predictions in a speech at the Jackson Hole conference in August 2007. He warned that the housing crash could cause a broader crisis, but also offered a note of hope. “Monetary authorities,” he said, “have the tools to limit the negative effects on the economy.”

    Days Before 2007 Crisis, Fed Officials Doubted Need to Act, NYT, 18.1.2013,






Hard Choices on Debt if the U.S. Hits the Ceiling


January 17, 2013
The New York Times


WASHINGTON — By mid-February or early March, the United States could face an unprecedented default unless it raises its debt ceiling, the Treasury Department said this week.

Some legislators have theorized that a quick breach in the debt ceiling might cause only a minor disruption to government finances. And some commentators have suggested that the United States could pass legislation to prioritize or guarantee payments to bondholders, thus erasing what they describe as the worst of the financial market reaction and removing the threat of technical default.

But experts in government finance and markets described running up against the debt ceiling as an event that might quickly precipitate a financial crisis and eventually lead to a recession — an event with far greater disruptive potential than the “fiscal cliff” package of tax increases and spending cuts, a government shutdown or even the collapse of Lehman Brothers.

A debt-ceiling crisis would be at its heart a cash-management problem. Every day the government receives millions of bills to pay, to its employees, older Americans, soldiers, bondholders and contractors, among others. Under normal circumstances, it makes payments with new revenue as well as with the proceeds from bond sales. But the country has already run out of authority to issue new debt, as of Dec. 31, and Congress has not yet raised the statutory debt ceiling, currently around $16.4 trillion.

The Treasury Department is undertaking “extraordinary measures,” like suspending the reinvestment of certain government retirement funds, to leave it with more cash on hand. But such measures buy the country only so much time, and in a matter of weeks outflows will overwhelm inflow.

That day might be Feb. 15, for instance. According to a Bipartisan Policy Center analysis, the government expects about $9 billion in revenue to arrive in its coffers that day. But it has $52 billion in committed spending on that day: $30 billion in interest payments, $6.8 billion in tax refunds, $3.5 billion in federal salaries, $2.7 billion in military pay, $2.3 billion in Medicaid and Medicare payments, $1.5 billion owed to military contractors and a smattering of other commitments.

The Treasury would be confronted with paying doctors but not soldiers, Chinese bondholders but not defense companies. Worse, it is not clear whether the Treasury secretary would have the legal latitude or even the technical ability to prioritize some payments over others. Every day the country remained in breach of the ceiling, the problems would be compounded.

The Treasury Department has shed little light on what actions it would take if the country breached the ceiling.

But there are a few clues as to how the Obama administration might react. A Treasury inspector general’s report from last year described some of the planning for the debt ceiling standoff in 2011, which caused a broad slump in the market and raised the country's borrowing costs by about $1.3 billion in that fiscal year. “Treasury considered asset sales; imposing across-the-board payment reductions; various ways of attempting to prioritize payments; and various ways of delaying payments,” the report said.

It determined that delaying payments might be the least harmful option, but made no decisions about the best route forward. Moreover, “Treasury reached the same conclusion that other administrations had reached about these options — none of them could reasonably protect the full faith and credit of the U.S., the American economy, or individual citizens from very serious harm,” the report said.

Some Republican lawmakers have suggested giving the Treasury more guidance. For instance, Representative Daniel Webster of Florida has put forward a bill ordering the Treasury to pay obligations to bondholders, followed by troops, national security “priorities,” Social Security and then Medicare.

But organized chaos would still be chaos, analysts said. Consider again the day of Feb. 15. The country would not have enough money to pay its bondholders, let alone anyone else. Moreover, analysts have raised questions about whether the Treasury would be able to reprogram its automated payment systems to prioritize some payments over others. With bills stacking up day by day, the government would be able to make only about 60 percent of its payments over time.

Businesses and individuals would be left without expected funds from the government, and a tremendous financial crisis might ensue. “We’re the reserve currency of the entire world,” said Steve Bell of the Bipartisan Policy Center. “There’s trillions of dollars of our debt sliced and diced into all sorts of financial instruments around the world. If you’re a 28-year-old bond trader for Nomura in Tokyo, and someone says, ‘Hey, we just heard a rumor Treasury isn’t making all its payments,’ what do you do? You panic and you sell.”

For that reason, 84 percent of the top economists surveyed by the University of Chicago’s Booth School of Business this week said the debt ceiling “periodically creates unneeded certainty and can potentially lead to worse fiscal outcomes” for the country.

“Deciding whether or not to pay the debts incurred to fund the previously approved tax and spending is nuts,” responded Anil K. Kashyap of the University of Chicago. “The debt ceiling is a dumb idea with no benefits and potentially catastrophic costs if ever used,” added Richard H. Thaler, also of Chicago.

A standoff in the debt ceiling — even a brief one, with bondholders paid on time — might also raise the country’s borrowing costs permanently. “It is not assured that the Treasury would or legally could prioritize debt service over its myriad other obligations, including Social Security payments, tax rebates and payments to contractors and employees,” said Fitch, the major ratings agency, on Tuesday. “Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.”

For that reason, some Republicans are shying away from using the debt ceiling as leverage — with some quietly suggesting that a forthcoming debate over the continuing spending resolution necessary to finance the government might be a better time to wrangle for budget cuts.

In an interview with The Wall Street Journal, for instance, Speaker John A. Boehner of Ohio described the debt ceiling as “one point of leverage” but “not the ultimate leverage.” The White House, for its part, has refused to negotiate any budget cuts as part of negotiations over the ceiling, and has suggested that Congress give up most its authority over the debt ceiling to begin with.

    Hard Choices on Debt if the U.S. Hits the Ceiling, NYT, 17.1.2013,






The Foreclosure Fiasco


January 14, 2013
The New York Times


It’s been five days since Jessica Silver-Greenberg’s article on the latest bank settlement was posted on The New York Times’s Web site. I’m still shaking my head. Her “story behind the story” of the $8.5 billion settlement between federal bank regulators and 10 banks over their foreclosure misdeeds illustrates just about everything that is wrong with the way the government has handled the Great Foreclosure Crisis.

Shall we count the ways?

1. It is more about public relations than problem-solving. Pick a program — any program — that the Obama administration unveiled to help troubled homeowners over the past four years. Not one has amounted to a hill of beans.

This settlement is no different. The country’s primary bank regulator, the Office of the Comptroller of the Currency — which, along with the Federal Reserve, engineered the settlement — is trying to make it look like a victory. Of the $8.5 billion, $3.3 billion will go directly to foreclosed-upon borrowers, making it “the largest cash payout to date,” according to Bryan Hubbard, the O.C.C.’s chief spinmeister. (The rest of the money will consist of reduced interest payments and loan modifications.)

In truth, the O.C.C. needed to save face after a foreclosure review process it had mandated had become an expensive fiasco. As amply demonstrated by Silver-Greenberg and American Banker, the government insisted that the banks hire expensive consultants to do a review of every foreclosure that took place in 2009 and 2010. The consultants racked up more than $1 billion in fees, while proceeding at such a molasseslike pace that the feds and the banks finally threw up their hands. The settlement made the whole thing go away.

2. Accountability? What’s that? We have known for a long time that overwhelmed bank servicers took shortcuts, like robo-signing, that violated many state laws. They also put people through hell who were trying to get a modified mortgage. “I’ve seen marriages break up because of what banks put families through,” says Elizabeth Lynch of MFY Legal Services. All this settlement does is push those misdeeds under an $8.5 billion rug.

3. It won’t actually help anybody. The settlement will cover some 3.8 million foreclosures. The government is going to distribute $3.3 billion dollars. It comes to around $1,150 per lost home.

Of course, the O.C.C. says that is the wrong way to look at it: Some people — military personnel, for instance — could get as much as $125,000 while others won’t get much at all. People denied a modification will be eligible for up to $40,000 or $50,000, said Hubbard. I have no doubt that money will be welcome. But for those who lost their homes because of bank misconduct, it doesn’t come close to making them whole.

4. The money is being distributed with no regard to whether a borrower suffered harm. In some ways, this is the sorriest part of the whole episode. The foreclosure review never answered the key question: which borrowers had legitimate claims against their bank and which didn’t. Thus, the settlement doesn’t make that distinction. If you lost your house in 2009 and 2010, you are going to get money — whether the bank was culpable or not. “The notion of error is not involved in this settlement,” conceded Hubbard.

As a result, those who really were truly harmed by bank behavior will be shortchanged. As Karen Petrou, the well-known banking consultant, puts it, the government has “come up with something that gives every borrower — maybe — a pittance and leaves the truly hurt — and there were many — as much in the lurch as before.”

This is hardly the only time in recent months that a settlement that is publicized as righting a wrong instead hands money to people who were never victimized. Think back to the $4.3 billion fund established by Congress to compensate people who became sick because of their exposure to toxic dust created by the 9/11 attacks. Even though there is no scientific evidence that the dust caused cancer, the government added cancer to the list of diseases that would be compensated. The result will be less money for those who truly did become sick because of their exposure to the 9/11 aftermath.

Or take Toyota, which recently paid $1 billion to settle a lawsuit claiming that an electrical flaw caused some accelerators to stick — even though there turned out to be no evidence to support that claim.

People who do these kinds of settlements regularly say that the world has become so complicated that, more often than not, it is simply too expensive to figure out who was harmed and who was not. So best just to throw a little money at everybody and make the problem go away.

That is what the federal government did last week in its settlement with the banks. It’s nothing to be proud of.


David Brooks is off today.

    The Foreclosure Fiasco, NYT, 14.1.2013,






Over 50, and Under No Illusions


January 12, 2013
The New York Times


IT’S a baby boomer’s nightmare. One moment you’re 40-ish and moving up, the next you’re 50-plus and suddenly, shockingly, moving out — jobless in a tough economy.

Too young to retire, too old to start over. Or at least that’s the line. Comfortable jobs with comfortable salaries are scarce, after all. Almost overnight, skills honed over a lifetime seem tired, passé. Twenty- and thirty-somethings will gladly do the work you used to do, and probably for less money. Yes, businesses are hiring again, but not nearly fast enough. Many people are so disheartened that they’ve simply stopped looking for work.

For millions of Americans over 50, this isn’t a bad dream — it’s grim reality. The recession and its aftermath have hit older workers especially hard. People 55 to 64 — an age range when many start to dream of kicking back — are having a particularly hard time finding new jobs. For a vast majority of this cohort, being thrown out of work means months of fruitless searching and soul-crushing rejection.

To which many experts say, “What did you expect?”

Everyone, whatever age, needs a Plan B. And maybe a Plan C and a Plan D. Who doesn’t know that loyalty and hard work go only so far these days?

“Shame on you if you’re not thinking every single year, ‘What’s my next step?’ ” says Pamela Mitchell, a career coach and author. “It’s magical thinking not to do this.”

Ms. Mitchell, who has reinvented her own career a few times, says everyone should think about options, alternative job paths and career goals, just in case. She recommends talking over job possibilities with family members and, if possible, building a financial cushion.

Constant networking is crucial, too. The idea, she says, is to prepare in case a big change comes.

“If you’re thinking about it, you’ll be doing all this piecemeal along the way,” she says.

All of which, of course, is easier said than done. But some people who have gone through the emotional and financial strains of late-career unemployment say that with skill, determination and a bit of luck, the end of a job doesn’t have to be the end of the world. Changing jobs or careers can be a good thing later in life, despite the many risks. Many agree that a willingness to push beyond the comforts of location, lifestyle and line of work is vital.

Though there is no single path, there are success stories that offer hope.

After Bonjet Sandigan left a job in computers, he chose to operate a franchise for ShelfGenie, which makes custom shelves.

Like the story of Bonjet Sandigan, now of Delray Beach, Fla. An information technology specialist, Mr. Sandigan was laid off from Dun & Bradstreet in August 2011. But Mr. Sandigan, now 51, has since carved out a new career with ShelfGenie, a seller of custom home shelving.

It was a big switch. Mr. Sandigan grew up in the Philippines and has a computer science degree from Texas A&M. For years, he worked in I.T. support, helping customers over the phone. But he never managed to move up. When Dun & Bradstreet offered him a severance package, he figured that he could finally afford to take a little time to figure out his next move.

“I did some soul-searching about what’s important to me,” he says. “As you grow, your priorities change.”

His father had been an entrepreneur in the Philippines, and Mr. Sandigan was attracted to the idea of working for himself. With the help of a consultant, he looked into buying a franchise in the I.T. or health care industries. Then he considered a ShelfGenie franchise, which appealed to him partly because it was a turnkey operation.

“The infrastructure is there, the market is there, the policies and procedures are there,” he says. “You just have to follow the procedures.”

Mr. Sandigan had worked in I.T. in various industries, including health care, gambling and financial services, so he was willing to try something new again. Still, the change wasn’t easy.

“I had a whole lot of fears,” he says. “But my background told me to do the numbers, do the math and research the market.”

He eventually spent a low six-figure sum to buy four ShelfGenie sales territories and, after living for decades near Dallas, moved to Delray Beach for his new career and new life. He says his experience in I.T., working with cross-cultural teams in India and China, has been surprisingly useful in his new job, which requires a focus on customer service.

“It was a very diverse culture, so my experience there, trying to understand where people are coming from” proves helpful in his current work, he says. He says his old career taught him to listen closely — a valuable skill in his new work.

“Now that I have to be in front of the client,” he says, “I can spend two hours with them before we even discuss the product, and I can do a demonstration.”

Mr. Sandigan says he figured that the switch would mean a drop in income, at least initially. The first six to eight months would be hard. But, by his reckoning, his new career is on track financially.

“I’m right where I’m supposed to be,” he says.


The Adventurer

Clare Novak is more than on track with her new career. At 58, she is making twice as much as she did in 2008, when her previous work dried up.

But Ms. Novak didn’t just change jobs. She changed countries and cultures. After 18 years working in Chester Springs, Pa., doing management training for a range of businesses, she moved to Islamabad, Pakistan, in November, to work as a human resources adviser to nine power companies. Her first contract will last through this year, and possibly through 2015, a prospect she is happy to contemplate.

How did she end up making such a leap? She had formerly done work for someone in Egypt, who e-mailed her a job description and asked if she knew anyone who might fit the bill.

“The only person I know who would go there is me,” Ms. Novak says. When asked if she was interested, she said, “I was thrilled and said yes.”

Today, her life is vastly different. Once an avid hiker, she now spends more time at home, given that she is a foreign woman in a patriarchal society. She lives in what amounts to a rooming house and no longer enjoys the privacy she did in Chester Springs.

“Fortunately, I’m with a very collegial group,” she says.

She is accustomed to adapting, and to using her networking skills. In the economic downturn, “networking and word of mouth were how I developed my business,” Ms. Novak said in an e-mail interview. “Volunteering and networking kept me in business quite nicely, including overseas work in Egypt and Ukraine, and later Canada and Kuwait.”

When American businesses began automating the training that was her specialty, a shrinking profession shrank further. Several of her large clients ended projects.

“My business was down to a few small projects and one week’s work a month in Kuwait,” she says. “The year after, I had only Kuwait, which was not enough to make ends meet.

“In those down years, it was a struggle to remain positive and keep at it,” she says. “A longtime friend and colleague suggested that we form a business forum of like-minded women to help each other. We kept each other on track with our businesses and emotionally.”

To this day, she says, all of those women “are still in business, and we are all experiencing upturns.”

Moving to Pakistan has meant big changes. “There is considerably less autonomy for any foreigner of any age here,” she says. “Due to security, both men and women can only walk in the daylight, and never alone. Our driver can take us to specific sectors, and outside of that we require a protection officer to accompany us. Society is relatively segregated socially, so women cluster together and men likewise. The businesswomen I meet are comfortable in mixed groups, and some are very cosmopolitan.”

All the trade-offs are worth it, she says. Ms. Novak says she loves the adventure of living abroad, and the satisfaction of “being able to make a difference in people’s lives.”


The Inventor

After 15 years selling men’s clothing for a national retailer, Jeffrey Nash, 58, was earning $90,000 a year and was often the top salesman in his company. But as the recession deepened, he began referring his customers to struggling co-workers. His sales commissions took a hit.

“I kind of softened up,” he says. “My sales went down because I was sharing them.”

His income fell to $65,000. And as shoppers became more cautious during the recession, he knew that it would soon fall even further.

“I was doomed,” he says. “I knew I had to come up with an idea.”

Mr. Nash, who lives in Las Vegas, had invented a device he called the Juppy, a sling that helps toddlers learn to walk more safely and confidently.

“I had already touched base with a patent attorney and had started the ball rolling,” he says. He took three weeks of vacation to see if he could make a go of his invention, telling only a few people about his plans. Their opinions were “really negative,” he recalls.

Undaunted, he drove to Los Angeles and San Diego, selling the Juppy from his trunk and on a televised sales show, and earning $12,000 in three weeks.

“I never went back to work,” he says.

Investing $35,000 of his savings and an additional $9,000 from his father and a friend, Mr. Nash had the device manufactured in China.

“The transition was simple,” he says. “If I’d stayed in my old job, I was going to lose in the end. I was done. I needed a massive change. I needed income of several hundred thousand dollars. I knew I had to take a risk, a massive risk.”

That included selling his home — for $200,000 less than he had paid for it, because of the downturn — and renting a house instead.

“I used to drive a Lexus,” he says. “I let that go. I don’t need it anymore.”

Mr. Nash has since sold $500,000 worth of his product, netting $200,000 in two and a half years, an annual average of $80,000.

He is relieved, and proud of having successfully leapt from the familiar into the unknown.

“It’s unbelievable to me that at my age I recognized a need and filled it,” he says. “We’re having a hard time filling orders right now, we have so much demand.”


The Renovator

When the economy heads south, it helps to have been through the situation a few times before, says Duke Marquiss, 67, a real estate investor and broker in Fort Collins, Colo. In 1974, he bought a motel in Gillette, Wyo., during an oil and coal boom. “I made the most money of my life,” he recalls.

But the boom went bust, and in 1987, he moved to Scottsdale, Ariz., where he worked as a mortgage broker. By the time he and his wife moved to Colorado in 1989, Mr. Marquiss understood how to buy, sell, manage and rehabilitate real estate.

Today he earns his living in the real estate market niche known as A.R.V., for “after repair value.” He buys properties, restores them and sells them for a profit. Tipped off by a local friend, he bought 65 town houses in Rock Springs, Wyo., in 2005 for $75,000 apiece, on average, and sold them each for about $100,000.

Mr. Marquiss had saved carefully and lived for three years with no income during the worst years of the recession. Because of a lack of new construction, he says he couldn’t “do the development side I liked and was good at.”

“That left me back selling houses,” he adds, “so I decided I would ‘fix and flip.’ ”

Growing up on a large sheep farm taught him “ranch-hand logic,” but Mr. Marquiss acknowledges that he has had to learn his new business quickly, including how to use social media to gather advice from generous industry veterans. “LinkedIn helped a lot,” he says.

Mr. Marquiss uses only private investors to do his deals, borrowing between $15,000 and $450,000. “They’re tired of low interest rates or losing their money in the stock market,” he says.

His new line of work is not for everyone, he warns.

“You’ve got to be flexible and think very quickly,” he says. “You can’t bank on any of these deals ever closing.”

Before he found his new field, his wife suggested at one point that he find a full-time job working for someone else. He sent out 200 résumés, but received only one call. Sharply reducing their costs of living helped Mr. Marquiss and his wife, Ginger, weather the transition to their new life. They sold their 3,000-square-foot mountain home and now live in a condominium a third of the size in Fort Collins. He also saves $600 to $700 a month on gasoline by not commuting 45 minutes each way into town.

“It takes a conscious decision to reduce your overhead,” he says. “I see so many people in denial about where they really are financially.”


The Networker

Kenneth Jay Cohen, with his son, Jonathan, has been laid off several times, which has taught him the power of networking.

Since graduating from college, Kenneth Jay Cohen, 52, of Stamford, Conn., has faced six layoffs, the first in his early 30s, and the most recent at 50 with two young children to support. A prolonged period of unemployment wasn’t an option, so he did what he has done diligently for decades: he called upon his multiple networks for guidance and leads.

The first time he lost his job, “it was a shock, because I’d never experienced this before,” he says. “But now I know exactly what to do. I try to feed the network as much as I can while I’m still working so I know it’s there when I need it.”

He has more than 1,000 contacts on LinkedIn and works at finding and keeping business contacts elsewhere, too. “Every three or four months I go to a meeting,” he says. “I know who in my network is out of work, so every time I pick up a lead I pass it along to the group.”

Staying actively connected has also helped.

“I’m associated with a few finance groups within my own industry because people in finance need I.T.,” he says. “I also network with bankers, investment bankers and management types and a few accounting groups.”

In all, Mr. Cohen belongs to 24 groups, of which he is most active in seven to nine at any given time.

When he has lost a job, he has made a point of expanding his networks even further. “I always pick a new group to which I devote my time and my leadership skills,” he says. “It keeps me sane. It keeps me focused.”

It took him five months to find his latest job, a full-time position handling I.T. security for a Manhattan-based financial services company. He found his previous job within 30 days, picking up a year’s guaranteed contract work in Hartford.

“I seem to be able to find work,” he says modestly. “I know project managers who’ve been out of work for two years, and they’re really frustrated.” Some, he says, are too busy nursing their wounds to get out and meet the dozens, perhaps hundreds, of others in their field and affiliated areas who might be able to help them.

Living in an affluent area can complicate the issue when it’s time to tighten your belt.

“I’m back to where I was three and a half years ago financially,” he says. “The consumer I used to be when I was younger has considerably changed. It boils down to what your priorities are, and mine is my family. Sure, I’d like a shiny new Lexus and a million-dollar home. But is that practical for me? I’d rather have my kids.”

    Over 50, and Under No Illusions, NYT, 12.1.2013,






A Shocking Death,

a Financial Lesson and Help for Others


January 11, 2013
The New York Times



In the days after Chanel Reynolds’s husband was hit while riding his bicycle near Lake Washington here and the best-case possibilities just kept getting worse, she was not yet consumed by grief. There were no dogged middle-of-the-night Web searches for faraway cures for his crushed upper spine or tearful bedside vigils with their 5-year-old son.

Instead, the buzz in her brain came from a growing list of financial tasks that grown-ups are supposed to have finished by the time they approach middle age. And she and her husband, José Hernando, had not finished them.

“I was finding it really hard for me to stay present and in the room and to be able to hear what the doctors were saying because I was so overwhelmed with not knowing how much money we had in our checking account, and the fact that we had our wills drafted but not signed,” she said. “I didn’t know whether I was going to be able to float a family by myself.”

In the many months of suffering after Mr. Hernando’s death in July 2009, she beat herself up while spending dozens of hours excavating their financial life and slowly reassembling it. But then, she resolved to keep anyone she knew from ever again being in the same situation.

The result is a Web site named for the scolding, profane exhortation that her inner voice shouted during those dark days in the intensive care unit. She might have called it Getyouracttogether.org, but she changed just one word.

The site offers some basic financial advice, gives away free templates for a master checklist and provides starter forms to draft a will, living will and power of attorney. There’s also a guide to starting a list of all of the accounts in your life that someone might need to access and shut down in your absence.

All of these forms and lists are already out there on the Web in various places, though rarely in one place. But there are two things that make Ms. Reynolds’s effort decidedly different.

First, the world of personal finance suffers from an odd sort of organizational failure. We tend to organize our thinking around products: retirement accounts, mortgages, long-term care insurance.

But in the real world, it’s a big life event that often governs our hunt for solutions. Sometimes, it’s a happy one, like getting married. But there are few ready-made tool kits like the one Ms. Reynolds has assembled for people considering the possibility of serious illness or death.

The other thing that compelled me to sprint here right after I stumbled across her site Tuesday night was that it is not neutered, stripped of the mess of feelings that govern much of what we do with our money. Sometimes, we just need to meet the person in personal finance.

Maybe, just maybe, hearing the story of someone who has been there, in the worst possible way, can finally push us all into action.

And we desperately need to act. According to a survey that the legal services site Rocket Lawyer conducted in 2011, 57 percent of adults in the United States do not have a will. Of those 45 to 64 years of age, a shocking 44 percent still have not gotten it down.

People who get a fatal diagnosis from a doctor at least have a bit of time to sort things out. But Ms. Reynolds and her husband had made only a few plans.

Mr. Hernando was 43 years old on the day in July 2009 when a van mowed him down while making a left turn into the path of his bicycle.

He was a self-taught engineer who played guitar in a band called Moonshine back when Seattle was the world capital of rock. At the time of his death, he rode for a cycling team and was a Flash developer working at the highly regarded firm Frog Design.

Given all that vitality, death was the farthest thing from Ms. Reynolds’s mind when she kissed him goodbye after failing to persuade him to take their son along for the ride. Which was why she was confused when she checked her phone from a party two hours later and found 14 missed calls, none of which were from numbers she recognized.

After his death, this much was clear: The family with the six-figure income and the four-bedroom house that they had bought in the Mount Baker neighborhood one year before had a will with no signature, little emergency savings and an unknown number of accounts with passwords that had been in Mr. Hernando’s head.

What saved Ms. Reynolds, now 42, from ruin was life insurance. They didn’t have a lot, but they had just enough (a couple of hundred thousand dollars in the end) to keep her from having to go right back to work as a freelance project manager and sell the house at a big loss right away. It helped pay for the education of their son, Gabriel, who is now 9, and for Mr. Hernando’s daughter from a previous relationship, Lyric, who is 16 and still close to Ms. Reynolds and her brother. Ms. Reynolds now carries a $1,000,000 term policy on her own life.

So she did not go bankrupt. But the lack of a signed will ended up costing her thousands of dollars in unnecessary legal fees. And then there was the extended period of suspended animation, where she was trying to figure out where she stood with insurance and retirement accounts and phone bills but could not get the information that she needed without account numbers and passwords.

She describes that netherworld as a slow death by a thousand paper cuts. “Sometimes it was the one little, last thing that put me over the edge,” she said.

“I’m trying to figure out how best to take care of my son and when I can go back to work and how much I’ll lose on the house. And if I have to spend 30 minutes following up with some bank that won’t take a check from him, I just don’t have the extra 30 minutes to do this again.”

But she did it again and again, dozens of times, following the same “Hello, my name is Chanel and my husband just died and I need access to X account” script. Once she had enough emotional distance from it all, she created her Web site, where she tries to persuade others to take a couple of hours now to spare themselves countless hours of hardship later.

It’s true that her efforts are not unprecedented. Nolo helped pioneer a do-it-yourself legal movement, and its state-by-state materials are thorough. Several commercial sites can help store and sort your documents and accounts, including organizemyaffairs.com, estatedocsorganizer.com, legacylocker.com, aftersteps.com, thedocsafe.com and safeboxfinancial.com.

There are a few things about Ms. Reynolds’s site that seem unique to me, though. The first is her raw insistence on considering what it means if you’re having trouble finding the right people to serve as your estate’s executor or to inherit prized possessions.

“If you are at a loss for whom to name, get out there and tighten up your friends and family relationships,” she writes on the site. “Find some better friends. Be a better friend. This is everything. This means everything.”

It did for her, at least. “I felt really lucky when I went down my favorites list on my iPhone at the hospital, and everyone showed up,” she said. Hospital staff eventually had to gently inform Ms. Reynolds that her large group of supporters was getting in the way.

She also urges people to leave traces of themselves. This is particularly crucial for parents who fetishize every piece of preschool artwork and capture every meaningful moment but rarely come out from behind the camera themselves.

Forget about just preserving memories of your children for yourself. What about the things that they may need to remember you by?

I asked two lawyers for feedback on Ms. Reynolds’s efforts. Bill Cahill, a lawyer who writes wills for many people who live near me in Brooklyn, said that her legal templates were infinitely better than nothing.

He did lament Ms. Reynolds’s choice of a name for her Web effort. “It seems to me that the whole process deserves more dignity,” he wrote in an e-mail message.

While a private admonition to get it together may well be worthwhile, he added, “the coarseness of the communication is not appropriate for the public square.”

Ms. Reynolds considered this but decided that she needed to be honest. “Those were actually the words that came out of my mouth in the I.C.U.,” she said. “To try to come up with another word to describe something that is part of my own personal experience is too hard to do for me, and it doesn’t, for me, communicate the level of importance and intensity and emotion that comes along with the content.”

Diana S.C. Zeydel, a shareholder at Greenberg Traurig in Miami and chairwoman of the estate and gift tax committee for the American College of Trust and Estate Counsel, applauded Ms. Reynolds’s consciousness-raising efforts.

But she worried that some people who adopted Ms. Reynolds’s sample will (from a template derived from her own Washington State will, which she wrote with the help of a lawyer) as their own could end up worse off than if they had nothing, depending on their circumstances.

It is not surprising that a lawyer would urge you to consult a lawyer, and Ms. Reynolds is not at all opposed to anyone doing so. She also doesn’t accept the idea that anyone even remotely like her and her late husband cannot afford it. “If people can save to go on vacation, they can save to do this, too,” she said.

Ms. Reynolds’s Web site is only four days old as of this writing, and within 24 hours it had been shared over 100 times on Facebook.

She has already heard from a social worker in Santa Fe, N.M., who was near retirement and had not yet pulled her financial records together and a 22-year-old with no children who is now considering a living will.

So already, Ms. Reynolds feels that it’s been worthwhile to share her own experience, if only to help people feel the relief that she now feels because she has her act together.

“It takes way more energy to worry about something than it does to be relieved,” she said.

“It makes a lot more space for joy and gratitude and happiness. And the rest of your life.”

    A Shocking Death, a Financial Lesson and Help for Others, NYT, 11.1.2013,






The Debt Ceiling’s Escape Hatch


January 9, 2013
The New York Times



THE fiscal cliff may have been avoided, but an even higher-stakes political standoff — this time, over the federal debt ceiling — is just around the bend.

Congressional Republicans have said they will demand immense cuts to popular government programs in exchange for agreeing to raise the nation’s authorized borrowing limit of $16.4 trillion. The Treasury Department briefly nudged against that ceiling on Dec. 31, but used “extraordinary” financial measures to buy more time. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin.

So far, President Obama isn’t giving in. As he rightly said last week, he “will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed.”

But for the president’s tough talk to be credible, Congress and the country need to know before we reach the breach point — an event that could come as early as February — that he has a plausible plan to work around the debt ceiling.

There are no great options. Most of the ideas floated so far would either severely disrupt the public markets for Treasury debt or rely on a constitutional claim of executive authority so far-reaching that we would very likely spend the next two years locked in an impeachment fight.

Some have suggested, for instance, that the president could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations. But the Constitution is clear, and Mr. Obama agrees, that Congress alone has the power to authorize new borrowing.

Other supposed solutions — like the notion that the Treasury Department could create a $1 trillion dollar platinum coin and deposit it in its own account at the Federal Reserve — are even more fantastical.

However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.

The federal Anti-Assignment Act generally prohibits the transfer of claims against the United States from one private actor to another, but the government could waive the act’s application, which is what the president would do here.

The strategy may sound far-fetched, but it has been used before: in fact, California relied on it as recently as 2009.

Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.

Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the Legislature quickly worked out a budget deal and the scrip was then redeemed for cash.

Throughout the ordeal, California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

A federal scrip program, importantly, would not explicitly challenge any constitutional allocation of powers. Nor would there be confusion in the marketplace between valid Treasury bonds and this new paper, which would have a different name, financial terms and legal status. And because the scrip would be transferable, claimants forced to accept it would be able to turn it into immediate cash in private markets, for as long as the Treasury was unable to issue new debt.

Would a federal scrip program be a painless way of resolving a debt ceiling crisis? Hardly. But it would be the least awful way to defang the most extortionate demands of Congressional hard-liners — and one that would not permanently damage America’s fiscal standing in the world.


Edward D. Kleinbard, a former chief of staff

at the Congressional Joint Committee

on Taxation, is a law professor at the University of Southern California.

    The Debt Ceiling’s Escape Hatch, NYT, 9.1.2012,






A Financial Service for People Fed Up With Banks


January 8, 2013
The New York Times


Like many people, Josh Reich got fed up with his bank after it charged him overdraft fees and he endured painful customer service calls to fight them. But unlike most people, Mr. Reich, a software engineer from Australia, decided to come up with a better way to bank.

Mr. Reich and a co-founder, Shamir Karkal, created Simple, an online banking start-up company based in Portland, Ore., that offers its customers free checking accounts and data-rich analysis of their transactions and spending habits.

Few entrepreneurs dare to set their sights on industries as large and entrenched as banking and expect to flourish. But Mr. Reich, 34, a professed data nerd who has built computers and tinkered with the innards of sophisticated cameras, holds a master’s degree in business and has a robust background in financial data analysis. He is confident that Simple’s minimalist approach — it promises not to charge any fees for any services — will draw fans and customers.

“Banks make money by keeping customers confused,” Mr. Reich said. “There’s no incentives to make the experience better.”

Of course, inviting people to trust a start-up with their money is a lot to ask. The company, which began signing up customers late last year in a deliberately slow fashion, now has 20,000 and has processed transactions worth more than $200 million.

It also has the backing of prominent venture capital firms including Shasta Ventures, SV Angel and IA Ventures and has raised more than $13 million. Simple has few, if any, direct competitors, although some services like SmartyPig and Mint offer analysis of bank accounts and financial transactions.

Simple is actually not a bank. It has deals with CBW Bank and Bancorp, federally insured banks, to hold its customers’ money.

And it has built slick apps for the Web and mobile devices to give customers an overview of their accounts and transactions. But it encourages customers to treat it as a bank, closing their more traditional accounts and only using Simple.

The company’s biggest challenge, banking analysts say, will be to persuade people to give it a try.

“It is extremely difficult to get consumers to change and leave their banks,” said Jacob Jegher, an analyst at Celent, a research and consulting firm. “Plus, although they are not a bank, they still operate like a financial institution, and they will face challenges that big banks have decades of experience with.”

After the financial crisis, smaller community banks and credit unions gained customers eager for alternatives to larger corporate banks. Experts say Simple could attract those customers as well.

Early adopters are warming to the service; during a speech last fall at a conference aimed at technology enthusiasts, designers and creative people, Mr. Reich asked how many in attendance were Simple customers. A majority of the crowd raised hands.

Mr. Reich said Simple was keeping its first group of customers small to allow it to work out any kinks. (Already there have been some flaws, like one that briefly locked several users out of their accounts in November.) At this stage, those who want a Simple account have to request an invitation on its site, though these are handed out fairly liberally to those who meet the minimal qualifications of Simple and its bank partners.

Customers receive a plain white card that can be used like a debit card. The company offers most traditional banking features, like direct deposit and money transfers. But there is plenty it does not offer, like joint or business checking accounts, or paper checkbooks, which may be a deal killer for some.

The start-up does not have physical bank branches or automated teller machines, nor does it plan to build any. As a result, Simple customers cannot make cash deposits and must rely on the Internet and phone for service.

Simple tries to make up for what it does not have with modern software design and data analysis.

Each Simple transaction is tagged with detailed information that allows customers to search their accounts with plain English commands like “Show me how much I spent on meals over $30 last month,” or “Show me how much money I spent on gifts in December.”

Customers can see transactions plotted on a map or search for all transactions in a particular state or country, something that would be difficult with a traditional bank account.

“Banks throw out a lot of data,” Mr. Reich said. “There are 80 fields of data per transaction, and banks only show you a few: the dollar amount, the place and the date. We can use much more than that to let people have real-time financial data.” The general approach is intended to appeal to technically adept people who are tuned into the rising interest in analyzing one’s personal data and behavior, as captured by tracking tools like Nike Plus and Jawbone’s Up bracelet.

In the same way that such tools can help people learn more about their physical activity and how many hours a night they sleep, Simple hopes to offer insights into spending behavior.

Simple will have to expand to survive. It makes money by earning interest on the cash it carries and from interchange fees, which it gets from each swipe of the card. It will require a large enough base of deposits and customers to cover its costs.

And there is always the risk that Simple’s greatest advantage — its data tools — could be copied by competitors, Mr. Jegher, the Celent analyst, said: “Can they get to critical mass before banks catch up with their own digital tools to offer a competing experience?”

Some of Simple’s early users are big fans, like Chris Lanphear, 30, a Web developer in Fort Collins, Colo., who signed up in July.

Mr. Lanphear said he had been hesitant to try Simple at first because of the company’s lack of physical infrastructure, “but then I realized it doesn’t ensure better service if you see the face of the person you are talking to.”

He said he had been impressed with Simple’s quick responses, via phone and e-mail, to questions about transactions and charges. The tracking features helped him realize he was spending too much on dining out, so he decided to cut back.

Mr. Lanphear was impressed enough to move over to Simple and close his old bank account. “I figured it couldn’t be worse than the alternatives,” he said. “But it’s actually turning out to be much better.”

    A Financial Service for People Fed Up With Banks, NYT, 8.1.2013,






Fred L. Turner,

Innovative Chief of McDonald’s,

Dies at 80


January 8, 2013
The New York Times


Fred L. Turner, who as chief executive helped transform McDonald’s into a global giant and introduced the world to the Chicken McNugget, the Egg McMuffin and the Happy Meal, died on Monday in Glenview, Ill. He was 80.

The cause was complications of pneumonia, his daughter Paula Turner, said.

Mr. Turner went to work at the McDonald’s Corporation in 1956 as one of its first employees. He had been flipping hamburgers at a local franchise — learning the ropes as part of a plan to open his own restaurant with business partners — when the chain’s pioneer, Ray A. Kroc, offered a job opening new franchises.

He was named vice president for operations in 1958, became president and chief administrative officer in 1968, and was named chief executive in 1974, a position he held until 1987.

Mr. Turner was seen as the driving force behind many of the ideas and products that made McDonald’s one of the world’s most recognizable and successful brands.

“Ray Kroc founded it, but Fred Turner built it into what it is today,” said Dick Starmann, a former McDonald’s executive and longtime spokesman, who worked with Mr. Turner for nearly 30 years.

He is seen as the architect of the company’s “quality, service and cleanliness” model, which helped establish its reputation in the United States and abroad as a welcoming, family-friendly destination.

In 1961 he created Hamburger University, the training program for managers, franchisees and employees. During his time as chief executive — when the number of restaurants more than tripled — he expanded McDonald’s well beyond the early model of the walk-up hamburger stand. Under his watch, the company increased indoor seating and introduced the drive-through; the Happy Meal for children, complete with a toy; and the Chicken McNugget.

One of Mr. Turner’s biggest successes was the introduction of a McDonald’s breakfast companywide. Although some local franchises were already offering a breakfast menu, there was debate internally about how aggressively the company should promote it, Mr. Starmann recalled: “He made a big, bold decision — we’re going on national TV. He said, ‘The breakfast train is leaving the station — lead, follow or get out of the way.’ ”

In 1975 the company placed the Egg McMuffin on the national menu, and breakfast sales soon took off.

The Chicken McNugget was a similar breakthrough. The company had been experimenting with fried chicken for years, “but for whatever reason it just didn’t seem like we got it right,” Mr. Starmann said. Under Mr. Turner’s direction, the company developed the idea of “a boneless piece of chicken, to sell them almost like French fries.” The Chicken McNugget was introduced in all domestic restaurants in 1983.

Frederick Leo Turner was born on Jan. 6, 1933, in Des Moines, where he spent much of his childhood. He met his future wife, Patty Shurtleff, while they were students at Drake University. She died in 2000.

In addition to his daughter Paula, survivors include two other daughters, Patty Rhea and Teri Turner, and eight grandchildren.

    Fred L. Turner, Innovative Chief of McDonald’s, Dies at 80, NYT, 8.1.2013,






Social Security: It’s Worse Than You Think


January 5, 2013
The New York Times


CONGRESS and President Obama have pushed through a relatively modest stopgap measure to avoid the “fiscal cliff,” but over the coming years, the United States will confront another huge cliff: Social Security.

In the first presidential debate, Mr. Obama described Social Security as “structurally sound,” and Mitt Romney said that “neither the president nor I are proposing any changes” to the program. It was a rare issue on which both men agreed — and both were utterly wrong.

For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds — a $2.7 trillion buffer built in anticipation of retiring baby boomers — will be exhausted by 2033, the government currently projects.

Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out — to the tune of $800 billion by 2031, more than the current annual defense budget — and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.

We reached these conclusions, and presented them in an article in the journal Demography, after finding that the government’s methods for forecasting Americans’ longevity were outdated and omitted crucial health and demographic factors. Historic declines in smoking and improvements in the prevention and treatment of cardiovascular disease are adding years of life that the government hasn’t accounted for. (While obesity has rapidly increased, it is not likely, at this point, to offset these public health and medical successes.) More retirees will receive benefits for longer than predicted, supported by the payroll taxes of relatively fewer working adults than projected.

Remarkably, since Social Security was created in 1935, the government’s forecasting methods have barely changed, even as a revolution in big data and statistics has transformed everything from baseball to retailing.

This omission can be explained by the fact that the Office of the Chief Actuary, the branch of the Social Security Administration that is responsible for the forecasts, is almost exclusively composed of, well, actuaries — without any serious representation of statisticians or social science methodologists. While these actuaries are highly responsible and careful and do excellent work curating and describing the data that go into the forecasts, their job is not to make statistical predictions. Yet the agency badly needs such expertise.

With considerable help from the actuaries and other officials at the Social Security Administration, we unearthed how the agency makes mortality forecasts and uses them to predict the program’s solvency. We learned that the methods are antiquated, subjective and needlessly complicated — and, as a result, are prone to error and to potential interference from political appointees. This may explain why the agency’s forecasts have, at times, changed significantly from year to year, even when there was little change in the underlying data.

We have made our methods, calculations and software available online at j.mp/SSecurity so that others can replicate or improve our forecasts. The implications of our findings go beyond social science. As the wave of retirement by the baby boomers continues, doing nothing to shore up Social Security’s solvency is irresponsible. If the amount of money coming in through payroll taxes does not increase and if the amount of money going out as benefits remains the same, the trust funds will become insolvent less than 20 years from now.

To save Social Security, which has lifted generations of elderly people out of poverty, tough choices have to be made. One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity.

A second option is to increase payroll taxes, for example by taxing wages over $113,700, the current earnings limit. A third is to limit the annual cost-of-living adjustments, possibly by changing how those adjustments are calculated. A fourth is to reduce benefits — for example, by lowering the initial benefits for workers whose lifetime wages are above the national average (currently $43,000 a year). Other choices, in numerous combinations, are possible, too.

One factor that might be considered is new research suggesting that retirement itself, although popular, may reduce life expectancy by breaking lifelong routines and disrupting deep social connections. One might question how much government policy should actively encourage retirement, as opposed to merely making it an option.

Americans need to discuss these difficult choices — and the Social Security Administration needs the ability to improve its forecasting technology by adding statisticians and social science methodologists to help its actuaries institute more formalized quantitative and statistical procedures.

In 1983, after the last time the trust funds ran a deficit, the National Commission on Social Security Reform, led by Alan Greenspan and with members appointed by President Ronald Reagan and Congressional leaders, produced a report that led to changes in payroll taxes. But in the quarter-century since, there have been only modest changes in the program.

We know much more now about mortality and demography, and so an open debate today about Social Security’s future could be even more productive than it was then. The high levels of partisan strife may not make the present seem like the best time to reach a bipartisan agreement. But few issues are more important to more Americans, of both parties, and the longer we ignore the problem, the more disruptive any change will need to be to keep Social Security alive.


Gary King is a professor of government

and director of the Institute for Quantitative Social Science at Harvard.

Samir S. Soneji, a demographer, is an assistant professor

at the Dartmouth Institute for Health Policy and Clinical Practice.

    Social Security: It’s Worse Than You Think, NYT, 5.1.2013,






Job Creation Is Still Steady Despite Worry


January 4, 2013
The New York Times


Despite concerns about looming tax increases and government spending cuts, American employers added 155,000 jobs in December. Employees also enjoyed slightly faster wage growth and worked longer hours, which could bode well for future hiring.

The job growth, almost exactly equal to the average monthly growth in the last two years, was enough to keep the unemployment rate steady at 7.8 percent, the Labor Department reported on Friday. But it was not enough to reduce the backlog of 12.2 million jobless workers, underscoring the challenge facing Washington politicians as they continue to wrestle over how to address the budget deficit.

“Job creation might firm a little bit, but it’s still looking nothing like the typical recovery year we’ve had in deep recessions in the past,” said John Ryding, chief economist at RDQ Economics. “There’s nothing in the deal to do that,” he said, referring to Congress’s Jan. 1 compromise on taxes, “and nothing in this latest jobs report to suggest that. We’re a long way short of the 300,000 job growth that we need.”

If anything, the most visible debt-related options that policy makers are discussing could slow down economic and job growth, which, at its existing pace, would take seven years to reduce the unemployment rate to its prerecession level. The $110 billion in across-the-board federal spending cuts scheduled for March 1, for example, might provoke layoffs by local governments, military contractors and other companies that depend on federal funds.

A showdown over the debt ceiling expected in late February could also damage business confidence, as it did the last time Congress nearly allowed a default on the nation’s debts in August 2011.

“We may be seeing the calm before the storm right now,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, noting that a recent survey from the National Federation of Independent Business found that alarmingly few small companies planned to hire in the coming months. “Small businesses are wringing their hands in horror at what’s going on in Washington.”

A best case for the economy, many analysts say, would involve a swift and civil Congressional agreement that raised the debt ceiling immediately. It would also address the country’s long-term debt challenges, like Medicare costs, without sudden or draconian fiscal tightening this year.

Given the uncertainty over what Congress will do, estimates of the unemployment rate’s path this year vary wildly. The more optimistic forecasts for the end of 2013 predict that unemployment will fall to just above 7 percent, which would be considerably below its most recent peak of 10 percent in October 2009, but still higher than its prerecession level of 5 percent.

The job gains in December were driven by hiring in health care, food services, construction and manufacturing. The last two industries were probably helped by rebuilding after Hurricane Sandy.

Aside from the wild card of what happens in Washington, some encouraging trends in the economy — including the housing recovery, looser credit for small businesses, a rebound in China and pent-up demand for new automobiles — suggest that businesses have good reason to speed up hiring.

Congress’s last-minute deal to raise taxes this week will offset some of these sources of growth, since higher taxes trim how much money consumers have available each month.

President Obama’s proposals to spend more money on infrastructure projects and other measures intended to spur hiring are fiercely opposed by Republican deficit hawks. The fiscal compromise reached this week did include one modest form of stimulus, though: a one-year renewal of the federal government’s emergency unemployment benefits program. That program allows workers to continue receiving benefits for up to 73 weeks, depending on the unemployment rate in the state where they live, and stimulates economic activity because unemployment benefits are spent almost immediately.

The extension was a tremendous relief to the two million workers who would otherwise have lost their benefits this week.

“We woke up on Wednesday morning and saw the news and just said, ‘Thank God, thank God, thank God,’ and then went out and went food shopping because we knew we had money coming in,” said Gina Shadis, 56, of Newton, N.J.

Both she and her husband, Stephen, were laid off within the last 14 months from jobs they had held for more than a decade: she from a quality assurance manager position at an environmental testing lab, and he as foreman and senior master technician at an auto dealership. They are each receiving $548 a week in federal jobless benefits, or about a quarter of their pay at their most recent jobs.

“It has just been such a traumatic time,” Ms. Shadis said. “You wake up in the morning with shoulders tense and head aching because you didn’t sleep the night before from worrying.”

More than six million workers have exhausted their unemployment benefits since the recession began in December 2007, according to the National Employment Law Project, a labor advocacy group.

Millions of workers are sitting on the sidelines and so are not counted in the tally of unemployed. Some are merely waiting for the job market to improve, and others are trying to invest in new skills to appeal to employers who are already hiring.

“I have a few prospects who say they want me to work for them when I graduate,” said Jordan Douglas, a 24-year-old single mother in Pampa, Tex., who is enrolled in a special program that allows her to receive jobless benefits while attending school full time to become a registered nurse. She receives $792 in benefits every two weeks, a little less than half of what she earned in an administrative position at the nursing home that laid her off last year.

Ms. Douglas calculates that her federal jobless benefits will run out the very last week of nursing school.

“This had to have been a sign from God that I had to do this, since it all worked out so well,” she said.

    Job Creation Is Still Steady Despite Worry, NYT, 4.1.2013,






And at the Bottom of the Wage Scale ...


January 4, 2013
The New York Times

Nearly a million low-wage workers in 10 states will get a modest raise this year. In Rhode Island, a new law has raised the state’s minimum wage by 35 cents an hour, to $7.75, which will work out to an average annual raise of $510 for 11,000 Rhode Islanders. In nine other states — Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington — laws that peg the minimum wage to inflation will result in increases of 10 cents to 15 cents an hour, for hourly wages ranging from $7.35 in Missouri to $9.19 in Washington.

By contrast, the federal minimum wage has been stuck at $7.25 an hour since 2009. In all, 19 states and the District of Columbia set their minimums above that level, providing a much needed lift for the lowest-paid workers. But state efforts are no substitute for a higher federal minimum because the ability to earn a minimally acceptable income should not depend on where a worker lives.

Will Congress finally raise the federal minimum wage this year? It would be the least that lawmakers could do. In the fiscal cliff deal, lawmakers locked in big tax breaks for wealthy investors and for heirs of multimillion-dollar estates. At the same time, they allowed the payroll tax cut for low- and middle-income taxpayers to expire, without enacting new provisions to ease the blow. The lowest-paid workers will be hit the hardest. In the states that raised their minimum wage this year, much of the increase will be eaten up by the higher payroll tax. In the other states, paychecks will simply be smaller.

Efforts to raise the minimum invariably run into arguments that employers, especially small businesses, cannot afford to pay a higher wage. But the evidence shows that most low-wage employees work for large companies, which have largely recovered from the recession and have reinstituted generous pay packages for executives. As for low-wage workers at small businesses, many are waitresses and other “tipped” workers for whom the federal minimum wage is $2.13 an hour, where it has been since 1991. Clearly, there is ample room for an increase.

A related argument is that a higher minimum wage destroys jobs, especially employment for teenagers. But research shows that most low-wage workers are over the age of 20 and suggests that paying them a higher wage could actually create jobs by bolstering consumer spending.

A higher minimum wage is also an obvious way to counter the accelerating trend toward low-wage work and growing income inequality. For decades, various forces, including the decline in unionization and the global competition for jobs, have pushed down wages in the United States. But the situation has become worse in the last few years, as most of the middle-wage jobs lost during the recession have been replaced with lower-paid work.

Raising the minimum wage is always a fight. Congress has approved legislation to do so only three times in the last 30 years. President Obama promised to take on this fight back in 2008, when he called for a federal minimum wage of $9.50 an hour by 2011, indexed to inflation. It is past time to keep the promise.

    And at the Bottom of the Wage Scale ..., NYT, 4.1.2013,






How to Halt the Terrorist Money Train


January 2, 2013
The New York Times


Tampa, Fla.

LAST month, HSBC admitted in court pleadings that it had allowed big Mexican and Colombian drug cartels to launder at least $881 million. The bank also admitted to using various schemes to move hundreds of millions of dollars to nations subject to trade sanctions, including Iran, Cuba and Sudan, in violation of the Trading With the Enemy Act. “On at least one occasion,” according to a statement by Assistant Attorney General Lanny A. Breuer, “HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States.”

Those were some of the transgressions uncovered during a two-year investigation led by the Justice and Treasury Departments and acknowledged by HSBC in a settlement, known as a deferred prosecution agreement, that was filed in a federal court in December. Not a single executive was charged with a crime. Instead, the bank paid $1.9 billion in fines and forfeitures — or roughly 10 percent of the pretax profits it earned in just 2010, one of the more than five years during which it admitted to criminal conduct.

HSBC is hardly alone. Court filings show that, since 2006, more than a dozen banks have reached settlements with the Justice Department regarding violations related to money laundering. ING Bank paid a $619 million fine for altering records and secretly transferring more than $2 billion for entities trading with Iran and other nations under sanctions. American Express Bank International acknowledged that more than $55 million in drug proceeds may have been laundered through offshore shell accounts it maintained. The Justice Department has signed similar agreements, withholding prosecution in exchange for bank promises to tighten oversight, with Wachovia, Union Bank of California, Lloyds, Credit Suisse, ABN Amro Holding (now owned by Royal Bank of Scotland), Barclays and Standard Chartered. All admitted to criminal offenses; all were handed the equivalent of traffic tickets — pay a fine on your way out the door.

This has been the government’s playbook in fighting terrorism and the drug trade. For make no mistake, without the ability to “wash” billions of dollars of money from illicit sources each year and bank the untraceable profits, both of these criminal enterprises would falter.

In November, the House Subcommittee on Oversight, Investigations and Management issued a shocking report documenting the collaboration between Mexican and Colombian drug cartels and Hezbollah in narcotics and human trafficking, smuggling and financial crimes in the United States and Latin America — a partnership that, in just the border region between Brazil, Paraguay and Argentina, produces an estimated $12 billion in cash each year.

Yet data from the Department of Justice Asset Forfeiture Fund and the United Nations Office on Drugs and Crime Research Report show that United States law enforcement tracks down and seizes no more than 1 percent of the drug fortunes generated each year by global cartels.

The rest isn’t hiding in mattresses. It’s being washed — stripped clean of information that would identify its source, then transferred from one account to another, and often moved surreptitiously through various business enterprises, until it can settle safely in a criminal’s private offshore bank account. None of this happens without help from bankers, lawyers and businessmen.

I have seen this firsthand. I was a federal agent for 27 years and worked undercover as a money launderer within this murky realm for five of them. I worked on teams that put leaders of drug cartels behind bars. The largest and most sophisticated of these criminal enterprises don’t trick banks into laundering their money — they partner with that small segment of the international banking and business community that recirculates drug profits and cash from other illicit trades, like black-market arms dealing.

The only way to stop the flow of this dirty money is to get tough on the bankers who help mask and transfer it around the world. Banks themselves don’t launder money, after all; people do.

The standard of proof needed to charge and convict a bank officer of money laundering is simple. If the person knows that funds are proceeds of a crime and, thereafter, he attempts to disguise or conceal the true source of the funds, he has committed the criminal offense of money laundering. Any individual who intentionally provides financial services to criminal organizations should be dealt with as harshly as possible under the law.

Bank officers at HSBC branches in Mexico who facilitated the transfer of $881 million for the Sinaloa Cartel in Mexico, the Norte del Valle Cartel in Colombia and other narcotics traffickers — deposits that were often passed through teller windows in cash-filled boxes, some with hundreds of thousands of dollars in them — might contend that they were naïve about this money’s source. But there’s little incentive for them, or any bank officer, to be more vigilant when turning a blind eye comes with little or no penalty.

The stakes are simply too high for such a soft-glove approach on money laundering. As long as drug traffickers can wash the stain from 99 percent of their ill-gotten gains, as long as terrorists can move their cash freely around the world, we’ll have no chance to halt their deadly trades. We can help put an end to both of these scourges by putting the bankers who facilitate them in jail.


Robert Mazur, a former federal agent, is the author of “The Infiltrator,”

a memoir of his undercover life as a money launderer.

    How to Halt the Terrorist Money Train, NYT, 2.1.2013,






Amid Pressure, House Passes Fiscal Deal


January 1, 2013
The New York Times


WASHINGTON — Ending a climactic fiscal showdown in the final hours of the 112th Congress, the House late Tuesday passed and sent to President Obama legislation to avert big income tax increases on most Americans and prevent large cuts in spending for the Pentagon and other government programs.

The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy.

Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.”

In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare.

The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.

Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over.

“The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls.”

Not a single leader among House Republicans came to the floor to speak in favor of the bill, though Speaker John A. Boehner, who rarely takes part in roll calls, voted in favor. Representative Eric Cantor of Virginia, the majority leader, and Representative Kevin McCarthy of California, the No. 3 Republican, voted no. Representative Paul D. Ryan, the budget chairman who was the Republican vice-presidential candidate, supported the bill.

Despite the party divisions, many Republicans in their remarks characterized the measure, which allows taxes to go up on household income over $400,000 for individuals and $450,000 for couples but makes permanent tax cuts for income below that level, as a victory of sorts, even as so many of them declined to vote for it.

“After more than a decade of criticizing these tax cuts,” said Representative Dave Camp of Michigan, “Democrats are finally joining Republicans in making them permanent. Republicans and the American people are getting something really important, permanent tax relief.”

The dynamic with the House was a near replay of a fight at the end of 2011 over a payroll tax break extension. In that showdown, Senate Democrats and Republicans passed legislation, and while House Republicans fulminated, they were eventually forced to swallow it.

On Tuesday, as they got a detailed look at the Senate’s fiscal legislation, House Republicans ranging from Midwest pragmatists to Tea Party-blessed conservatives voiced serious reservations about the measure, emerging from a lunchtime New Year’s Day meeting with their leaders, eyes flashing and faces grim, insisting they would not accept a bill without substantial savings from cuts.

The unrest reached to the highest levels as Mr. Cantor told members in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form.

Mr. Boehner, who faces a re-election vote on his post on Thursday when the 113th Congress convenes, had grave concerns as well, but he had pledged to allow the House to consider any legislation that cleared the Senate. And he was not eager to have such a major piece of legislation pass with mainly opposition votes, and the outcome could be seen as undermining his authority.

Adding to the pressure on the House, the fiscal agreement was reached by Senator Mitch McConnell of Kentucky, the Senate Republican leader, and had deep Republican support in the Senate, isolating the House Republicans in their opposition. Some of the Senate Republicans who backed the bill are staunch conservatives, like Senators Patrick J. Toomey of Pennsylvania and Tom Coburn of Oklahoma, with deep credibility among House Republicans.

The options before the House Republicans were fraught with risks. Senate Democrats said they would not brook any serious amendments to their bill — one that was hard fought and passed in the dark of night with many clenched teeth on either side of the aisle. Senate Democratic leaders planned no more votes before the new Congress convenes Thursday afternoon.

An up-or-down House vote on the Senate measure presented many Republicans with a nearly impossible choice: to prolong the standoff that most Americans wished to see cease, or to vote to allow taxes to go up on wealthy Americans without any of the changes to spending and benefit programs they had fought for vigorously for the better part of two years.

“I have read the bill and can’t find the spending cuts — even with an electron magnifying glass,” said Representative Trey Gowdy of South Carolina. “It’s part medicinal, part placebo, and part treating the symptoms but not the underlying pathology.”

But with their options shrinking just two days before the beginning of a new Congress, the House leadership made one of the biggest concessions of their rebellious two years and let the measure move forward to avoid being seen as the chief obstacle to legislation that Mr. Obama and a bipartisan Senate majority said was necessary to prevent the nation from slipping back into a recession.

The measure, while less reflective of Mr. Obama’s fiscal agenda than Senate Democrats had wished, still provided fewer concessions than the president initially offered in a, tentative agreement with Mr. Boehner last month, and it was a far cry from what was on the table in 2011 when negotiators tried to reach a so-called grand bargain. “I thank all of you who will vote for it,” said Representative Darrell Issa of California. “I cannot bring myself to vote for it.”

Still, many Republicans, in light of the broad party support for the bill in the Senate and the unwavering, rare discipline they faced from Democrats, concluded that they had little room to maneuver. They decided they would save their fire for the coming rounds — the effort to increase the nation’s debt ceiling again in another month or two and an expiring governmentwide spending bill.

“We can and will pursue comprehensive tax reform,” Representative Camp said.

Republicans hope to fight for more spending cuts in the debt-ceiling vote, but Mr. Obama warned against that tactic.

“While I will negotiate over many things,” he said, “I will not have another debate with this Congress over whether or not they should pay the bills they’ve already racked up through the laws they have passed. Let me repeat: we can’t not pay bills that we’ve already incurred.”

The last time the House voted on New Year’s Day, according to Congressional staff members on the Rules Committee, was in 1951, on a measure concerning money for the Korean War.


Robert Pear and Peter Baker contributed reporting.

Amid Pressure, House Passes Fiscal Deal,




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