Friday, July 2, 2010

The “mini-stimulus”

A prophet in his own house

The president’s push for more stimulus hits the buffers

BARACK OBAMA’S plea to stimulate economic growth now and cut deficits later got a mixed response from world leaders at the G20 summit in Toronto last weekend. And the reception back home was a lot worse.

On June 24th Democratic leaders in Congress withdrew a stimulus plan after failing, for the third time, to get the necessary 60 votes in the Senate to proceed. The defeat was all the more humbling because the bill had already been fiercely pared back. In his February budget Barack Obama had proposed $266 billion of new stimulus measures over the next few years. The “American Jobs and Closing Tax Loopholes Act” that Democratic leaders in Congress unveiled in May contained only $79 billion-worth: extended unemployment benefits, health-insurance subsidies for the unemployed and Medicaid grants to the states. (The entire bill would have added $134 billion to deficits because of extensions to expiring tax breaks and Medicare payments for doctors.) It was then repeatedly whittled down, finally to just $34 billion, in a vain attempt to win over a few Republicans.

The package failed for several reasons, including opposition from business groups (and Republicans) to its increased taxes on multinationals and on the carried interest of private-equity fund managers. But the main reason is that record deficits and the sovereign-debt crisis in Europe have heightened the political price of any new borrowing, even as the graver threat of future entitlement spending goes unmet. “We’ve reached a new political equilibrium—you can’t add to the deficit but you can’t cut it either,” notes Andy Laperriere of ISI Group, a brokerage.

These days Mr Obama needs at least a few Republican senators to pass almost anything, but recent primary battles have shown deep antipathy among Republican voters to any increase in spending, deficits or taxes. So while a stand-alone extension of unemployment benefits may eventually pass, the prospect of any sizeable new stimulus has faded. The pre-mid-term gridlock means that even an extension of George Bush junior’s tax cuts, which expire this year, is not assured, even for America’s middle class. That would be a big blow to the president.

The latest defeat comes at a pinched time. The winding down of most of last year’s $862 billion stimulus package (the price grew in the spending from the original $787 billion) has already factored substantial fiscal tightening into the economic outlook as aid to states dries up and temporary tax cuts end. JPMorgan Chase estimates that these will subtract 1.8 percentage points, at an annual rate (see chart), from growth in the first half of next year, though it reckons there will be enough underlying momentum in the recovery to keep growth above 3%.

Without a mini-stimulus bill, though, the drag increases to 2.4 points. A failure to renew Mr Bush’s tax cuts would add another percentage point to that. So if underlying growth flags even a little, that fiscal tightening could be enough to tip the economy back into recession. A surprise plunge in consumer confidence in June was the latest reminder that this gloomy scenario cannot be ruled out.



War in the fifth domain

Are the mouse and keyboard the new weapons of conflict?

AT THE height of the cold war, in June 1982, an American early-warning satellite detected a large blast in Siberia. A missile being fired? A nuclear test? It was, it seems, an explosion on a Soviet gas pipeline. The cause was a malfunction in the computer-control system that Soviet spies had stolen from a firm in Canada. They did not know that the CIA had tampered with the software so that it would “go haywire, after a decent interval, to reset pump speeds and valve settings to produce pressures far beyond those acceptable to pipeline joints and welds,” according to the memoirs of Thomas Reed, a former air force secretary. The result, he said, “was the most monumental non-nuclear explosion and fire ever seen from space.”

This was one of the earliest demonstrations of the power of a “logic bomb”. Three decades later, with more and more vital computer systems linked up to the internet, could enemies use logic bombs to, say, turn off the electricity from the other side of the world? Could terrorists or hackers cause financial chaos by tampering with Wall Street’s computerised trading systems? And given that computer chips and software are produced globally, could a foreign power infect high-tech military equipment with computer bugs? “It scares me to death,” says one senior military source. “The destructive potential is so great.”

After land, sea, air and space, warfare has entered the fifth domain: cyberspace. President Barack Obama has declared America’s digital infrastructure to be a “strategic national asset” and appointed Howard Schmidt, the former head of security at Microsoft, as his cyber-security tsar. In May the Pentagon set up its new Cyber Command (Cybercom) headed by General Keith Alexander, director of the National Security Agency (NSA). His mandate is to conduct “full-spectrum” operations—to defend American military networks and attack other countries’ systems. Precisely how, and by what rules, is secret.

Britain, too, has set up a cyber-security policy outfit, and an “operations centre” based in GCHQ, the British equivalent of the NSA. China talks of “winning informationised wars by the mid-21st century”. Many other countries are organising for cyberwar, among them Russia, Israel and North Korea. Iran boasts of having the world’s second-largest cyber-army.

What will cyberwar look like? In a new book Richard Clarke, a former White House staffer in charge of counter-terrorism and cyber-security, envisages a catastrophic breakdown within 15 minutes. Computer bugs bring down military e-mail systems; oil refineries and pipelines explode; air-traffic-control systems collapse; freight and metro trains derail; financial data are scrambled; the electrical grid goes down in the eastern United States; orbiting satellites spin out of control. Society soon breaks down as food becomes scarce and money runs out. Worst of all, the identity of the attacker may remain a mystery.

In the view of Mike McConnell, a former spy chief, the effects of full-blown cyberwar are much like nuclear attack. Cyberwar has already started, he says, “and we are losing it.” Not so, retorts Mr Schmidt. There is no cyberwar. Bruce Schneier, an IT industry security guru, accuses securocrats like Mr Clarke of scaremongering. Cyberspace will certainly be part of any future war, he says, but an apocalyptic attack on America is both difficult to achieve technically (“movie-script stuff”) and implausible except in the context of a real war, in which case the perpetrator is likely to be obvious.

For the top brass, computer technology is both a blessing and a curse. Bombs are guided by GPS satellites; drones are piloted remotely from across the world; fighter planes and warships are now huge data-processing centres; even the ordinary foot-soldier is being wired up. Yet growing connectivity over an insecure internet multiplies the avenues for e-attack; and growing dependence on computers increases the harm they can cause.

By breaking up data and sending it over multiple routes, the internet can survive the loss of large parts of the network. Yet some of the global digital infrastructure is more fragile. More than nine-tenths of internet traffic travels through undersea fibre-optic cables, and these are dangerously bunched up in a few choke-points, for instance around New York, the Red Sea or the Luzon Strait in the Philippines (see map). Internet traffic is directed by just 13 clusters of potentially vulnerable domain-name servers. Other dangers are coming: weakly governed swathes of Africa are being connected up to fibre-optic cables, potentially creating new havens for cyber-criminals. And the spread of mobile internet will bring new means of attack.

The internet was designed for convenience and reliability, not security. Yet in wiring together the globe, it has merged the garden and the wilderness. No passport is required in cyberspace. And although police are constrained by national borders, criminals roam freely. Enemy states are no longer on the other side of the ocean, but just behind the firewall. The ill-intentioned can mask their identity and location, impersonate others and con their way into the buildings that hold the digitised wealth of the electronic age: money, personal data and intellectual property.

Mr Obama has quoted a figure of $1 trillion lost last year to cybercrime—a bigger underworld than the drugs trade, though such figures are disputed. Banks and other companies do not like to admit how much data they lose. In 2008 alone Verizon, a telecoms company, recorded the loss of 285m personal-data records, including credit-card and bank-account details, in investigations conducted for clients.

About nine-tenths of the 140 billion e-mails sent daily are spam; of these about 16% contain moneymaking scams (see chart 1), including “phishing” attacks that seek to dupe recipients into giving out passwords or bank details, according to Symantec, a security-software vendor. The amount of information now available online about individuals makes it ever easier to attack a computer by crafting a personalised e-mail that is more likely to be trusted and opened. This is known as “spear-phishing”.

The ostentatious hackers and virus-writers who once wrecked computers for fun are all but gone, replaced by criminal gangs seeking to harvest data. “Hacking used to be about making noise. Now it’s about staying silent,” says Greg Day of McAfee, a vendor of IT security products. Hackers have become wholesale providers of malware—viruses, worms and Trojans that infect computers—for others to use. Websites are now the favoured means of spreading malware, partly because the unwary are directed to them through spam or links posted on social-networking sites. And poorly designed websites often provide a window into valuable databases.

Malware is exploding (see chart 2). It is typically used to steal passwords and other data, or to open a “back door” to a computer so that it can be taken over by outsiders. Such “zombie” machines can be linked up to thousands, if not millions, of others around the world to create a “botnet”. Estimates for the number of infected machines range up to 100m (see map for global distribution of infections). Botnets are used to send spam, spread malware or launch distributed denial-of-service (DDoS) attacks, which seek to bring down a targeted computer by overloading it with countless bogus requests.

The spy who spammed me

Criminals usually look for easy prey. But states can combine the criminal hacker’s tricks, such as spear-phishing, with the intelligence apparatus to reconnoitre a target, the computing power to break codes and passwords, and the patience to probe a system until it finds a weakness—usually a fallible human being. Steven Chabinsky, a senior FBI official responsible for cyber- security, recently said that “given enough time, motivation and funding, a determined adversary will always—always—be able to penetrate a targeted system.”

Traditional human spies risk arrest or execution by trying to smuggle out copies of documents. But those in the cyberworld face no such risks. “A spy might once have been able to take out a few books’ worth of material,” says one senior American military source, “Now they take the whole library. And if you restock the shelves, they will steal it again.”

China, in particular, is accused of wholesale espionage, attacking the computers of major Western defence contractors and reputedly taking classified details of the F-35 fighter, the mainstay of future American air power. At the end of 2009 it appears to have targeted Google and more than a score of other IT companies. Experts at a cyber-test-range built in Maryland by Lockheed Martin, a defence contractor (which denies losing the F-35 data), say “advanced persistent threats” are hard to fend off amid the countless minor probing of its networks. Sometimes attackers try to slip information out slowly, hidden in ordinary internet traffic. At other times they have tried to break in by leaving infected memory-sticks in the car park, hoping somebody would plug them into the network. Even unclassified e-mails can contain a wealth of useful information about projects under development.

“Cyber-espionage is the biggest intelligence disaster since the loss of the nuclear secrets [in the late 1940s],” says Jim Lewis of the Centre for Strategic and International Studies, a think-tank in Washington, DC. Spying probably presents the most immediate danger to the West: the loss of high-tech know-how that could erode its economic lead or, if it ever came to a shooting war, blunt its military edge.

Western spooks think China deploys the most assiduous, and most shameless, cyberspies, but Russian ones are probably more skilled and subtle. Top of the league, say the spooks, are still America’s NSA and Britain’s GCHQ, which may explain why Western countries have until recently been reluctant to complain too loudly about computer snooping.

The next step after penetrating networks to steal data is to disrupt or manipulate them. If military targeting information could be attacked, for example, ballistic missiles would be useless. Those who play war games speak of being able to “change the red and blue dots”: make friendly (blue) forces appear to be the enemy (red), and vice versa.

General Alexander says the Pentagon and NSA started co-operating on cyberwarfare in late 2008 after “a serious intrusion into our classified networks”. Mr Lewis says this refers to the penetration of Central Command, which oversees the wars in Iraq and Afghanistan, through an infected thumb-drive. It took a week to winkle out the intruder. Nobody knows what, if any, damage was caused. But the thought of an enemy lurking in battle-fighting systems alarms the top brass.

That said, an attacker might prefer to go after unclassified military logistics supply systems, or even the civilian infrastructure. A loss of confidence in financial data and electronic transfers could cause economic upheaval. An even bigger worry is an attack on the power grid. Power companies tend not to keep many spares of expensive generator parts, which can take months to replace. Emergency diesel generators cannot make up for the loss of the grid, and cannot operate indefinitely. Without electricity and other critical services, communications systems and cash-dispensers cease to work. A loss of power lasting just a few days, reckon some, starts to cause a cascade of economic damage.

Experts disagree about the vulnerability of systems that run industrial plants, known as supervisory control and data acquisition (SCADA). But more and more of these are being connected to the internet, raising the risk of remote attack. “Smart” grids”, which relay information about energy use to the utilities, are promoted as ways of reducing energy waste. But they also increase security worries about both crime (eg, allowing bills to be falsified) and exposing SCADA networks to attack.

General Alexander has spoken of “hints that some penetrations are targeting systems for remote sabotage”. But precisely what is happening is unclear: are outsiders probing SCADA systems only for reconnaissance, or to open “back doors” for future use? One senior American military source said that if any country were found to be planting logic bombs on the grid, it would provoke the equivalent of the Cuban missile crisis.

Estonia, Georgia and WWI

Important thinking about the tactical and legal concepts of cyber-warfare is taking place in a former Soviet barracks in Estonia, now home to NATO’s “centre of excellence” for cyber-defence. It was established in response to what has become known as “Web War 1”, a concerted denial-of-service attack on Estonian government, media and bank web servers that was precipitated by the decision to move a Soviet-era war memorial in central Tallinn in 2007. This was more a cyber-riot than a war, but it forced Estonia more or less to cut itself off from the internet.

Similar attacks during Russia’s war with Georgia the next year looked more ominous, because they seemed to be co-ordinated with the advance of Russian military columns. Government and media websites went down and telephone lines were jammed, crippling Georgia’s ability to present its case abroad. President Mikheil Saakashvili’s website had to be moved to an American server better able to fight off the attack. Estonian experts were dispatched to Georgia to help out.

Many assume that both these attacks were instigated by the Kremlin. But investigations traced them only to Russian “hacktivists” and criminal botnets; many of the attacking computers were in Western countries. There are wider issues: did the cyber-attack on Estonia, a member of NATO, count as an armed attack, and should the alliance have defended it? And did Estonia’s assistance to Georgia, which is not in NATO, risk drawing Estonia into the war, and NATO along with it?

Such questions permeate discussions of NATO’s new “strategic concept”, to be adopted later this year. A panel of experts headed by Madeleine Albright, a former American secretary of state, reported in May that cyber-attacks are among the three most likely threats to the alliance. The next significant attack, it said, “may well come down a fibre-optic cable” and may be serious enough to merit a response under the mutual-defence provisions of Article 5.

During his confirmation hearing, senators sent General Alexander several questions. Would he have “significant” offensive cyber-weapons? Might these encourage others to follow suit? How sure would he need to be about the identity of an attacker to “fire back”? Answers to these were restricted to a classified supplement. In public the general said that the president would be the judge of what constituted cyberwar; if America responded with force in cyberspace it would be in keeping with the rules of war and the “principles of military necessity, discrimination, and proportionality”.

General Alexander’s seven-month confirmation process is a sign of the qualms senators felt at the merging of military and espionage functions, the militarisation of cyberspace and the fear that it may undermine Americans’ right to privacy. Cybercommand will protect only the military “.mil” domain. The government domain, “.gov”, and the corporate infrastructure, “.com” will be the responsibility respectively of the Department of Homeland Security and private companies, with support from Cybercom.

One senior military official says General Alexander’s priority will be to improve the defences of military networks. Another bigwig casts some doubt on cyber-offence. “It’s hard to do it at a specific time,” he says. “If a cyber-attack is used as a military weapon, you want a predictable time and effect. If you are using it for espionage it does not matter; you can wait.” He implies that cyber-weapons would be used mainly as an adjunct to conventional operations in a narrow theatre.

The Chinese may be thinking the same way. A report on China’s cyber-warfare doctrine, written for the congressionally mandated US-China Economic and Security Review Commission, envisages China using cyber-weapons not to defeat America, but to disrupt and slow down its forces long enough for China to seize Taiwan without having to fight a shooting war.

Apocalypse or asymmetry?

Deterrence in cyber-warfare is more uncertain than, say, in nuclear strategy: there is no mutually assured destruction, the dividing line between criminality and war is blurred and identifying attacking computers, let alone the fingers on the keyboards, is difficult. Retaliation need not be confined to cyberspace; the one system that is certainly not linked to the public internet is America’s nuclear firing chain. Still, the more likely use of cyber-weapons is probably not to bring about electronic apocalypse, but as tools of limited warfare.

Cyber-weapons are most effective in the hands of big states. But because they are cheap, they may be most useful to the comparatively weak. They may well suit terrorists. Fortunately, perhaps, the likes of al-Qaeda have mostly used the internet for propaganda and communication. It may be that jihadists lack the ability to, say, induce a refinery to blow itself up. Or it may be that they prefer the gory theatre of suicide-bombings to the anonymity of computer sabotage—for now.

Guns and the Supreme Court

Guns and the Supreme Court

The uninfringed

Two-nil to the gun lobby, but with plenty of money still to be spent on lawyers

FOR the “bitter” Americans Barack Obama accused in 2008 of “clinging” to their guns (and religion), this has been a sweet week. In June of that year five of the nine justices on the Supreme Court ruled in DC v Heller that the right to bear arms set out in the second amendment really did apply to individuals and not just to the “well regulated militia” in the arguably ambiguous sentence that ends by saying “the right of the people to keep and bear arms, shall not be infringed.” Now, almost exactly two years later, and again by five votes to four, the court has ruled, in McDonald v Chicago, that this right must be acknowledged by state and local governments and not only by the federal one.

The two findings, taken together, represent a big step forward for the gun lobby. Heller ruled that the second amendment should be construed as a personal right to keep and bear arms for lawful purposes, most notably for self-defence within the home. It struck down a handgun ban in Washington, DC, as unconstitutional. But because the capital is an enclave of the federal government, the ruling did not resolve the status of similar bans elsewhere.

Otis McDonald and his fellow plaintiffs in McDonald wanted to keep handguns for protection but were prohibited from doing so by ordinances in Chicago. The court has now ruled that under the “due process” clause of the 14th amendment the right to bear arms cannot be infringed by either the states or the federal government. Alan Gottlieb, vice-president of the Second Amendment Foundation, said that as a result of McDonald “the right of the individual citizen to have a gun is constitutionally protected in every corner of the United States.” He says that his organisation is preparing challenges against restrictive anti-gun laws across the country, in order to “win back our firearms freedoms one lawsuit at a time”. The National Rifle Association says that it, too, is planning legal challenges to gun laws across the country; it claims there are 20,000 of these.

And yet campaigners for gun control have not been cast into utter gloom. They are consoled by the fact that in this week’s ruling Justice Samuel Alito, writing for the majority, made a point of repeating something else the court said in Heller: the right to keep and bear arms is not “a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose”. The court emphasised two years ago that it was not questioning longstanding regulations such as preventing felons and the mentally ill from owning guns, or keeping guns out of sensitive places such as schools or government buildings. “We repeat those assurances here,” wrote Mr Alito in the new opinion.

The Brady Campaign to Prevent Gun Violence, a bipartisan movement that advocates gun control, did its best to put on a brave face, claiming to welcome the court’s rejection of the gun-lobby argument that its “any gun, for anybody, anywhere” agenda was protected by the constitution. Paul Helmke, the campaign’s president, noted that the court had again recognised that the second amendment allowed “for reasonable restrictions on firearms, including who can have them and under what conditions, where they can be taken, and what types of firearms are available.” Criminal-background checks, which states or cities can require, are rising (see chart).

But who is to decide which restrictions are reasonable and which offend against what the Supreme Court has now declared to be a fundamental right? That battle will now return to the lower courts. Blanket or near-blanket bans on the possession of handguns, such as those in Chicago and the adjacent city of Oak Park, will almost certainly be struck down. But these are very rare. In the case of most other regulations McDonald offers little guidance. Can assault weapons be banned? Can guns be banned from public places? Should there be rules on how they are stored at home? Should they be registered? In a dissenting opinion, Justice Stephen Breyer berated the majority for setting the judges on lower courts a “mission-almost-impossible”.

If the jurisprudence of gun control is treacherous, the politics are a nightmare. In an average year more than 100,000 Americans are shot by guns, more than 30,000 fatally. And yet support for stricter gun controls is declining—from 59% in 1994 to 40% last April, according to a CBS News poll last April. Gun-control regulations tend to be popular in cities and unpopular, often deeply so, in rural areas.

For that reason, the Democrats may be pleased that the Supreme Court has at last entrenched the second amendment so firmly. This makes it harder for Republicans to scare voters into believing that a Democratic president intends to take their guns away. The sale of guns surged after Mr Obama’s election, perhaps because the clingers believed they had to stock up while they still could. Harry Reid, the Democratic majority leader in the Senate, who faces a tough re-election battle in Nevada in November, was quick to give the McDonald ruling a warm welcome. “The right to bear arms”, he said, “is one of the essential freedoms on which our country was founded.” And it will be earning money for lawyers for years to come.


American politics

Democracy in America


YESTERDAY the House passed an extension to long-term unemployment benefits through November 30th. According to congressman Sandy Levin (via Annie Lowrey), by the time the Senate can take up the bill on July 12th, some 2.5m Americans will have lost their benefits since the beginning of June. If the bill passes the Senate, they will have their benefits retroactively extended. With average benefits amounting to $300 per week, that's about $750m per week in additional spending on unemployed people the Senate will have to vote for. But the reason Congress hasn't already passed an unemployment extension is that the previous bill also included funding for new government jobs programmes, which Republicans say they will not vote for.

Meanwhile, the New York Times's Motoko Rich reports today, factories that are looking to hire more workers as the nation's manufacturing economy recovers are finding that the kinds of workers they're looking for aren't out there.

During the recession, domestic manufacturers appear to have accelerated the long-term move toward greater automation, laying off more of their lowest-skilled workers and replacing them with cheaper labor abroad. Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker. Makers of innovative products like advanced medical devices and wind turbines are among those growing quickly and looking to hire, and they too need higher skills....

Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year... All candidates at Ben Venue must pass a basic skills test showing they can read and understand math at a ninth-grade level. A significant portion of recent applicants failed, and the company has been disappointed by the quality of graduates from local training programs. It is now struggling to fill 100 positions.

This would suggest that retraining workers for new jobs might produce substantial returns. But government job-training programmes have at best a mixed record of success in America. The system has improved since the 1998 Workforce Investment Act (WIA) consolidated a barrage of different programmes into one-stop centres administered by the states. A 2008 evaluation found that adult trainees in WIA programmes improved their earnings on average by several hundred dollars per quarter, which greatly exceeded the cost of the programmes. But for reasons not sufficiently understood, dislocated workers entering the programmes did much less well, and actually had lower earnings for the first several quarters than those who didn't receive retraining. (Of course, this might be substantially different in the current climate; whatever jobs those non-retrained workers were landing in 2007 may not exist anymore.) Moreover, part of the problem with attempting to recruit highly-skilled workers in Cleveland these days may be the reduced mobility of America's workforce due to the ongoing slump in housing prices.

Still, it's striking that Congress may be grudgingly willing to spend on extending unemployment benefits, but not on doing anything geared towards addressing the structural reasons why Americans are unemployed. Ben Venue's inability to find 100 qualified workers, and more broadly the extreme disparity between low unemployment among the college-educated and high unemployment among high-school graduates, suggests that America is not investing enough in its workers to remain a competitive location for high-value-added employers.

Maybe government isn't very good at worker training, and investments in other kinds of capital, such as improved infrastructure (high-speed trains, bridge and highway improvement, low-emission energy generation) may produce better returns. But what Congress seems to be saying, at this moment of increasing deficit hawkishness, is that government can't do anything at all about high structural unemployment. All it can do is maintain a safety net for the unemployed. Perhaps severe cutbacks in state government spending, forced by lower tax revenues, will induce the private sector to regain confidence in the economy. Alternatively, we'd better just get used to paying a lot of money for indefinite extensions of unemployment insurance.

Sovereign debt


Free exchange

Sovereign debt

Collateral damage

by D.R. | LONDON

THE old adage that timing is everything was proven yet again this week, in the second round of Argentina’s debt restructuring. When details of the country’s planned swap became public in March, analysts valued it at around 53 cents on the dollar—a hefty profit for investors who had scooped up Argentina’s defaulted bonds in the teens. Most forecasters expected around three-quarters of creditors who rejected the country’s original exchange offer in 2005 to take it this time, which would bring the total acceptance rate to 94%. That, in turn, would give Argentina a very good chance of regaining the access to international capital markets it lost with its 2001 default. Although hedge funds holding non-performing debt would surely try to block any new bond issue in the courts, such a high acceptance rate would probably convince judges that Argentina had made a good-faith effort and lead them to reject the claims.

However, the opening of the deal was delayed for weeks by regulators in Italy, where three-quarters of retail investors who held out of the first exchange are located. That pushed back the start date to May 3rd—by which point Greece’s debt crisis, which many observers have compared to Argentina’s a decade before, had exploded. The resulting flight to quality drove down the prices of all risky assets, particularly other dodgy sovereigns like Argentina, whose interest rate spread above American Treasury bonds has increased by 1.81 percentage points since the final terms of the swap were announced on April 15th. That reduced the consensus valuation of Argentina’s offer—in which investors would receive new paper whose price had fallen sharply—to around 40 cents on the dollar. The government postponed the deal’s closing date to encourage greater participation, but it could not escape the new, harsher financial reality. On Tuesday, Argentina announced it had achieved a 66% acceptance rate—a decent, but disappointing showing.

The key question is whether the performance will be enough for Argentina to borrow internationally. On one hand, the government proudly notes that 92% of the defaulted bonds have now been exchanged, and that the remainder is almost entirely held by unsympathetic “vulture” funds who acquired their positions for pennies. On the other, the hold-outs can argue that Argentina refused to improve its offer in the face of declining market conditions, and that the country can afford to pay more: in April, a judge accepted one creditor’s argument that Argentina’s central bank was the “alter ego” of the government rather than an independent entity, and thus that its reserves should be incorporated onto the country’s balance sheet. The biggest winners from this inconclusive outcome will surely be the lawyers from both sides, who will continue to duke it out in the courts for the foreseeable future.

Blood on the campaign trail

Blood on the campaign trail

by The Economist online | MEXICO CITY

MEXICO has been shaken by what is reckoned to be its highest-profile political assassination in more than 15 years. Rodolfo Torre, the front-runner to become the next governor of the northern border state of Tamaulipas, was shot dead by masked gunmen along with four supporters on June 28th, just six days before the election. The killers have not been identified and probably never will be, but it is assumed that they were linked to the Zetas or Gulf “cartels”, rival drug-trafficking organisations which have been involved in an increasingly bloody squabble for control of Tamaulipas in recent months.

Mr Torre, a member of the Institutional Revolutionary Party (PRI), had made the fight against the narcos his main message. His killing is the most prominent political murder since the 1994 killing of Donaldo Colosio, the front-running presidential candidate of that year, whose murder has never really been explained despite the conviction of a lone gunman. But it is not the first time this year that politics has been interrupted by violence. On May 13th another Tamaulipas politician, José Mario Guajardo, a member of the National Action Party (PAN), was shot dead with his son and an employee. Mr Guajardo had been running on an anti-narco platform to be mayor of the town of Valle Hermoso.

Mexicans feel wounded that there is so much coverage of the drug-related violence in their country, despite the fact that the murder rate in Mexico remains lower than in many Latin American countries. Most of the mayhem is trafficker-on-trafficker. But the spilling over of the violence into politics makes a big difference. On May 15th Diego "El Jefe" (“The Boss”) Fernández, another 1994 presidential candidate, was kidnapped from his ranch in Querétaro. The disappearance of El Jefe, whose kidnappers are believed still to be negotiating a ransom, marked a recent high in the reach of organised crime.

The question of how far the violence affects ordinary Mexicans and foreign investors is increasingly pressing. In northern cities such as Monterrey, the violence is acting as a brake on economic recovery. Mr Torre’s murder contributed to a weakening of the peso on Monday, which closed 0.46% down at 12.71 to the US dollar. The attack represented “the clearest attack on the political process since crime became a focal point for markets in early 2009,” according to Jimena Zuñiga of Barclays Capital.

Mexico's drug war is still a far cry from Colombia's in the 1990s. Ms Zuñiga offers three differences: unlike Colombia’s FARC guerrillas, Mexico’s drug-traffickers are not ideologically motivated; the violence remains concentrated geographically; and gangs have so far avoided the type of mass attacks on civil society that would most affect confidence and investment. But Mr Torre’s killing is likely to draw a strong response from the federal government, whose deployment of the army since 2006 to fight the drugs traffickers has already seen an increase in violence. It may be that one murder in Tamaulipas provokes many more.

In Lula's footsteps

Brazil's presidential campaign

In Lula's footsteps

Dilma Rousseff is cruising towards victory on the coat-tails of a popular president. But there is more at stake in October’s election than meets the eye

AT THE moment only one thing matters to Brazilians: the performance of the national football team in the World Cup, where lifting the trophy for the sixth time is considered almost a right. Even a normally hard-working city like São Paulo, where supermarkets open at 7.00am and heavy traffic is a way of life, came to a standstill for Brazil’s matches. Across the country factories, offices and even health posts shut down. But the country’s politicians are limbering up for a different contest. On July 6th the campaign for October’s general election formally kicks off. It will be the first presidential election since democracy was restored in the 1980s in which the name of Luiz Inácio Lula da Silva does not appear on the ballot. But Lula, Brazil’s president since 2003, is nevertheless the dominant figure in the campaign.

For the past 18 months he has put all his efforts into trying to get Dilma Rousseff, his former chief of staff, elected as his successor. She is not an obvious presidential candidate: an efficient though notoriously bad-tempered administrator, she only joined Lula’s Workers’ Party (PT) in 2001. She has never before stood for elected office. But several more senior figures in the PT were forced out of politics by a corruption scandal during Lula’s first term, and others have proved electoral flops.

Barely known to the public at the outset, Ms Rousseff spent half of the past year recovering from lymphatic cancer. Despite all these handicaps, she has risen inexorably in the opinion polls. This month she overhauled the opposition’s standard-bearer, José Serra, formerly the governor of São Paulo state, for the first time (see chart 1). The only other plausible candidate is Marina Silva, a long-time member of the PT who is standing for the small Green Party. Like Lula, she was born in poverty, but she fell out with him over what she sees as his government’s failure to defend the environment.

The election has now become Ms Rousseff’s to lose. Her rise in the polls shows that Lula has been able to transfer his own extraordinary popularity to her. A former trade-union leader, Lula has a rapport with ordinary Brazilians that no other politician enjoys. But he can also point to solid accomplishments. He has presided over both a steady increase in economic growth which is now—conveniently—reaching new heights, and a sharp reduction in poverty. Even allowing for an expected slowdown, the economy will have grown by around 8% in the year before the vote. The polls show that roughly 75% of Brazilians approve of the job Lula has done. Alexandre Marinis, a political consultant in São Paulo, notes that recent elections show a close correlation between the president’s popularity and his candidate’s success.

All this makes Mr Serra’s job exceptionally hard. A minister in the government of Fernando Henrique Cardoso, Lula’s predecessor, he trumps Ms Rousseff in political experience and has been an effective governor of São Paulo, the country’s second-most-powerful job. His supporters are counting on his opponent to make gaffes. But Ms Rousseff is looking increasingly assured. And he is struggling to make his experience count in an election where most Brazilians—especially in the country’s poorer areas—want continuity.

To see why, visit places like Jardim Iguatemi, a favela (a self-built settlement) straggling over steep hills on the eastern extremity of São Paulo. Bordered by forest, it is an hour and a half’s drive from the city centre. Mr Serra’s state government built a big new school and a health clinic there. But it is the president who commands the sympathy of many residents. They credit Lula with Bolsa Família, a programme under which 12m of the poorest Brazilian families get a monthly stipend of up to 200 reais ($111), paid to mothers provided they keep their children in school and take them for health checks. His government also opened a free technical college nearby in Itaquera. “He’s made a big effort. He thought a lot about concrete problems,” says Milene Ribeiro, a single parent of three children, whose ambition to be a teacher was frustrated when she had to drop out of university for lack of funds. “Living here so far from the world, we have to vote for someone who will do something for us,” says Quitéria de Souza, a separated mother of three girls.

The statistics of social progress in Brazil are remarkable. The number of people living in poverty has fallen by 20m under Lula, from 49.5m (or 28.5% of the total) in 2003 to 29m (16% of the total) in 2008, according to calculations by Marcelo Neri, a social-policy expert at the Fundaçao Getulio Vargas, a university. Although the world recession and its brief impact in Brazil temporarily halted the progress, it did not reverse it. Using different criteria, Ricardo Paes de Barros of the Institute for Applied Economic Research, a government-linked body, paints a similar picture. He finds that the number of Brazilians too poor to feed themselves properly has fallen from 17% of the population in 2003 to 8.8% in 2008.

Levelling the playing field

At the same time Brazil’s notoriously unequal distribution of income is becoming a bit less so (see chart 2). The Gini coefficient, a standard statistical measure of inequality, has fallen steadily since 2001 (though it remains very high by international standards). Over that period the income of the poorest 10% of the population has grown at 8% a year, while that of the richest tenth has grown at only 1.5% a year, according to Mr Paes de Barros.

In various ways Brazil is starting to become a more homogeneous society. Regional inequality has been diminishing, too: average income in the poor north-east has been growing faster than the national average. A majority of Brazilians (some 52%, up from 44% in 2002) now belong to what marketers call social class C, or the lower-middle class, meaning that they have a monthly household income of between 1,064 and 4,561 reais.

This progress stems from a mixture of faster economic growth and government policies. Though there is debate about the details, around half of the fall in poverty comes from higher income from employment. Better social policy accounts for a big share of the fall in inequality—or at least of the narrowing of the bottom of the pyramid. Bolsa Família has been particularly effective in helping the poorest.

How much of the credit does Lula deserve for all this? His government turned Bolsa Família from a small-scale experiment into the world’s biggest conditional cash-transfer programme. He also raised the minimum wage by two-and-a-half times since 2003, taking its purchasing power to its highest level since 1979. This has not destroyed jobs: some 13m new jobs in the formal (ie, legally registered) economy have been created since 2003. Lula is also proud of a government programme under which 12m people in rural areas have gained access to electricity, and another programme that provides subsidised housing for the poor. Above all, the polls suggest, he has given poorer Brazilians a new sense both of self-esteem and that their government is not just for the rich.

But faster economic growth and the social transformation are also the result of longer-term trends. Mr Cardoso’s two governments tamed inflation, creating the stability that has allowed credit, investment and jobs to grow. And part of the fall in inequality (which began in 2001, before Lula took office) stems from a big effort over the past quarter of a century to expand Brazil’s previously woeful education. The average Brazilian worker now has 8.3 years of schooling, up from 6.1 in 1995.

Certainly Lula deserves praise for not imitating the economic populism of some of the other left-wing leaders who have come to power in Latin America over the past decade. Broadly speaking, his government has stuck to the responsible macroeconomic policies that have kept inflation low. After some procrastination, it has also continued the progress in education. His education minister, Fernando Haddad, has introduced standardised national tests of schoolchildren, for example. And as Ms Rousseff points out, the government has respected the contracts under which private companies, including foreign ones, have invested in Brazil.

The state and the nation

The question the candidates have to answer in the next three months is how to sustain Lula’s legacy and build on it. There is broad political consensus about economic stability, the importance of education and, to a degree, on social policies (Mr Serra would maintain Bolsa Família, for example). Apart from foreign policy (which matters to some Brazilians but not to the mass of voters), the differences between the two main candidates are sharpest over the role of the state in the economy.

In many ways Lula has been a lucky president. Brazil has benefited hugely from China’s industrialisation. China’s appetite for foodstuffs and iron ore has boosted Brazil’s exports, helping growth and eliminating the balance-of-payments troubles that so often dogged the country in the past. But this has masked some important weaknesses that Lula did not fix, and may even have exacerbated.

Mr Serra likes to say that Brazil holds three negative world records: it has the highest interest rates in the world, the heaviest tax burden of any emerging country and one of the lowest rates of public investment. All of these, he has argued, stem from an “obese” federal government that is spending too much on public-sector jobs for its supporters. He says he would slash wasteful public spending, leaving room for interest rates to fall (the Central Bank’s benchmark rate is 10.25%). That in turn would allow the real, which is overvalued, to weaken, helping manufacturers cope with competition from China. He would simplify and reform the labyrinthine tax system. The aim would be to boost investment, both public and private, so that Brazil could take greater advantage of the opportunity granted by its commodity boom, which will not last forever.

The shortfall in investment means that, by common consent, Brazil cannot sustain this year’s growth spurt. If the economy is to continue to expand at 5% a year, Brazil needs to double its annual investment in infrastructure, to 4% of GDP, according to Marcelo Carvalho of Morgan Stanley, an investment bank.

The airports are clogged. Off Santos, Brazil’s biggest port, a line of ships queuing to load stretches to the horizon. The lack of good roads and railways adds to the costs of business. This year soyabean-growers in Mato Grosso, an inland state, spent up to 38% of their revenues just on getting their crop from the farm to the docks, according to José Roberto Mendonça de Barros, an economic consultant in São Paulo. Under Lula, the price of electricity for industrial users has more than doubled.

The government has cautiously allowed private investment in roads, railways and ports. But airports are run by an inefficient state body. Such mismanagement is a luxury Brazil can ill afford—if only because it will need to handle visitors to the football World Cup, to be held in the country in 2014, and the Olympic games, in Rio de Janeiro two years later.

Meanwhile, the government is spending more and more on pensions. Fábio Giambiagi, an economist at the National Development Bank (BNDES), notes that although only 6% of Brazilians are of pensionable age, the country spends 11.3% of its GDP on them; in the United States, by contrast, the 12% of the population who are pensioners receive around 6% of GDP. Spending on pensions for private-sector workers in the formal economy has tripled as a share of Brazil’s GDP since 1988. This is partly because the economy grew quite slowly (until recently), but mainly because of the generosity of the pension regime. Many affluent Brazilians retire in their 50s, and many pensions have risen steeply because they are tied to the minimum wage.

The result is that the federal government bails out the national pension system to the tune of 1.5% of GDP. Mr Giambiagi points out that the number of pensioners will grow by about 4% a year for the next ten years. Provided the economy grows at a similar rate and the next government slows the rise in the minimum wage, the pension burden will be just about manageable. But it reinforces Brazil’s inequalities. Mr Paes de Barros notes that the government transfers ten times more money to pensioners than to children. He is advising the third candidate, Ms Silva, the only one who talks much about pension reform.

Banking on industrial policy

The government’s critics also worry about the implications of a big expansion of the role of state banks (Brazil has three large ones). This came about partly as a result of the world financial crisis, when private banks temporarily cut back their lending. But the BNDES, in particular, has become an important agent of industrial policy under Lula. Over the past two years the federal government boosted the bank’s capital base with two long-term loans worth 180 billion reais. Its annual lending has reached 4.5% of GDP, and should be double its 2008 level by year’s end. Its loans are mainly long-term (for up to 30 years), with priority for infrastructure, investment in industry and services and seed money for innovation. They cost around half of the Central Bank’s benchmark interest rate.

The BNDES has given big loans to state-owned electricity companies (revived by Lula) and to Petrobras, the government-controlled oil giant. But it has also financed takeovers by big private companies, both at home and abroad, creating national champions in businesses ranging from food to pulp and paper. Eduardo Giannetti, an economist in São Paulo, worries that all this involves big, but opaque, subsidies (of perhaps 8 billion to 12 billion reais a year, he thinks) while extending government influence over business.

Luciano Coutinho, the BNDES’s president (who is tipped to be finance minister if Ms Rousseff wins), insists that the bank deploys professional techniques of credit analysis and dismisses as a “conservative fiction” the notion that its loans are governed by political criteria. The bank’s role is transitional, he says, until private capital markets develop long-term savings and lending instruments.

Ms Rousseff champions industrial policy—indeed her critics see her as more dirigiste than Lula, whose instincts are pragmatic. But Mr Coutinho says that this does not involve a return to the big Brazilian state and the high tariff protection of the 1960s and 1970s, as the critics charge. Brazil’s economy is more open today. Mr Coutinho says his inspiration comes from Asian countries such as South Korea and China (though average tariffs are still higher in Brazil than in those countries).

This debate is most intense over how to develop the vast new oil deposits found deep beneath the Atlantic in 2007. Their discovery followed Mr Cardoso’s decision to open up the oil industry to competition and subject Petrobras to market discipline (though the company continues to be controlled by the government, a majority of its shares are publicly traded).

Since Lula’s administration thinks it clear that there is much more oil to be found, it wants to change the rules governing the industry. Instead of concessions under which oil companies pay royalties and taxes but keep the oil they extract, in any future fields the oil will belong to a new state company and Petrobras will be the sole operator (though it can team up with partners under production-sharing agreements). These changes are embodied in four laws, though only one—allowing the government to vest oil deposits in Petrobras as a way of increasing its capital—has so far been approved by Congress.

The government also hopes to create a national oil-supply industry. It is drawing up requirements that equipment, from tankers to service platforms and drilling rigs, should be mainly locally produced. Already Petrobras is doing much of its procurement locally, and officials point to a revival in Brazil’s shipbuilding industry as an early success. Provided such restrictions are temporary, they may pay off for the oil industry. But there are risks. One is a repeat of the mistakes of the 1970s, when a government attempt to develop a computer industry by banning imports cut Brazil off from new technology. Another is placing too much strain on Petrobras, which has also been required by the government to build four new refineries.

Serra ponders how he fell behind

This month Petrobras unveiled a huge increase in its five-year investment plan, to $224 billion (up from $187 billion). But the next day it abruptly postponed until September a planned share offering expected to be worth up to $25 billion. The price of the company’s bonds has fallen recently because of fears that the accident at a BP rig in the Gulf of Mexico will add to the cost of deep-sea oil operations.

Oil now accounts for 12% of Brazil’s GDP, a fourfold increase since 1997. It will climb as high as 20%, reckons Adrian Pires, an industry regulator under Mr Cardoso. The opposition’s nightmare is that Ms Rousseff might use oil revenues to entrench the PT in power and that Brazil might go the way of other oil-rich Latin American states, such as Hugo Chávez’s Venezuela or Mexico under the Institutional Revolutionary Party. But officials have other models in mind, such as democratic Norway, which has saved much of its oil revenues. “We want to use the oil wealth in ways such that it doesn’t contaminate the rest of the economy,” says Márcio Zimmermann, the energy minister.

Brazilians thus face a choice in October. Mr Serra would provide them with a strong but lean state, that would make room for more private investment and initiative and would tax its citizens less. Ms Rousseff’s advisers think that Brazil has time to bring down interest rates and taxes gradually, and that the state should promote industrial development and redistribute income. After 16 years of stability and policy continuity under Mr Cardoso and Lula, neither candidate offers a radical change of course. What is at stake is the speed of the country’s progress.

Harvard’s Kagan Glides Past ‘Gotcha’ Republicans

Harvard’s Kagan Glides Past ‘Gotcha’ Republicans: Ann Woolner

Commentary by Ann Woolner

July 2 (Bloomberg) -- The top Republican on the Senate Judiciary Committee said he was “disappointed” at the end of Elena Kagan’s testimony this week, fearing she would move the U.S. Supreme Court leftward.

That isn’t likely, given the reliably liberal justice she would be replacing, John Paul Stevens. The only room for an ideological shift would be to the right of Stevens.

Still, the senator, Jeff Sessions of Alabama, had the right feeling in being let down, even if for the wrong reason.

Kagan emerged unbruised from the battering he and other Republicans tried to administer. They are the ones who walked away bloody.

President Barack Obama’s high court nominee deflected their blows with her intelligence, an encyclopedic knowledge of the law and a well-articulated if generalized view of judging. She appeared confident and comfortable in the hot seat. She was funny.

You can be frustrated that she refused to say how she would vote on a given issue, or even acknowledge where her passions lie. But in that way she is no different from most nominees over the past 20 years.

I’m all for senators of both parties closely questioning nominees to lifetime appointment to the nation’s most influential court. Who are these people? Is there anything about them that disqualifies them?

Laser Focus

But Sessions, with his “gotcha” smile and laser focus on military recruiting at Harvard Law School, was obsessed. Seemingly intent on exposing her as an anti-military, pro- homosexual activist who put her own, weird views above the law - - above even the welfare of our country in time of war -- Sessions looked small when his attack failed and he kept at it.

No, she never kicked military recruiters off campus, even though university policy required would-be employers to sign anti-discrimination pledges. The Defense Department couldn’t do that because of its “don’t ask, don’t tell” policy.

So a veterans organization stepped in to offer the services Harvard’s placement office would have otherwise given. The Defense Department recruited so successfully on campus when Kagan was dean that their numbers rose during that period, she testified.

Didn’t you call don’t ask, don’t tell “a profound wrong, a moral injustice of the first order,” Sessions demanded, as if accusing her of selling secrets to Osama Bin Laden.

Armed Forces

Yes, she did. And for good reason. It not only hurts gay and lesbian students who want military careers, it also limits the number of good folks who go into the armed forces and are allowed to stay.

Congress has already said it wants to lift the policy. So has Defense Secretary Robert Gates.

Republican attempts to depict her as some sort of radical got downright silly. Senator Charles Grassley of Iowa hit hard on this crucial topic: Why didn’t she require constitutional law for first-year law students, when she did require international law? Doesn’t that mean she cares more about foreign law than the very foundation of American law?

Well, no. Students are better equipped to tackle that essential subject with greater depth and understanding in their second or third year, she said.

More Liberal

No doubt Kagan is more liberal than the Republicans who questioned her. “My political views are generally progressive,” she acknowledged. She has worked for two Democratic administrations, she confessed.

Presidents get to nominate justices who think like they do, and no one was better at that than President George W. Bush. Bent on moving the court to the right, his two appointments did just that.

But any claim that Kagan might bring back the pre-Bush court, much less the notoriously liberal Warren court, is fear- mongering (or wishful thinking). The balance can’t tilt left because no confirmable nominee could be as consistently liberal as Stevens has been.

And we already have reason to suspect Kagan will think differently from Stevens about the government’s treatment of suspected terrorists.

The retiring justice was part of slim majorities that struck down key aspects of Bush administration policies. He authored two of the four key opinions in the area.

Sounding Like Graham

Kagan, on the other hand, sounds more like Republican Senator Lindsey Graham of South Carolina than Stevens. She so cheerfully agreed with the senator when questioned this week that I half expected them to walk out hand in hand.

Graham congratulated her for winning an appeals court ruling as solicitor general that says detainees held in Afghanistan don’t have the same rights won by Guantanamo prisoners.

But that isn’t the worst of it for those who don’t like the idea of forever holding people behind bars while giving them no chance to show they don’t belong there.

As solicitor general involved in some of those cases, she would recuse herself if they reach the Supreme Court. Even if, once shed of her advocate’s job she wanted to side with the detainees, she couldn’t.

Tie Votes

With Stevens gone and Kagan unavailable, rulings that might have gone against the government by 5-4 votes would presumably tie 4-4.

That would leave lower court rulings in force, such as the one Graham congratulated Kagan for winning.

For that reason alone, “she’s a terrible choice,” says John Chandler, a King & Spalding partner in Atlanta representing several Guantanamo detainees.

Republicans entered this confirmation period knowing they could have done far worse than Kagan. They knew, too, that she would likely win the seat.

They used what little material her past gave them to challenge her, hoping any smear would rub off on Obama.

Instead, it rubbed off on them.

Payrolls in U.S. Fall 125,000

Payrolls in U.S. Fall 125,000; Jobless Rate at 9.5% (Update2)

By Bob Willis

July 2 (Bloomberg) -- Employment fell in June for the first time this year, reflecting a drop in federal census workers and a smaller-than-forecast gain in private hiring.

Payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures in Washington showed today. Economists projected a decline of 130,000 payrolls, according to the median forecast in a Bloomberg News survey. Employment at companies rose 83,000. The jobless rate fell to 9.5 percent from 9.7 percent as the labor force shrank.

The pace of hiring signals it will take years for the world’s largest economy to recover the more than 8 million jobs lost during the recession that began in December 2007. The turmoil in financial markets brought on by the European debt crisis raises the risk that employment will slow, depriving American households of the income needed to maintain spending.

“Overall, it’s weak with very little breadth in new hiring,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston, who forecast a gain in private payrolls of 88,000. “This will lead to second-half consumption growth well below the first half.”

U.S. stock-index futures swung between gains and losses after the report. Futures on the Standard & Poor’s 500 Index rose 0.2 percent to 1,023.6 at 8:46 a.m. in New York after falling as much as 0.4 percent. The yield on the 10-year Treasury note fell to 2.92 percent from 2.95 percent late yesterday.

Employment rose a revised 433,000 in May, today’s figures showed. Payroll estimates in the Bloomberg survey of 82 economists ranged from a decline of 200,000 to no change after a previously reported gain of 431,000 jobs in May that was led by census hiring. Private payrolls were forecast to rise 110,000.

Private Employment

Private employment in June was led by gains in education and health services, transportation and leisure and hospitality. The report also showed declines in average hourly earnings and hours worked.

Economists surveyed also forecast the jobless rate, which fell to the lowest level since July 2009, would rise to 9.8 percent last month from 9.7 percent in May. The decline in June reflected a 652,000 decrease in the size of the labor force.

The decrease in census workers left 339,000 temporary employees still working on the survey, indicating more cuts to come that will keep distorting the employment figures for months.

For that reason, economists say private payrolls, which exclude government jobs, will be a better gauge of the state of the labor market for much of 2010.

Discouraged Jobseekers

Joblessness, which reached a 26-year high of 10.1 percent in October, will take time to recede as the number of previously discouraged jobseekers returning to the labor force exceeds the number of available jobs.

Manufacturing payrolls increased by 9,000 in June, the smallest gain this year and less than the survey median of a 25,000 increase.

Those gains may slacken as the industry leading the U.S. economic expansion cools. A report yesterday showed manufacturing expanded in June at the slowest pace of the year as orders and exports decelerated.

Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in an interview June 23, in a reference to the manufacturer’s agricultural business. The Moline, Illinois-based company also has started adding stockpiles on the construction side in recent months, he said.

“We do believe the recovery is underway,” Allen said. “We do believe it is moving slowly. We do believe it is on stable ground at this time.”

Construction Down

Employment at service-providers decreased 117,000 after rising 420,000. Construction companies cut payrolls by 22,000 after reducing them 30,000 in May.

Delta Air Lines Inc., the world’s biggest carrier, will hire 700 airport ticket and gate agents to help handle increased summer traffic and operations disrupted by weather, Chris Kelly, a Delta spokeswoman, said June 18 in an interview. The new hiring is in addition to the 300 pilot and 300 reservation agent jobs recently filled by the Atlanta-based airline.

Average hourly earnings fell 2 cents to $22.53 in June, today’s report showed. The average work week for all workers declined to 34.1 hours in June from 34.2 hours the prior month.

Government payrolls decreased by 208,000. State and local governments employment declined by 10,000, while the federal government jobs dropped 198,000.

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- decreased to 16.5percent from 16.6 percent.

The number of temporary workers increased 20,500. Payrolls at temporary-help agencies often picks up before companies take on permanent staff.

Obama Economy

President Barack Obama, after meeting with Federal Reserve Chairman Ben S. Bernanke June 29, said the U.S. economy is strengthening even as the European debt crisis has weakened financial markets.

“We have seen some very positive trends in a number of sectors,” Obama said at the White House after meeting with his economic advisers. “Unfortunately, because of the troubles we’ve seen in Europe, we’re now seeing some headwinds and skittishness and nervousness on the part of the markets.”

The economy, jobs and the budget deficit are likely to be top issues in November elections that will decide control of Congress. Heading into the campaign season, the administration is facing public pessimism about the direction of the economy.

The Fed last month said slowing inflation and the fallout from Europe’s debt crisis where among reasons it will maintain interest rates low for “an extended period.”

European Stocks Rebound

European Stocks Rebound, U.S. Futures Rise Before Jobs Report

By Stephen Kirkland

July 2 (Bloomberg) -- European stocks rose and U.S. futures gained, indicating the Standard & Poor’s 500 Index may rebound from a nine-month low even as economists forecast the American economy lost jobs last month. Copper rallied and the Swiss franc weakened.

The Stoxx Europe 600 Index increased 0.6 percent at 8 a.m. in New York, led by automakers. Futures on the S&P 500 Index gained 0.3 percent. Copper jumped 2.4 percent from a three-week low and zinc advanced 3.7 percent. The Swiss franc depreciated against all 16 of the most-traded currencies.

The recovery in stocks came after Europe’s benchmark index fell more than 5 percent on concern the region’s debt crisis and China’s efforts to contain inflation will undermine the global economy. While Bayerische Motoren Werke AG and Daimler AG reported U.S. sales increases of more than 15 percent in June, the Labor Department may say today that American employment fell for the first time this year.

“Leading indicators may be peaking, however valuations in most markets around the world are not bad,” said Friedrich Mostboeck, Vienna-based head of research at Erste Group Bank AG. “We are overall neutral in stocks.”

The gain in U.S. stock-index futures signaled the S&P 500 will advance for the first time this week. Payrolls declined by 130,000 last month, according to the median estimate of 82 economists surveyed by Bloomberg News. The report will also show the unemployment rate rose to 9.8 percent last month from 9.7 percent in May, according to the survey. The Labor Department is scheduled to release the data at 8:30 a.m. in Washington.

European Stocks

European stocks rebounded after this year’s slump left the Stoxx 600 index trading at 11 times reported earnings, the lowest level since 2008. Daimler climbed 1.8 percent in Frankfurt, and BMW rallied 1.1 percent.

Dana Petroleum Plc jumped 18 percent in London after the Scottish oil explorer said it received a takeover approach. BHP Billiton Ltd., the world’s biggest mining company, advanced 1.4 percent in London, while Rio Tinto Group rose 1.3 percent after the Australian government scaled back a proposed tax on the industry.

The MSCI Asia Pacific Index lost 0.2 percent after Goldman Sachs Group Inc. cut its forecast for China’s growth this year to 10.1 percent from 11.4 percent as government restrictions on lending and real estate slow expansion in the world’s fastest growing major economy.

Emerging Markets

Stocks in eastern Europe rose for the first time in four days, sending MSCI’s regional index to a 1.2 percent gain, after Poland’s central bank boosted its economic growth forecast and metals producers rallied. Economic growth in emerging markets means stocks are in a “bull phase,” even after the global benchmark MSCI Emerging Markets Index fell 13 percent from its 2010 high, according to investor Mark Mobius.

“We are happy with the correction,” Mobius, who oversees $34 billion in emerging markets at Templeton Asset Management Ltd., said at a briefing today in Paris. “We’ll be able to buy cheaper stocks.”

The Australian dollar strengthened 0.5 percent to 84.72 U.S. cents, and gained 0.9 percent to 74.52 yen. The Swiss franc declined 0.7 percent to 1.3363 per euro, and weakened 0.9 percent to 1.0688 against the dollar. The yen depreciated 0.4 percent to 87.95 per dollar.

Copper for delivery in three months advanced $152 to $6,482 a metric ton on the London Metal Exchange and zinc increased $64.25 to $1,804.25 a ton. Gold for immediate delivery was little changed at $1,205.70 an ounce. Crude oil lost 0.3 percent to $72.76 a barrel in New York.

‘Worst’ Over

Government bonds of so-called peripheral euro-area nations rose as concern abated that the countries may struggle to raise funds. The Portuguese 10-year bond yield fell 21 basis points to 5.44 percent, the lowest since June 14 based on closing prices. Spain’s 2020 bond yield dropped 4 basis points to 4.57 percent.

The “worst part” of the European debt crisis is over, Former European Commission President Romano Prodi said in a Bloomberg Television interview from Beijing today.

The yield on the 10-year Treasury note was little changed at 2.95 percent, holding below 3 percent for a fourth day.

Employment in U.S. Probably Dropped

Employment in U.S. Probably Dropped in June on Census Cutbacks

By Bob Willis

July 2 (Bloomberg) -- Employment fell in June for the first time this year, reflecting a drop in federal census workers as the decennial population count began to wind down, economists said before a report today.

Payrolls declined by 130,000 last month, according to the median estimate of 82 economists surveyed by Bloomberg News. Private employment, which excludes government jobs, rose for a sixth consecutive month, the survey showed.

The pace of hiring signals it will take years for the world’s largest economy to recover the more than 8 million jobs lost during the recession that began in December 2007. The turmoil in financial markets brought on by the European debt crisis raises the risk that employment will slow, depriving American households of the income needed to maintain spending.

“The recovery downshifted a gear in recent months,” said David Resler, chief economist at Nomura Securities International Inc. in New York. Payroll gains will probably be “consistent with moderate growth in income and spending.”

Figures from the Labor Department show the number of workers helping conduct the census dropped by about 230,000 from mid May to mid June, the period corresponding to the government’s jobs survey. The decrease still left 344,000 people on the census payroll, indicating more cuts to come that will keep distorting the employment figures for months.

Private Payrolls

For that reason, economists say private payrolls, which exclude government jobs, will be a better gauge of the state of the labor market for much of 2010. Employment at companies rose by 110,000 after a 41,000 gain in May, according to the median forecast of 50 economists surveyed.

The report will also show the unemployment rate rose to 9.8 percent last month from 9.7 percent in May, according to the survey. Joblessness, which reached a 26-year high of 10.1 percent in October, will take time to recede as the number of previously discouraged jobseekers returning to the labor force exceeds the number of available jobs.

Factory payrolls increased in June for the sixth straight month, according to the survey.

Those gains may slacken as the industry leading the U.S. economic expansion cools. A report yesterday from the Tempe, Arizona-based Institute for Supply Management showed manufacturing expanded in June at the slowest pace of the year as orders and exports decelerated.

Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in an interview June 23, in a reference to the manufacturer’s agricultural business. The Moline, Illinois-based company also has started adding stockpiles on the construction side in recent months, he said.

‘Moving Slowly’

“We do believe the recovery is under way,” Allen said. “We do believe it is moving slowly. We do believe it is on stable ground at this time.”

Manufacturers have avoided the worst of the market turmoil. The Standard & Poor’s Supercomposite Industrial Machinery Index of 52 companies, including Caterpillar Inc. and Deere, has decreased 0.1 percent so far this year compared with a 7.9 percent decline in the broader S&P 500.

President Barack Obama, after meeting with Federal Reserve Chairman Ben S. Bernanke June 29, said the U.S. economy is strengthening even as the European debt crisis has weakened financial markets.

“We have seen some very positive trends in a number of sectors,” Obama said at the White House after meeting with his economic advisers. “Unfortunately, because of the troubles we’ve seen in Europe, we’re now seeing some headwinds and skittishness and nervousness on the part of the markets.”

November Elections

The economy, jobs and the budget deficit are likely to be top issues in November elections that will decide control of Congress. Heading into the campaign season, the administration is facing public pessimism about the direction of the economy.

The Fed last month said slowing inflation and the fallout from Europe’s debt crisis where among reasons it will maintain interest rates low for “an extended period.”

Delta Air Lines Inc., the world’s biggest carrier, is starting to add staff. Atlanta-based Delta will hire 700 airport ticket and gate agents to help handle increased summer traffic and operations disrupted by weather, Chris Kelly, a Delta spokeswoman, said June 18 in an interview. The new positions are in addition to the 300 pilot and 300 reservation agent jobs recently filled by the Atlanta-based airline.

                        Bloomberg Survey
Nonfarm Private Manu Unemploy
Payrolls Payrolls Payrolls Rate
,000’s ,000’s ,000’s %

Date of Release 07/02 07/02 07/02 07/02
Observation Period June June June June
Median -130 110 25 9.8%
Average -121 111 24 9.8%
High Forecast 0 200 40 9.9%
Low Forecast -250 12 10 9.5%
Number of Participants 82 50 21 81
Previous 431 41 29 9.7%
4CAST Ltd. -140 --- --- 9.6%
Action Economics -160 80 10 9.8%
Aletti Gestielle SGR -100 137 30 9.8%
Ameriprise Financial Inc -150 100 20 9.9%
Banesto -45 --- --- ---
Bank of Tokyo- Mitsubishi -115 113 30 9.7%
Bantleon Bank AG -100 --- --- 9.8%
Barclays Capital -100 --- --- 9.6%
Bayerische Landesbank -85 --- --- 9.8%
BBVA -60 111 40 9.8%
BMO Capital Markets -200 50 --- 9.8%
BNP Paribas -150 50 --- 9.8%
BofA Merrill Lynch Research -125 125 --- 9.8% -145 --- --- 9.8%
C I T I C Securities 0 110 --- 9.7%
Capital Economics -100 150 --- 9.8%
CIBC World Markets -50 --- --- 9.8%
Citi -130 110 --- 9.7%
ClearView Economics -100 200 25 9.8%
Commerzbank AG -100 150 --- 9.7%
Credit Agricole CIB -200 50 --- 9.8%
Credit Suisse -170 75 --- 9.7%
Daiwa Securities America -150 --- --- 9.8%
Danske Bank -100 150 --- ---
DekaBank -130 100 --- 9.7%
Desjardins Group -75 --- --- 9.9%
Deutsche Bank Securities -150 100 --- 9.6%
Deutsche Postbank AG -50 --- --- 9.7%
DZ Bank -140 --- --- 9.8%
Exane -100 --- --- 9.7%
First Trust Advisors -50 --- 25 9.7%
Fortis -160 100 --- 9.8%
FTN Financial -165 --- --- 9.8%
Goldman, Sachs & Co. -100 --- --- 9.8%
Helaba -30 --- --- 9.7%
High Frequency Economics -200 50 --- 9.8%
HSBC Markets -155 105 --- 9.8%
Hugh Johnson Advisors -120 --- 20 9.7%
IDEAglobal -80 150 25 9.7%
IHS Global Insight -140 120 --- 9.8%
Informa Global Markets -160 --- 30 9.8%
ING Financial Markets -250 15 30 9.9%
Insight Economics -125 125 --- 9.9%
Intesa-SanPaulo -70 --- --- 9.7%
J.P. Morgan Chase -90 170 10 9.8%
Janney Montgomery Scott -40 135 --- 9.9%
Jefferies & Co. -125 110 25 9.7%
Landesbank Berlin --- --- --- 9.7%
Landesbank BW -40 180 --- 9.7%
Maria Fiorini Ramirez -190 50 --- 9.8%
MF Global -170 90 10 9.8%
MFC Global Investment -115 125 20 9.7%
Mizuho Securities --- 50 --- 9.8%
Moody’s -155 100 25 9.8%
Morgan Keegan & Co. -178 --- --- ---
Morgan Stanley & Co. -90 --- --- 9.8%
National Bank Financial -150 --- --- 9.8%
Natixis -150 --- --- 9.8%
Nomura Securities Intl. -155 100 30 9.7%
Paragon Research -160 --- --- 9.9%
Pierpont Securities LLC -80 170 --- 9.6%
PineBridge Investments -152 --- --- 9.7%
PNC Bank -25 100 20 9.7%
Prestige Economics -125 --- --- 9.8%
Raiffeisen Zentralbank -60 200 --- 9.7%
Raymond James -155 95 --- 9.7%
RBC Capital Markets -135 --- --- 9.8%
RBS Securities Inc. -90 160 --- 9.6%
Ried, Thunberg & Co. -130 125 --- 9.5%
Societe Generale -60 150 --- 9.6%
Standard Chartered -188 12 --- 9.8%
State Street Global Markets -158 88 19 9.8%
Stone & McCarthy Research -50 --- 30 9.8%
Thomson Reuters/IFR -150 110 --- 9.8%
Tullett Prebon -160 --- --- 9.8%
UBS -150 100 --- 9.7%
UniCredit Research -130 --- --- 9.8%
Union Investment -75 --- --- 9.8%
University of Maryland -150 100 20 9.8%
Wells Fargo & Co. -130 95 --- 9.7%
WestLB AG -130 --- --- 9.8%
Westpac Banking Co. 0 180 --- 9.9%
Woodley Park Research -182 --- --- 9.7%
Wrightson Associates -130 125 --- 9.5%

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