The First Amendment Can’t Always Protect You – by Ann Coulter
First of all, I feel so much more confident that the TSA’s nude photos of airline passengers will never be released now that I know the government couldn’t even prevent half a million classified national security documents from being posted on WikiLeaks.
President Obama and Attorney General Eric Holder will be getting around to WikiLeaks’ proprietor, Julian Assange, just as soon as they figure out which law the New Black Panthers might have violated by standing outside a polling place with billy clubs.
These legal eagles are either giving the press a lot of disinformation about the WikiLeaks investigation or they are a couple Elmer Fudds who can’t find their own butts without a map.
Since Holder apparently wasn’t watching Fox News a few weeks ago, I’ll repeat myself and save the taxpayers the cost of Holder’s legal assistants having to pore through the federal criminal statutes starting with the A’s.
Among the criminal laws apparently broken by Assange is 18 U.S.C. 793(e), which provides:
“Whoever having unauthorized possession of, access to, or control over any document, writing, code book, signal book, sketch, photograph, (etc. etc.) relating to the national defense, … (which) the possessor has reason to believe could be used to the injury of the United States or to the advantage of any foreign nation, willfully communicates (etc. etc) the same to any person not entitled to receive it, or willfully retains the same (etc) …
“Shall be fined under this title or imprisoned not more than ten years, or both.”
As is evident, merely being in unauthorized possession of classified national security documents that could be used to harm this country and publishing those documents constitutes a felony.
There’s no exception for albinos with webpages — or “journalists.” Journalists are people, too!
Depending on the facts adduced at trial, there are about a half-dozen other federal laws that might apply to the WikiLeaks document dump, including 18 USC 641, which provides that any person who “receives” or “retains” a “thing of value of the United States” knowing “it to have been embezzled, stolen, purloined or converted” is also guilty of a felony, punishable by up to ten years in prison.
Classified information is valuable government property.
The entire public discussion about prosecuting Assange has been neurotically fixated on the First Amendment, as if that matters. Is Assange a “journalist”? What kind of journalist? Who is a “journalist” in the world of the Internet?
Assange’s lawyer, naturally, wraps his client in the First Amendment, saying Assange “is entitled to First Amendment protection as publisher of WikiLeaks.”
Even Sen. Dianne Feinstein, who wants Assange prosecuted — bless her patriotic Democratic heart — has responded to Assange’s free speech defense by saying, “But he is no journalist: He is an agitator intent on damaging our government, whose policies he happens to disagree with, regardless of who gets hurt.”
All this is completely irrelevant.
New York Times reporters are agitators intent on damaging our government, and they’re considered “journalists.” That doesn’t mean they have carte blanche to hunt endangered species, refuse to pay their taxes or embezzle money. The First Amendment isn’t a Star Trek “energy field” that protects journalists from phasers, photon torpedoes, lasers, rockets and criminal prosecutions.
It’s possible for the First Amendment to be implicated in a case involving national security information, just as it’s possible for the First Amendment to be implicated in a case involving the Montgomery County (Ala.) public safety commissioner.
This isn’t that case.
The government isn’t trying to put a prior restraint on Assange’s publication of the documents, as in the Pentagon Papers case (though it probably could have). It wouldn’t be punishing Assange for his opinions. The government wouldn’t be prosecuting Assange to force him to give up his sources — and not only because we already know who his source is (a gay guy in “an awkward place”), but because it simply doesn’t matter.
Assange would be prosecuted for committing the crime of possessing and releasing classified national security documents that could do this country harm. The First Amendment has no bearing whatsoever on whether Assange has committed this particular crime, so whether or not Assange is a “journalist” is irrelevant.
The problem here is that people get their information from the media, which is written by journalists, and journalists have spent the last half-century trying to persuade everyone that laws don’t apply to them.
If a fully certified, bona fide, grade-A “journalist,” rushing to get a story, swerves his car onto a sidewalk and mows down 20 pedestrians, he’s committed a crime. It doesn’t matter that he was engaged in the vital First Amendment-protected activity of news-gathering.
If Paul Krugman shoots his wife because she’s talking too much when he’s engaged in the First Amendment activity of finishing another silly column about the economy, he’s committed a crime.
Journalists can’t run red lights, they can’t print Coca-Cola’s secret formula, they can’t torture sources for information, and — as Gawker Media recently discovered when it published a story on the new iPhone before it was released — journalists can’t misappropriate lost property.
Fox News’ Alan Colmes said he checked with Fox News legal analyst Andrew Napolitano, who told him there’s no case against Assange because the government can’t punish “the disseminator of information.” They should have been on Gawker’s legal team!
If Assange had unauthorized possession of any national defense document that he had reason to believe could be used to injure the United States, and he willfully communicated that to any person not entitled to receive it, Assange committed a felony, and it wouldn’t matter if he were Lois Lane, my favorite reporter.
As I have noted previously, the only part of the criminal law that doesn’t apply to reporters is the death penalty, at least since 2002, when the Supreme Court decided in Atkins v. Virginia that it’s “cruel and unusual punishment” to execute the retarded.
Also, journalists can slander people at will. That ought to make them happy.
* Ann Coulter is Legal Affairs Correspondent for HUMAN EVENTS and author of “High Crimes and Misdemeanors,” “Slander,” ““How to Talk to a Liberal (If You Must),” “Godless,” “If Democrats Had Any Brains, They’d Be Republicans” and most recently, Guilty: Liberal “Victims” and their Assault on America.
US: A Bored Walk Down Perk Place – by Greg Walcher
Members of the Washington, D.C. City Council and several activist groups continue their tired push for statehood, claiming the city’s residents are entitled to two U.S. Senators, and pretending the founders had no reason to put the Capitol in a district that was not part of any state.
This week the Council debated new welcome signs for roads entering the District from Maryland. In addition to the traditional “Welcome to Washington, D.C.,”some members propose replacing “The Nation’s Capitol” with cutesy slogans like “Unrepresented in Congress for over 200 years” or “Enjoy your stay and join our fight for statehood.” Last year D.C. began issuing license plates emblazoned with the motto “Taxation Without Representation” – as if Congress has never paid any attention whatsoever to the needs of Washington, D.C.
The latest publicity scheme calls for renaming a portion of Pennsylvania Avenue - the Nation’s Main Street – to call attention to the statehood demand. A website set up by council members to solicit public suggestions produced such uninspired gems as“Statehood for DC Avenue”and “DC Demands Full Democracy Avenue.”
All of this noise about Congressional representation for D.C. ignores several important facts and principles.
First, Washington, D.C. is a city, not a state. It has neighborhoods, not counties. Its politics are monolithic and its people share the same interests – including an interest in subsidizing everything they do with tax money from the rest of the country.
Second, Washington enjoys greater representation in Congress and all federal agencies than any other part of the United States. The D.C. metro area has about 5.4 million residents, including 4 U.S. Senators and 5 Congressmen who live in its suburbs – and the other 530 Members of Congress and over 3,000 presidential appointees who spend most of the year there. Any idea that the needs of Washington, D.C. have no voice in government would be laughable, if it were funny.
Third, Washington, D.C. is actually closer to “representation without taxation” than the other way around. Consider that Congress subsidizes D.C. government to the tune of ¾ of a billion dollars every year – in addition to the taxes paid by residents – and the D.C. delegate in Congress sits on the Appropriations Committee to see that the money gets earmarked to all her favorite projects. Last year America’s taxpayers spent $768 million on D.C. projects such as a $35 million Tuition Assistance Grant program, new charter schools ($62 million), homeless shelters ($19 million); a local sewer project ($20 million), $100,000 each for the Whitman Walker Clinic and the Youth Power Center, and $50,000 to fund upgrades at a Washington hospital. These annual subsidies, of course, tell only a fraction of the real story, especially considering the tens of billions spent to build the city itself – and it is not built with cheap materials. What other city can afford to eschew concrete, building its sidewalks of brick and its curbs of granite? Where else are daily commuter roads maintained by the National Park Service, or traffic enforcement provided by U.S. Capitol Police? Washington is a beautiful city with parks, open spaces, fountains, plazas, circles, and magnificent architectural masterpieces – all built by the entire nation’s taxpayers.
Fourth, the founders understood exactly why the seat of government could not be part of any State, as it would provide an automatic advantage to residents of that State. In the sectional disputes that characterize a giant country – disputes that are as common today as in 1790 when Washington was founded – the balance of power is delicate and it is important. Diluting the representation of all the other states to give a single city even greater hold – over a country it already dominates – would be a colossal mistake.
Finally, residents of the District have a much simpler choice. If the issue is really about a vote in Congress as they claim, the easy fix is to give the non-federal part of the city back to Maryland (from which it was originally carved out). That would almost certainly gain one additional congressional district for Maryland. The Virginia portion of the original 10 square-mile tract was given back to that state more than 100 years ago, and that solution would still work today. But if you suspect another agenda is at work, you’re right. What is really at stake is nothing more than a partisan attempt to stack more Democratic votes in the U.S. Senate, which would be the result of statehood (for D.C. and also for Puerto Rico, another perennial proposal). Like FDR’s attempt to pack the Supreme Court 75 years ago, it is an attempt to thwart the will of the people and the spirit of the Constitution.
The United States already include several historical quirks. For instance, Rhode Island is essentially a county, separated from Massachusetts Bay Colony because of religious differences between Roger Williams and the Puritans. And West Virginia was separated from Virginia in complete violation of the U.S. Constitution during the Civil War because of strong Union sentiments there. But no such national catastrophe plagues modern-day residents of the nation’s capitol.
In fact, D.C. residents have no desire to give up the many perks of living in Washington, from the right to in-state tuition at colleges in every state to the heavily subsidized subway system. If they seek a more appropriate name for Pennsylvania Avenue, they ought to consider calling it Perk Place. Then residents can pass GO, collect $200, and ponder the benefits of living in a world-class city built by the hard work and tax money of the entire rest of the country.
US: Going broke by going green – by Bishop Harry Jackson, Jr. & Niger Innis
President Obama’s healthcare program came under intense scrutiny in 2010. As we enter 2011, we need to open our eyes to what is really going on behind his green energy propaganda, as well. To some, it may not seem as desperate an issue as healthcare, but it will grow to become just as devastating to those citizens among us who are poor, because access to affordable energy affects everything we do.
The administration’s green policies are being thrust into a precarious American economy. Every “green scenario” shows raised energy costs across the board. Not only will the average person pay more for energy; many will lose their jobs as the forced transition to alternative power sources rocks the stability of current energy-producing and energy-using companies.
Skyrocketing energy prices and lost jobs also mean millions of otherwise healthy Americans are subjected to new health threats: higher air conditioning, heating, transportation and other energy bills. For those who cannot afford the increased costs, this can mean death from heat stroke and hypothermia; reduced budgets for healthy food, proper healthcare, home and car repairs, college, retirement, and charitable giving; and psychological depression that accompanies economic depression.
Land withdrawals and leasing and permitting delays don’t just lock up vast energy storehouses. They kill jobs, eliminate billions in government bonus, rent, royalty and tax revenues – and force us to spend other billions to import more oil that we could produce right here at home.
The White House agenda represents a double power grab. It usurps state, local and private sector control over energy prices and generation, and gives it to unelected Washington bureaucrats. It also seizes our reliable, affordable energy, and replaces it with expensive, intermittent power.
While many Americans are duped into thinking renewable energy sources are the ticket to a clean world, they have not looked at the downside to these energy sources. Replacing fossil fuel power with coerced renewable energy means millions of acres will be covered with turbines and solar panels, and built with billions of tons of concrete, steel, copper, fiberglass and rare earth metals. It means millions of acres of forest and crop land will be converted to farming for inefficient biofuels that also require vast inputs of water, pesticides, fertilizers and hydrocarbon fuels.
Moreover, wind and solar facilities work only 10-30 percent of the time, compared to 90-95 percent for coal, gas and nuclear power plants. Even worse, prolonged cold is almost invariably associated with high atmospheric pressure, and thus very little wind.
On December 21, 2010 – one of the coldest days on record for Yorkshire, England (undoubtedly due to global warming) – the region’s coal, gas and nuclear power plants generated 53,000 megawatts of electricity; its wind turbines provided a measly 20 MW, or 0.04% of the total. The same high pressure, no wind scenario happens on the hottest summer days.
But these realities rarely seem to matter in the arena of “green” energy policy-making. “Renewable” and “clean” energy projects received $30 billion in subsidies under the gargantuan stimulus bill. They got another $3 billion in the “lame duck” tax deal. Federal wind power subsidies are $6.44 per million BTUs – dozens of times what coal and natural gas receive, to generate 1/50 of the electricity that coal does. At current and foreseeable coal and gas prices, wind (and solar) simply cannot compete.
As to “green” jobs, Competitive Enterprise Institute energy analyst Chris Horner calculates that the stimulus bill’s subsidies for wind and solar mean taxpayers are billed $475,000 for each job created. Texas Comptroller Susan Combs reports that property tax breaks for wind projects in her state cost nearly $1.6 million per job. “Green energy” is simply unsustainable, environmentally and economically.
President Obama and EPA Administrator Lisa Jackson may be convinced that we face a manmade climate change crisis, and unacceptable health risks from power plant and refinery emissions. However, their “climate science” is little more than a self-proving theory: no matter what happens – hotter or colder, wetter or drier, more storms or fewer – it’s “proof” of global warming.
Thousands of scientists say there is yet no real evidence that we face such a crisis, and most coal-fired power plants and refineries have already reduced their harmful emissions to the point that only the most sensitive or health-impaired would be harmed.
The problem is not runaway global warming. It is a runaway and unaccountable federal bureaucracy.
Putting the green power grab into even sharper focus are these eye-opening comments from two “socially responsible” CEOs, who have lobbied the Congress, EPA and White House intensely for cap-tax-and-trade, far tougher emission policies and still more subsidies. We thank the Wall Street Journal for bringing them to our attention.
EPA’s regulations “increase operating costs for coal-fired generators and ultimately increase the price of energy” for families and companies that need electricity, observed Exelon CEO John Rowe. “The upside for Exelon is unmistakable. Exelon’s clean [mostly nuclear] generation will continue to grow in value in a relatively short time. We are of course positioning our portfolio to capture that value.”
“Even without legislation in Congress, EPA is marching forward in terms of regulating carbon dioxide,” noted Lewis Hay, CEO of NextEra Energy, America’s largest producer of wind and solar power. “That puts us in a very good position.”
The Journal summarized the situation succinctly in a recent editorial: “The EPA is abusing environmental law to achieve policy goals that the democratic process rejected, while also engineering a transfer of wealth from the 25 states in the Midwest and South that get more than 50 percent of their electricity from coal. The industry beneficiaries [of these destructive regulations] then pretend that this agenda is nothing more than a stroll around Walden Pond, when it’s really about lining their own pockets.”
It is time to face reality. Misnamed “green energy” policies severely undermine any opportunity America may have to rebuild her economy. Perpetuating current jobless rates would be just the tip of the iceberg, if we follow the path that EPA and the White House have laid in front of us.
Let your legislators know that you do not support the White House’s current green programs. We cannot afford to go broke trying to go green.
* Bishop Harry Jackson, Jr. and Niger Innis are co-chairs of the Affordable Power Alliance, a humanitarian coalition of civil rights, minority, small business, senior citizen and faith-based organizations that champion access to reliable, affordable energy: www.AffordablePowerAlliance.org
U.S. Slips to 9th Freest Economy – by Deroy Murdock
America has slipped one spot since last year — from Earth’s eighth freest economy in 2010, according to 2011′s Index of Economic Freedom. This 17th annual report, jointly published by the Heritage Foundation and the Wall Street Journal, sifts through the wreckage caused by government’s turbocharged acceleration during the Bush-Obama years. America’s slumping score (down from No. 5 in 2008) confirms the urgent need for Washington, D.C. to revitalize free markets and restrain government intervention.
Among the Index’s 179 countries, Hong Kong is rated first, followed by Singapore, Australia, New Zealand, Switzerland, Canada, Ireland, and Denmark. These nations all outscored the US across 10 categories, including taxes, free trade, regulation, monetary policy, and corruption.
America barely made the Top 10. Bahrain was tenth, with 77.7 points, one decimal point behind America’s 77.8 rating. Chile reached No. 11 with 77.4, just 0.4 points behind the US.
Even worse, with a score below 80, the US is spending its second year as a “mostly free” economy. As it departed the family of “free” nations in 2010, it led the “mostly free” category. Even within this less-than-illustrious group, America now lags behind Ireland and Denmark.
How did our once unassailable country wind up so winded?
“The national government’s role in the economy has expanded sharply in the past two years, and the federal budget deficit is extremely large, with gross public debt approaching 100 percent of GDP,” explain the Index’s authors, Terry Miller and Kim R. Holmes. “Interventionist responses to the economic slowdown have eroded economic freedom and long-term competitiveness. Drastic legislative changes in health care and financial regulations have retarded job creation and injected substantial uncertainty into business investment planning.”
Miller and Holmes also criticize Washington for abandoning the free-trade posture of earlier years, an area where former Democratic President Bill Clinton boldly guided his party, starting with the NAFTA trade pact. Washington Democrats these days scorn Clinton’s successful example. As Miller and Holmes write: “Leadership and credibility in trade also have been undercut by protectionist policy stances and inaction on previously agreed free trade agreements with South Korea, Panama, and Colombia.”
On fiscal freedom, the Index marks the U.S. below average. The top American federal income-tax rate is 35 percent, versus a worldwide average of 28.7 percent. At 35 percent, America’s federal corporate tax outpaces the world’s 24.8 percent average and increases US exports…of jobs. America’s overall average tax burden was 26.9 percent of GDP, compared to 24.4 percent globally.
America also suffers a below-average score for government spending. Worldwide, such expenditures average 33.5 percent of GDP; in the US: 38.9 percent.
Compare America to Rwanda, the Index’s most-improved nation. This landlocked African nation leapfrogged 18 spots, from No. 93 in 2010 to No. 75 today. How?
“Rwanda scores relatively high in business freedom, fiscal freedom, and labor freedom,” Miller and Holmes observe. “Personal and corporate tax rates are moderate. With a sound regulatory framework that is conducive to private-sector development, Rwanda has achieved annual economic growth of around 7 percent over the past five years.”
As I noted on my visit there last month, Rwanda remains poor, with a long list of challenges. Yet there is no denying its self-confidence and unflagging commitment to pro-market modernization, Rwanda is moving on up.
America remains blessed with wealth, durable institutions, and creative, clever, industrious citizens. Yet its self-doubt is fueled by an insatiable state that constantly devours more of the nation’s output, and with little to show for its gobbling. Depleted, America stumbles downhill.
Miller and Holmes surveyed the globe and reached this conclusion: Rather than multi-billion-dollar stimuli and 2,000-page regulatory behemoths, “The best results are likely to be achieved instead through policy reforms that improve incentives that drive entrepreneurial activity, creating greater opportunities for investment and job growth.”
The path back to American prosperity and pre-eminence lies in Washington’s bipartisan leadership abiding by the previous paragraph.
* Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University. E-mail him at deroy.Murdock(at)gmail.com
A special report on global leaders
Brains bring ever larger rewards
from PRINT EDITION
WHEN the financial crisis struck, says a prominent banker, the women he knows stopped wearing jewellery. “It wasn’t just that they were self-conscious about the ostentation. It was because it didn’t look good to them any more.” He goes on: “There were blogs that had my name, my family’s names, my address. There were death threats. You’d think this could be some pimply kid in a basement, but John Lennon met some pimply kid from a basement. And the kid shot him.”
The crash sparked a wave of public ire against financiers, and against rich people in general. It also intensified the debate about inequality, which has risen sharply in nearly all rich countries. In America, for example, in 1987 the top 1% of taxpayers received 12.3% of all pre-tax income. Twenty years later their share, at 23.5%, was nearly twice as large. The bottom half’s share fell from 15.6% to 12.2% over the same period.
Jan Pen, a Dutch economist who died last year, came up with a striking way to picture inequality. Imagine people’s height being proportional to their income, so that someone with an average income is of average height. Now imagine that the entire adult population of America is walking past you in a single hour, in ascending order of income.
The first passers-by, the owners of loss-making businesses, are invisible: their heads are below ground. Then come the jobless and the working poor, who are midgets. After half an hour the strollers are still only waist-high, since America’s median income is only half the mean. It takes nearly 45 minutes before normal-sized people appear. But then, in the final minutes, giants thunder by. With six minutes to go they are 12 feet tall. When the 400 highest earners walk by, right at the end, each is more than two miles tall.
The most common measure of inequality is the Gini coefficient. A score of zero means perfect equality: everyone earns the same. A score of one means that one person gets everything. America’s Gini coefficient has risen from 0.34 in the 1980s to 0.38 in the mid-2000s. Germany’s has risen from 0.26 to 0.3 and China’s has jumped from 0.28 to 0.4 (see chart 2). In only one large country, Brazil, has the coefficient come down, from 0.59 to 0.55.
Surprisingly, over the same period global inequality has fallen, from 0.66 in the mid-1980s to 0.61 in the mid-2000s, according to Xavier Sala-i-Martin, an economist at Columbia University. This is because poorer countries, such as China, have grown faster than richer countries.
How much does inequality matter? A lot, say Richard Wilkinson and Kate Pickett, the authors of “The Spirit Level: Why Equality is Better for Everyone”. Their book caused a stir in Britain by showing, with copious graphs and statistics, that inequality is associated with all manner of social ills. After comparing various unequal countries and American states with more equal ones, the authors concluded that greater inequality leads to more crime, higher infant mortality, fatter citizens, shorter lives, more teenage pregnancies, more discrimination against women and so on. They even found that more equal countries are more innovative, as measured by patents earned per person.
Mr Wilkinson and Ms Pickett suggest that equal societies fare better because humans evolved in small groups of hunter-gatherers who shared food. Modern, unequal societies are hugely stressful because they violate people’s hard-wired sense of fairness. The authors call for stiffer taxes on the rich and more co-operative ownership of companies. Pundits on the left applaud, but others are not so sure.
Peter Saunders of Policy Exchange, a centre-right think-tank in London, thinks the book’s statistical claims are mostly bunk. He points to several flaws. First, Mr Wilkinson and Ms Pickett did not exclude outliers from their sample. So, for example, when they say that unequal countries have higher murder rates than equal ones, all they have really observed is that Americans kill each other much more often than do people in other rich countries, perhaps because they are better armed. For the rest of the sample the link between inequality and homicide does not hold.
Likewise, their findings about life expectancy depend on the Japanese, whose longevity is more likely to be due to a healthy diet than to a flat income distribution. And their findings about teen births, women’s status and innovation depend on Scandinavia, a region with a mild and sensible culture that is equally evident among people of Scandinavian stock who live in America.
Factors other than inequality are often more strongly correlated with the problems described in the book. In American states, for example, race is a far more accurate predictor of murder, imprisonment and infant-mortality rates, says Mr Saunders. He also chides the authors for ignoring countries that do not fit their theory, and for glossing over social problems, such as divorce and suicide, that are worse in more equal countries.
This debate will probably never be resolved. The statistical problems are tricky enough. If you measure inequality of wealth rather than income, the global pecking order changes. By this measure, Sweden is less equal than Britain, since fewer Swedes have private pensions. And if you measure consumption, the world seems a more equal place. The poor in rich countries often consume more than they earn, because they receive welfare benefits and use public services. The very rich often consume only a small portion of their income. Bill Gates is millions of times richer than the average person, but he does not eat millions of meals each day.
The philosophical questions are even trickier. It seems unfair that footballers, bankers and tycoons earn more money than they know what to do with whereas jobless folk and single parents struggle to pay the rent, notes Mr Saunders. Yet it also seems unfair to take money from those who have worked hard and give it to those who have not, or to take away the profits of those who have risked their life savings to bring a new invention to market in order to help those who have risked nothing. Different societies choose to deal with this conflict in different ways.
It is hard to gauge just how strongly people object to inequality. A recent poll by the BBC, a tax-funded broadcaster, found that many people in Britain think cashiers and care assistants should be paid more and chief executives and football stars less. Yet few Britons tip cashiers, boycott firms with fat-cat bosses or watch second-division football teams.
The Pew Global Attitudes Project asks people in various countries whether in their view “most people are better off in a free-market economy, even though some people are rich and some are poor.” In Britain, France, Germany, Poland, America and even Sweden most people agree, but in Japan and Mexico most disagree. People in countries that have recently liberalised and are now booming are the most enthusiastic: 79% of Indians and 84% of Chinese say yes.
Inequality jars less if the rich have earned their fortunes. Steve Jobs is a billionaire because people love Apple’s products; J.K. Rowling’s vault is stuffed with gold galleons because millions have bought her Harry Potter books. But people are more resentful when bankers are rewarded for failure, or when fortunes are made by rent-seeking rather than enterprise.
In the most corrupt countries the rulers simply help themselves to public money. In mature democracies power is abused in more subtle ways. In Japan, for example, retiring bureaucrats often take lucrative jobs at firms they used to regulate, a practice known as amakudari (literally “descent from heaven”). The Kyodo news agency reported last year that all 43 past and present heads of six non-profit organisations funded by government-run lottery revenues secured their jobs this way.
In America, too, ex-politicians often walk into cushy directorships when they retire. This may be because they are talented, driven individuals. But a study by Amy Hillman of Arizona State University finds that American firms in heavily regulated industries such as telecoms, drugs or gambling hire more ex-politicians as directors than firms in lightly regulated ones.
People from humble origins sometimes rise to the top. Barack Obama was raised by a single mother. Lloyd Blankfein, the boss of Goldman Sachs, is the son of a clerk. What such people usually have in common is uncommon intelligence.
All kinds of talent are rewarded. But the number of people who get rich by singing or kicking a ball is tiny compared with the number who become wealthy or influential through brainpower. The most lucrative careers, such as law, medicine, technology and finance, all require above-average mental skills. A bond dealer need not appreciate Proust, but he must be able to do sums in his head. A lawyer need not understand “A Brief History of Time”, but she must be able to argue logically.
As technology advances, the rewards to cleverness increase. Computers have hugely increased the availability of information, raising the demand for those sharp enough to make sense of it. In 1991 the average wage for a male American worker with a bachelor’s degree was 2.5 times that of a high-school drop-out; now the ratio is 3. Cognitive skills are at a premium, and they are unevenly distributed.
Parents who graduated from university are far more likely than non-graduates to raise children who also earn degrees. This is true in all countries, but more so in America and France than in Israel, Finland or South Korea, according to the OECD. Nature, nurture and politics all play a part.
Children may inherit a genetic predisposition to be intelligent. Their raw mental talents may then be nurtured better in some homes than others. Bookish parents read more to their children, use a larger vocabulary when they talk to them and prod them to do their homework. Educated parents typically earn more (see chart 3), so they can afford private schools or houses near good public ones. In America, where residential segregation is extreme, the best public schools are stuffed with college-bound strivers, whereas the worst need metal detectors. School reform helps, but cannot level the playing field.
“Assortative mating” further entrenches inequality. Highly educated men are much more likely to marry highly educated women than they were a generation ago. In 1970 only 9% of those with bachelors’ degrees in America were women, so the vast majority of men with such degrees married women who lacked them. Now the numbers are roughly even (in fact women are earning more degrees) and people tend to pair up with mates of a similar educational background.
Women have made immense strides in the workplace, too. For example, in 1970, fewer than 5% of American lawyers were female. Now the figure is 34%, and nearly half of law students are female. So highly educated, double-income power couples have become far more common. The children of such couples have every advantage, but there are not many of them. The lifetime fertility rate for American high-school dropouts is 2.4; for women with advanced degrees, it is only 1.6. The opportunity costs of child-rearing are far higher for a woman who earns $200,000 a year than for one who greets customers at Wal-Mart. And raising elite children is expensive. A lawyer couple can easily afford to put one child through Yale, but perhaps not four.
The cost of higher education has contributed to plummeting birth rates among pushy parents in other rich countries, too. Greens may rejoice at anything that curbs population growth, but the implications of these trends are troubling. Demography makes it harder for people who start at the bottom of the ladder to climb up it. And that has political consequences.
What to do (and not do) about inequality
APART from being famous and influential, Hu Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn do not obviously have a lot in common. So it tells you something about the breadth of global concerns about inequality that China’s president, Britain’s prime minister, America’s second-richest man and the head of the International Monetary Fund have all worried, loudly and publicly, about the dangers of a rising gap between the rich and the rest.
Mr Hu puts the reduction of income disparities, particularly between China’s urban elites and its rural poor, at the centre of his pledge to create a “harmonious society”. Mr Cameron has said that more unequal societies do worse “according to almost every quality-of-life indicator”. Mr Buffett has become a crusader for a higher inheritance tax, arguing that America risks an entrenched plutocracy without it. And Mr Strauss-Kahn argues for a new global growth model, claiming that gaping income gaps threaten social and economic stability. Many others seem to share their concerns. A new survey by the World Economic Forum, whose annual gathering of bigwigs in Davos begins on January 26th, says its members see widening economic disparities as one of the two main global risks over the next decade (alongside failings in global governance).
The debate about inequality is an old one. But in the wake of a financial crisis that is widely blamed on Wall Street fat cats, from which the richest have rebounded fastest, and ahead of public-spending cuts that will hit the poor hardest, its tone has changed. For much of the past two decades the prevailing view among the world’s policy elite—call it the Davos consensus—was that inequality itself was less important than ensuring that those at the bottom were becoming better-off. Tony Blair, a Labour predecessor of Mr Cameron’s, embodied that attitude. His New Labour party was famously said to be “intensely relaxed” about the millions earned by David Beckham (a footballer) provided that child poverty fell.
Now the focus is on inequality itself, and its supposedly pernicious consequences. One strand of argument, epitomised by “The Spirit Level”, a book that caused a stir in Britain, suggests that countries with greater disparities of income fare worse on all manner of social indicators, from higher murder rates to lower life expectancy. A second thread revisits the macroeconomic consequences of income disparities. Several prominent economists now reckon that inequality was a root cause of the financial crisis: politicians tried to counter the growing gap between rich and poor by encouraging poorer folk to take on more credit (see article). A third argument is that inequality perverts politics, with Wall Street’s influence in Washington often cited as exhibit A of the unhealthy clout of a plutocratic elite.
If these arguments are right, there might be a case for some fairly radical responses, especially a greater focus on redistribution. In fact, much of the recent hand-wringing about widening inequality is based on sloppy thinking. The old Davos consensus of boosting growth and combating poverty is still a better guide to good policy. Rather than a sweeping assault on inequality itself, policymakers would do better to take on the market distortions that often lie behind the most galling income gaps, and which also impede economic growth.
Begin with the facts about inequality. Globally, the gap between the rich and the poor has actually been narrowing, as poorer countries are growing faster. Nor is there a monolithic trend within countries (see article). In Latin America, long home to the world’s most unequal societies, many countries—including the biggest, Brazil—have become a bit more equal, as governments have boosted the incomes of the poor with fast growth and an overhaul of public spending to improve the social safety-net (but not by raising tax rates for the rich).
The gap between rich and poor has risen in other emerging economies (notably China and India) as well as in many rich countries (especially America, but also in places with a reputation for being more egalitarian, such as Germany). But the reasons for this differ. In China inequality has a lot to do with the hukou system of residency permits, which limits internal migration to the towns; by some measures inequality has peaked as rural labour becomes more scarce. In America income inequality began to widen in the 1980s largely because the poor fell behind those in the middle. More recently, the shift has been overwhelmingly due to a rise in the share of income going to the very top—the highest 1% of earners and above—particularly those working in the financial sector. Many Americans are seeing their living standards stagnate, but the gap between most of them has not changed all that much.
The links between inequality and the ills attributed to it are often weak. For instance, some of the findings in “The Spirit Level” were distorted by outliers: strip out America’s high murder rate (which many would blame on guns, not inequality) or Japan’s longevity (diet, not equality), and flatter societies no longer look so much healthier. As for the mooted link to the financial crisis, the timing is dodgy: America’s poor fell behind in the 1980s, the credit bubble took off two decades later.
These nuances suggest that rather than fretting about inequality itself, policymakers need to differentiate between its causes and focus on ways to increase social mobility. A global market offers far bigger returns to those at the top of their game, be they authors, lawyers or fund managers. Modern technology favours the skilled. These economic changes are themselves often reinforced by social ones: educated men now tend to marry educated women. The result of all this, as our special report this week shows, is the rise of a global elite.
At heart, this is a meritocratic process; but not always. Rules and institutions are often rigged in ways that limit competition and favour insiders at the expense both of growth and equality. The rules can be blatantly unfair: witness China’s limits to migration, which keep the poor in the countryside. Or they can involve more subtle distortions: look at the way that powerful teachers’ unions have stopped poorer Americans getting a good education, or the implicit “too big to fail” system that encouraged bankers to be reckless and left the rest with the tab. These are very different problems, but they all lead to wider inequality, fewer rungs in the ladder and lower growth.
Viewed from this perspective, the right way to combat inequality and increase mobility is clear. First, governments need to keep their focus on pushing up the bottom and middle rather than dragging down the top: investing in (and removing barriers to) education, abolishing rules that prevent the able from getting ahead and refocusing government spending on those that need it most. Oddly, the urgency of these kinds of reform is greatest in rich countries, where prospects for the less-skilled are stagnant or falling. Second, governments should get rid of rigged rules and subsidies that favour specific industries or insiders. Forcing banks to hold more capital and pay for their implicit government safety-net is the best way to slim Wall Street’s chubbier felines. In the emerging world there should be a far more vigorous assault on monopolies and a renewed commitment to reducing global trade barriers—for nothing boosts competition and loosens social barriers better than freer commerce.
Such reforms would not narrow all income disparities: in a freer world skill and intellect would still be rewarded, in some cases magnificently well. But the reforms would strike at the most pernicious, unfair sorts of income disparity and allow more people to move upwards. They would also boost growth and leave the world economy more stable. If the Davos elites are worried about the gap between the rich and the rest, this is the route they should follow.
Regulation and the Obama administration
The regulatory state is expanding sharply. But Barack Obama hints that there may be moderation ahead
WASHINGTON, DC | from PRINT EDITION
EVER since his thumping in the mid-term elections, Barack Obama has been busily mending relations with business folk. He has extended existing tax cuts, introduced new ones, completed a free-trade deal and appointed a banker as chief of staff. Now he is attending to their biggest grievance: that he has enmeshed them in stifling new rules, from health care and finance to oil-drilling and greenhouse gases.
Unlike many charges lobbed at Mr Obama, this one is well grounded. In his first two years in office the federal government issued 132 “economically significant” rules, according to Susan Dudley of George Washington University. (“Economically significant” means that either the rule’s costs, or its benefits, exceed $100m a year.) That is about 40% more than the annual rate under both George Bush junior and Bill Clinton. Many rules associated with the newly passed health-care and financial-reform laws are still to come.
Existing rules are also being enforced more keenly. The workplace-safety regulator slapped employers with 167% more violations in Mr Obama’s first year than in Mr Bush’s last, according to OMB Watch, a liberal watchdog. The Food and Drug Administration (FDA) has stepped up scrutiny of drugs that have already been approved for sale. Last year it barred the use of Avastin for breast cancer, not because it was unsafe but because its benefits seemed too uncertain. The regulatory workforce has grown 16% in Mr Obama’s first two years in office, to 276,429, while private employment has fallen (see chart 1).
Has this extra regulation made the economy worse off? Not necessarily. The White House Office of Information and Regulatory Affairs (OIRA), which vets most new federal rules, reckons that although Mr Obama’s regulations cost more than his predecessors’, they also bring greater benefits (see chart 2): fewer lives lost from inhaling mercury, being hit by lorries, or eating contaminated food. “I take any costs seriously, but they may be worth incurring if, in return, we get much higher benefits,” says Cass Sunstein, who heads OIRA and, like Mr Obama, taught law at the University of Chicago.
Even business concedes that some new rules were long overdue. A law passed last December gives the FDA sweeping new authority to order food recalls, track the supply chain for fresh food and order companies to submit food-safety plans, while authorising some 1,000 new staff to carry out its orders. Despite its intrusiveness, food manufacturers backed the law in the hope that it would restore public trust in the food system, which had been shaken by fatal outbreaks of E. coli and salmonella.
Nonetheless, Mr Obama now seems more sympathetic to business complaints about regulatory overkill. On January 18th he signed an executive order laying out his philosophy of regulation. It reiterates guidelines first issued by Mr Clinton and adhered to by Mr Bush: rules should be subject to cost-benefit analyses, imposed in the least costly way and leave companies free to work out how to comply. Mr Obama also went further, ordering all regulatory agencies to put in place within 120 days a system for reviewing old rules to see if they can be amended or repealed, and to ease the burden of regulation on small businesses.
Yet the order also expands the scope of regulation by telling agencies that they may consider “values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts”. That is an important consideration for rules such as better access to toilets for the disabled. The risk is that such criteria could be used to justify rules that cost the earth. Banning limits on health insurance, for example, as the health-care law does, may reduce the anxiety of people who might otherwise lose coverage, but whether that is worth the increase in premiums is impossible to say.
A similar attitude underlies both the thicket of homeland-security rules that has sprung up since the terrorist attacks of September 2001, and financial reforms since the banking crisis. These are justified largely by arguing that another terrorist attack or financial crisis would be unimaginably damaging. But since the probability of either event seems unknowable, so are the benefits that might accrue from the laws. Vikram Pandit, the chief of Citigroup, has likened the new Basel capital rules to maintaining a standing army large enough to fight the second world war.
Also unquantifiable is the innovation that may be deterred by regulation. Michael Mandel, a scholar at the Progressive Policy Institute, a think-tank, says some of Mr Obama’s rules, though well intentioned, interfere with the most dynamic parts of the economy. Rules meant to deter the abuse of student aid by for-profit colleges could stunt the growth of college courses taught over the internet; tighter conditions on drug approvals, prompted by much-publicised scandals, raise the cost of drug research, especially for small companies; and “net neutrality” rules could expose internet-access providers to stifling litigation.
Mr Obama’s regulatory surge would be less damaging if it had not followed one by Mr Bush, Mr Mandel says. Because of fears about national security, telecoms and internet companies came under pressure to accommodate federal eavesdroppers. The Sarbanes-Oxley accounting law has made it more expensive for start-up companies to list their stock publicly.
Perhaps Mr Obama’s new edict will hack away some of the regulatory undergrowth that has flourished over the decades. But business could be waiting a while for results. In December the Environmental Protection Agency took saccharine, an artificial sweetener, off its list of hazardous materials—more than a decade after scientists had concluded it was not carcinogenic after all. Mr Sunstein vows: “It isn’t going to take ten years to get rid of rules that deserve to be got rid of.”
China Can Just Say `No' to One American Export: Caroline Baum
At a joint press conference to welcome Chinese President Hu Jintao to the U.S. on Jan. 19, President Barack Obama downplayed contentious issues, such as China’s undervalued currency, and focused instead on areas of economic cooperation.
“We want to sell you all kinds of stuff,” Obama said. “We want to sell you planes, we want to sell you cars, we want to sell you software.”
One thing not on his export list: inflation.
It’s become commonplace to accuse the U.S. of exporting inflation to the rest of the world. After all, the dollar is the world’s reserve currency. International trade is conducted in dollars. Print too many of them, and inflation is sure to follow.
Not so fast. The U.S. needs a partner in crime, a willing counterparty to import what the U.S. is selling.
It has a perfect ally in the People’s Bank of China, which prints yuan to absorb the dollars that flow into the country in exchange for its exports.
At an earlier point in time, Federal Reserve Chairman Ben Bernanke was eager to remind us that the central bank has a “technology called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
He didn’t explain that the printing press has only one setting: U.S. dollars. The Fed can’t churn out British pounds, Swiss francs or Chinese yuan. How is it, then, the Fed can export inflation to all these other countries?
First, let’s define inflation so we’re all on the same page. Inflation is, depending on one’s orientation, too much money chasing too few goods and services or, in the extreme case favored by Austrian economists, an increase in the money supply. In other words, money is key.
The Fed can print dollars, and those dollars may very well find their way into global commodities prices, emerging debt and equity markets or country-specific goods. That’s not inflation. No matter how many dollars the Fed prints, it cannot affect another country’s inflation unless that country is complicit in increasing its own money supply to prevent its currency from appreciating.
China is making a choice to import inflation. (Actually, in pegging the yuan to the dollar, the PBOC is choosing to cede control over its domestic monetary policy to the Federal Reserve. Inflation is the result.)
Whether a zero percent interest-rate policy is suitable for the U.S. is an open question. It’s not appropriate for a country like China, which grew 10.3 percent in 2010 and is faced with accelerating inflation, a property bubble and soaring money and credit growth.
The PBOC has been raising reserve requirements and short- term interest rates, selling bills and setting caps on loan growth in an attempt to reduce liquidity and fight inflation. It has allowed the yuan to appreciate only gradually -- about 3 percent in the last six months -- even as China receives an average of $20 billion each month as a result of its trade surplus with the U.S.
Of course, the choice not to import inflation isn’t quite as simple as trade-surplus countries allowing their currencies to appreciate. It never is.
“Exchange rates have lots of effects on the rest of the economy that a country may or may not be able to tolerate,” says Neal Soss, chief economist at Credit Suisse in New York.
Because international trade is conducted in dollars, a rise in commodity prices affects all countries, he says. If it’s “pure dollar price inflation,” prices in other currencies would be stable, says Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh.
China’s economy has grown 100-fold, in nominal terms, since Communist Party leader Deng Xiaoping introduced free-market policies in 1978. It has done that by adopting a mercantilist policy of selling more abroad than it buys, holding its exchange rate down to maintain that advantage.
“China keeps consumers poor so it can grow through mercantilism,” Goodfriend says. “The route they are taking is reducing the purchasing power of consumers’ lifetime savings held in the bank.”
Prices and wages eventually move up, making Chinese goods less competitive. In the long run, inflation will destroy any competitive edge China derived from its undervalued currency.
Global Central Bank
Some economists claim that because the dollar is the world’s reserve currency, the Fed must act as central bank to the world.
No single central bank can play that role for the world (gold standard bearers, hold your fire), just as no central bank can export inflation without a willing importer on the other side.
Hu Says Strong China-U.S. Ties Are Needed as World has `Tortuous' Recovery
Chinese President Hu Jintao told business executives in Washington that closer ties between his country and the U.S. were critical amid a “tortuous” global economic recovery.
“In the face of the complex and fluid international situation and various risks and challenges, the people of our two countries should step up cooperation,” Hu said in a speech yesterday following a White House summit on Jan. 19 with President Barack Obama.
U.S. companies doing business in China are concerned that their growth in what may now be the world’s second-biggest economy will be curbed by government policies to help home-grown firms compete globally in sectors such as aviation, banking and telecommunications. Business leaders including Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein were in the audience.
At a White House meeting Jan. 19 with Blankfein and other executives including Boeing Co. CEO Jim McNerney and General Electric Co. CEO Jeffrey Immelt, Hu addressed that issue, telling them that China “will, as always, try to provide a transparent, just, fair, highly efficient investment climate to U.S. companies and other foreign companies.”
Hu’s address yesterday, his only policy speech in a four- day U.S. visit that concludes today in Chicago, also discussed broader bilateral issues. Hu said China would never pursue an “expansionist policy” and that its military was only for self- defense. He stressed that Tibet and Taiwan were China’s “core interests.”
Partner and Competitor
Many U.S. companies have begun questioning their “long- term viability in China” amid regulations designed to promote Chinese companies, according to a report last year by the Beijing-based American Chamber of Commerce in China, which counts Intel Corp. and GE as members.
“You always get this question: are they a partner, are they a competitor, are they a customer, are they a supplier, and of course the answer is ‘yes,’” Honeywell International Inc. CEO David Cote, who attended the speech, said in an interview with Bloomberg Television. “You need kind of a nuanced, broad based, thoughtful approach to our relationship with them, and I’m very hopeful that this visit took one more step to having that broader, more nuanced relationship.”
Even as U.S. business groups voice concerns over the China market, many are seeing rapid sales growth there. Two of the top 10 best-selling cars in China last year were made by a General Motors Co. venture. GE’s China sales should grow in the “high double digits” this year, Immelt said last month.
“For many American companies, their businesses in China have become the biggest source of profits in their global operations,” Hu said in his speech yesterday. “Even in 2008 and 2009 when the international financial crisis was most severe, over 70 percent of American companies in China remained profitable.”
Hu said that inexpensive but “quality” Chinese goods saved U.S. consumers more than $600 billion over the past decade. He also called for more cooperation on aviation, infrastructure, power grids, health and the environment.
“There still exist many uncertainties and destabilizing factors, making the world economic recovery a tortuous process,” Hu said. “All countries in the world, including China and the United States, want to fully emerge from the crisis as soon as possible.
Other invited guests included former Goldman Co-Chairman Robert Rubin, former American International Group CEO Maurice “Hank” Greenberg and former Secretary of State Henry Kissinger, who introduced Hu.
Outside the hotel in Northwest Washington where Hu gave his speech, protesters lined the streets, waving Tibetan and U.S. flags and calling for Tibetan independence. Other demonstrators supported Hu, waving the red-and-gold Chinese flag and chanting, in Chinese, “welcome, welcome.”
Demonstrators both supporting and opposing Hu greeted him again at the Hilton Hotel in downtown Chicago, where he arrived yesterday evening to have dinner with Mayor Richard M. Daley and meet with CEOs, including Boeing’s McNerney.
“American politics is too polarized,” said Jin Zhongmin, a research scientist at Argonne National Laboratory outside Chicago who was born in China’s Hubei province and came to support Hu. “I don’t want the international relationship to be like that. China and America have a lot of differences but more common ground.”
Earlier yesterday, Hu met with bipartisan groups of U.S. House and Senate leaders at the Capitol. Lawmakers said afterward that they pressed the Chinese president on human rights, trade, currency, intellectual property and other issues.
China has a “responsibility to do better” at guaranteeing freedom and dignity for its citizens and the U.S. has a “responsibility to hold them to account,” House Speaker John Boehner, an Ohio Republican, said in a statement after Hu met with leaders of his chamber.
At his dinner with Hu, Daley called the Chinese leader a “man of vision” and said he would make Chicago “the most China-friendly city in the United States.”
Davos Man Looks to East to See Economic Future: Mark Gilbert
“There was a period of remorse and apology for banks; that period needs to be over.”
Thus Bob Diamond, the chief executive officer of Barclays Plc, tried to draw a line under the credit crisis during a 2 1/2 hour grilling by Members of Parliament at the House of Commons Treasury Committee on Jan. 11. The “blame game,” he told the MPs, has hamstrung the finance industry for long enough: “Now, we need to build some confidence.”
Never mind that most of us must have blinked and missed the bankers’ self-excoriation; Diamond would like to return to business as usual, without pesky regulators hobbling risk- taking.
So when Diamond travels to Davos to hobnob with his fellow Masters of the Universe at the World Economic Forum’s annual shindig, the theme set by the event’s organizers -- “Shared Norms for the New Reality” -- will be wildly inappropriate. While there may be a new reality, the norms arising from the financial disaster’s aftermath aren’t shared by Davos Man.
The Davos agenda -- which runs to 110 pages in a Word document, even shrunk to a font size of 10-point Arial -- doesn’t ignore the parlous economic backdrop that the mishaps of the banking fraternity created. Yet the questions posed by the event’s organizers don’t seem particularly challenging.
‘Back on Track’
One workshop asks whether the international financial system is “back on track.” A panel, featuring Gary D. Cohn, the chief operating officer of Goldman Sachs Group Inc., is hardly likely to conclude that the financial system is still headed in the wrong direction with regards to transparency, bonus culture and making sure a crisis doesn’t happen again.
Also featured are cybersecurity (a hot topic now that the New York Times has presented evidence that the U.S. and Israel deployed a computer virus to hobble Iran’s nuclear programs); the environment (a bit rich, given the carbon footprint caused by shipping thousands of executives and media hangers-on to the Swiss Alps); the future of employment (how many Davos panelists cut jobs in the recession?); and a session on “Doing Better With Less” (or, how the public sector is paying for the private sector’s misadventures).
Diamond, who will sit on a panel examining the global economic outlook, is the archetypal Davos Man. An American presiding over one of Britain’s great banks, he was at the eye of the credit-crunch storm. He’s not alone in urging the world to move on. “We’ve got to work for the balance, rather than just say let’s get revenge on these people,” British Prime Minister David Cameron said earlier this month.
Barclays vigorously defends its chief’s recent comments. “Mr. Diamond made it perfectly clear that the role of banks in the U.K. and elsewhere is to support businesses and households, and that is exactly what Barclays is doing,” says spokesman Giles Croot. Still, the Barclays CEO’s desire for closure is a lot easier to understand once you know that Diamond -- who pocketed more than $32 million from 2005 to 2007, when the seeds of the crisis were sown by banks like his -- has had to forgo his bonus for the past two years.
The WEF, which kicks off Jan. 26, has also defined four “thematic clusters” for the gathering.
“Responding to the New Reality,” focuses on the fear factor; new players are competing for finite resources, the agenda says. In other words, China is snapping up coal mines, farmland and more worldwide.
“The Economic Outlook and Defining Policies for Inclusive Growth” riffs on the risks of a double-dip recession as economists debate whether deflation or inflation is the bigger threat.
“Supporting the G-20 agenda” comes with the caveat that achieving financial stability “will require significant engagement from economies outside the G-20.” That comment gives at least a nod to the ascendancy of emerging economies as the drivers of growth.
The fourth item promotes “Building a Risk Response Network,” which seems to ignore the sad truth that nations have proved unwilling to cede sovereignty even as globalization gathers pace.
Implicit in the agenda is the idea that while the West has fouled its economic sandpit, other nations are speeding ahead. The inclusion of Pranab Mukherjee, India’s finance minister, on Diamond’s panel, the discussions promising “Insights on China” and “Insights on India,” the appearance of Chinese and Indian executives on the panel opening the whole event -- all suggest that Davos Man must look East to see the future.
A survey conducted by the Pew Research Center for the People & the Press on Jan. 5-9 showed 47 percent of Americans now consider China the top economic power. In a similar poll in 2008, 41 percent named the U.S. top dog. While Davos Man didn’t switch the pecking order, the crisis he triggered surely accelerated the change.
That shift, in a way, was clearly acknowledged on Jan. 19, when U.S. President Barack Obama held the first state dinner for a Chinese president since 1997. When the guy who has loaned you $907 billion comes calling -- China has about a third of its foreign-exchange reserves parked in the U.S. government bond market -- it makes sense to put out the welcome mat.
BofA Reports Loss on Costs Tied to Bad Loans, Mortgage Unit
Bank of America Corp., the largest U.S. bank by assets, reported a $1.24 billion fourth-quarter loss as costs mounted for refunds, writedowns and litigation tied to faulty mortgages.
The loss of 16 cents a share widened from $194 million a year earlier, according to a statement today from the Charlotte, North Carolina-based bank. The lender increased the amount set aside to cover mortgage disputes for the second time in less than a month and added $1.5 billion for legal expenses.
Brian T. Moynihan, 51, who started as chief executive officer a year ago, booked $12.4 billion in 2010 impairments on credit-card and mortgage units purchased by predecessor Kenneth D. Lewis. The 2008 acquisition of Countrywide Financial Corp., then the largest U.S. mortgage originator, has saddled the bank with lawsuits and demands to repurchase bad loans.
“It’s a kitchen-sink quarter for their Countrywide issues,” said Jason Tyler, who helps oversee $5.5 billion at Chicago-based Ariel Investments LLC. “It’s typical for a new CEO to report a lot of big charges to lower the bar for themselves. You have a small window to do this and not get blamed for it.”
The bank said earlier this month it agreed to pay Fannie Mae and Freddie Mac $2.8 billion to settle or preclude disputes over mortgages, triggering a $3 billion fourth-quarter provision. The sum was expanded to $4.1 billion, Bank of America said today, citing outstanding and future mortgage buyback claims.
“Last year was a necessary repair and rebuilding year,” Moynihan said in the statement. “Our results reflect the progress we are making at putting legacy -- primarily mortgage- related -- issues behind us.”
Bank of America’s shares fell 26 cents, or 1.8 percent, to $14.28 at 9:33 a.m. in New York Stock Exchange composite trading. The stock slid 11.4 percent in 2010, the second-worst performance in the 24-company KBW Bank Index; only People’s United Financial Inc. declined more.
In an interview on Bloomberg Television, Moynihan said there is more work to do on resolving mortgage claims and trading revenue was weak. Positive signs included a rebound in credit-card profit, and loan losses are easing as the economy strengthens, Moynihan said.
Credit expenses will “come down substantially,” he said. “The credit’s really cleaning up.”
Profit in the global banking and markets group, run by Thomas K. Montag, dropped to $724 million from $1.45 billion in the third quarter and $1.44 billion a year earlier. Card services swung to a $1.49 billion profit from a $994 million loss a year earlier. The company reduced loss provisions to $2.14 billion from $6.85 billion in the same period of 2009.
“The opportunities weren’t there, and Tom and his team managed through it,” Moynihan said of the quarter, while calling the unit’s overall year “solid” for trading. “We weren’t happy with the numbers, we’d like to make more money.”
Bank of America posted a $2.24 billion net loss for 2010, fueled by the writedowns, as revenue declined 7.9 percent to $111.4 billion. That compares with a $6.28 billion profit in 2009. In the quarter ended Dec. 31, revenue net of interest expense fell 11 percent from a year earlier to $22.7 billion.
The mortgage unit posted a $4.97 billion quarterly loss, widening from $994 million a year earlier, on the provision and goodwill charge.
“It was a bad quarter for the industry but particularly for Bank of America,” said Thomas Brown, CEO of Second Curve Capital LLC, a New York hedge fund that focuses on financial firms. “It should be tough for everybody again in the first quarter, and Bank of America better do better on a relative basis.”
Fannie Mae and Freddie Mac, two of the biggest purchasers of home mortgages, have demanded banks buy back loans that were based on incorrect data about the home or borrower. The two government-controlled companies made more than $20 billion in buyback requests to Bank of America through year-end.
The lender told investors to expect a $2 billion goodwill impairment on its mortgage operations in the fourth quarter, saying the unit’s value had declined because of litigation and foreclosure costs. Bank of America acquired Calabasas, California-based Countrywide in a stock swap originally valued at $4 billion.
All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. Bank of America said Oct. 8 it froze foreclosures nationwide and then resumed in some states after saying its decisions were justified.
The bank still faces suits from insurers including MBIA Inc. and Ambac Financial Group Inc. alleging that Countrywide fraudulently induced the firms to guarantee bonds composed of faulty mortgages. Bank of America said in a November filing that it was “not possible at this time to reasonably estimate future repurchase obligations” tied to litigation brought by the insurers.
Moynihan also must fend off demands from Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York for putbacks tied to about $47 billion of bonds, people familiar with the matter have said. Bondholders agreed to delay legal action while holding talks with Bank of America, the lender said last month.
The wealth and investment management business, run by Sallie L. Krawcheck, reported a 37 percent profit decline from a year earlier to $332 million. Revenue rose to $4.28 billion from $4.05 billion as asset-management fees increased, the bank said.
Bank of America’s commercial banking division had a quarterly profit of $1.04 billion compared with a loss of $31 million a year earlier as the provision for credit losses decreased by $1.98 billion.
The bank earmarked a total of $5.13 billion for credit losses in the quarter, compared with $5.4 billion in the third quarter and $10.1 billion a year earlier. Net write-offs of uncollectible loans declined 5.8 percent from the third quarter to $6.78 billion.
Bank of America’s fourth-quarter results were aided by a $1.2 billion income tax benefit and $360 million in gains from the sale of non-core assets, the firm said. Bank of America sold shares in BlackRock, the world’s biggest asset manager, in the quarter.
Excluding a goodwill charge, adjusted net income was 4 cents a share, less than the 21-cent average estimate of 24 analysts surveyed by Bloomberg. Some of the estimates, which ranged from a profit of 10 cents to 31 cents, didn’t include preannounced costs caused by the defective loans.
JPMorgan Chase & Co., the second-biggest U.S. bank by assets, said last week that fourth-quarter profit surged 47 percent to $4.83 billion as $2 billion in reserves flowed back to earnings on improving credit quality. Citigroup Inc., the No. 3 bank, reported a $1.31 billion profit, compared with a $7.58 billion loss a year earlier. San Francisco-based Wells Fargo & Co., the fourth biggest bank by assets, said Jan. 19 that profit rose 21 percent to $3.41 billion.
The bank may be able to raised its dividend by the end of this year, Moynihan told investors today. “We continue to believe we’ll increase our dividend in the back half of 2011,” Moynihan said in a conference call today, adding that any addition to the payment needs to be approved by regulators.
Obama Taps GE's Immelt to Head Economic Advisor Panel
President Barack Obama will name Jeffrey Immelt, General Electric Co.’s chief executive officer, to head his outside panel of economic advisers, replacing former Federal Reserve Chairman Paul Volcker.
Immelt wrote in an op-ed today in the Washington Post that Obama asked him to take the helm of the newly renamed President’s Council on Jobs and Competitiveness. The group will reach out to labor and business leaders to serve “as a catalyst for action,” he wrote.
Immelt, 54, is an original member of the panel, which was formed as the President’s Economic Recovery Advisory Board in February 2009. GE’s CEO since 2001, he heads the world’s biggest maker of jet engines, medical-imaging equipment and power-plant turbines and gives the White House a corporate heavyweight to help burnish Obama’s pro-business credentials.
He has sounded many of the administration’s themes: boosting jobs through U.S. exports, ensuring companies can compete with powers like China and India, and jumpstarting a clean-energy economy. Immelt wrote today that he and Obama are committed to making the U.S. “the most competitive and innovating economy in the world.”
‘The Right Aspiration’
“It’s the right aspiration,” Immelt who will still serve as an outside adviser in his new role, said of the president’s goal of doubling American exports to more than $2 trillion in five years, during a Nov. 6 interview in Mumbai, where he joined Obama for a meeting with business leaders. “We’ve done it in the last five years as a company.”
Obama will formally announce Immelt’s appointment today when he travels to Schenectady, New York, an administration official said on condition of anonymity. That’s the birthplace of GE’s energy business and where the steam turbines in a $750 million order from India’s Reliance Power Ltd. announced in November will be built for export.
GE today is also scheduled to report fourth-quarter and year-end results. GE Capital, transportation and health care may help push the Fairfield, Connecticut-based parent company’s fourth-quarter profit to 32 cents a share, from 28 cents a year earlier, according to analysts surveyed by Bloomberg.
Immelt will head the renamed advisory panel that Obama announced shortly after his 2008 election with Volcker standing beside him. The board was meant to bring together business executives and other experts to advise the president on combating the worst recession since the Great Depression.
The panel’s start-up was delayed, and Volcker, known for taming inflation as Fed chairman in the 1980s, told colleagues he sometimes felt it was more of a public relations tool for the White House, according to a person familiar with his views.
Still, he advised the administration on the rewriting of financial laws. And the Volcker rule -- which banned proprietary trading at banks and restricted their investments in private- equity and hedge funds -- was named after him. Volcker had agreed to serve only for two years as head of the board and plans to be available to advise the administration, according to another person familiar with the matter.
“Since my campaign for president, I have relied on Paul Volcker’s counsel as we worked to recover from the worst economic crisis since the Great Depression,” Obama said in a statement. “I will always be grateful to Paul Volcker for his service as the head of my Economic Recovery Advisory Board. I have valued his friendship and skill over the years, and I will rely on his counsel for years to come.”
Naming New Members
While Obama is expected to name additional members to the panel, he won’t do so today, the administration official said. Members of the existing board include Robert Wolf, head of UBS AG’s Americas unit, Jim Owens, former chairman of Caterpillar Inc., and Richard Trumka, president of the AFL-CIO labor union federation.
Having a corporate leader as Volcker’s replacement may prove to be an asset to Obama when the president comes under attack from groups like the U.S. Chamber of Commerce.
Immelt, a self-described Republican, has emerged as one of Obama’s most visible outside economic advisers. In addition to the summit in India, he was among the executives who met with Obama and Chinese President Hu Jintao this week and later attended the state dinner honoring the Asian leader.
His relationship with Obama wasn’t always close. During the 2008 campaign, Immelt, who counts former President Ronald Reagan as a “personal hero,” donated $2,300 to Obama’s Democratic primary challenger, Hillary Clinton, and $2,300 to the Republican presidential nominee, Senator John McCain of Arizona, according to the Washington-based Center for Responsive Politics.
Yet in recent months, Immelt has championed some administration goals against criticism.
“It’s a great step he’s taking, meeting with CEOs,” Immelt said after a Dec. 14 talk with investors before Obama’s summit with business leaders in Washington. He described as “real positives” Obama’s agreement to extend Bush-era tax cuts and “the tone of just being open to work with business.”
Immelt is among a group of executives -- Boeing Co. CEO Jim McNerney, Motorola Solutions Inc. CEO Greg Brown and Honeywell International Inc. Chairman David Cote -- who have voiced support for Obama policies. The four serve on several of the president’s outside advisory boards.
U.S. corporate profits in the third quarter of 2010 exceeded the 2006 high reached before the recession. Optimism about the economy among CEOs of the largest companies rose in the fourth quarter to the highest level since the start of 2006, according to a Business Roundtable survey.
6,500 New Jobs
GE has announced 6,500 new U.S. manufacturing jobs and retained more than 8,700 permanent and temporary positions across its manufacturing units in the past two years.
Many of the jobs are tied to Immelt’s export push. GE this week announced joint ventures and orders for Chinese rail, aviation and energy projects that may yield $2.1 billion in sales, creating or retaining about 5,000 jobs.
GE had 304,000 employees at the end of 2009, with about 134,000 based in the U.S.
While Immelt will head an advisory panel for a Democratic administration, that won’t prevent him from embracing his Republican leanings.
GE will be the lead sponsor of celebrations marking Reagan’s 100th birthday, donating $10 million for the two-year schedule of events. Reagan said in his memoirs that he honed political and leadership skills as television host of General Electric Theater from 1954 to 1962.
Reagan had “a very simple vision for the country,” Immelt said in a March interview. “He had a ‘one-two-three, this is what we’re going to get done’ about him, and I think that’s important for business leadership as well.”