Thursday, April 7, 2011

Capitalism at the Farm Stand

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I laugh to myself every time I pull up to the little farm stand to pick up my weekly share from the Community Supported Agriculture program. I see a hilarious irony in the bumper stickers on the cars, proclaiming the social consciousness and leftist orientation of my fellow CSA members. I chuckle when I see the variety of reusable shopping bags, each proclaiming some message about how they're saving the planet "one bag at a time."

As I stand, filling the provided plastic (and supposedly nonreusable) grocery bags, I can barely hide my amusement. I am engaging in an enterprise that is the essence of pure capitalism while surrounded by those to whom the very word "capitalism" is one of the greatest of obscenities. It is voluntary exchange; it is a relationship where everyone feels as if they have won. Isn't that the essence of the free market?

To join a Community Supported Agriculture program, you buy a share of the farm's produce each season, which entitles you to a weekly box of locally grown vegetables and fruit. In a sense, members are not purchasing produce per se, but the rights to a certain proportion of produce should it be successfully delivered. It is more analogous to buying mineral rights or investing in stock for the dividends.

Most CSAs endeavor to grow without a lot of chemical pesticides and fertilizers, which makes CSAs extremely popular with environmentalists and others of the Left. They think they are doing battle with capitalism and corporate greed; I say it is a pure and beautiful example of a market exchange. They are acting like capitalists, even if they don't know it. To quote one of my favorite lines from Bourbon for Breakfast, "Capitalism is so darn good at what it does that it can even bamboozle muddleheaded socialists to cough up money for its products; that's wonderful" (p. 60).

The evidence of this is found in the details of the exchange. I pay $275 per season for a "medium share," which is more than enough for my family of four. The season lasts roughly 15 weeks, but can be shorter or longer depending on weather. This means I pay about $18 per week for more than ten pounds of produce; an average of less than $2 per pound. If you go and peruse the grocery store, you'll find that fresh produce generally costs more than this — and "organics" are significantly higher — while the quality and flavor is completely inferior.

The farm gets an infusion of capital at the beginning of the growing season when they most need it, a guaranteed market for a proportion of their goods, and an opportunity to advertise and sell other items not included in the CSA, such as milk and beef. Additionally, and perhaps most importantly, in the event of crop failures, there is shared risk between the farmer and the consumer. If they have a bad year with some particular crop, then you receive less; if they have a bumper crop, you are given more than you can possibly use. A few seasons ago, we were getting three or four quarts of strawberries a week; more than we could possibly consume, even with my daughter eating half a quart on the way home from the farm stand.

The consumer receives better-tasting produce at a lower price than can be had elsewhere. Additionally, for those who care about such things, they are purchasing more than just vegetables: they are purchasing the air of superiority and ecofriendly street cred that comes from shunning the corporate grocery store and sharing in something that they believe to be one step away from a hippie commune. That reality doesn't support such a conclusion is immaterial; if we are driven to act, even based upon some imaginary construct, we are still acting in accordance with market principles. It's an example of the Misesian idea that all human action is an effort to relieve some discomfort about the way things are.

Rather than striking a blow at the evils of the free market, CSA members exemplify voluntary exchange in its purest form. I and the farmer "beat the market" in this transaction, largely because of the direct nature of the buying and selling. I walk away from the exchange having purchased produce at a lower price by accepting a little bit of risk, while the farmer, having cut out the wholesaler, walks away having sold the fruit of his labor at a higher price.

Additionally, I purchase the satisfaction of knowing that the "muddleheaded socialists" loading up and comparing their reusable shopping bags are unwitting participants in a market economy that they claim to reject. For me, that satisfaction alone is worth almost the price of membership. The vegetables are just a bonus.

Murray, My Intellectual Mentor

Murray, My Intellectual Mentor

Mises Daily: by

[Introduction to Economic Controversies (2011)]

Economic Controversies

It was nearly 40 years ago that Murray Rothbard changed my life. I was then a PhD candidate in economics at the New School for Social Research in downtown Manhattan, while also teaching principles courses at a local university. And I was rapidly losing interest in the whole subject.

Bored by the prattling of the left-wing crowd who dominated the New School, I could find nothing very satisfying in mainstream economics either. The New School's left-wingers certainly cared about achieving a free society. But their radical agenda mainly consisted of the "instrumentalist" ideas of the econ department's emeritus professor Adolph Lowe, which boiled down to coercing people into following the dictates of elitists like him.

My only real objection to conventional economics was that it also bored me. If a theory like "perfect competition" was remote from reality, it seemed like a judgment on the imperfections of capitalism. After all, to the degree that capitalism was not perfectly competitive, it fell prey to the evils of "imperfect competition," which might require intervention from antitrust. As a typically zonked-out product of conventional schooling, I vaguely believed that to the degree that any textbook theory failed to explain reality, so much the worse for reality. (Not long ago I spoke with an econ grad student who, when pressed, believed this quite explicitly.)

Always a compulsive book browser, I had more than once leafed through a two-volume work titled Man, Economy, and State in the New School library, whose author, Murray Rothbard, I had barely heard of. After the third or fourth look, I finally began reading the book — and experienced one eureka moment after another. Two especially memorable moments reflected the leftist tradition in which I was then mired.

First, I learned that, if leftists thought "capital" deserved no share of the economic bounty, they were in a sense more right than they knew. Rothbard explained that, in a free market, there were no financial returns to owners of capital goods as such. Since capital goods consisted of such items as factories, machinery, offices, and desks, these goods were entirely the product of labor and land (or resources). So the monetary value of newly created capital goods is entirely attributable to the purchase of land and labor, with nothing remaining for capital-goods owners.

How, then, did capital-goods owners make any money at all? The money they received came in two forms: interest payments for advancing resources in the present and profits for their entrepreneurial foresight — unless, of course, they were unsuccessful entrepreneurs and suffered losses.

Second was Rothbard's devastating refutation of the theory of imperfect or "monopolistic" competition — dear to leftists' hearts, since it highlighted the irrationality of capitalism. A cornerstone of this theory is that a monopolistic competitor like "Marioni Brothers' Barbershop" (monopolistic because there is only one set of Marioni Brothers; competitive, since there are many barbershops), always operate with excess capacity.

Economist Paul Samuelson had in fact targeted barber shops in his best-selling Principles text, observing, "The barbershop has excess capacity, with empty chairs much of the time," as he inveighed against the "wasteful social losses" resulting.[1]

Even before I read Rothbard, it occurred to me that, in this case at least, Professor Samuelson may have been missing something. Given his flexible work schedule, he may have had a habit of going for his haircut on a weekday, which would explain why he kept noticing empty chairs. Had he gone instead on Saturdays, he might have noticed that all the barber chairs were full, and that business was actually backed up. It then might have occurred to him that our hypothetical Marioni Brothers were not so dumb as to waste their money on excess capacity.

The problem they actually faced as businessmen was the classic tradeoff between peaks and troughs in demand. Had they not had empty chairs during the week, they wouldn't have been able to take advantage of the glut in demand on weekends.

Such were my tentative doubts. What Rothbard exposed was the preposterousness of the whole formulation. For why assume that all such monopolistic competitors necessarily invest in excess capacity? "To plan a plant for producing x units," he quotes economist Roy Harrod observing, "while knowing that it will only be possible to maintain an output of x−y units, is surely to suffer from schizophrenia."[2] It made no more sense to believe that all such businessmen would waste funds on excess as it was to believe that they would all consistently underinvest and plan on inadequate capacity.

Then came what for me — robotically drawing all those cost and demand curves with the aid of differential calculus — was the coup de grâce. Rothbard demonstrated that the whole naïve error hinged on the technicalities of geometry. The theory was simply a prisoner of the way the demand curve was made tangent to the cost curve! He then adroitly showed two different ways of drawing the graph, without violating any of the assumptions. The miraculous result: The monopolistic competitor was now operating at the low point of his average cost curve, or at full capacity.[3]

I found such moments profoundly empowering, making me realize that, whenever I thought about economics outside formal straitjackets, I naturally fell back on modes of reasoning used by Rothbard and his mentor, Ludwig von Mises. That's why the very term "Austrian economics" is a kind of redundancy. Whenever people think sensibly about economics, they think like Austrians — one key reason why even the mainstream can have a few things to teach us, especially when they're writing mere journalism.

After finishing Man, Economy, and State, I discovered the Laissez-Faire bookshop, then a well-stocked store on Mercer Street, which regrettably shut down years ago. Browsing at that bookshop virtually every Saturday, I gradually bought up all the Rothbard I could find, plus all the Mises, F.A. Hayek, and Israel Kirzner.

"The very term 'Austrian economics' is a kind of redundancy. Whenever people think sensibly about economics, they think like Austrians."

I formed a reading group in Austrian economics, attended late-afternoon seminars chaired by Kirzner at New York University — and even barged into one of Rothbard's classes at Brooklyn Polytechnic Institute, where he taught for many years.

I say "barged in" because somehow I forgot to ask him if I could sit in and audit. That might explain why he gave me a perplexed look when I raised my hand to ask a question, a reaction that discouraged me from chatting with him afterward. (The session must have been somewhere in the middle of the semester, since it was devoted entirely to the mundane task of reviewing the material to prepare students for the mid-term exam.)

When I became a senior economist at the New York Stock Exchange, the director I reported to once told me, "Gene, you're the only guy I ever met who reads economics for fun." I was honestly surprised, and might have remarked that if everyone read Rothbard and the Austrians, they might have just as much fun.

My only real, albeit brief, conversation with Rothbard occurred over the phone in October 1993, by which point he was teaching at the University of Nevada in Las Vegas, and I had just begun as a journalist at Barron's. University of Chicago economist Gary Becker had just won the economics Nobel, partly in recognition of his insight that a family was like a firm. (But how much more intriguing to theorize that a firm is like a family!)

Asking Rothbard what he thought of Becker's win, I expected him to tell me that he thought applying economics to noneconomic issues was foolish. Instead he began by saying that it was gratifying to see a free-market-oriented economist like Becker gain such recognition.

Then I asked, "But what do you think of the theory that a family is like a firm?"

Rothbard answered, "I think it's nuts!" And I was thus treated, firsthand, to that nasal voice going squeaky.

I had already become familiar with that nasal voice in the scores of audiotapes I'd heard of Rothbard's lectures, along with the salty insights tossed off with dazzling ease, punctuated by the signature giggle. To me, the joy in that giggle bespeaks an indefatigable spirit.

In Rothard's lectures on economic history, I caught him in a rare moment of hypocrisy. While he blasted the use of price indexes in his writings, he never hesitated to use a price index to prove a point about historical trends. He was of course quite right to criticize the pseudoscience of price indexes. But he might have acknowledged more explicitly that they sometimes come in handy as a rough approximation of price trends.

Audio Mises Daily

To get a sense of the fun it must have been to be Murray Rothbard or to merely know him, try listening to one of his best lectures, "The Meaning of Ludwig von Mises."

We all know there could be no Murray Rothbard the great writer and thinker without his great teacher, Ludwig von Mises. Those who read and love Rothbard would be cheating themselves if they did not also read Mises's many books. In my case, reading Mises's magnum opus, Human Action, for the first time, I found his discussion of wages finally cemented my understanding of why wages inevitably rise in a free market with rising productivity — an insight that helped seal my conversion to libertarianism.

It's remarkable that Mises's books read as well as they do, both in translation and in the English he began to write in at age 60. Rothbard had the advantage of being an extraordinary writer in the language he grew up in, as well as a devoted student of Mises. It was therefore left to him to render Mises's great theories in clear, accessible prose, while often bringing those theories to a new level.

So I think of Rothbard as having been Plato to Mises's Socrates — an analogy I might push further if Rothbard were not so critical of Plato. Try his discussion of Aristotle's refutation of Plato's communism in Economic Thought Before Adam Smith, the first of his two books on the history of economic thought. Among all of Rothbard's writings — the second volume is called Classical Economics — these two books are the ones I prefer to dip into again when I'm looking for something diverting to reread.

The whole informed guided tour of the way people thought about economics is vastly entertaining. My favorite part is probably the devastating dissection of the supposed "father" of economics, Adam Smith. It's tragic that Rothbard didn't live to complete the third and final volume, which would have dealt with economic thought in the modern era.

Which brings us to Economic Controversies. It contains all of Rothbard's best essays. If there is any single book worthy of being called a companion volume to Man, Economy, and State, this is it.

You should start, as the book does, with the magisterial essay "The Mantle of Science," in which Rothbard lays the groundwork on how to think about economics. After finishing this essay, you might reflect that all the writer has really done is make explicit a mode of thinking that comes naturally to us all. And just as I felt after I finished Man, Economy, and State, you might find it similarly empowering.

Mainstream economics suffers from two main handicaps:

  1. the desire to sound like a branch of physics, which feeds the elitist fantasies of those who aspire to be professional economists, and

  2. the desire to sit at the tables of power à la John Maynard Keynes and Alan Greenspan, which spawns such top-down monstrosities as "macroeconomics."

Given these handicaps, it's remarkable, as mentioned, that mainstream economists can still be insightful at times, especially in their journalism. I submit it's because even they are still capable of using the mode of thinking Rothbard sets forth in "The Mantle of Science."

You might then jump, for comic relief, to "The Hermeneutical Invasion of Philosophy and Economics." In that essay, Rothbard makes fun of the heavy thinkers who keep telling us, in effect, that words have no meaning. Of course, if they are right that words have no meaning, we can only respond that this key message of theirs is incomprehensible.

For me the greatest eureka moment of all is when I first read Rothbard's essay "The Austrian Theory of Money."Download PDF That was when I fully grasped Mises's most beautiful insight, called the "regression theorem," in which Mises was able to show that all money must have originated in some commodity (gold, seashells), that if you regress backward in time, you'll find this had to have been the case. What people think of as government-created money (dollars, euros) is nothing of the kind, but came from those same commodities. For me, the beauty of the regression theorem lies in its power to infer historical fact from simple logic about human action.

I did not read Rothbard's 1972 essay "Heilbroner's Economic Means and Social Ends" until years after it was first published. It's a devastating critique of a book edited by New School economics professor Robert Heilbroner about the ideas of the abovementioned Adolph Lowe.

Economic Controversies

Here, too, Plato comes up. "Professor Lowe's political economics," observes Rothbard, "is of a piece with an unfortunate penchant of intellectuals since the days of Plato: to impose their own arbitrary and static 'order' upon the rest of society, to freeze and annul change by their coercive fiat." Had I read this essay when it first came out, it probably would have gotten me to read more of Rothbard, even if I hadn't been lucky enough to find his economic treatise in the stacks.

There are many "first books" on libertarianism in general and Austrian economics in particular. Which one is most suitable depends on the individual. For me, the way in was Man, Economy, and State, which had a great deal to do with me and my circumstances at the time. If my counterpart today finds that book and this one in the stacks, I would say that Economic Controversies is probably the better way in. Man, Economy, and State can come a bit later.

The "Crime" of Private Money

The "Crime" of Private Money

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Bernard von NotHaus was convicted last month in federal court on conspiracy and counterfeiting charges for his development of silver "Liberty Dollars." He faces up to 25 years in prison. Earlier this week the feds moved to seize about $7 million of precious metals from the operation as well.

Besides the government's dubious legal maneuvers, its broader message here is clear: "Don't try to provide Americans with any alternative to the fiat dollar, or we will come after you." For those who have always wondered why free-market monies haven't supplanted various state's fiat currencies, we have yet another illustration of the answer.

The Legal Issues

Writing in the Wall Street Journal, New York Sun editor Seth Lipsky explained a quirk of the trial and the government's subsequent description of what happened:

The warning [against issuers of private currency] is contained in paragraph 33 of the indictment handed up against Mr. von NotHaus in a courtroom at Statesville, N.C. It said:

Article 1, Section 8, Clause 5 of the United States Constitution delegates to Congress the power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish a uniform standard of value. Along with the power to coin money, Congress has the concurrent power to restrain the circulation of money not issued under its own authority, in order to protect and preserve the constitutional currency for the benefit of the nation. Thus, it is a violation of law for private coin systems to compete with the official coinage of the United States.

Yet a curious thing happened in the courthouse on the day before the jury went to deliberate. According to Aaron Michel, Mr. von NotHaus's attorney, the judge granted Mr. Michel's request to delete paragraph 33 from the indictment.

"That is a statement of law that, if it were to be put before the jury at all, should have been a matter of discussion between the parties as to the court's instructions to the jury on the law," Mr. Michel quoted the judge, Richard Voorhees, as saying. "In any event, it does not appear to the court to be a factual predicate that is supported by the evidence in the case."

The judge then asked one of the federal prosecutors, Jill Westmoreland Rose, whether she had "any comment on that." "No, Your Honor," Ms. Rose replied, according to Mr. Michel. So the copy of the indictment that went to the jury contained white space where paragraph 33 once was.

Yet after Mr. von NotHaus was convicted on March 18, the government issued a press release trumpeting the verdict and repeating the part of the original indictment that the judge had struck out. The release also went further, asserting that Congress's power to coin money under the Constitution was also meant to "insure a singular monetary system for all purchases and debts in the United States, public and private."

It again asserted that it is a violation of federal law for individuals … "to create private coin or currency systems to compete with official coinage and currency of the United States." So much for the judge's view that the paragraph was unsupported by evidence in the case. The U.S. Attorney's office did not respond to a request for comment.

If von NotHaus's attorney's version of events is accurate, it means that the government is falsely describing its court victory as a blow against any issuers of private coin or currency, when in fact that wasn't (apparently) in the actual indictment.

Other specifics of the case involve the similarity between von NotHaus's Liberty Dollars and official US currency:

Figure 1

Even some hard-money enthusiasts concede that the Liberty Dollars (especially the face sides) do bear a superficial similarity to coins issued by the US government, and in that respect von NotHaus made it easier for the government to prosecute him. In particular, the coins featured "$" symbols and the words, "TRUST IN GOD."

Having said all that, we should hardly blame the victim. The government went after von NotHaus because he was low-hanging fruit; it was relatively easy to convince a jury that he was engaged in counterfeiting, because his coins share many features with official US coinage.

It would be naïve to conclude that von NotHaus would have been safe had he taken more care to distinguish his coins from those of the US mint. For one thing, the government's case was internally contradictory: On the one hand, von NotHaus is accused of counterfeiting, in other words, trying to pass his coins off as authentic US coins. On the other hand, von NotHaus is accused of undermining the "legitimate" US currency by offering a product to compete with it. Indeed, von NotHaus advertised his Liberty Dollars as inflation-proof substitutes for the "genuine" US currency.

So which is it? Either von NotHaus was trying to pass his coins off as regular quarters and dollars, or he was trying to convince people that his own coins were superior.

Furthermore, it would be rather odd to try to charge people the silver-bullion price (or more) for coins that were intended to be counterfeit US coins. That would be like printing up fake $10 bills and trying to buy $50 worth of merchandise with them.

To remove any doubt that this was a politically motivated process — rather than an honest application of the law — consider the government's description of the verdict:

"A unique form of domestic terrorism" is the way the U.S. Attorney for the Western District of North Carolina, Anne M. Tompkins, is describing attempts "to undermine the legitimate currency of this country." The Justice Department press release quotes her as saying: "While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country."

Besides the absurdity of government officials decrying clear and present dangers to economic stability, there is the chilling fact that these sweeping accusations could be leveled at anyone. For years civil libertarians have been vainly warning Americans against the lawless imprisonment of "War on Terror" suspects, saying that it will not always be radical Muslims with unusual names who are rounded up.

By the same token, if von NotHaus's conviction of a "unique form of domestic terrorism" stands, the precedent will be set for the government to go after any group preaching against the evils of fiat currency.

Keeping Us on the Fiat Dollar: More than Just Legal-Tender Laws

As a college professor and lecturer at the Mises Institute, I have always had some difficulty explaining exactly how the government kept everybody using fiat money. Students would often think that legal-tender laws explained everything, but I would point out that they weren't the whole story.

It's true, legal-tender laws mean that nobody can refuse to accept Treasury notes (and coins) as payments of dollar-denominated debts. But legal-tender laws per se wouldn't prevent merchants and their customers from using precious-metal coins issued by a private mint.

For example, suppose the owner of an electronics store has 50″ 3D plasma screen TVs that he wants to sell for the equivalent of $1,400, but he only wants to accept gold, not paper money. He could get around legal tender laws by posting a sticker price on the TVs saying, "1 oz. of gold, or $10,000." In this way, he would be operating just as merchants near the Mexican-US border, who accept both pesos and dollars while offering exchange rates sometimes far worse than a tourist could obtain at an official currency-exchange booth.

When students would press me, I would give two major reasons that Americans still used the fiat dollar, despite the numerous flaws we had studied. First, everyone is born into this system. It's hard for a few individuals to unilaterally "secede" from the dollar standard, because everyone else is still using it. For example, even if the promoters of a hard-money conference paid me in gold coins for my talk, I would probably have to convert the gold into dollars in order to pay my mortgage or utility bill that month. The gold would only be convenient for me if I had intended on saving at least that much and wanted to do so in the form of gold.

Second, I would argue that if any attempts to circumvent the dollar actually got off the ground, then the government would find some legal pretext to shut it down. So it was pointless to study the legal code and come up with loopholes, because the government wouldn't play by the rules. It would find a way to shut down a genuine threat to its monopoly on money, meaning no entrepreneur would spend the resources and time trying to launch an alternative system.

The fate of Bernard von NotHaus has vindicated my musings.

Conclusion

The conviction and likely asset forfeiture of Bernard von NotHaus shows that our fiat monetary system is not in any way voluntary. People who deride the gold standard as an obsolete relic that "we" abandoned should heed the words of Ludwig von Mises:

The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard. (The Theory of Money and Credit, p. 461).

Japanese business confidence

Japanese business confidence

Before and after

by H.T. | TOKYO

Japan gets all the bad luck these days. Just as economic conditions were finally improving—at least for big business—after the long post-Lehman slump, the March 11th earthquake, tsunami and nuclear power-plant crisis has knocked them for six again. This is clear from an extraordinary release from the Bank of Japan on April 4th which compares results of the Tankan business-conditions survey for which responses were supposed to be submitted by March 11th. Using submissions from before and after that fateful day, it shows just how dramatically business confidence has worsened.

For example: in the manufacturing sector, the diffusion index for large firms who sent back responses before March 11th was seven, and its forecast was three (a positive reading means optimists outnumber pessimists). Those responding after the earthquake put current conditions at six, but their forecasts had fallen to minus-two. Medium-sized and small enterprises, which make up the bulk of those in the stricken Tohoku region, were less confident about the future than the bigger ones even before the earthquake. But since, small manufacturing firms, whose judgment of actual conditions was minus-six on the index, now have a forecast of minus-18.

This is hardly surprising. Companies face a looming energy crisis, with planned black-outs that may last into next years, as well as the devastation of parts of Tohoku, which Barclays Capital estimates affects 6-7% of Japanese GDP. On top of that is the spectre of radiation, which is making it difficult for exporters to ship goods abroad because of exaggerated fears in foreign ports, as well as putting off many foreigners from doing business in Japan. Add to this the danger of jishuku, the Japanese notion of self-restraint, which is leading to the cancellation of everything from hanami (cherry-blossom viewing parties) to baseball games, and you have dashed consumer confidence overlaid on waning business confidence.

Time, then, for the government to get out in front of its own people, and tell them to spend, and to get out in front of foreigners, and tell them that they shouldn't panic. As for companies, the surprise is, they are not more pessimistic. Let's hope that's the positive side of jishuku.

Togetherness in Libya

Lexington

Togetherness in Libya

Barack Obama’s awfully big change in America’s use of force

IT IS Pavlovian. As soon as a president does something new in foreign policy, the world wants to know whether he has invented a new “doctrine”. The short answer in the case of Libya is that Barack Obama has not invented a new doctrine so much as repudiated an old one. What he is also doing, however, is challenging an American habit of mind.

The doctrine Mr Obama has repudiated is the one attributed to Colin Powell, the former chairman of the joint chiefs of staff and George W. Bush’s transparently miserable secretary of state when America invaded Iraq in 2003. That held, among other things, that America ought to go to war only when its vital interests are threatened, when the exit strategy is clear, and when it can apply overwhelming force to ensure that its aims are achieved. Nothing could be more different from the account Mr Obama gave Americans on March 28th of his reasons for using military force in Libya. He does not believe that America’s vital interests are at stake (though some “important” ones are); the exit strategy is not entirely clear (Colonel Qaddafi must go, but who knows when, and not as a direct result of American military action); and the force America is willing to apply (no boots on the ground) is strictly limited.

None of this should be a surprise. In “The Audacity of Hope”, the bestseller Mr Obama wrote as a senator in 2006, he set out a theory of military intervention. Like all sovereign nations, he argued, America has the unilateral right to defend itself from attack, and to take unilateral military action to eliminate an imminent threat. But beyond matters of clear self-defence, it would “almost always” be in its interest to use force multilaterally. This would not mean giving the UN Security Council a veto over its actions, or rounding up Britain and Togo and doing as it pleased. It would mean following the example of the first President Bush in the first Gulf war—“engaging in the hard diplomatic work of obtaining most of the world’s support for our actions”.

The virtue of such an approach was that America had much to gain in a world that lived by rules. By upholding such rules itself, it could encourage others to do so too. A multilateral approach would also lighten America’s burden at times of war. This might be “a bit of an illusion”, given the modest power of most American allies. But in many future conflicts the military operation was likely to cost less than the aftermath: training police, switching the lights back on, building democracy and so forth.

The president, it now emerges, remembers exactly what he wrote. He hesitated about whether to act in Libya (just ask the French and British, who egged him on but came close to losing hope), but he was always clear about how. All the conditions he wished for in that book five years ago have come to pass. In this week’s speech he ticked them methodically off: “an international mandate for action, a broad coalition prepared to join us, the support of Arab countries, and a plea for help from the Libyan people themselves. We also had the ability to stop Qaddafi’s forces in their tracks without putting American troops on the ground.” Under such circumstances, he said, for America to turn a blind eye to the fate of Benghazi would have been “a betrayal of who we are”.

Why does this theory of intervention, and the noble sentiment attached to it, fail to qualify as a “doctrine”? Because it is too elastic to provide a guide to future action. Would America “betray” itself by turning a blind eye to atrocities under different, less favourable, circumstances? So it seems. It has, after all, done so before, in Rwanda and Darfur—and Mr Obama appears to accept that it might have to do so again when, say, an alliance would be damaged, as in Bahrain, or the job is too hot to handle, as in Syria or Iran. Also unclear is whether an American interest must also be at stake before Mr Obama invokes the moral case for action. Conveniently (for the purpose of selling this particular war), the president detects a “strategic interest” in preventing Colonel Qaddafi from chilling the wider Arab spring, so nobody knows.

In fairness, elasticity is not a sin; and Mr Obama does not claim to have invented anything he calls a “doctrine”. The worst you can say about his approach is that it is merely commonsensical: decide the issues case-by-case while holding some idea of values and interests in mind. Many who say they want more consistency than this (typically by asking some variant of “What about Zimbabwe?”) do so not because they really believe that foreign policy can be run by an algorithm but in order to embarrass Mr Obama in any way they can. Prize chump in the case of Libya this past fortnight has been Newt Gingrich, the Republican presidential hopeful who demanded consistency, called for intervention and turned on a dime the instant Mr Obama answered.

After you, Sarko

More significant, however, is that habit of mind. In Libya Mr Obama is challenging the assumption of global leadership America has taken for granted ever since the second world war. America has joined coalitions before, but never under a president quite so adamant that America is not in charge—even if the military burden-sharing is indeed a bit of an illusion.

Most Republicans and quite a few Democrats hate this. Mr Obama’s hope is that America’s low profile will make the war more palatable not only to the Muslim world but also to the economy-fixated voters at home who question whether America can still afford to play its traditional leadership role. What he may soon discover is that modesty extracts a price of its own. By sharing the leadership with others, he has made his policy hostage to the limited mandate (no use of force for regime change) imposed by the United Nations and the limited means of his allies in Europe and the Middle East. It may not be a doctrine, it should not be a surprise, but nobody can deny that it is a gamble.

Praising Congressman Ryan

The Republican budget

Praising Congressman Ryan

At long last somebody is trying to grapple with America’s fiscal troubles

BARACK OBAMA, as we unhappily noted when he produced his budget in February, has no credible plan for getting America’s runaway budget deficit under control. Up to now the Republicans have been just as useless; they have confined themselves to provoking a probable government shutdown in pursuit of a fantasy war against the non-security discretionary expenditures that make up only an eighth of the total budget, rather than tackling the long-term problem posed by the escalating costs of entitlements. The only people with the guts to talk about such things have been various independent commissions which the two parties have ignored.

Now that has changed. On April 5th Paul Ryan, the young chairman of the House Budget Committee, laid out a brave counter-proposal for next year’s budget and beyond (see article)—brave both in identifying the scope of the problem and in proposing the kind of deeply unpopular medicine that will be needed to cope with it. It is far from perfect; but it is the first sign of courage from someone with actual power over the budget.

Unlike Mr Obama, Mr Ryan puts fiscal responsibility at the centre of his plan: it aims to bring the budget into primary balance as early as 2015 and federal government spending down to below 20% of GDP in 2018. He also outlines a simplification of America’s mad tax code, bringing the top rate for both individuals and businesses down to 25% by eliminating loopholes. Above all, he aims at the core of the problem, the ever-rising cost of health care for the elderly.

At the moment, retirees in America are entitled to Medicare, an all-you-can-eat buffet of care provided by the private sector but paid for by government-run insurance. Under Mr Ryan’s scheme, future retirees would have to take out private insurance plans, helped by a government subsidy. The effect would be a bit like changing from a defined-benefit pension to a defined-contribution one. The savings come because the subsidy would not cover everything that is currently provided: people will either end up with less lavish care or have to pay more. Mr Ryan also wants to turn Medicaid, government-financed health care for the poor, over to the states in the form of “block grants”. This would force them to manage their budgets more responsibly than they have needed to when they have been able to send much of the tab to Washington.

Let the debate begin

There is plenty wrong with Mr Ryan’s plan. Too much of the gain goes to the rich, and too much of the pain is felt by the poor. Some of his figures are deeply suspect. Mr Ryan should not have ruled out any revenue gain from broadening the tax base. He says nothing substantive about Social Security. He would cancel Obamacare, which though flawed addresses one of America’s great problems. And there are practical difficulties: his proposals are far too radical to engender the sort of compromise needed in Washington. Even if the plan passes the Republican-controlled House (by no means certain), it will fail in the Democrat-controlled Senate.

Yet at least Mr Ryan accepts that the present system is unaffordable and destined to collapse. Everyone else, including Mr Obama, is pretending that it isn’t. Mr Ryan’s willingness to confront the scale of the problem has set a standard by which other proposals will now have to be judged. And there might even be political mileage in telling the truth. Two years ago, when Britain’s prime minister, Gordon Brown was unable to mention the word “cuts”, George Osborne, the Tories’ shadow chancellor, made a speech saying they were inevitable. It changed the political debate. Mr Brown’s protestations looked increasingly ridiculous. Mr Obama should take note.

Praising Congressman Ryan

The Republican budget

Praising Congressman Ryan

At long last somebody is trying to grapple with America’s fiscal troubles

BARACK OBAMA, as we unhappily noted when he produced his budget in February, has no credible plan for getting America’s runaway budget deficit under control. Up to now the Republicans have been just as useless; they have confined themselves to provoking a probable government shutdown in pursuit of a fantasy war against the non-security discretionary expenditures that make up only an eighth of the total budget, rather than tackling the long-term problem posed by the escalating costs of entitlements. The only people with the guts to talk about such things have been various independent commissions which the two parties have ignored.

Now that has changed. On April 5th Paul Ryan, the young chairman of the House Budget Committee, laid out a brave counter-proposal for next year’s budget and beyond (see article)—brave both in identifying the scope of the problem and in proposing the kind of deeply unpopular medicine that will be needed to cope with it. It is far from perfect; but it is the first sign of courage from someone with actual power over the budget.

Unlike Mr Obama, Mr Ryan puts fiscal responsibility at the centre of his plan: it aims to bring the budget into primary balance as early as 2015 and federal government spending down to below 20% of GDP in 2018. He also outlines a simplification of America’s mad tax code, bringing the top rate for both individuals and businesses down to 25% by eliminating loopholes. Above all, he aims at the core of the problem, the ever-rising cost of health care for the elderly.

At the moment, retirees in America are entitled to Medicare, an all-you-can-eat buffet of care provided by the private sector but paid for by government-run insurance. Under Mr Ryan’s scheme, future retirees would have to take out private insurance plans, helped by a government subsidy. The effect would be a bit like changing from a defined-benefit pension to a defined-contribution one. The savings come because the subsidy would not cover everything that is currently provided: people will either end up with less lavish care or have to pay more. Mr Ryan also wants to turn Medicaid, government-financed health care for the poor, over to the states in the form of “block grants”. This would force them to manage their budgets more responsibly than they have needed to when they have been able to send much of the tab to Washington.

Let the debate begin

There is plenty wrong with Mr Ryan’s plan. Too much of the gain goes to the rich, and too much of the pain is felt by the poor. Some of his figures are deeply suspect. Mr Ryan should not have ruled out any revenue gain from broadening the tax base. He says nothing substantive about Social Security. He would cancel Obamacare, which though flawed addresses one of America’s great problems. And there are practical difficulties: his proposals are far too radical to engender the sort of compromise needed in Washington. Even if the plan passes the Republican-controlled House (by no means certain), it will fail in the Democrat-controlled Senate.

Yet at least Mr Ryan accepts that the present system is unaffordable and destined to collapse. Everyone else, including Mr Obama, is pretending that it isn’t. Mr Ryan’s willingness to confront the scale of the problem has set a standard by which other proposals will now have to be judged. And there might even be political mileage in telling the truth. Two years ago, when Britain’s prime minister, Gordon Brown was unable to mention the word “cuts”, George Osborne, the Tories’ shadow chancellor, made a speech saying they were inevitable. It changed the political debate. Mr Brown’s protestations looked increasingly ridiculous. Mr Obama should take note.

70 or bust!

70 or bust!

Current plans to raise the retirement age are not bold enough

PUT aside the cruise brochures and let the garden retain that natural look for a few more years. Demography and declining investment returns are conspiring to keep you at your desk far longer than you ever expected.

This painful truth is no longer news in the rich world, and many governments have started to deal with the ageing problem. They have announced increases in the official retirement age that attempt to hold down the costs of state pensions while encouraging workers to stay in their jobs or get on their bikes and look for new ones.

Unfortunately, the boldest plans look inadequate. Older people are going to have to stay economically active longer than governments currently envisage; and that is going to require not just governments, but also employers and workers, to behave differently.

Trying, but not very hard

Since 1971 the life expectancy of the average 65-year-old in the rich world has improved by four to five years. By 2050, forecasts suggest, they will add a further three years on top of that. Until now, people have converted all that extra lifespan into leisure time. The average retirement age in the OECD in 2010 was 63, almost one year lower than in 1970.

Living longer, and retiring early, might not be a problem if the supply of workers were increasing. But declining fertility rates imply that by 2050 there will be just 2.6 American workers supporting each pensioner and the figures for France, Germany and Italy will be 1.9, 1.6 and 1.5 respectively. The young will be shoring up pensions systems which, as our special report this week explains, are riddled with problems.

Most governments are already planning increases in the retirement age. America is heading for 67, Britain for 68. Others are moving more slowly. Belgium allows women to retire at 60, for instance, and has no plans to change that. Under current policies the mean retirement age by 2050 will still be less than 65, barely higher than it was after the second world war.

Because life expectancy continues to rise—people in rich countries are gaining a little under a month a year—even the American and British plans are inadequate. In Europe the retirement age should be raised to 70 by 2040; America, with a younger population, can afford to keep it a smidgen lower.

Working longer has three great advantages. The employee gets more years of wages; the government receives more in taxes and pays out less in benefits; and the economy grows faster as more people work for longer. Older workers are a neglected consumer market, as our briefing on the media’s ageing audiences explains (see article).

Yet too many people see longer working lives as a worry rather than an opportunity—and not just because they are going to be chained to their desks. Some fret that there will not be enough jobs to go around. This misapprehension, known to economists as the “lump of labour fallacy”, was once used to argue that women should stay at home and leave all the jobs for breadwinning males. Now lump-of-labourites say that keeping the old at work would deprive the young of employment. The idea that society can become more prosperous by paying more of its citizens to be idle is clearly nonsensical. On that reasoning, if the retirement age came down to 25 we would all be as rich as Croesus.

Raising the official retirement age is only part of the solution, for many workers retire before the official age. Martin Baily and Jacob Kirkegaard of the Peterson Institute in Washington, DC, reckon that raising actual EU retirement ages to the official age would offset the impact of an ageing population over the next 20 years.

For that to happen, working practices and attitudes need to change. Western managers worry too much about the quality of older workers (see Schumpeter). In physically demanding occupations, it is true, some may be unable to work into their late 60s. The incapacitated will need disability benefits. Others will need to find a different job. But this should be less of a problem than it used to be now that economies are based on services not manufacturing. In knowledge-based jobs, age is less of a disadvantage. Although older people reason more slowly, they have more experience and, by and large, better personal skills. Even so, most people’s productivity does eventually decline with age; and pay needs to reflect this falling-off. Traditional seniority systems, under which people get promoted and paid more as they age, therefore need to change.

The missing $3 trillion

The huge cost of pension schemes is being dealt with in the private sector. Final-salary schemes are hardly ever offered to new employees these days. In the public sector, however, they are still standard. In Britain the recent report by Lord Hutton made some sensible suggestions for reform (see article). The accrued rights of workers should be maintained but their future pension rights should be based on the state retirement age (many public-sector workers currently retire early) and on a career average, rather than final, salary. That would both prevent abuses and make part-time working easier.

The public-sector pension problem is sharpest in American states. The deficits in their pension funds may amount to $3 trillion. They face legal and constitutional constraints that prevent them from following the British lead. Unlike wages, pension promises have been deemed, weirdly, to be permanent and sacrosanct. But as budget pressures bite, politicians are going to have to change laws and constitutions.

Private-sector workers face a different problem. The demise of final-salary pensions leaves them facing two big risks: that falling markets will undermine their retirement planning, and that they will outlive their savings. So governments should encourage workers to save more, nudging them into pension schemes by requiring them to opt out rather than opt in. And the basic state pension should be high enough to give those unlucky elderly with insufficient savings a decent income, without penalising those who have been thrifty. That is the least people deserve in return for toiling until they are 70.

The Professors and Qaddafi

The Professors and Qaddafi's Extreme Makeover

What was lost when some of America's finest scholars got paid to buff the Libyan dictator's image?

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Photo Illustration by Maayan Pearl; Foto24/Gallo Images/Getty Images

In 2006 and 2007, a dozen Western intellectuals traveled to the North African desert for intimate conversations with the man who likes to call himself the Brother Leader. Muammar Qaddafi received his visitors in a carpeted Bedouin-style tent, where they sat on plastic chairs and sipped tea while discussing the dictator's thoughts on economics and politics.

The meetings were arranged by the Monitor Group, a Cambridge (Mass.) consulting firm co-founded in 1983 by Michael Porter, the Harvard Business School management expert. As Politico first reported on Feb. 21, the Qaddafi regime paid Monitor a fee of $3 million a year, plus expenses, to run what the firm called "a sustained, long-term program to enhance international understanding and appreciation of Libya." Monitor, which has 1,500 employees worldwide, organized roundtables and produced thick studies on stimulating business in the isolated oil state. It provided research for a PhD thesis Qaddafi's son Saif al-Islam submitted to the London School of Economics.

At one point, the firm proposed a mass-circulation book—for an additional price of $2.45 million—that according to a Monitor memo would "allow the reader to hear Qaddafi elaborate, in his own words and in conversation with renowned international experts, his core ideas on individual freedom, direct democracy vs. representative democracy, [and] the role of state and religion."

The book never materialized, but Monitor succeeded in generating plenty of positive press for Libya. In an interview with Businessweek in February 2007, Porter said Saif Qaddafi had helped arrange Monitor's engagement with Libya. "I have gotten to know Saif quite well," Porter said. "He was a doctoral candidate at the London School of Economics, where he studied with some of the best professors. He's very much oriented toward making Libya a member of the modern world community."

Monitor brought Benjamin R. Barber, then a professor at the University of Maryland, to Libya for three visits. On Aug. 15, 2007, Barber published an opinion article in The Washington Post entitled "Qaddafi's Libya: An Ally for America?" Although "written off not long ago as an implacable despot," Qaddafi "is a complex and adaptive thinker," Barber asserted, "as well as an efficient, if laid-back autocrat." Joseph Nye, a professor at Harvard's Kennedy School of Government, also met Qaddafi. In December 2007 he published an essay in The New Republic in which he described the ruler of Libya since 1969 as "an autocrat" and a past "sponsor of terrorism," but also a man of ideas, "actively seeking a new strategy" and interested in "direct democracy."

Now that Qaddafi has vowed to hunt down and kill every last dissident in Libya, Monitor's image-buffing campaign has received probing coverage in The Boston Globe and Mother Jones, and the firm has issued an online apologia. "Given the terrible spectacle of Colonel Qaddafi using force on his own people, it may be difficult to imagine that just a few years ago many saw a period of promise in Libya," the firm said on Mar. 24. "Colonel Qaddafi had renounced terror, forfeited nuclear and chemical weapons and programs, and declared himself ready to rejoin the community of nations."

An idea in the abstract may thrill its creator, but an idea that has been tested by reality—and survives intact—can change the world. That's why academics who descend from the ivory tower and subject their theories to the complications of modern life deserve applause. Provided, of course, that their motivations remain pure. Recent history suggests that's a tricky line to walk.

A generation of Ivy League economists was enjoying both professional esteem and financial industry paychecks until the Wall Street crisis of 2008 made them look pretty dumb, if not venal. The Academy Award-winning documentary Inside Job offered a bipartisan parade of these men—for example, at Harvard, Larry Summers, a Democrat who opposed more oversight of derivatives, also collected generous speaking fees from investment banks, while Frederic Mishkin, a George W. Bush appointee to the Federal Reserve who teaches at Columbia, was paid to co-author a 2006 report praising the Icelandic financial system, which subsequently collapsed.

Government Shutdown Threatens 800,000 U.S. Workers

Government Shutdown Threatens 800,000 U.S. Workers as Obama Seeks Solution


U.S. President Barack Obama

U.S. President Barack Obama said, “People are going to have to understand that a shutdown would have real effects on everyday Americans.” Photographer: Olivier Douliery/Pool via Bloomberg

April 7 (Bloomberg) -- Stephen Myrow, chief operating officer of ACG Analytics talks about prospects for a federal government shutdown when spending authority expires tomorrow and House Speaker John Boehner's efforts to accomodate Tea Party members in negotiations about budget cuts. Myrow speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)

In the event of a government shutdown, the National Institutes of Health won’t admit new patients, some taxpayers will wait longer for refunds and any furloughed civil servants with federally issued BlackBerrys must turn them off.

A failure by Congress to extend the government’s spending authority, which expires tomorrow, would force the closure of national parks, monuments and museums. Federal agencies -- such as the National Labor Relations Board -- that don’t protect lives, property or national security also would be shuttered.

As Democratic and Republican leaders in Congress seek agreement on a spending measure for the rest of the 2011 fiscal year, the Obama administration has warned of economic disruption from even a short shutdown. More than 800,000 “non-essential” federal workers -- out of a civilian workforce of 2.1 million -- would be furloughed until new spending legislation was passed. Agencies have drafted contingency plans for who would work and who wouldn’t.

The prospect of a government shutdown, however limited it may be, has placed pressure on the Obama administration and congressional leaders to settle their dispute over $30 billion or more in cuts from the federal budget through September before a suspension -- as of midnight tomorrow -- of all but essential federal services. Leaders of both parties are bracing for the blame that will be attached to their failure to resolve what the White House has described as minimal differences.

“People are going to have to understand that a shutdown would have real effects on everyday Americans,” President Barack Obama said last night after a meeting with congressional leaders at the White House, where he expressed confidence that a shutdown can be averted.

Elected Officials

Elected officials, including members of Congress and the president, would get paid during a shutdown unless Congress changes the law. Unlike the president and legislators, though, military personnel and federal employees who are deemed “essential” would receive no paychecks.

Although troops and the civilian employees who continue to work would get paid for their service after government financing is restored, there is no guarantee that Congress would make furloughed workers whole.

“You should plan accordingly,” says a sample letter to non-essential employees prepared by the House Administration Committee that also advises furloughed workers not to log on to government e-mail and to turn off their government-issued BlackBerrys.

$174 Million Per Day

The cost of back pay for furloughed government workers would be $174 million for each day the government is closed, according to data compiled by Bloomberg Government analyst Scott Anchin.

The U.S. military’s operations in Afghanistan, Iraq and Libya would continue under the Feed and Forage Act, which guarantees payment of its expenses. The 1861 law “was designed for the cavalry troop that was going through Dodge City and needed to get ammunition for its rifles and food for men and horses,” said John F. Cooney, a former government budget official. It’s “a standing promise” by Congress to “fund any bill troops run up” to defend themselves, he said.

Medicare, Social Security

Medicare and Social Security would continue to pay benefits to elderly Americans because they don’t depend on year-to-year spending measures from Congress, said Cooney, who was deputy general counsel of the Office of Management and Budget under President Ronald Reagan.

The Social Security Administration plans to continue sending checks during a shutdown and accept new applications for benefits, said spokesman Mark Hinkle.

As long as there is money in the Medicare trust fund, Medicare beneficiaries would continue to receive checks, said an administration official who briefed reporters yesterday. The trust fund would only be depleted if there is a lengthy government shutdown, said the official, who spoke on condition of anonymity.

The Internal Revenue Service will continue sending refunds to taxpayers who file their returns electronically, Commissioner Douglas Shulman said yesterday. Online filings accounted for 70 percent of all tax returns last year, he said.

Taxpayers who filed by mail may have to wait longer to get their money because Shulman says the IRS won’t process their refunds during a shutdown.

The IRS would also suspend tax audits, said the administration official.

Financial Markets

The political drama in Washington has not disrupted the prevailing calm in financial markets. Yields on two-year Treasury securities rose 2 basis points yesterday to 0.83 percent. That is still below the average yield of 2.59 percent in the last decade, according to Bloomberg Bond Trade prices.

Those prices reflect expectations by investors that when political leaders “come to the edge of the precipice, a more rational approach should prevail,” said John Lonski, chief economist at Moody’s Capital Markets Group.

As White House officials warned of devastating economic consequences, some Republicans attempted to downplay the impact of a shutdown.

“There is no such thing as an actual government shutdown,” Representative Michele Bachmann of Minnesota told a crowd of Tea Party protesters outside the Capitol yesterday. “It is a government slowdown.”

Economic Impact

The economic impact would depend on its duration and whether government workers are repaid.

“If they’re not losing their income or some of it is made up, then you have a situation where impacts are minor, relatively,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

There is no precedent for Congress reimbursing the hundreds of thousands of federal contractors or their employees who may be laid off during a shutdown.

“A government shutdown would be devastating to small businesses, their employees and their communities,” said Terry Williams, a spokesman for the National Association of Small Business Contractors in Washington.

Contractors such as SAIC Inc. (SAI), AeroVironment Inc. (AVAV) and Comtech Telecommunications Corp. (CMTL) face greater financial risk than rivals because they must report earnings after April 30, according to a Lazard Capital Markets LLC report.

It will be difficult for such companies to “pick up all that lost revenue” by April 30, Michael Lewis, the report’s author, said in a telephone interview.

Economic Data Delay

A shutdown would delay release of U.S. economic data, such as the scheduled April 12 release of Labor Department figures on March import prices, Commerce Department numbers on the February trade balance and the Treasury’s budget for last month.

Closures of the Small Business Administration and the Federal Housing Administration would suspend processing of business loans and government-insured home mortgages, the administration official said. FHA-insured mortgages account for about 30 percent of the home-loan market, compared with 12 percent during the last two shutdowns in late 1995 and early 1996.

And researchers at the National Institutes of Health would not be allowed to start new clinical trials of experimental treatments or admit new patients, said the administration official.

Open for Business

The Treasury Department will conduct its regular schedule of securities auctions, a government official said yesterday on condition of anonymity. The Federal Reserve Board and its 12 regional banks will continue to operate because the Fed finances its operations from its bond portfolio.

Also unaffected would be air-traffic control operations, airplane safety inspections and maintenance of airport communications, Randy Babbitt, head of the Federal Aviation Administration, told a congressional subcommittee.

The FBI’s criminal investigations will likely be “unhindered,” though a shutdown would force the bureau to postpone training and new initiatives, director Robert Mueller told a House subcommittee yesterday.

All 116 federal prisons would remain open and criminal investigations and prosecutions would continue, said Justice Department spokeswoman Jessica Smith in an e-mail. The agency would be forced to “stop or significantly curtail” civil litigation, outreach to crime victims and managing grants.

The federal court system will use fees paid by litigants and criminal defendants to remain open for about two weeks, said spokesman Dick Carelli.

The State Department’s passport and visa services will likely be curtailed, said spokesman Mark Toner. U.S. embassies “will continue to provide services” of an emergency nature to Americans abroad, he said.

National parks, monuments and Smithsonian Institution museums would close to visitors. The National Zoo in Washington would continue to employ keepers and veterinarians to care for the animals.

The animals “need to have their keepers” for food and “vets on duty” in case they get sick, said spokeswoman Linda St. Thomas. “What they won’t have is visitors.”

How I Learned to Love the Government Shutdown

How I Learned to Love the Government Shutdown: Caroline Baum


Baum

Caroline Baum

April 6 (Bloomberg) -- Douglas Holtz-Eakin, president of the American Action Forum, a non-profit group that favors smaller government, and a former director of the Congressional Budget Office, talks about the likelihood of a federal government shutdown if agreement isn't reached on a 2011 spending compromise, and Representative Paul Ryan’s budget proposal for fiscal 2012 that would cut federal spending by $6 trillion over the next decade and end traditional Medicare for future generations. Holtz-Eakin speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

What if the U.S. government shut down and no one noticed?

Even worse (or better, depending on one’s point of view), what if all federal workers went on furlough and the public realized there were benefits, not just costs, to smaller government?

The sixth stop-gap spending bill, known as a continuing resolution, expires tomorrow. In the event Democrats and Republicans can’t agree on a budget for fiscal year 2011, which is more than half over, the federal government, or parts of it, will shut down.

Essential services will be maintained, including the distribution of Social Security checks. Employees involved in the military, national security and law enforcement will stay on the job. Non-essential workers will be furloughed.

Neither party seems eager to halt government operations because a) they don’t want to shoulder the blame, as Republicans did in 1995; or b) they don’t want to be subject to repercussions (read: voter backlash) in 2012.

President Barack Obama says a shutdown would devastate the economy at a time when job growth is struggling to reach a cruising altitude. What’s more, it would further reduce confidence in government.

Guess what? It can’t go much lower. The approval rating for Congress dropped to 18 percent last month, near the lowest in the Gallup poll’s 37-year history of tracking the trend.

So stop all the negativity and look at the bright side. A government shutdown would give federal employees a well-deserved respite from those grueling 9-to-5 workdays. Even essential workers deserve a break.

My advice is to stop worrying and learn to love a U.S. government shutdown. Just imagine all the benefits…

Count the Ways

President Obama would be able to work on his golf game without the risk of appearing disengaged at a time when the country is involved in an It’s-Not-a-War in Libya.

The U.S. State Department would have time to formulate a coherent foreign policy rather than deal with each Middle East uprising on an ad hoc basis. It can start by defining the criteria it uses to differentiate between good dictators (Saddam Hussein, Hosni Mubarak, Muammar Qaddafi) and bad dictators (Saddam Hussein, Hosni Mubarak, Muammar Qaddafi).

CIA operatives would have time to hunker down with Rosetta Stone software and become fluent in Arabic so that next time they can provide valuable intel before a region ignites.

A government closure would give the investigators at the Securities and Exchange Commission an opportunity to read and respond to information provided by whistleblowers like Harry Markopolos.

Light Reading

The residential real estate market might get some breathing room to heal itself without an array of federal programs that create artificial demand for housing, prop up prices and delay the day of reckoning for underwater homeowners.

A government shutdown would reduce commuter traffic on the Beltway. Air traffic controllers could catch up on their sleep. Tourists would face shorter lines at Washington’s monuments, although they’d have to sneak in.

No lawmakers means no new laws, regulations, targeted tax breaks, exemptions or loopholes. Members of Congress would have much-needed time to read the health-care bill they passed last year, holding then-House Speaker Nancy Pelosi to her word when she said: “We have to pass the bill so you can find out what is in it.”

Bigger Means Smaller

A government shutdown would give family-values Republicans more time to spend with spouses and children (preferably their own). Democrats favoring income redistribution (yours, not theirs) could use the time to consult with their accountants so they can take advantage of the loopholes they write into the tax code. Members of both parties would have more time for fundraising.

Too-big-to-fail banks would get a taste of what it’s like to swim without a life preserver should a crisis strike while the government is shuttered.

Media companies should see improved profits as paid advertisements replace the endless obligatory coverage of the president and Congress bloviating.

Finally, a shutdown would produce such an outcry and warnings of dire consequences from the media, activists and politicians, it might just get open-minded folks to reflect on how the government got so big and why it’s so intertwined in our lives.

If that’s the first step to a smaller government, then by all means, shut it down.

Initial Jobless Claims in U.S. Fell

Initial Jobless Claims in U.S. Fell 10,000 Last Week to 382,000


Jobless Claims in U.S. Fell 10,000 Last Week to 382,000

Job seeker Walter Hemphill fills out paperwork at the Hiring Our Heroes veterans employment fair sponsored by the United States Chamber of Commerce, the Chicagoland Chamber of Commerce and the Illinois Chamber in Chicago. Photographer: Tim Boyle/Bloomberg

Fewer Americans filed first-time claims for unemployment insurance last week, indicating the labor market is recovering.

Applications for jobless benefits fell 10,000 in the week ended April 2 to 382,000, the fewest since Feb. 26, Labor Department figures showed today. Economists projected claims would be little changed at 385,000, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls and those collecting extended payments decreased.

Fewer firings along with further increases in headcount may help ensure that gains in consumer spending, which accounts for 70 percent of the economy, are sustained. Unemployment that has declined four straight months supports the view of Federal Reserve policy makers that the job market is showing signs of healing.

“The improvement in the labor market is for real,” said Eric Green, chief market economist at TD Securities Inc. in New York. “Growth is on a steady upswing. Sales expectations are rising with more hiring plans.”

Estimates for first-time claims ranged from 373,000 to 400,000 in the Bloomberg survey of 44 economists. The Labor Department initially reported the prior week’s applications at 388,000.

Stock-index futures maintained gains after the report. The contract on the Standard & Poor’s 500 Index expiring in June rose 0.2 percent to 1,331.9 at 8:42 a.m. in New York. The benchmark 10-year Treasury note fell, pushing up the yield to 3.57 percent from 3.55 percent late yesterday.

Four-Week Average

The four-week moving average, a less volatile measure, dropped to 389,500 from 395,250.

The number of people continuing to collect jobless benefits declined by 9,000 in the week ended March 26 to 3.72 million. The continuing claims figure does not include the number of workers receiving extended benefits under federal programs.

Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 91,400 to 4.27 million in the week ended March 19.

The unemployment rate among people eligible for benefits, which tends to track the national jobless rate, held at 3 percent in the week ended March 26. Thirty-three states and territories reported a decrease in claims, while 20 had an increase.

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

Jobless Rate

The unemployment rate in the U.S. unexpectedly fell to a two-year low of 8.8 percent in March as employers created more jobs than forecast, the Labor Department said last week. Payrolls rose by 216,000 after a 194,000 gain in February.

As employment picks up, consumers have the wherewithal to increase spending, encouraging companies to hire more workers. McDonald’s Corp. (MCD), the world’s largest restaurant chain by revenue, is seeking about 50,000 workers in the U.S. during its National Hiring Day event on April 19, the company said in a news release this week.

General Motors Co. (GM) is among companies that says the economy is improving, which may lead to more hiring.

“We continue to see good solid signs of progress despite some of the challenges that remain” for the economy, Don Johnson, vice president of U.S. sales for GM, said during an April 1 teleconference. “A recovering job market is going to be the most important factor for the U.S. economy at this stage, and we do anticipate that this is going to continue to improve.”

‘Moderate Pace’

The economic recovery “continued to proceed at a moderate pace, with a further gradual improvement in labor market conditions,” minutes of the Fed’s March 15 meeting released this week showed.

While U.S. central bankers unanimously decided during that meeting to maintain their $600 billion stimulus, some of the 10 voting members of the committee thought evidence of a stronger recovery, higher inflation and rising inflation expectations “could make it appropriate to reduce the pace or overall size of the purchase program,” according to the minutes.

“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011.”

Japan Rattled by 7.4 Quake

Japan Rattled by 7.4 Quake; No New Problems at Nuclear Units

April 7 (Bloomberg) -- A magnitude 7.4 earthquake hit 215 miles (345 kilometers) northeast of Tokyo, resulting in warnings of a possible tsunami. The quake was measured at a depth of about 25 miles and struck about 11:32 p.m. local time, the U.S. Geological Survey reported on its website. Bloomberg's Brian Fowler talks about the quake with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)

A magnitude-7.1 aftershock, the strongest since the devastating earthquake of March 11, struck Japan today 215 miles (345 kilometers) northeast of Tokyo, resulting in warnings of a possible tsunami.

The quake was measured at a depth of about 25 miles and struck about 11:32 p.m. local time near the site of last month’s quake, the largest on record in Japan, the U.S. Geological Survey reported on its website.

Japan issued a tsunami alert for a possible two-meter wave. A tsunami wasn’t expected to reach Hawaii, according to the Pacific Tsunami Warning Center.

“What occurred today is an aftershock in the same area and rupture zone to the magnitude-9 main shock that occurred about a month ago,” said Don Blakeman, a geophysicist in the U.S. National Earthquake Information Center in Golden, Colorado. “It is tremendously smaller than the main shock. The main shock caused about 80 times more ground movement.”

Tokyo Electric Power Co. told reporters that the quake caused no new disruption at the Fukushima Dai-Ichi and Dai-Ni nuclear power units. The Fukushima units were crippled by a 9.0 quake and tsunami on March 11 that left more than 27,000 people dead or missing and caused an estimated 25 trillion yen ($295 billion) in damage.

Power Failures Reported

Today’s quake, initially estimated at a magnitude of 7.4, caused power failures in Sendai, Yamagata and Fukushima City, according to broadcaster NHK. Miyagi Prefecture reported no immediate damage from the quake, which caused the region to close highways, Kyodo said. Bullet trains were also idled.

Two of three external power lines were knocked out to the Onagawa nuclear plant, north of Fukushima, said Japan’s Nuclear Industrial Safety Agency. The Onagawa plant shut safely during the March 11 quake.

Tohoku Electric Power Co.’s Higashidori nuclear plant lost a power source and is continuing the cooling process for spent fuel with an emergency generator, the Kyodo news service reported.

U.S. stocks fell, dragging the Dow Jones Industrial Average down from an almost three-year high, while Treasuries erased losses and the yen rose following news of the latest quake. European stocks fell for the first time in five days.

Boehner Paid as Soldiers

Boehner Paid as Soldiers Wait If Government Shuts Down

Boehner Paid as Soldiers Wait

Elected officials, like Speaker of the House John Boehner, would be paid as usual during a shutdown. About 800,000 "non-essential" federal workers would not. Photographer: Alex Wong/Getty Images

House Speaker John Boehner

House Speaker John Boehner. Photographer: Olivier Douliery/Pool via Bloomberg

As tomorrow night’s deadline for avoiding a government shutdown nears, about 800,000 “non- essential” federal workers face the prospect of getting no pay at all for time lost to the political impasse.

Elected officials, including Republican House Speaker John Boehner, Democratic Senate Majority Leader Harry Reid and President Barack Obama, all would be paid as usual during a shutdown, unless Congress changes the law. Soldiers, law enforcement officers and other government employees whose jobs are deemed essential would continue to work yet wouldn’t get paychecks until the budget standoff is resolved.

Workers furloughed as non-essential, however, aren’t guaranteed that they’ll be paid at all for time off when the government closes for business. While they’ve ultimately received back pay after previous shutdowns, it’s up to Congress to “determine whether ‘non-excepted’ employees receive pay for the furlough period,” according to a U.S. Office of Personnel Management website providing guidance and information on furloughs.

“It is unknown whether legislation will ultimately be passed” to make up lost pay, says a sample letter to non- essential employees prepared by the Committee on House Administration. “We wish that we could provide you with more guidance on this issue but, due to the fluid nature of the situation, we cannot.”

Obama said a White House meeting last night with congressional leaders served to “narrow” differences over spending cuts. The government’s current spending authority is set to expire at midnight tomorrow.

‘Everyday Americans’

“A shutdown could have real effects on everyday Americans,” Obama said late last night at the White House after a meeting where Boehner and Reid failed to reach an agreement.

“It means that hundreds of thousands of workers across the country suddenly are without a paycheck. Their families are counting on them being able to go to work and do a good job.”

The Senate has passed a measure to dock the pay of lawmakers for the duration of a shutdown. A House measure, part of the largely symbolic Prevention of Government Shutdown Act approved last week, would dock the pay of the president in addition to members of Congress. Neither proposal has taken effect.

Members of Congress “shouldn’t be getting paid, just like federal employees shouldn’t be getting paid” during a shutdown, Boehner said today on ABC’s “Good Morning America.”

Freshman Democratic Senator Joe Manchin, of West Virginia, said in a statement on his website that he would forgo his salary during a government shutdown and challenged colleagues to do the same thing.

Bottom Line

“The bottom line is this: I can’t imagine that the president, vice president or any member of Congress --Republican or Democrat -- thinks they should get paid when the government has shut down,” Manchin said.

Yields on two-year Treasury securities fell 2 basis points to 0.81 percent at 10:39 a.m. in New York, below the average yield of 2.59 percent in the last decade, according to Bloomberg Bond Trader prices. Bond prices reflect expectations that lawmakers will resolve differences over the budget and avoid a crisis of confidence in U.S. assets, said John Lonski, chief economist at Moody’s Capital Markets Group.

“I just don’t see where that is exerting much influence over the pricing of financial assets,” Lonski said in a telephone interview from his New York office. Investors foresee that “when you come to the edge of the precipice, a more rational approach should prevail,” he said.

Investor Perception

Contracts that show investor perception of U.S. credit risk rose today, reversing a five-day decline to the lowest since Oct. 19.

Credit-default swaps on U.S. government debt, which investors use to hedge against losses or to speculate on creditworthiness, jumped 4.1 basis points to 40.9 basis points as of 10:53 a.m. in New York, according to data provider CMA. The swaps are down from as high as 51.5 basis points on Jan. 27

Consumer confidence in the U.S. rose for a second consecutive week as an improving job market helped ease the burden of higher fuel costs. The Bloomberg Consumer Comfort Index climbed to minus 44.5 in the period ended April 3 from minus 46.9 the previous week.

In Washington, the shutdown has specific costs. The cost of back pay for furloughed government workers would be $174 million for each day the government is closed, according to data compiled by Bloomberg Government analyst Scott Anchin.

Wait for Paychecks

Unlike the president and legislators, military personnel and essential federal employees who stay on the job would have to wait until government spending authority is restored to get salaries and wages.

“Agencies will incur obligations to pay for services performed by excepted employees during a lapse in appropriations,” according to the website.

There is no guarantee that Congress would make furloughed workers whole. It is possible they will be eligible for unemployment compensation, though it depends on state requirements, the website says. “Some states require a 1-week waiting period before an individual qualifies for payments,” it says.

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