But we should not allow this speculation over troop numbers to distract us from the bigger picture. Even if by the end of 2012 the size of the U.S. military presence is reduced by 30,000 (and I’m not holding my breath), that would still leave more than twice as many troops as were there in January 2009 when Obama took office.
We won’t know for sure what the president intends until tomorrow. More importantly, we won’t know if the president’s intentions translate into actual troop withdrawals until our brave men and women are welcomed back home. There will always be those arguing that conditions on the ground do not allow for a U.S. withdrawal. Some are making that case with respect to Iraq, a war that was supposedly won by David Petraeus and the surge back in 2008. For the U.S. military, it seems that every war is like the Eagles’ Hotel California: we can check out, but we can never leave.
Regardless of the president’s decision, the mission will not have changed. The military wants more time to put pressure on the Taliban. They believe that they have the Taliban on the run, and that continuing pressure will aid in negotiations on a political settlement. Meanwhile, the true believers of nation-building want to buy more time for the Karzai government to get its act together. They believe that if American troops and aid workers dig more wells, pave more roads, build more schools, and draft more legal standards, we will have achieved our essential goals. The public, and a growing number within the Congress, is skeptical.
And they should be. A nation-building mission is far too ambitious, and far too costly. Most importantly, it isn’t necessary. We could keep pressure on the Taliban, and deny al Qaeda a sanctuary, with perhaps as few as 10,000 troops in Afghanistan. If President Obama rejects that option, and declares instead that more than 60,000 U.S. troops will be in Afghanistan in 2013, he will have bowed to pressure from some within the Pentagon, at State, and a handful of think tankers, and ignored the clear wishes of the American people who want to turn their attention to building the United States, and allow the Afghans to build Afghanistan.
Taxpayers Have Rights, Tooby Neal McCluskey
Framing this as a one-sided attack on basic rights seems to be working for unionists. In a recently released New York Times/CBS News poll, 60 percent of respondents said they opposed "taking away some of the collective bargaining rights" of public employees.
Let people decide for themselves with whom they will do business and under what terms, and everyone's rights will be on an equal footing.Are Wisconsin Republicans, in fact, trying to take away collective bargaining rights?
The answer is yes and no. Under the law just passed by the state Legislature, public employees — the biggest group of whom is teachers — will be able to collectively bargain for salaries but not benefits. There will also be a cap on wage increases. Workers' ability to bargain collectively won't be eliminated, but it will be constrained.
What's crucial to examine, though, is the much-neglected opposite side of all this rights talk: the right of individuals not to deal with unions and collective bargaining.
For one thing, there's the forcing of people as a condition of public employment to pay union dues. The law will end this egregious violation of individual freedom — the right to associate or not associate with others — but not having to plow money into their coffers is one right the unions absolutely will not tolerate.
Then there is the broader right: that of any taxpayer not to employ workers under terms he finds unacceptable. In other words, just as potential employees have the right to propose conditions for their employment, those who hire them have the right to make their own proposals and reject those they find unsatisfactory.
But don't elected bodies such as school boards represent taxpayers, putting them on an equal footing with unions?
It's hardly equal, thanks to concentrated benefits and diffuse costs. Public-sector unions have huge incentives to be involved in the politics of whatever their specific area is, while taxpayers have to deal with every single issue with which government is involved. The result is that in any given area, the employees have much greater power than their ultimate employers.
Notably, the impossibility of protecting everyone's rights is a problem when it comes to not just public-school employment, but anything people can conceivably disagree about, whether it's the teaching of evolution, reading The Adventures of Huckleberry Finn, or choosing a school mascot. As long as government decides such things, people's rights to determine for themselves what their children will learn, or with what educators they will associate, will be violated.
The solution to this is freedom: Let people decide for themselves with whom they will do business and under what terms, and everyone's rights will be on an equal footing. It would be an especially easy thing to do in education, where private schools already educate millions of children and would proliferate if they didn't have to compete with "free" alternatives.
Unfortunately, there are two major obstacles in the way: education politics, and the teachers' unions that dominate it. To equally respect everyone's rights, politicians would have to end the public schooling monopoly, setting both educators and parents free. But that would decimate union power, and all their current rhetoric about rights notwithstanding, unions would fight madly to keep that from happening.
Yesterday, Sen. Tom Harkin (D-IA) held his fifth — and perhaps final – Health, Education, Labor, and Pensions committee show-hearing lambasting for-profit colleges. As usual, it was a decidedly one-sided affair, with no profit-defenders apparently invited to testify, and Republican committee members boycotting. Perhaps the only interesting thing that occurred was Sen. Al Franken (D-MN), who has never given any indication he doesn’t support Harkin’s obsessive whale hunt, saying the proceedings could have benefitted from more than one point of view. According to MarketWatch, Franken lamented that “it would have been nice to have someone here to represent the for-profit schools.” Now, he might have only wanted a for-profit rep there to receive the beating, but even that would have been preferable to no rep at all.
Could this indicate that even Senate Democrats are getting tired of Harkin’s tedious grandstanding against for-profit colleges, especially now that the Education Department has issued its “gainful employment” rules? Maybe, and there are lots of Dems in the House who have opposed the attack on for-profit schools for some time. But don’t expect this to be over quite yet: Harkin still gets a lot of negative media coverage for proprietary schools with each hearing, while the scandals surrounding people he’s had testify; the decrepit GAO “secret shopper” report that turned out to be hugely inaccurate; and potentially dirty dealings behind the gainful employment rules seem only to get real ink from Fox News and The Daily Caller. And Harkin keeps indicating that he will introduce legislation — doomed to failure though it may be — to curb for-profits even further.
Of course, what should be the biggest source of outrage in all of this is that while Harkin fixates on for-profit schools, Washington just keeps on enabling all of higher education to luxuriate in ever-pricier, taxpayer-funded opulence. Indeed, as a new Cato report due out next week will show, putatively nonprofit universities are likely making bigger profits on undergraduate students than are for-profit institutions. Of course, they don’t call them “profits” – nonprofits always spend excess funds, thus increasing their “costs” – but that’s probably just plain smart. Be honest about trying to make a buck, and Sen. Harkin has shown just what’s likely to befall you.
Let’s start with the source of aggravation that by now must seem very old to regular Cato@Liberty readers, but that has to be constantly revisited because national standardizers are so darned disciplined about their message: The national-standards drive is absolutely not “state led and voluntary,” and by all indications this is totally intentional. Federal arm-twisting hasn’t just been the result of ”unforced errors,” as Petrilli suggests, but is part of a conscious strategy.
There was, of course, Benchmarking for Success: Ensuring Students Receive a World-class Education, the 2008 joint publication of Achieve, Inc., the National Governors Association, and the Council of Chief State School Officers that called for Washington to implement “tiered incentives” to push states to adopt “common core” standards. Once those organizations formed the Common Core State Standards Initiative they reissued that appeal while simultaneously — and laughably — stating that “the federal government has had no role in the development of the common core state standards and will not have a role in their implementation [italics added].”
Soon after formation of the CCSSI, the Obama administration created the “Race to the Top,” a $4.35-billion program that in accordance with the CCSSI’s request — as opposed to its hollow no-Feds “promise” — went ahead and required states to adopt national standards to be fully competitive for taxpayer dough.
The carnival of convenient contradiction has continued, and Fordham — despite Petrilli’s assertion that “nobody is proposing” that “federal funding” be linked “to state adoption of the common core standards and tests” — has been running it. Indeed, just like President Obama’s “blueprint” for reauthorizing the Elementary and Secondary Education Act — better known as No Child Left Behind — Fordham’s ESEA “Briefing Book” proposes (see page 11) that states either adopt the Common Core or have some other federally sanctioned body certify a state’s standards as just as good in order to get federal money. So there would be an ”option” for states, but it would be six of one, half-dozen of the other, and the Feds would definitely link taxpayer dough to adoption of Common Core standards and tests.
Frankly, there’s probably no one who knows about these proposals who doesn’t think that the options exist exclusively to let national-standards proponents say the Feds wouldn’t technically “require” adoption of the Common Core. But even if the options were meaningful alternatives, does anyone think they wouldn’t be eliminated in subsequent legislation?
Of course, the problem is that most people don’t know what has actually been proposed — who outside of education-wonk circles has time to follow all of this? — which is what national-standards advocates are almost certainly counting on.
But suppose Fordham and company really don’t want federal compulsion? They could put concerns to rest by doing just one thing: loudly and publicly condemning all federal funding, incentivizing, or any other federal involvement whatsoever in national standards. Indeed, I proposed this a few months ago. And just a couple of weeks ago, Petrilli and Fordham President Chester Finn rejected that call, saying that they ”have no particular concern with the federal government … helping to pay” for the creation of curricular guides and other material and activities to go with national standards.
So, Fordham, you are proposing that federal funding be linked to adoption of common standards and tests, and denying it is becoming almost comical. At least, comical to people who are familiar with all of this. But as long as the public doesn’t know, the deception ends up being anything but funny.
Maybe, though, Fordham is getting nervous, at least over the possibility that engaged conservatives are on to them. Why do I think that? Because in addition to belching out the standard rhetorical smoke screen, Petrilli is now employing the’ “look over there — that guy’s really bad” gambit to get the heat off. Indeed, after ticking off some odious NCLB reauthorization proposals from other groups, Petrilli concludes his piece with the following appeal to lay off Fordham and go after people all conservatives can dislike:
We might never see eye to eye with all conservatives about national standards and tests. But we should be able to agree about reining in Washington’s involvement in other aspects of education. How about we drop the infighting and spend some of our energy working together on that?Nice try, but sorry. While I can’t speak for conservatives, those of us at Cato who handle education have certainly addressed all sorts of problems with federal intervention in our schools. But right now in education there is no greater threat to the Constitution, nor our children’s learning, than the unprecedented, deception-drenched drive to empower the federal government to dictate curricular terms to every public school — and every public-school child — in America. And the harder you try to hide the truth, the more clear that becomes.
right to Capitol Hill: The federal government has been an abject education failure, and the only acceptable solution to the problem is for Uncle Sam to leave our kids alone.
At the briefing in which the word was issued, Heritage’s Lindsey Burke and I also examined congressional proposals that could move us closer to the ultimate solution — especially the LEARN and A-PLUS acts — and explained why Washington, even if its interference were authorized by the Constitution, will never make education better by staying involved.
Unfortunately, lots of people couldn’t make the briefing. That’s why we are so happy to be able to present the briefing right here, to view in the comfort of your own computer chair.
Earth in the Balance, Humankind on the Edge: Nathan Myhrvold
It’s easy to write this off to greed or foolishness on the part of Wall Street. But the truth is, our entire civilization rests on a foundation just as shaky. We assume that the very Earth is static and will always be as it is now, or as we remember it.
Yet geophysics tells us that is emphatically not the case. Bad things happen. In the past couple of years alone, we have witnessed a litany of horrific natural disasters. Early last year, Haiti, already one of the most impoverished places in the world, was slammed by a magnitude 7 earthquake that caused hundreds of thousands of deaths, both directly and as the result of a cholera epidemic that occurred 10 months later during the recovery effort.
Flights CancelledIn Iceland last year, a long-dormant volcano erupted, necessitating the cancellation of more than 100,000 flights, and causing an estimated $1.8 billion in losses across Europe (but no deaths). Just a few months ago, Japan was savaged by the fourth-most-powerful earthquake ever caught on seismographs and an ensuing tsunami that killed more than 15,000 people, brought down almost 200,000 buildings and (unfairly) tarnished the image of nuclear energy worldwide. This was only seven years after a tsunami in the Indian Ocean killed at least a quarter-million people.
When the Earth itself isn’t tormenting us, the weather is. Within the past few months, the U.S. has been wracked by drought, wildfires and record-breaking flooding and tornadoes; the damage bill will total more than $32 billion. Tuscaloosa, Alabama; Joplin, Missouri; and, more surprisingly, Monson, Massachusetts, were flattened by tornadoes, which have taken more American lives this tornado season than in any year since 1927.
A Restive EarthWhat’s behind all this terrestrial unrest? The answer may not be comforting, but it is simple: A run of bad events like this is completely normal. Nature contains many phenomena that are usually benign but sometimes turn vicious. The probability that really bad things will happen is low -- but it isn’t zero. Its rarity only lulls people into a false sense of security.
As a result, natural disasters are almost always compounded by human error. The buildings in Port-au-Prince, Haiti’s capital, were poorly constructed. That most of them would collapse in a severe earthquake, leading to enormous loss of life, was easily predictable. Worsening the situation, United Nations aid officials staffed the relief effort with personnel from Nepal, where there was an ongoing cholera epidemic. Unsurprisingly, those workers brought the disease with them, and so began an outbreak that is thought to have so far killed at least 4,700 Haitians.
It’s easy to dismiss this kind of poor response when it occurs in Haiti, which has an infamously ineffective government. But a mortifying degree of incompetence was also on display after Hurricane Katrina struck New Orleans in 2005, and again this year when the Japanese tsunami swamped four reactors at the Fukushima Dai-Ichi nuclear-power plant.
Bad DecisionsSomeone there had decided it would be safe to build the reactors behind a 16-foot (5-meter) sea wall in an area that experienced 125-foot tsunamis as recently as 1896. Then, in the crucial hours and days following the event, a string of bad decisions caused most of the problems -- the nuclear-plant operators just didn’t know what to do.
Mistakes are common in big natural disasters. If such events happened frequently, response teams and the people who direct them would have practice, as trauma teams in hospital emergency rooms have. Unfortunately, responders rarely get the opportunity to rehearse large-scale disasters. When the inevitable finally occurs, and a tsunami hits a nuclear reactor, or an earthquake reduces much of a major city to rubble, the people in charge often are caught napping and react ineptly.
Lucky HistoryNone of these catastrophes came entirely out of the blue. To the contrary, geologic history tells us that we’ve actually gotten off lucky. In 1783, the Laki volcano in Iceland erupted so violently that it killed perhaps a quarter of the country’s population. That volcano put enough ash into the sky to change the weather in the entire Northern Hemisphere, causing crop failures and famines across Europe, India, Japan, Egypt and North America that pushed the total death toll to 6 million. It took almost a decade for the weather to recover.
Laki isn’t even the worst Icelandic volcano on record -- far larger was the six-year eruption of Eldgja that began in 934.
One could recount many such examples, but people’s eyes tend to glaze over when you talk about something that last occurred in 1783, much less 934. Surely things are different now, they say. The unfortunate truth is quite the opposite -- a millennium ago was yesterday as far as the Earth is concerned, and the relevant phenomena operate as vigorously as ever. Proud as we are of the many technological achievements of modern society, we are actually more vulnerable than ever because we live more densely, within a complex and sometimes fragile web of buildings, roads, bridges and the like.
No War GamesThe military uses war games to prepare for unforeseen contingencies, but there seem to be few civilian equivalents. Unfortunately, people just aren’t built to think about danger that way. A few rare risks -- such as dying in an airplane accident -- loom larger in our imaginations than statistics suggest they should. But we discount other low-probability perils straight to zero.
The lesson is simple to state, but hard to follow: Risks with heavy consequences must be taken seriously even if the probability of their happening tomorrow is low. That means incurring small, but real, costs in the here and now to mitigate the damage from some disaster that may lie far in the future -- even though “far” means beyond the present budget cycle, after the current chief executive officer has retired, or after the current politicians have left office. Only by thinking and training in anticipation of the inevitable can authorities avoid getting blindsided.
Washington Whiffs at U.S. Foreclosure Mess: Douglas Holtz-EakinThere is little doubt that the U.S. housing market is hurting; the latest S&P Case-Shiller index shows residential values declined 4.2 percent in the first quarter compared with the previous three months.
The market has struggled, partly because federal policy has wandered all over the proverbial lot. Congress should create a clear and effective strategy for supporting mortgages or, given the remote odds of that happening, let the market stabilize on its own.
Past efforts to buoy the market haven’t worked, but the government is loath to stop trying. The weakness is both an indication of a sputtering economy and the bursting of the housing bubble that the federal government (and both political parties) did so much to promote.
With this in mind, two recent developments in Washington may provide a clue to the likely future of mortgage regulation. The first was the delivery of a 27-page so-called code-of- conduct settlement proposal between the companies that service many of the nation’s mortgages and the 50 state attorneys general as well as federal agencies. The second was the appointment of Sendhil Mullainathan, a Harvard University economist, to head the Office of Research at the new Consumer Financial Protection Bureau.
At the heart of the code-of-conduct settlement is a plan to encourage more mortgage modifications for borrowers who are underwater -- people who owe more than their homes are worth. The attorneys general propose, for example, that loan servicers -- the companies that collect and disburse payments to the investors who hold the mortgages -- modify loans when the investment return would be greater than if the home had been placed into foreclosure. The recommendations also call for servicers to provide as much as $20 billion in aid to homeowners, much of which would be used for reducing mortgage principal.
Little PartHere’s the problem: Mandated principal reduction plays little part in preventing foreclosures. Most people want to hold on to their home as long as they can pay the mortgage, even when the property is underwater. A recent Federal Reserve study found that borrowers didn’t skip out and default until they owed 62 percent more than the house’s value. In any case, given recent estimates that the mortgage market is more than $750 billion underwater as a whole, a successful principal-reduction policy would require much more than $20 billion.
So, if mortgage modifications won’t work, how about a more market-friendly approach? Mullainathan, a prominent behavioral economist, is the kind of thinker who might be expected to give that a try. His 2008 paper, “Behaviorally Informed Financial Services Regulation,” written with Michael Barr, a former assistant secretary of the Treasury; and Eldar Shafir, a cognitive scientist at Princeton University; argued that consumers are “fallible in systematic and important ways.” The goal of federal housing policy, the authors said, should be to correct “social welfare failures,” one of which is the preference for homeownership when renting makes more economic sense.
Plain VanillaAmong other things, the paper proposed that the federal government require lenders to disclose mortgage terms (and potential alternative options) in easy-to-understand language, and borrowers to affirmatively opt out of plain-vanilla mortgages. What’s more, Mullainathan and his co-authors proposed making it costlier for mortgage originators to sell exotic loans into the secondary market. That would make it harder for some buyers to get unconventional financing.
Alas, many consumers choose to purchase houses even when it is in their long-term financial interest to rent. So the Mullainathan plan sets up a contradiction: If his proposals were to become law, they would nudge Americans toward renting, while many other existing policies champion homeownership. Furthermore, discouraging buying wouldn’t do much to help revive the housing market.
Bigger ChallengesOther behavioral approaches face even bigger challenges. Eric Posner, a law professor at the University of Chicago, and Luigi Zingales, an economist at the Chicago Booth School of Business, have suggested that the government require mortgages to be written down in areas of the country where prices have fallen 20 percent or more. In exchange, lenders would receive a portion of future gains in neighborhood prices.
But why 20 percent? And, what happens if a neighborhood’s prices rise on average, but an individual homeowner is left behind?
Unfortunately, none of the leading philosophies coming out of Washington today on how to change mortgage policy has much merit. The longer the government continues to try telling consumers how to behave, the longer the much-needed housing recovery will take to materialize.
The truth is, there is little the government can do to prevent the painful, but needed, marketadjustment. By moving out of the way and allowing foreclosures to proceed in due course, the markets will eventually clear.
John Paulson, Subprime God, Flees Muddy Waters: William PesekJohn Paulson isn’t looking so omniscient. The New York-based hedge-fund manager was the star of the 2008 subprime crisis, capitalizing on Wall Street’s misrepresentations to the tune of $15 billion betting against U.S. mortgages. Now, fraudsters may have taken him in.
That is, if a June 2 report by Muddy Waters LLC is correct and Sino-Forest Corp. lied about its finances. I don’t know, and neither do investors such as Paulson, the biggest shareholder in the Canadian-listed, Chinese timberland owner. Paulson & Co. said this week that it sold all its stock, which has plunged more than 90 percent in the past few weeks.
Even though Sino-Forest rejects claims that it exaggerated its landholdings, investors are taking no chances. That gets at a bigger issue than short sellers trying to undermine one company. The skittishness of markets reflects the sense that we’re one step away from replaying the world financial crisis.
The global backdrop offers no comfort. Post-tsunami Japan is a mess; the U.S. recovery is faltering; and Europe poses a Lehman Brothers-like risk if Greece’s debt crisis can’t be resolved. The sudden collapse in confidence in some Chinese investments adds to the anxiety for the markets.
Dodgy AccountsWhy is it a surprise that some Chinese companies have dodgy finances? One reason we are so quick to assume the worst is that Lehman, after months of vehement denials in 2008, really was a house of cards. Before that, WorldCom Inc. and Parmalat SpA really had cooked their books as Wall Street looked the other way.
So why are markets quick to believe a little-known investor such as Carson Block, the head of Hong Kong-based research firm Muddy Waters, when he questions China? Although few short- sellers make lots of money betting against China, the ranks of Carson and his ilk are growing. That’s partly a reflection of the fear that the great Chinese crash is coming.
One worry is that the first wave of bad loans from China’s huge 2008-2009 stimulus is about to hit. The bigger concern is how growth in recent years left the domestic financial system less resilient. China’s expansion relies on a variety of counterproductive policies: an undervalued, nonconvertible currency, off-balance-sheet arrangements to mask debt and ample credit to politically connected firms that don’t necessarily make the most productive use of capital.
Margin for ErrorChina does have a rather large margin for error, mostly in the form of $3 trillion in currency reserves. Yet it has made little progress toward developing a more transparent and open financial system. That, too, is making some investors more inclined to short China than to bet on continued growth.
China is less of a market-based economy than a vast family- run business controlled by the political elite, says Fraser Howie, a co-author of the book “Red Capitalism.” It’s important to remember that when a company such as Industrial & Commercial Bank of China Ltd. goes public, majority ownership stays with the Communist Party in Beijing. Good corporate governance doesn’t always follow.
Is the new scrutiny of Chinese companies a game changer? “I certainly hope so,” Howie says. “We know China is a difficult and corrupt place to do business, so funny dealings are rife. Certainly small Chinese companies are coming under the spotlight, but will it translate to the big state-owned enterprises as well? That I am not so sure of. I think too many investors will shy away from questioning the big guys.”
Start Asking QuestionsIt’s important that investors start asking those questions. As potential irregularities come to the surface, they will fuel a broad reappraisal of corporate-governance practices at foreign-listed Chinese companies. As skepticism and activism widen, China Inc. will be subjected to much more intense scrutiny than in the past.
That would be a plus for China’s long-term development. In the short run, the fact that markets are so riled about reports that a small company like Sino-Forest might be exaggerating revenue hints at the broad erosion in confidence over the fate of the world’s major economies.
China is now the second-biggest economy, but there is a growing sense that it is due for a setback. The country has proved it can live without consumers in Japan, Europe and the U.S. for a couple of years. But a third or fourth year as the world heads into an economic soft patch or worse?
Everyone liked having a bright spot amid the gloom after the world financial crisis. Now China’s prospects are becoming as murky as the governance of its companies. There’s a reason Block called his firm Muddy Waters.
Stocks Little Changed on Fed Decision
FedEx Corp. (FDX), operator of the biggest cargo airline and considered a proxy for the economy, added 3 percent after forecasting earnings that may top analysts’ estimates as global shipping demand climbs. Adobe Systems Inc. (ADBE), the largest maker of graphic-design software, slumped 5.3 percent after forecasting profit that fell short of analysts’ estimates.
The S&P 500 rose 0.1 percent to 1,296.87 at 12:56 p.m. in New York. The benchmark gauge had risen 2.4 percent over the previous four days. The Dow Jones Industrial Average climbed 4.66 points, or less than 0.1 percent, to 12,194.67 today.
“The economy would have to decelerate materially from here for the Fed to do another round of quantitative easing,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion. “The economy will continue in a low trajectory of recovery. The underlying fundamentals remain in place. We see little downside risk for stocks.”
The S&P 500 surged 24 percent through yesterday since Fed Chairman Ben S. Bernanke’s Aug. 27 speech in Jackson Hole, Wyoming, where he foreshadowed the second round of quantitative easing, known as QE, to boost the economy.
‘Moderate Pace’“The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings,” the Federal Open Market Committee said today in a statement after a two-day meeting in Washington. “The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected.”
Bernanke has said record-low interest rates are still needed to spur a recovery that remains “frustratingly slow” two years after the recession ended. Consumer spending has been held back by falling home values, accelerating inflation and an unemployment rate that rose to 9.1 percent last month. At the same time, Bernanke has said growth is likely to pick up as commodity costs recede and factories overcome disruptions of supplies from Japan.
In a Twitter post this morning, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said the Fed at its Jackson Hole, Wyoming, meeting in August "will likely hint" at a third round of quantitative easing and an effort to limit borrowing costs through interest-rate caps.
Home PricesU.S. home prices fell 5.7 percent in April from a year earlier, signaling the housing market is struggling to recover as foreclosures weigh down values. The decline was led by an 11 percent drop in the region that includes Nevada and Arizona, the Federal Housing Finance Agency said today. Prices rose 0.8 percent from March, the FHFA said. Economists had projected a 0.3 percent decline from the previous month, according to the average of 18 estimates in a Bloomberg survey.
FedEx gained 3 percent to $91.81. The company is benefiting from a pickup in worldwide shipping and higher pricing. The express unit’s overall revenue per package, or yield, added 10 percent to $22.69 in the quarter through May, FedEx said.
‘Boxes Are Moving’“The FedEx data today is as good as anything,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which manages $1.5 billion. “Boxes are still moving and that’s a sign that business is getting done.”
CarMax Inc. (KMX) gained 6.8 percent to $32.58. The largest U.S. seller of used cars sold more vehicles at higher prices in its first fiscal quarter.
Adobe fell 5.3 percent to $30.31. The company said profit for the third quarter may be as low as 50 cents a share, compared with the 54-cent average analyst projection, excluding certain items.
U.S. corporate profit margins are so high that a return to normal will cut about 3 percentage points a year from any future stock-market gains, according to Pierre Lapointe, a strategist at Brockhouse & Cooper Inc.
Margins in the first quarter were 11.3 percent overall and 13 percent in the non-financial category, based on Commerce Department data. These were the highest readings since 2007, before the latest recession started. Both were about two points higher than the average since the 1970s.
“We see no way around margin contraction,” Lapointe and economist Alex Bellefleur wrote yesterday in a report with a similar chart. U.S. companies are vulnerable even though they are increasingly generating profits overseas, they wrote.
Fed to Maintain Stimulus After Ending Treasury Purchases
“The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings,” the Federal Open Market Committee said today in a statement after a two-day meeting in Washington. “The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected.”
Fed Chairman Ben S. Bernanke has said record-low interest rates are still needed to spur a recovery that remains “frustratingly slow” two years after the recession ended. Consumer spending has been held back by falling home values, accelerating inflation and an unemployment rate that rose to 9.1 percent last month. At the same time, Bernanke has said growth is likely to pick up as commodity costs recede and factories overcome disruptions of supplies from Japan.
“Recent labor market indicators have been weaker than anticipated,” the statement said. “The slower pace of the recovery reflects in part factors that are likely to be temporary,” such as supply chain disruptions stemming from the Japanese disaster in March.
The Standard & Poor’s 500 Index was little changed at 1,295.24 at 12:29 p.m. in New York. The yield on the 10-year Treasury note was 2.96 percent from 2.98 percent late yesterday.
Press ConferenceFed officials will release their economic forecasts for 2011-2013 at 2 p.m. today, and Bernanke plans to hold a press conference at 2:15 p.m.
The Fed left its benchmark interest rate in a range of zero to 0.25 percent and repeated a pledge to keep it there “for an extended period.” The decision was unanimous.
“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate.”
The U.S. economy grew at an annual rate of 1.8 percent in the first quarter, down from 3.1 percent in the fourth quarter of 2010, and recent data have shown manufacturing and consumer and business sentiment weakening.
‘Sit and Wait’“Growth in the economy has just not been what people expected,” said Bret Barker, a portfolio manager at Los Angeles-based TCW Group Inc., which manages about $120 billion in assets. “The Fed is going to want to sit and wait and see what is going to happen.”
Bernanke said on June 7 that policy makers will “closely monitor” inflation, while predicting that price increases will ease in the medium term. The consumer price index rose 3.6 percent for the 12 months ending in May, the most since October 2008, as food and fuel prices drove the benchmark higher. So- called core CPI, the index excluding food and fuel, rose 1.5 percent during the same period, the most since January 2010.
“Higher raw material costs” prompted Orrville, Ohio-based J.M. Smucker Co. to boost prices, effective in May, across “key categories including coffee, peanut butter, fruit spreads, oil and various baking products,” Richard Smucker, co-chief executive officer, said in a conference call with analysts on June 9. The company produces Folgers Coffee, Jif peanut butter and Smucker’s jams and jellies.
No Reason to ExpandWithout slower inflation and a bigger deterioration in growth, Bernanke sees no reason to expand stimulus, said Julia Coronado, North America Chief Economist for BNP Paribas in New York.
“Monetary policy isn’t getting any easier,” Coronado said before the statement was released. “We haven’t met the threshold for quantitative easing three, and the economy is going to struggle to gain traction,” she said, referring to a third round of bond purchases.
Investor expectations for long-term inflation have fallen. Price increases will average 2.53 percent a year for the five years starting 2016, according to a measure of yields on Treasuries indexed to inflation and nominal Treasury notes tracked by Barclays Capital Inc. in New York. That’s down from the 12-month high of 2.99 percent on April 14.
Households find little cause to step up spending. The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent in March from a year earlier, the biggest year-over-year decline since November 2009.
Hourly EarningsAlso, real average hourly earnings fell 1.6 percent in May from a year earlier, and the Standard and Poor’s 500 Index has fallen about 5 percent from its 2011 peak on April 29.
“We expect the recovery will continue to be slow and uneven, particularly for more moderate-income households,” Gregg Steinhafel, chairman and chief executive of Minneapolis- based Target Corp., the second largest U.S. discount retailer, told investors last month. “These households need to see further improvements in housing and income growth before they’ll have the capacity to meaningfully increase their discretionary spending.”
Economists at several U.S. government bond dealers reduced their estimates for second-quarter growth in recent weeks.
Barclays Capital cut its forecast to a 2 percent annual rate from a prior estimate of 3.5 percent, and JPMorgan Chase & Co. (JPM) economists reduced their estimate to a 2 percent annual rate from 2.5 percent. Goldman Sachs Group Inc. (GS) cut its estimate to a 2 percent rate from 3 percent.
Core InflationThe economy’s moderate growth rate combined with rising core inflation measures have left Fed policy in “a zone of inaction,” Goldman Sachs economists said in a report on June 17. It would take a 1.25 percentage point increase in the unemployment rate or a 1 point drop in core inflation to trigger an increase in Fed stimulus, the economists said.
“There is little prospect of either monetary tightening or monetary easing anytime soon,” Goldman Sachs economist Sven Jari Stehn said before the Fed released its statement.
Tuesday, June 21, 2011
Readers old enough to recall “the misery index” will remember it was computed by adding the inflation rate to the unemployment rate. On Friday, CNBC posted, and Drudge picked up, a brief story about how the misery index stands at its highest since 1983:
People who’ve given up looking for work no longer count as unemployed. Statisticians make the rising price of steak go away by assuming you buy less steak and more hamburger. And so on.
John Williams at ShadowStats.com still runs the numbers the way they were in those bygone days. Let’s recalculate…
If circumstances now feel worse than they did then, if the “recovery” of the last two years seems like a chimera, now you have a statistical glimpse why.
If they don’t feel worse, then you’ve been successful at staying abreast of the trends… and on the “right side of the trade,” for which you should be commended. We’ll do our best to assist you in that endeavor, if we can…
The source of much of the “misery” in the index, the number of foreclosure filings, fell to a near four-year low in May, according to RealtyTrac. If the “recovery” were for real, this would be because homeowners can once again keep up with their payments.
But the real reason for the low number of filings appears to be that banks are “weighed down by an increasing inventory of seized homes,” as a Bloomberg story put it… so they’re holding off (again) on processing even more defaults.
In New York State, 213,000 homes are now in severe default or foreclosure, according to figures from LPS Analytics. At the current rate banks are unloading these properties, it will take 62 years to clear the inventory.
In New Jersey, it will take 49 years. In Illinois, Massachusetts and Florida, it will take a decade.
What? We’ve had a lost weekend or two. But how can you lose a whole decade?
But Americans have done it already. Read on…
What’s the hot news today?
Well, the European Central Bank is withholding money from the Greeks. It says they need to get their act together before it will give them more money.
This bit of drama kept markets on edge yesterday. The Dow finished up. It broke a 6-week losing streak last week. So far this week, it seems to be continuing in an upward direction in an irresolute kind of way.
Oil remained down.
US 2-year debt, on other hand, has been in a 10-week winning streak. You know what that means. When the price of debt goes up and the price of oil goes down? It signals a weaker economy.
Not that we especially care. We’ve got our story. And we’re sticking to it until the facts prove we’re wrong. Even then, we might not give it up.
Our story is this:
After a 60-year debt expansion, the developed world – led by the USA – went into a period of debt contraction. This is what we call the Great Correction. We know for sure that debt is being consolidated – at least in the private sector. We know that this will be a drag on the economy for several more years.
We know also that the feds’ efforts to fight the correction are setting up another crisis and correction – this one in the public sector.
So, it looks as though at least two things will be corrected – private debt…and public debt. Beyond that, we’re not sure what excesses, mistakes and absurdities this correction will target. Only time will tell.
So far, all the facts that have come to light in the last 4 years seem to corroborate our Great Correction story. As expected, jobs are few and far between. Consumer spending is weak, as households try to repair their balance sheets. And the economy limps along with negative or barely positive real GDP growth.
What does this sound like to you?
Like Japan, of course, which has been in a Great Correction for 20 years.
And even though the peak of credit in the US wasn’t hit until 2007 we’re beginning to think that the actual correction began in 2000. Since then, jobs, stocks, houses, and the real, per-capita GDP have gone nowhere. In other words, a stealth correction has probably been going on for 10 years already…it didn’t come out into the open until after 2007.
Last week and this week, several articles in the financial press have warned that America might face a “Lost Decade,” similar to the ’90s in Japan. They can stop worrying. We’ve already lost a decade.
Now, another ‘lost decade’ is coming up.
Yes, just look at page 20 of today’s International Herald Tribune:
“Long unemployment lines in US cities could last years, study finds…”
And then the follow-on subhead:
“Report says may areas will need until 2020 to reach pre-recession levels.”
Yes, dear reader… One ‘lost decade’ already completed. Another coming up.
Losing one decade could be bad luck. Losing two begins to look like recklessness. Inattention. Or robbery. Stay tuned…
For the benefit of dear readers, the service level at United-Continental has crashed. We found more professional service at the Anne Arundel county dump on Saturday. The fellow checking our trash was a half-wit. But at least he didn’t get in the way. Believe it or not, they have a kind of TSA security at the dump. They want to be sure people from other counties aren’t throwing out their junk in Anne Arundel County. So, the fellow at the gate checks your driver’s license to see where you live. Pretty soon, he’ll be issued jackboots.
Naturally, our papers were not in order. Our license shows a Baltimore City address. But it didn’t seem to matter, because the guy checking our documents was probably illiterate.
“You can go ahead,” he said politely, ignoring the one and only reason he was supposed to check the papers.
At Dulles Airport yesterday, nobody told us to go ahead. Instead, they all stopped us. It took us an hour of standing in line to check in – Business Class, no less. People in economy were probably lucky to be able to check in at all.
But who cares. It’s still almost a miracle to be able to leave our home in Washington at 4PM and be in London at 6AM the following day. What a boost to our standard of living! This is the kind of miracle that high-octane fossil fuel can give you. You have to burn a lot of energy in order to lift a giant vessel made of thin metal, filled with fat people off the ground. And then fly across the Atlantic Ocean with it!
You can’t do that with solar power…or wood…or batteries charged up from hydroelectric power stations. You can only do it by reaching into the earth and using up some of its stored up calories. And you can only use those calories once. (For reasons we can’t figure out at this hour, the law of conservation of energy doesn’t seem to apply.)
As you will see later this week, the energy revolution of the 18th century boosted output and speeded up GDP growth. Our standard of living – not to be confused with our quality of life – is directly proportional to the amount of energy consumed. All of which is a warm up to where our meandering will take us this week.
Energy use in the US peaked in 1997. Real US GDP peaked a few years later. Since then, it’s been downhill for the economy.
From memory…US GPD didn’t hit 10 trillion dollars until about 2000. Now, it’s about $14 trillion. Nice growth, huh? But wait. We know that a lot of that was phony, debt-fueled growth. It was phony because it raised living standards to a level that people couldn’t really afford. Or to look at it another way, it drew on earnings that hadn’t happened yet…and maybe never would.
But how much of that $4 trillion worth of GDP is real and how much is phony? We don’t know. But we note that the federal deficit is about $1.5 trillion, which is as phony as a $3 bill. Subtract that and you have a gain of $3.5 trillion over 10 years…or about $350 billion per year.
Let’s see, adjust that for population growth. Subtract phony private sector debt-fueled growth too. And properly adjust for inflation. What do you get?
You get a lost decade.
U.S. and Pakistan: Afghan StrategiesBy George Friedman
U.S. President Barack Obama will give a speech on Afghanistan on June 22. Whatever he says, it is becoming apparent that the United States is exploring ways to accelerate the drawdown of its forces in the country. It is also clear that U.S. relations with Pakistan are deteriorating to a point where cooperation — whatever level there was — is breaking down. These are two intimately related issues. Any withdrawal from Afghanistan, particularly an accelerated one, will leave a power vacuum in Afghanistan that the Kabul government will not be able to fill. Afghanistan is Pakistan’s back door, and its evolution is a matter of fundamental interest to Pakistan. A U.S. withdrawal means an Afghanistan intertwined with and influenced by Pakistan. Therefore, the current dynamic with Pakistan challenges any withdrawal plan.
There may be some in the U.S. military who believe that the United States might prevail in Afghanistan, but they are few in number. The champion of this view, Gen. David Petraeus, has been relieved of his command of forces in Afghanistan and promoted (or kicked upstairs) to become director of the CIA. The conventional definition of victory has been the creation of a strong government in Kabul controlling an army and police force able to protect the regime and ultimately impose its will throughout Afghanistan. With President Hamid Karzai increasingly uncooperative with the United States, the likelihood of this outcome is evaporating. Karzai realizes his American protection will be withdrawn and understands that the Americans will blame him for any negative outcomes of the withdrawal because of his inability or unwillingness to control corruption.
Defining Success in AfghanistanThere is a prior definition of success that shaped the Bush administration’s approach to Afghanistan in its early phases. The goal here was the disruption of al Qaeda’s operations in Afghanistan and the prevention of further attacks on the United States from Afghanistan. This definition did not envisage the emergence of a stable and democratic Afghanistan free of corruption and able to control its territory. It was more modest and, in many ways, it was achieved in 2001-2002. Its defect, of course, was that the disruption of al Qaeda in Afghanistan, while useful, did not address the evolution of al Qaeda in other countries. In particular, it did not deal with the movement of al Qaeda operatives to Pakistan, nor did it address the Taliban, which were not defeated in 2001-2002 but simply declined combat on American terms, re-emerging as a viable insurgency when the United States became bogged down in Iraq.
The mission creep from denying Afghan bases to al Qaeda to the transformation of Afghan society had many roots and was well under way during the Bush administration, but the immediate origin of the current strategy was the attempt to transfer the lessons of Iraq to Afghanistan. The surge in Iraq, and the important political settlement with Sunni insurgents that brought them into the American fold, reduced the insurgency. It remains to be seen whether it will produce a stable Iraq not hostile to American interests. The ultimate Iraq strategy was a political settlement framed by an increase in forces, and its long-term success was never clear. The Obama administration was prepared to repeat the attempt in Afghanistan, at least by using Iraq as a template if not applying exactly the same tactics.
However, the United States found that the Taliban were less inclined to negotiate with the United States, and certainly not on the favorable terms of the Iraqi insurgents, simply because they believed they would win in the long run and did not face the dangers that the Sunni insurgents did. The military operations that framed the search for a political solution turned out to be a frame without a painting. In Iraq, it is not clear that the Petraeus strategy actually achieved a satisfactory political outcome, and its application to Afghanistan does not seem, as yet, to have drawn the Taliban into the political process in the way that incorporating the Sunnis made Iraq appear at least minimally successful.
As we pointed out after the death of Osama bin Laden, his demise, coupled with the transfer of Petraeus out of Afghanistan, offered two opportunities. The first was a return to the prior definition of success in Afghanistan, in which the goal was the disruption of al Qaeda. Second, the departure of Petraeus and his staff also removed the ideology of counterinsurgency, in which social transformation was seen as the means toward a practical and radical transformation of Afghanistan. These two events opened the door to the redefinition of the U.S. goal and the ability to claim mission accomplished for the earlier, more modest end, thereby building the basis for terminating the war.
The central battle was in the United States military, divided between conventional warfighters and counter-insurgents. Counterinsurgency draws its roots from theories of social development in emerging countries going back to the 1950s. It argues that victory in these sorts of wars depends on social and political mobilization and that the purpose of the military battle is to create a space to build a state and nation capable of defending itself.
The conventional understanding of war is that its purpose is to defeat the enemy military. It presents a more limited and focused view of military power. This faction, bitterly opposed to Petraeus’ view of what was happening in Afghanistan, saw the war in terms of defeating the Taliban as a military force. In the view of this faction, defeating the Taliban was impossible with the force available and unlikely even with a more substantial force. There were two reasons for this. First, the Taliban comprised a light infantry force with a superior intelligence capability and the ability to withdraw from untenable operations (such as the battle for Helmand province) and re-engage on more favorable terms elsewhere. Second, sanctuaries in Pakistan allowed the Taliban to withdraw to safety and reconstitute themselves, thereby making their defeat in detail impossible. The option of invading Pakistan remained, but the idea of invading a country of 180 million people with some fraction of the nearly 150,000 U.S. and allied troops in Afghanistan was militarily unsupportable. Indeed, no force the United States could field would be in a position to compel Pakistan to conform to American wishes.
The alternative on the American side is a more conventional definition of war in which the primary purpose of the U.S. military in Afghanistan is to create a framework for special operations forces to disrupt al Qaeda in Afghanistan and potentially Pakistan, not to attempt to either defeat the Taliban strategically or transform Afghanistan politically and culturally. With the death of bin Laden, an argument can be made — at least for political purposes — that al Qaeda has been disrupted enough that the conventional military framework in Afghanistan is no longer needed. If al Qaeda revives in Afghanistan, then covert operations can be considered. The problem with al Qaeda is that it does not require any single country to regenerate. It is a global guerrilla force.
Asymmetry in U.S. and Pakistani InterestsThe United States can choose to leave Afghanistan without suffering strategic disaster. Pakistan cannot leave Pakistan. It therefore cannot leave its border with Afghanistan nor can it evade the reality that Pakistani ethnic groups — particularly the Pashtun, which straddle the border and form the heart of the Taliban phenomenon — live on the Afghan side of the border as well. Therefore, while Afghanistan is a piece of American global strategy and not its whole, Afghanistan is central to Pakistan’s national strategy. This asymmetry in U.S. and Pakistani interests is now the central issue.
When the Soviets invaded Afghanistan, Pakistan joined with the United States to defeat the Soviets. Saudi Arabia provided money and recruits, the Pakistanis provided training facilities and intelligence and the United States provided trainers and other support. For Pakistan, the Soviet invasion was a matter of fundamental national interest. Facing a hostile India supported by the Soviets and a Soviet presence in Afghanistan, Pakistan was threatened on two fronts. Therefore, deep involvement with the jihadists in Afghanistan was essential to Pakistan because the jihadists tied down the Soviets. This was also beneficial to the United States.
After the Soviet withdrawal from Afghanistan, the United States became indifferent to Afghanistan’s future. Pakistan could not be indifferent. It remained deeply involved with the Islamist forces that had defeated the Soviets and would govern Afghanistan, and it helped facilitate the emergence of the Taliban as the dominant force in the country. The United States was quite content with this in the 1990s and accepted the fact that Pakistani intelligence had become intertwined not only with the forces that fought the Soviets but also with the Taliban, who, with Pakistani support, won the civil war that followed the Soviet defeat.
Intelligence organizations are as influenced by their clients as their clients are controlled by them. Consider anti-Castro Cubans in the 1960s and 1970s and their beginning as CIA assets and their end as major influencers of U.S. policy toward Cuba. The Pakistani Inter-Services Intelligence directorate (ISI) became entwined with its clients. As the influence of the Taliban and Islamist elements increased in Afghanistan, the sentiment spread to Pakistan, where a massive Islamist movement developed with influence in the government and intelligence services.
Sept. 11, 2001, posed a profound threat to Pakistan. On one side, Pakistan faced a United States in a state of crisis, demanding Pakistani support against both al Qaeda and the Taliban. On the other side Pakistan had a massive Islamist movement hostile to the United States and intelligence services that had, for a generation, been intimately linked to Afghan Islamists, first with whole-hearted U.S. support, then with its benign indifference. The American demands involved shredding close relationships in Afghanistan, supporting an American occupation in Afghanistan and therefore facing internal resistance and threats in both Afghanistan and Pakistan.
The Pakistani solution was the only one it could come up with to placate both the United States and the forces in Pakistan that did not want to cooperate with the United States. The Pakistanis lied. To be more precise and fair, they did as much as they could for the United States without completely destabilizing Pakistan while making it appear that they were being far more cooperative with the Americans and far less cooperative with their public. As in any such strategy, the ISI and Islamabad found themselves engaged in a massive balancing act.
U.S. and Pakistani national interests widely diverged. The United States wanted to disrupt al Qaeda regardless of the cost. The Pakistanis wanted to avoid the collapse of their regime at any cost. These were not compatible goals. At the same time, the United States and Pakistan needed each other. The United States could not possibly operate in Afghanistan without some Pakistani support, ranging from the use of Karachi and the Karachi-Khyber and Karachi-Chaman lines of supply to at least some collaboration on intelligence sharing, at least on al Qaeda. The Pakistanis badly needed American support against India. If the United States simply became pro-Indian, the Pakistani position would be in severe jeopardy.
The United States was always aware of the limits of Pakistani assistance. The United States accepted this publicly because it made Pakistan appear to be an ally at a time when the United States was under attack for unilateralism. It accepted it privately as well because it did not want to see Pakistan destabilize. The Pakistanis were aware of the limits of American tolerance, so a game was played out.
The Endgame in AfghanistanThat game is now breaking down, not because the United States raided Pakistan and killed bin Laden but because it is becoming apparent to Pakistan that the United States will, sooner or later, be dramatically drawing down its forces in Afghanistan. This drawdown creates three facts. First, Pakistan will be facing the future on its western border with Afghanistan without an American force to support it. Pakistan does not want to alienate the Taliban, and not just for ideological reasons. It also expects the Taliban to govern Afghanistan in due course. India aside, Pakistan needs to maintain its ties to the Taliban in order to maintain its influence in Afghanistan and guard its western flank. Being cooperative with the United States is less important. Second, Pakistan is aware that as the United States draws down, it will need Pakistan to cover its withdrawal strategically. Afghanistan is not Iraq, and as the U.S. force draws down, it will be in greater danger. The U.S. needs Pakistani influence. Finally, there will be a negotiation with the Taliban, and elements of Pakistan, particularly the ISI, will be the intermediary.
The Pakistanis are preparing for the American drawdown. Publicly, it is important for them to appear as independent and even hostile to the Americans as possible in order to maintain their domestic credibility. Up to now, they have appeared to various factions in Pakistan as American lackeys. If the United States is leaving, the Pakistanis can’t afford to appear that way anymore. There are genuine issues separating the two countries, but in the end, the show is as important as the issues. U.S. accusations that the government has not cooperated with the United States in fighting Islamists are exactly what the Pakistani establishment needs in order to move to the next phase. Publicly arresting CIA sources who aided the United States in capturing bin Laden also enhances this new image.
From the American point of view, the war in Afghanistan — and elsewhere — has not been a failure. There have been no more attacks on the United States on the order of 9/11, and that has not been for al Qaeda’s lack of trying. U.S. intelligence and security services, fumbling in the early days, achieved a remarkable success, and that was aided by the massive disruption of al Qaeda by U.S. military operations. The measure of military success is simple. If the enemy was unable to strike, the military effort was a success. Obviously, there is no guarantee that al Qaeda will not regenerate or that another group will not emerge, but a continued presence in Afghanistan at this point doesn’t affect that. This is particularly true as franchise operations like the Yemen-based al Qaeda in the Arabian Peninsula begin to overtake the old apex leadership in terms of both operational innovation in transnational efforts and the ideological underpinnings of those attacks.
In the end, the United States will leave Afghanistan (with the possible exception of some residual special operations forces). Pakistan will draw Afghanistan back into its sphere of influence. Pakistan will need American support against India (since China does not have the force needed to support Pakistan over the Himalayas nor the navy to protect Pakistan’s coast). The United States will need Pakistan to do the basic work of preventing an intercontinental al Qaeda from forming again. Reflecting on the past 10 years, Pakistan will see that as being in its national interest. The United States will use Pakistan to balance India while retaining close ties to India.
A play will be acted out like the New Zealand Haka, with both sides making terrible sounds and frightening gestures at each other. But now that the counterinsurgency concept is being discarded, from all indications, and a fresh military analysis is under way, the script is being rewritten and we can begin to see the end shaping up. The United States is furious at Pakistan for its willingness to protect American enemies. Pakistan is furious at the United States for conducting attacks on its sovereign territory. In the end it doesn’t matter. They need each other. In the affairs of nations, like and dislike are not meaningful categories, and bullying and treachery are not blocks to cooperation. The two countries need each other more than they need to punish each other. Great friendships among nations are built on less.
How Capitalist is America?
Looked at in this way, America’s capitalism becomes more ambiguous. American law gives more authority to managers and corporate directors than to shareholders. If shareholders want to tell directors what to do – say, borrow more money and expand the business, or close off the money-losing factory – well, they just can’t. The law is clear: the corporation’s board of directors, not its shareholders, runs the business.
Someone naïve in the ways of US corporations might say that these rules are paper-thin, because shareholders can just elect new directors if the incumbents are recalcitrant. As long as they can elect the directors, one might think, shareholders rule the firm. That would be plausible if American corporate ownership were concentrated and powerful, with major shareholders owning, say, 25% of a company’s stock – a structure common in most other advanced countries, where families, foundations, or financial institutions more often have that kind of authority inside large firms.
But that is neither how US firms are owned, nor how US corporate elections work. Ownership in large American firms is diffuse, with block-holding shareholders scarce, even today. Hedge funds with big blocks of stock are news, not the norm.
Corporate elections for the directors who run American firms are expensive. Incumbent directors typically nominate themselves, and the company pays their election expenses (for soliciting votes from distant and dispersed shareholders, producing voting materials, submitting legal filings, and, when an election is contested, paying for high-priced US litigation). If a shareholder dislikes, say, how GM’s directors are running the company (and, in the 1980’s and 1990’s, they were running it into the ground), she is free to nominate new directors, but she must pay their hefty elections costs, and should expect that no one, particularly not GM, will ever reimburse her. If she owns 100 shares, or 1,000, or even 100,000, challenging the incumbents is just not worthwhile.
Hence, contested elections are few, incumbents win the few that occur, and they remain in control. Firms and their managers are subject to competitive markets and other constraints, but not to shareholder authority.
In lieu of an election that could remove recalcitrant directors, an outside company might try to buy the firm and all of its stock. But the rules of the US corporate game – heavily influenced by directors and their lobbying organizations – usually allow directors to spurn outside offers, and even to block shareholders from selling to the outsider. Directors lacked that power in the early 1980’s, when a wave of such hostile takeovers took place; but by the end of the decade, directors had the rules changed in their favor, to allow them to reject offers for nearly any reason. It is now enough to reject the outsider’s price offer (even if no one else would pay more).
American corporate-law reformers have long had their eyes on corporate elections. About a decade ago, after the Enron and WorldCom scandals, America’s stock-market regulator, the Securities and Exchange Commission (SEC), considered requiring that companies allow qualified shareholders to put their director nominees on the company-paid election ballot. The actual proposal was anodyne, as it would allow only a few directors – not enough to change a board’s majority – to be nominated, and voted on, at the company’s expense.
Nevertheless, the directors’ lobbying organizations – such as the Business Roundtable and the Chamber of Commerce (and their lawyers) – attacked the SEC’s initiative. Lobbying was fierce, and is said to have reached into the White House. Business interests sought to replace SEC commissioners who wanted the rule, and their lawyers threatened to sue the SEC if it moved forward. It worked: America’s corporate insiders repeatedly pushed the proposal off of the SEC agenda in the ensuing decade.
Then, in the summer of 2010, after a relevant election and a financial crisis that weakened incumbents’ credibility, the SEC promulgated election rules that would give qualified shareholders free access to company-paid election ballots. As soon as it did, the US managerial establishment sued the SEC, and government officials felt compelled to suspend the new rules before they ever took effect. The litigation is now in America’s courts.
The lesson is that the US is less capitalist than it is “managerialist.” Managers, not owners, get the final say in corporate decisions.
Perhaps this is good. Even some capital-oriented thinking says that shareholders are better off if managers make all major decisions. And often the interests of shareholders and managers are aligned.
But there is considerable evidence that when managers are at odds with shareholders, managerial discretion in American firms is excessive and weakens companies. Managers of established firms continue money-losing ventures for too long, pay themselves too much relative to their and the company’s performance, and too often fail to act aggressively enough to enter new but risky markets.
When it comes to capitalism vs. socialism, we know which side the US is on. But when it’s managers vs. capital-owners, the US is managerialist, not capitalist.