Tuesday, August 30, 2011

Victor Davis Hanson

A Vineyard Too Far
People who rail against “fat cats” shouldn’t vacation with them.

By Sunday afternoon, the Gallup tracking poll showed a 17-point spread in the president’s approval rating — 38 percent approval to 55 percent disapproval. Such polls are fickle and can go up and down quickly, often depending on unwarranted and unfair perceptions and media hype, hinging on everything from hurricanes to killing bin Laden. That said, these recent abysmal numbers might suggest that for the first time, a considerable number of Americans are starting to be turned off not just by Barack Obama’s economic policies, but by Barack Obama himself. But why now?

The president’s latest Martha’s Vineyard vacation was a public-relations disaster, wholly unnecessary, and in part responsible for Obama’s most recent slide in the polls. Part of the problem was purely coincidental and no one’s fault: Who could have expected that while the president of the United States was resting on an exclusive private beach on a tony island on a calm August day, millions of Eastern Seaboarders around him would be engaged in a media-driven frenzy of emergency preparation and evacuation?

Yet most of the negative perception was the president’s own doing. For nearly three years, there has been something strange about the First Family’s ritzy getaway tastes. The annual Martha’s Vineyard rentals were bookended by First Family junkets to Vail, Costa del Sol, and Hawaii. The choice of venues spawned at least three problems for the president that have nothing to do with the First Family’s right, and indeed duty, to enjoy a little well-earned vacation time — or with the fact that other presidents have vacationed in nice places.

First, Obama’s fiery rhetoric (“fat-cat bankers,” “corporate jets,” “millionaires and billionaires,” “redistributive change,” “at a certain point you’ve made enough money,” etc.) has demonized the better off. Many successful liberal presidents do that, but they finesse the necessary fundraising and schmoozing with Wall Street zillionaires with tact and discretion. Bill Clinton was a past master at gluing a populist veneer atop his deep fascination with old money and hip celebrity. The Obamas are far clumsier in both their class-warfare boilerplate and their overt elite tastes, whose contradictions they apparently either miss or don’t much care about.

No doubt this August the presidential advisers, without a clue about life in Tulare or Des Moines, gave sycophantic pep talks to the Obamas not to listen to “right-wing talk radio” and just enjoy what they like to enjoy. Obama himself apparently is still confident that the media will always exempt his golfing in a way they never did Bush’s far less frequent putting. Michael Moore, after all, is not going to cut and paste a video clip of Obama on the fairway.

Yet some photos inevitably leaked out of the “redistributive change” statist at his $50,000-a-week rented estate, surrounded by “millionaires and billionaires” who could alone afford such rental prices, many of whom flew in on “corporate jets.” That disconnect appears to the American public as abjectly hypocritical. We all know that for the president to keep pushing his agenda of higher taxes, he will soon inevitably get back to bashing the rich. But we also assume that this time the public has seen the flip side of a one-eyed Jack and wonders, when the president hits up his Vineyard neighbors for campaign cash at his $20 million rented estate, whether he will first make sure that they are not “fat cats” and owners of “corporate jets.”

Even right-wing presidents, even in good times, know enough not to rub in too much the perks of being president. George W. Bush was pilloried for chain-sawing at “the ranch,” as if he were a counterfeit outdoorsman; but he still knew that his media critics suffered far more in his beloved nowheresville of Crawford than did he. The “Reagan Ranch” in the Santa Barbara Mountains was not really a ranch at all, but a rustic hovel, and the videos of Reagan in his early seventies, chopping wood amid burrs and stickers, with sweat spots under his arms, were not faked. In contrast, the elder Bush liked boating off his family estate in Maine — and was flayed for being a bit too happy with his seaside, preppie-sounding Kennebunkport mansion.

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Marco Rubio's Tide Is Rising
By Cal Thomas

In my high school days before sex and environmental education and the general dumbing down of the population, memorization of some Shakespeare was expected in Miss Kauffman's 12th-grade English class.
A favorite I still recall is this line spoken by Brutus in "Julius Caesar": "There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and in miseries ..."

Sen. Marco Rubio, R-Fla., repeatedly says in various ways it is too soon, or he isn't ready, for higher office such as vice president. He's been in the Senate for a little more than seven months and has delivered only two major speeches -- his maiden speech on the Senate floor and one last week at the Ronald Reagan Presidential Library in Simi Valley, Calif.

In the Reagan Library speech, Rubio laid out his philosophical foundation, something that must be at the heart of any policy.

Defining the proper role of government ought to be the central issue in the coming presidential campaign. Indeed, it should occupy our thoughts between campaigns because those of us who pay income tax are not getting a good return on our investment.

Here's Rubio: "We have the opportunity -- within our lifetimes -- to actually craft a proper role for government in our nation that will allow us to come closer than any Americans have ever come to our collective vision of a nation where both prosperity and compassion exist side by side."

That takes the "compassionate conservatism" of George W. Bush to a different level. To Rubio, prosperity is not the opposite of compassion. Rather, the two are -- or should be -- joined.

Prosperity provides the means by which people can be compassionate to those truly in need, such as the disabled and elderly. It is also the ticket out of dependency for people who can work but have been robbed of their dignity by addiction to a government check.

Dignity leads to many other character qualities, which advance the true welfare of an individual, benefiting society. Someone with dignity, self-regard and respect for others is unlikely to take part in a flash mob attack.

Rubio points to a path beyond the familiar "either-or" debate; beyond envy of the wealthy and multiple and ineffective programs to liberate the "poor." This repetitive scenario has produced, said Rubio, "a government that not even the richest and most prosperous nation on the face of the Earth can fund or afford to pay for. An extraordinary tragic accomplishment, if you can call it that."

Rubio went further than what might be expected of a Republican, acknowledging his party is partly responsible for the growth of government:

"I know that it is popular in my party to blame the president, the current president. But the truth is the only thing this president has done is accelerate policies that were already in place and were doomed to fail. All he is doing through his policies is making the day of reckoning come faster, but it was coming nonetheless."

And then there is this, which shatters the left's stereotype about the right: "Conservatism is not about leaving people behind. Conservatism is about empowering people to catch up, to give them the tools ... that make it possible for them to access all the hope, all the promise, all the opportunity that America offers. And our programs to help them should reflect that."

If this is not a speech that lays the foundation for a Rubio run for higher office, it is a speech that ought to begin a major transition from costly and ineffective government programs to a renewed empowerment of individuals.

No one, perhaps not even Rubio, can know for certain whether he is "ready" for higher office. President Obama has proven he wasn't ready. Some leaders don't know they can lead until leadership is thrust upon them.

The right philosophy is key and the Reagan Library speech proves that Rubio has the most important ingredient of any leader: vision. Read it, be inspired and then consider whether Rubio's tide is rising.
An Unusual Economy?
By Thomas Sowell

Many in the media are saying how unusual it is for our economy to be so sluggish for so long, after we have officially emerged from a recession. In a sense, they are right. But, in another sense, they are profoundly wrong.

The American economy usually rebounds a lot faster than it is doing today. After a recession passes, consumers usually increase their spending. And when businesses see demand picking up, they usually start hiring workers to produce the additional output required to meet that demand.

Some very sharp downturns in the American economy, such as in the early 1920s, were followed quickly by bouncing back to normal levels or beyond. The government did nothing -- and it worked.

In that sense, this is an unusual recovery in how long it is taking and in how slowly the economy is growing -- while the government is doing virtually everything imaginable.

Government intervention may look good to the media but its actual track record -- both today and in the 1930s -- is far worse than the track record of letting the economy recover on its own.

Americans today are alarmed that unemployment has stayed around 9 percent for so long. But such unemployment rates have been common for years in Western European welfare states that have followed policies similar to policies being followed currently by the Obama administration.

Those European welfare states have not only used the taxpayers' money to hand out "free" benefits to particular groups, they have mandated that employers do the same. Faced with higher labor costs, employers have hired less labor.

The vast uncertainties created by ObamaCare create a special problem. If employers knew that ObamaCare would add $1,000 to their costs of hiring an employee, then they could simply reduce the salaries they offer by $1,000 and start hiring.

But, since it will take years to create all the regulations required to carry out ObamaCare, employers today don't know whether the ObamaCare costs that will hit them down the road will be $500 per employee or $5,000 per employee. Even businesses that have record amounts of cash on hand are reluctant to gamble it by expanding their hiring under these conditions.

Many businesses work their existing employees overtime or hire temporary workers, rather than get stuck with unknown and unknowable costs for expanding their permanent work force.

As unusual as 9 percent unemployment rates may seem to the current generation of Americans, unemployment rates stayed in double digits for months and years on end during the 1930s. Franklin D. Roosevelt's administration followed policies very similar to those of the Obama administration today. He also got away with it politically by blaming his predecessor.
White House bluster hides truth


That’s a mighty wind blowing from the east. No, I’m not talking about Hurricane Irene. It’s the blustery gusts stirred up long before Irene by the constant whining from the Obama White House: Everything but the administration’s own policies are responsible for the faltering economy.

Irene is only the latest of the “head winds” White House officials blame for feeble economic growth and persistent high unemployment. There was the earthquake/tsunami in Japan, the fiscal crisis in Greece, the civil war in Libya on top of Arab Spring uprisings in other Arab countries and, of course, Republicans refusing to go along with President Barack Obama’s spending binge, er, “investments.” One adviser even found head winds from the East Coast earthquake, though its most notable damage appeared to be cracks in the foundation of the Washington Monument.

No doubt these events did create drag for the economy. But Democrats never cut that kind of slack for President George W. Bush. They constantly talk about him inheriting a surplus from the Clinton years but ignore that he also inherited a deteriorating economy that produced a recession in March of 2001 just weeks after he was sworn in.

Liberals ignore the economic devastation of the Sept. 11, 2001, terror attacks in New York and Washington. Air traffic was grounded for days, commerce came practically to a halt. But none of that was allowed to intrude into the left’s narrative of Bush squandering the surplus.

Hurricane Katrina was a convenient cudgel to pound Bush over the failure of government to respond effectively to the disaster, though it was the Democratic-run governments of New Orleans and Louisiana, the first responders, that were the most guilty. Here again the Democratic narrative leaves out the economic consequences of Katrina.

The point is that any president has to deal with “head winds” to the economy from unexpected and uncontrollable events domestic and foreign. What’s remarkable about this presidency is the never-ending whining about them.

This finger-pointing is just passing the buck to avoid responsibility for policies that have failed to revive the economy and, worse, served to prolong the economic suffering.

There’s the nearly trillion-dollar stimulus that failed its goal of keeping unemployment from breaching 8 percent. ObamaCare and the new financial regulatory law have bureaucrats working overtime writing new regulations. That’s frozen investment by businesses large and small worried about the yet-to-be-determined costs of the new rules.

Obama and his advisers never flinch from anti-business rhetoric, further undermining investment. They rail about millionaires and billionaires but their tax proposals would hit small businesses earning far less than a million dollars.

Democrats sneer at the Texas job growth story by pointing out that a significant part of it is based in the oil and gas industry, revealing left-wing job-killing hostility to developing traditional energy resources. A study by the business analysis firm IHS Global Insight asserts increased offshore energy production could produce nearly 230,000 jobs, add $44 billion to the economy and provide nearly $12 billion in tax and royalty revenues to state and federal governments.

But documents released by Sen. David Vitter (R-La.) show that the administration’s campaign against deepwater drilling in the Gulf of Mexico caused 10 oil rigs to leave for better opportunities in waters off Egypt, Congo and other places — including Brazil where, ironically, Obama has promoted the ocean exploration he frustrates at home.

Meanwhile the administration pursues alternative energy jobs, though the New York Times reported this month that “federal and state efforts to stimulate creation of green jobs have largely failed.”

All the finger pointing, whining and passing the buck can’t hide the failure of Obamanomics.

Irene's Broken Windows

By Larry Kudlow

Get ready for a bunch of demand-side economists to tell you that the post-Hurricane Irene rebuilding phase is actually a good thing for future economic growth. But don't believe it.

Who has it right?

Joshua Shapiro, chief U.S. economist at MFR Inc., delivered my favorite quote on the subject to The New York Times: "If you're in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly, that's not the case. It's not the case with a natural disaster, either."

Echoing this thought, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, bluntly noted on CNBC's website that "no one is made better off by the destruction of their home or workplace." He acknowledged the benefits of reconstruction work, but he dismissed the idea that somehow this is a net win for the economy.

It sounds to me as if both of these gentlemen are recalling the parable of the broken window, introduced by French free market philosopher Frederic Bastiat, in an 1850 essay called "That Which is Seen, and That Which is Not Seen." Though Bastiat agrees that repairing broken windows is a good thing, encouraging the glazier's trade and income, he argues that it is quite different from the idea that breaking windows is a good thing, in that it would cause money to circulate and encourage industry in general.

Why? Because a shopkeeper who spends money to fix broken windows cannot spend or invest that money on new ventures.

"It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library," Bastiat wrote. "In short, he would have employed his six francs in some way, which this accident has prevented."

In other words, the businesspeople who are spending to fix the damage of Hurricane Irene are not spending or investing that money on brand-new ventures or startups or on ordinary goods and services. Those are the real economics of Hurricane Irene.

There was a lot of damage incurred along 1,100 miles of U.S. coastline. Tragically, 28 deaths have been reported so far. There were toppled trees, power disruptions and flooding on damaged roads. Homes, commercial buildings and factories all stopped for at least a couple of days. In some sense, the human distress has been even greater than the economic distress.

On the other hand, lost sales, forgone consumer spending and temporary stoppages of production and employment all will be recouped in a relatively short period of time. Mark Zandi of Moody's Analytics suggests that the economic toll will be in the billions, but not the tens of billions. (Remember that the total U.S. gross domestic product is roughly $15 trillion.) So there's no black-swan event here that will throw our fragile economy into a double-dip recession.

Yes, the economic blow from Irene is noticeable, but it's temporary. In fact, what makes this economic setback even less worrisome is that it occurred over a weekend. You really didn't even lose two days of economic activity.

Restaurants, retailers, baseball games and Broadway shows all shut down, but only for a short bit. And actually, there was a lot of consumer buying in the days leading up to Irene. People went to Home Depot and Lowe's to find stuff with which to board up their windows. They went to Costco for food. And they went to Walmart and Dollar General for all sorts of things.

When the final tally is in, Irene may or may not qualify as a top 10 hurricane. But the history of such disasters is that the national economy rebuilds and snaps back shortly thereafter. Nonetheless, the economic rebuilding essentially gets you back to where you were before the storm. Unfortunately, there is virtually no net new investment from all of this.

That said, if President Barack Obama tries to use Hurricane Irene as an excuse to pour tens of billions of new infrastructure dollars into the economy, he's barking up the wrong tree.

For just as Bastiat's seen-and-unseen analysis holds for the shopkeeper repairing his window, it also holds for the impact of massive government spending on the whole economy. It's a huge mistake -- and a consequence of our fiscal profligacy -- when private money is not spent on new investment because funds are absorbed by big-government borrowing.

If we are to restore strong economic growth and job creation, we require measures such as pro-growth tax reform or regulatory rollback and repeal. In this sense, the new House Republican plan just released by Majority Leader Eric Cantor to repeal job-destroying regulations -- especially on labor and the environment -- makes a lot more sense than throwing money at the Federal Emergency Management Agency for new infrastructure banks.

Breaking fiscal windows is just as ineffective as breaking the shopkeeper's pane of glass.
Lawrence Kudlow is host of CNBC's The Kudlow Report and co-host of The Call. He is also a former Reagan economic advisor and a syndicated columnist. Visit his blog, Kudlow's Money Politics.

Can Obama Pull a Reagan?

Can Obama Pull a Reagan?

Democrats inside and outside the White House are looking for a comeback strategy for President Obama, and their model is Ronald Reagan.


Democrats inside and outside the White House are looking for a comeback strategy for President Obama, and their model is Ronald Reagan.

The Gipper's approval ratings were in the tank at the end of his second year in office, but he roared back to win 49 states against Democrat Walter Mondale. And Reagan's polling numbers at this stage of his presidency were not much better than Mr. Obama's are now.

Getty Images

However, a new analysis from Laffer and Associates suggests that it will be very difficult for Team Obama to replicate Reagan. Reagan's numbers bottomed out in January 1983, right after the trough of the 1982 recession, at about 35%. But for the rest of 1983, Reagan's numbers steadily climbed and eventually surpassed 50% by the end of that year. For Mr. Obama, the trend line this year has been in the opposite direction.

"Reagan's numbers really began to soar by late '83," says Arthur Laffer, who was an economic adviser to Reagan. "The numbers really tracked the economic recovery."

That kind of political resurrection could happen for Mr. Obama if the economy heals. But right now unemployment exceeds 9%, and presidents typically don't get re-elected when unemployment is more than 8%. And then there are the "confidence" and "competence" factors, according to the Laffer report. These are measures of whether people feel that things are getting better and the president is doing the right thing, even if the economy isn't so good at that point in time. In 1984, the unemployment rate was still above 7.5 % and Reagan won big.

The Laffer report on the two presidents is aptly entitled "The Odd Couple." In this case Reagan would be Felix, because he cleaned up the mess; and Mr. Obama is more like Oscar, who leaves a bigger mess behind.

Deficit Committee Taps GOP Tax Expert as Leader

CBO's Fiscal Fantasy

President Obama's Competency Crisis

Can Krueger Fix the Economy?

A New Japanese Government?

Larry Summers’s Bad Math Is S&P Informed Opinion

Larry Summers’s Bad Math Is S&P Informed Opinion: Caroline Baum

About Caroline Baum

Caroline Baum, a columnist for Bloomberg News since 1998, is the author of "Just What I Said: Bloomberg Economics Columnist Takes on Bonds, Banks, Budgets and Bubbles."

More about Caroline Baum

When Standard & Poor’s downgraded the U.S.’s long-term credit rating from AAA to AA+ on Aug. 5, Washington went on the offensive.

President Barack Obama’s advisers blasted S&P. The administration’s friends and allies came out with guns blazing. The Securities and Exchange Commission is reportedly scrutinizing S&P’s procedures connected with the downgrade. And the Senate Banking Committee is said to be pondering an investigation -- into what exactly, committee members haven’t said.

None of S&P’s detractors let us forget for one minute that this is the same S&P that slapped a AAA rating on collateralized subprime junk during the housing bubble, and that gave Enron Corp. and WorldCom Inc. investment-grade ratings shortly before each of them imploded.

What’s more, the U.S. Treasury found a $2 trillion error in S&P’s analysis, prompting Larry Summers, a former Obama economic adviser, to offer a rating of his own.

“S&P’s track record has been terrible and its arithmetic is worse,” Summers told CNN.

A pox on S&P’s house! Death to the messenger! In fact, the messenger was shot so early and often one might have missed the message amid all the gun smoke. Unless the U.S. gets its fiscal house in order and aligns the promises it has made to retirees with tax rates that don’t stunt growth, the nation’s sovereign- debt rating is unlikely to contain the first letter of the alphabet at all.

Ready, Shoot, Aim

As it turns out, the sharpshooters were wide of the target. S&P didn’t make an arithmetical error, as Summers would have us believe. Nor did the sovereign-debt analysts show “a stunning lack of knowledge,” as Treasury Secretary Tim Geithner claimed. Rather, they used a different assumption about the growth rate of discretionary spending, something the nonpartisan Congressional Budget Office does regularly in its long-term outlook.

CBO’s “alternative fiscal scenario,” which S&P used for its initial analysis, assumes discretionary spending increases at the same rate as nominal gross domestic product, or about 5 percent a year. CBO’s baseline scenario, which is subject to current law, assumes 2.5 percent annual growth in these outlays, which means less new debt over 10 years.

But S&P’s rating horizon is three to five years. The difference between the two assumptions amounts to a gap of about $250 billion in debt estimates for 2015: $14.5 trillion, or 79 percent of GDP, under the baseline scenario, versus $14.7 trillion, or 81 percent of GDP, under the alternative. (S&P includes federal, state and local government debt in its calculations.)

Over 10 years, the difference is, as Treasury says, $2 trillion and eight percentage points as a share of GDP.

Repeated Mistake

In its response to the S&P downgrade, Treasury used the word “mistake” eight times, “error” five times, and other pejorative words three times -- all in a 550-word memo. Just in case anyone missed the point.

To be sure, S&P’s critics have legitimate gripes. Was the credit rating company being too much of an activist in demanding $4 trillion of savings for the U.S. in order to maintain its AAA rating? Why didn’t S&P’s acceptance of a slower rate of spending produce a different outcome? Was the downgrade political? If so, is this a legitimate framework for assessing the creditworthiness of the U.S.?

These are all valid questions. Yet when the discussions between S&P and Treasury didn’t have the desired results, the administration set out to discredit the messenger.

Cognitive Dissonance

Imperfect as that messenger may be, shooting him doesn’t minimize the message. Fiscal policy is on an unsustainable path, largely the result of entitlement spending exacerbated by the retirement of the baby boomers. We have a government that lives beyond its means and a political class that lacks the will to find a solution.

For example, “preserving Medicare as we know it,” as House minority leader Nancy Pelosi is wont to say, isn’t an option. Medicare’s Hospital Insurance Trust Fund will be exhausted by 2024, according to the 2011 annual report from the program’s trustees. That’s five years earlier than they projected in 2010. Medicare has been running a cash-flow deficit, with expenditures exceeding income, since 2008.

The Social Security Trust Fund, which ran a cash-flow deficit excluding interest last year and is projected to run one this year, will be exhausted in 2036. (No, Virginia, there is no lockbox.)

‘Delicious Irony’

The Republicans’ intransigence on revenue increases, no matter what the source, is another stumbling block. As economist Art Laffer put it, “Who doesn’t want revenue increases” if they result from stronger economic and job growth? Almost everyone agrees the economy would get a boost from a more efficient tax system that eliminates loopholes and lowers corporate and individual income-tax rates.

Looking at the big picture, the American Enterprise Institute’s Alex Pollock finds a “delicious irony” in the S&P downgrade. The only reason it carried so much weight is the federal government gave S&P that power. S&P is one of three nationally recognized statistical rating organizations (NRSROs), along with Moody’s and Fitch, designated by the SEC in 1975.

The Dodd-Frank financial-reform act includes a provision that would end their monopoly, but progress on implementing it has been slow.

In the meantime, just think if all the energy expended to discredit S&P had been put to better use. Maybe the Obama administration could have offered up its own plan to put the U.S. on a sustainable fiscal path -- perhaps one that passes muster with S&P.

Granny’s Fate Rides With Bernanke in Jackson Hole

Granny’s Fate Rides With Bernanke in Jackson Hole: Caroline Baum

Granny's Fate

Illustration by Nathaniel Russell

About Caroline Baum

Caroline Baum, a columnist for Bloomberg News since 1998, is the author of "Just What I Said: Bloomberg Economics Columnist Takes on Bonds, Banks, Budgets and Bubbles."

More about Caroline Baum

Investors around the world are waiting to find out whether Federal Reserve Chairman Ben Bernanke puts any QE3 in his opening remarks today at the Kansas City Fed’s Jackson Hole conference. It was one year ago at the same event that he outlined the Fed’s policy options for an ailing economy, including a second round of quantitative easing that started in early November.

A second audience will be listening to Bernanke -- not as closely, perhaps, nor in real time, but with no less a stake in the outcome: retirees living on fixed incomes who have watched their returns dwindle to almost nothing.

Bernanke has already told this group to forget about earning a higher rate of interest anytime soon. At the conclusion of its Aug. 9 meeting, the Fed announced it would keep the benchmark rate near zero “at least through mid-2013.” What’s a small saver to do?

Monetary policy isn’t offering much solace in the short run. That’s because the Fed adjusts interest rates and, in so doing, changes the incentives to spend and to save.

When inflation-adjusted interest rates are high, the public is induced to forego current consumption in favor of future consumption. In plain talk, we’re being paid to save.

Alternatively, when real rates are low or negative, as they are now, the incentive is to spend today and forget about saving for a rainy day. Interest rates act as a guide to our choices.

Risk Management

That’s one explanation of how monetary policy works. There are others. While currently out of favor, monetarism teaches that if the Fed creates more money than the public wants to hold, people will spend it. It’s akin to dropping money from a helicopter, the metaphor adopted by the late Milton Friedman to teach his University of Chicago students how monetary policy works.

Bernanke explains it in a different way. Once short-term rates hit zero, monetary policy works through the portfolio balance channel, a theory he outlined at Jackson Hole last year. Specifically, when the Fed buys risk-free Treasuries, it depresses the yields and forces investors to buy other assets that carry increased credit and interest-rate risk -- long-term corporate bonds or stocks, for example.

In a Nov. 19 speech, he even argued that there was no Q in quantitative easing. The thrust of QE, he said, comes from changing the quantity of bank reserves, a channel he called weak. Securities purchases, on the other hand, work through portfolio substitution.

“The Fed should talk in terms of reserves, not asset prices,” said Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh and a former research director at the Richmond Fed.

Bad Marketing

The reason? To remind the public of the Fed’s unique authority, independent of the political process, “to stabilize the purchasing power of money,” Goodfriend said.

Maybe it’s just a case of bad marketing, although the Fed has been emphasizing the asset side of its balance sheet since December 2008, when it lowered the funds rate to near zero. For an institution that is so concerned with its communication policy, the Fed could do better. The talk about forcing investors to assume more risk sounds as if the Fed is encouraging Gram and Gramps to redeem those six-month Treasury bills, cash out of the money-market fund and let the CDs mature, and go out and buy stocks and high-yield bonds.

Small savers and retirees have reason to be upset. It’s as if monetary policy has been personalized to punish one group that behaved well (savers) and reward another that over-borrowed and over-spent.

Daily 400-point swings in the Dow Jones Industrial Average aren’t for everyone. Most octogenarians, I’d venture to say, prefer less volatility.

Bubble Blindness

Goodfriend says the Great Inflation of the 1970s soured many savers on owning long-term bonds. They opted for short-term instruments instead, which left them vulnerable to periodic bouts of ultra-low rates (the periods seem to be getting longer).

Besides, the Fed’s extended policy of zero-percent interest rates is apt to spark a bubble in some unexpected asset class. (Farm land and student loans have been mentioned as possible candidates.) When it comes to bubble identification, the Fed is the last one to know and even slower to admit to a role in its creation.

The Fed tries to be neutral in its conduct of monetary policy, buying Treasuries only and no other asset classes. (The various lending facilities created in 2007 and 2008 to deal with the financial crisis are the exception.) In the same spirit, the central bank needs to communicate that it’s running monetary policy for everyone, not just sophisticated investors.

Don’t Forget Gramps

“A policy that is effective in getting the economy to grow more rapidly will improve the lives of most people,” says former St. Louis Fed President Bill Poole.

Stronger growth means more hiring, more income, bigger profits, higher stock prices and higher real interest rates.

Figuring out what’s “effective” isn’t so easy. I doubt that Bernanke will offer any new solutions today. After all, three members of the Fed’s policy committee dissented from the Aug. 9 decision to commit to near-zero rates through mid-2013.

Inflation readings are much higher than they were a year ago: 3.6 percent versus 1.2 percent for the consumer price index; 1.8 percent versus 0.9 percent for the core CPI, which excludes food and energy and is given more weight by policy makers. The bar for additional Fed action has been raised.

Whatever Bernanke says or doesn’t say is sure to have a market impact. Stocks, for example, will probably be disappointed without the prospect of a Fed fix.

As for Gram and Gramps, who won’t be attending this or any Fed symposium, Bernanke will have nothing to offer. At minimum he could acknowledge their predicament and stop encouraging them to buy junk bonds.

How Steve Jobs Made Business Cool Again, 1981

How Steve Jobs Made Business Cool Again, 1981: Virginia Postrel

How Steve Jobs Made Business Cool

Illustration by Leif Parsons

About Virginia Postrel

Virginia Postrel writes about commerce and culture, innovation, economics and public policy. Shes the author of "The Future and Its Enemies" and "The Substance of Style," and is writing a book on glamour.

More about Virginia Postrel

To understand the cultural significance of Steve Jobs, you have to go back in time: to before the iPad or iPhone or iTunes, before Apple Inc.’s comeback products made candy-colored plastics and iAnything cool, before Jobs got kicked out of Apple, even before the Macintosh hurled a sledgehammer at Big Brother.

It’s 1981. Most people have never heard of Silicon Valley. The country’s most famous businessman is Lee Iacocca, the head of Chrysler Corp. He’s famous because in 1979 he engineered a government bailout -- loan guarantees -- that saved the company. He’s also famous because, unlike his peers, Iacocca is colorful. He seems to believe in what he’s doing.

In 1981, business executives aren’t known for either personality or passion. The general public sees business as a boring, impersonal, possibly suspect activity. Its significance seems purely financial.

“Businessmen,” Tom Wolfe tells the Wall Street Journal, “no longer have the conviction that what they’re doing is exciting and glamorous, which is, I guess, another way of saying intrinsically worthwhile.”

That was all about to change.

In the 1980s, entrepreneurs became heroes, celebrities and role models. The Apple whiz kids, Steve Jobs and Steve Wozniak, were the new face of business.

Money was, of course, part of the appeal -- millionaires in their 20s! -- but there was much more to it than that. The aspirations for pleasure and self-expression that the sociologist Daniel Bell had condemned as the “cultural contradictions of capitalism” turned out to be its fuel.

“It’s a neat way to play,” said Dave House, who was the manager of Intel Corp. (INTC)’s microprocessor division in 1982 when he posed for a magazine in a hot tub with his girlfriend, apparently naked. House wasn’t talking about his hot-tub frolics. He was explaining why he kept working once he had more money than he knew what to do with.

In the 1980s, business became a realm of passion and personality and, above all, surprises. Big changes could come from anywhere -- from backwaters such as Bentonville, Arkansas and Memphis, Tennessee, and Portland Oregon. Or, of course, Cupertino, California and Redmond, Washington. The ethos of Silicon Valley became, if not workaday reality, then the cultural norm.

“Apple was about as pure of a Silicon Valley company as you could imagine,” Jobs said in an interview with Newsweek after he was fired in 1985. If he had been born and raised in New York, we probably would never have heard of him. But Jobs grew up knowing about David Packard and Bill Hewlett starting a business in their garage. When he was barely a teenager, he cold-called Hewlett, whose home number was listed in the phone book, and talked his way into a job at HP.

“Our role model was Hewlett-Packard,” he said in 1985. Apple just grew a lot faster.

Although the HP Way was Silicon Valley lore, it wasn’t a touchstone to the general public. Apple’s rapid success, by contrast, made quite an impression. Before long, the ideal of the loyal company man working his way to the top was being replaced by the ideal of the brilliant, arrogant college dropout conquering the world before he was 30: the entrepreneur as Alexander.

Business became more like sports or fashion: a topic of social conversation, a source of rooting interest and an expression of personal taste. The cultural, or even religious, war between Apple and Microsoft devotees would have been as inconceivable in 1981 as a “brand evangelist” or a corporate chieftain who appeared in public without a tie.

Now, by contrast, people far removed from the executive suite, working in entirely different companies or even completely different industries, have strong opinions about what strategies Apple or Microsoft or General Motors or Wal-Mart or Amazon should pursue.

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work,” Jobs said in a 2005 Stanford University commencement speech, which has been much quoted in recent days. “And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle.”

That inspiring philosophy offers the promise of greatness and self-fulfillment, but also perpetual dissatisfaction. If business isn’t just about making money, if it is about finding a version of true love and leaving a cultural mark, the stakes are much higher. Your work becomes your identity.

Nobody ever asked why Steve Jobs kept working after he was rich. Everyone understood.

Why Alan Krueger's Jobs Analysis Was Spot On

Why Alan Krueger's Jobs Analysis Was Spot On: The Ticker

Ticker: Percent of U.S. Population with a Job in July

In a March 31 Bloomberg News op-ed, Princeton University economist Alan Krueger predicted that the unemployment rate, then at 8.9 percent, would keep falling. He was wrong -- it rose, and five months later it's still higher at 9.1 percent.

President Barack Obama today nominated Krueger to lead the Council of Economic Advisers, replacing Austan Goolsbee. Did the president choose someone who doesn't understand labor markets?

To the contrary. In the same op-ed, Krueger's analysis was spot on when he wrote about the employment-to-population ratio, which may offer a better window on job-market trends. As Krueger explained, the unemployment rate can be illusory because it only counts people who have actively looked for a job in the last month. He wrote:

"Here’s something to think about. At the end of this year, extended unemployment benefits will expire, while other people will exhaust their benefits during the course of the year. Once that happens we might start seeing more people give up looking for work, restoring the pattern where people unemployed the longest leave the labor force at a higher rate than others. After all, the prospect of finding a job after looking for two years is small, and it probably won’t improve much even if the labor market continues to heal.

So we might well see the labor force shrinking more even as the measured unemployment rate falls. Nonetheless, we still will have a serious joblessness problem even as the unemployment rate falls.

Instead of focusing on the unemployment rate, it may be better to look at the employment-to-population ratio, or the share of the population that is employed. This rate isn’t affected by whether someone is counted as in or out of the labor force.

Tellingly, the employment-to-population rate has hardly budged since reaching a low of 58.2 percent in December 2009. Last month it stood at just 58.4 percent. Even in the expansion from 2002 to 2007 the share of the population employed never reached the peak of 64.7 percent it attained before the March-November 2001 recession.

What this indicator tells me is that we weren’t creating enough jobs long before the recession that began in December 2007. If this pattern holds, even in recovery, it points to a much deeper and disturbing problem for the U.S. economy."

He was right: The employment-to-population ratio kept on slipping in subsequent months, reaching 58.2 percent in the June payrolls report and 58.1 percent in July. As my colleague Mark Whitehouse wrote in an Aug. 5 Ticker post, that's the lowest point since the 1983 recession. We'll see if it dips below that, to 58 or even lower, when the August employment figures are released on Friday.

Give Karl Marx a Chance to Save the World Economy

Give Karl Marx a Chance to Save the World Economy: George Magnus

Karl Marx and the World Economy

Illustration by Jordan Awan

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher’s analysis of capitalism had a lot of flaws, but today’s global economy bears some uncanny resemblances to the conditions he foresaw.

Consider, for example, Marx’s prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in “Das Kapital,” companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.”

The process he describes is visible throughout the developed world, particularly in the U.S. Companies’ efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant.

U.S. income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.

Over-Production Paradox

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today’s developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively.

As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”

Addressing the Crisis

So how do we address this crisis? To put Marx’s spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn’t temporary, and it certainly won’t be cured by the ideological passion for government austerity.

Here are five major planks of a strategy whose time, sadly, has not yet come.

First, we have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don’t face an imminent debt crisis -- including the U.S., Germany and the U.K. -- must make employment creation the litmus test of policy. In the U.S., the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start.

Lighten the Burden

Second, to lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.

Third, to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

Fourth, to ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalization of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility -- a sine qua non to solve the bond market crisis at least.

Build Defenses

Fifth, to build defenses against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens.

We can’t know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn’t acceptable, either. It could turn the U.S. into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that’s another subject.

U.S. Confidence Slumps to Lowest Since 2009

U.S. Confidence Slumps to Lowest Since 2009

Women carry shopping bags in New York. Photographer: Scott Eells/Bloomberg

Aug. 30 (Bloomberg) -- Jonathan Spector, chief executive officer of the Conference Board, talks about the group's consumer confidence survey for August and the outlook for the U.S. economy. The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July. Spector speaks with Matt Miller on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Aug. 30 (Bloomberg) -- Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home-price index, talks about the U.S. housing market and economy, and his prescription for government action to boost growth and employment. Property values in 20 cities fell 4.5 percent in the year ended in June, after a 4.6 percent drop in the 12 months ended in May that was the biggest since 2009, according to the Case-Shiller index. Shiller speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Aug. 26 (Bloomberg) -- Allan Meltzer, a professor at Carnegie Mellon University and a historian of the Federal Reserve, Jacob Frenkel, chairman of JPMorgan Chase International, and Dean Maki, chief U.S. economist at Barclays Capital, offer their views on today's speech by Fed Chairman Ben S. Bernanke at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming. This report also contains comments by Diane Swonk, chief economist at Mesirow Financial Holdings Inc., Allen Sinai, chief global economist at Decision Economics Inc., Richard Dekaser, an economist at the Parthenon Group, and Kevin Hassett, director of economic policy studies at the American Enterprise Institute. (Source: Bloomberg)

Shoppers look over merchandise at a Gap Inc. store in San Francisco. Photographer: David Paul Morris/Bloomberg

Confidence among U.S. consumers plunged in August to the lowest in more than two years as Americans’ outlooks for employment, incomes and business conditions soured. Photographer: David Paul Morris/Bloomberg

Confidence among U.S. consumers plunged to the lowest level in more than two years as Americans’ outlooks for employment and incomes soured.

The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

Treasury yields dropped on concern consumers will pull back on the spending that makes up about 70 percent of the economy, increasing the risk of a recession. An unemployment rate above 9 percent, partisan bickering over the budget deficit and a volatile stock market weighed on sentiment.

“This paints a picture of underlying demand weakening,” said Bricklin Dwyer, an economist at BNP Paribas in New York, whose forecast of 45 was most accurate in a Bloomberg News survey. “Consumers are seeing their wealth deteriorate. We’ve seen a huge decline continuing in the housing market. They’ve also been hit on the chin by the equity markets.”

Treasuries climbed, pushing down the yield on the benchmark 10-year note down to 2.17 percent from 2.26 percent late yesterday. After declining as much as 1.2 percent, the Standard & Poor’s 500 Index rose 0.2 percent to 1,212.92 at the 4 p.m. close in New York after minutes of the Federal Reserve’s last meeting showed some policy makers wanted to take more action to spur growth.

Global Confidence Slump

American consumers aren’t the only ones feeling more glum. European confidence in the economic outlook plunged in August by the most since December 2008 as a persistent debt crisis roiled markets and clouded growth prospects. An index of executive and consumer sentiment in the single-currency region fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today.

The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent in June from a year earlier, after a 4.6 percent drop in the 12 months ended in May that was the biggest since 2009.

Federal Reserve Bank of Chicago President Charles Evans urged easier monetary policy to keep the recovery going after the central bank on Aug. 9 vowed to keep its benchmark interest rate close to zero at least through mid 2013.

“I would favor more accommodation,” Evans, a voting member of the Fed’s policy-making committee, said today in a CNBC television interview. “I am somewhat nervous about the economic recovery and where we stand at this point.”

Survey Results

Economists predicted the Conference Board’s gauge would fall to 52 in August, according to the median forecast in the Bloomberg survey. The index averaged 98 during the economic expansion that ended in December 2007.

The share of consumers who said jobs are currently hard to get increased to 49.1 percent, the highest since November 2009, from 44.8 percent in July. Confidence dropped in all nine U.S. regions.

“If you were advised to lean on one side or the other, I’d say it’s more likely to be slightly more negative from a sentiment perspective in consumers in the United States,” Glenn Murphy, chief executive officer of Gap Inc. (GPS), said in an Aug. 18 conference call with analysts. “Maybe the holiday season could be slightly positive, but we’re not counting on it right now.”

San Francisco-based Gap, the largest U.S. apparel chain, reported a 19 percent decline in second-quarter profit as price increases failed to keep up with higher costs to make clothes.

Other Measures

Today’s confidence report is in line with other figures. The Thomson Reuters/University of Michigan final index of consumer sentiment dropped this month to the lowest level since November 2008. The Bloomberg Consumer Comfort Index has been hovering at levels previously consistent with recessions.

A struggling labor market is weighing on consumer sentiment. Employers added 75,000 jobs in August, compared with 117,000 in July, as the unemployment rate held at 9.1 percent, according to the median estimates in a Bloomberg survey ahead of a Sept. 2 report from the Labor Department.

“Economic growth has, for the most part, been at rates insufficient to achieve sustained reductions in unemployment,” Fed Chairman Ben S. Bernanke said Aug. 26 at the Jackson Hole, Wyoming, central bank symposium.

The Conference Board’s data showed a measure of present conditions declined to 33.3, the second-lowest this year, from 35.7 in July. The measure of expectations for the next six months slid to 51.9, the weakest since April 2009, from 74.9.

Job Concerns

The percent of respondents expecting more jobs to become available in the next six months fell to 11.4, the lowest since March 2009, from 16.9 the previous month. The proportion expecting their incomes to rise over the next six months declined to 14.3 from 15.9. The percent expecting a drop rose to 18.7, the highest since November 2009.

Fewer respondents in the Conference Board’s survey indicated they were planning to buy a house, while more intended to purchase cars or major appliances in the next six months.

The cutoff date for the survey responses in this month’s calculation was Aug. 18, Lynn Franco, director of the Conference Board’s Consumer Research Center, said in an interview. The group looked at the responses received before and after the downgrade of U.S. debt by Standard & Poor’s and saw very little difference, she said.

“The decline we saw was already in place before the downgrade, and there was really already a significant change in confidence,” said Franco.

Broad-Based Drop

All of the 20 cities in the S&P/Case-Shiller home-price index showed a year-over-year decline in June, led by an 11 percent drop in Minneapolis.

Any recovery in home values is probably years away as foreclosures dump more properties onto to the market, while a jobless rate hovering around 9 percent and strict lending rules hurt sales.

“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto.

Rebel Leader Gives Qaddafi Forces Weekend Deadline

Rebel Leader Gives Qaddafi Forces Weekend Deadline

Libyan rebel leader Mustafa Abdul Jalil pauses during a press conference on in Benghazi. Photographer: Gianluigi Guercia/AFP/Getty Images

Libyan rebel leaders expressed growing confidence that Muammar Qaddafi’s days on the run are numbered.

Mustafa Abdel Jalil, chairman of the rebel National Transitional Council, gave Qaddafi’s forces until Sept. 3 to surrender or face attack and said members of the former leader’s government would receive fair trials.

“We have a good idea where he is,” Ali Tarhouni, a rebel council minister, was quoted by the Associated Press as saying yesterday. “We don’t have any doubt that we will catch him.”

UN Secretary General Ban Ki-moon said yesterday that rebel forces have control over most of Tripoli since the Qaddafi family fled, the German press agency Deutsche Presse-Agentur reported.

“We are now looking for a quick conclusion of the conflict and sufferings of the Libyan people,” Ban told the UN Security Council, which met yesterday. The council approved the U.K’s request to release $1.55 billion of frozen Libyan banknotes held there.

Rebel leaders also demanded that Algeria return Qaddafi’s wife, Safia, daughter Aisha and two sons, Hannibal and Mohammed, who crossed the border into Algeria on Aug. 29.

Algeria closed part of the border with Libya after their arrival, according to the privately owned newspaper El Watan. The Algerian Foreign Ministry said yesterday that Aisha had given birth in Algeria.

Holdout Cities

The coastal city of Sirte and the southern town of Sabha are the key remaining bastions of Qaddafi loyalists, Abdel Jalil, the rebel council chairman, said yesterday in a televised press conference broadcast from Benghazi.

“The entry to Sirte and southern towns of Libya should be as peaceful as possible to avoid more bloodshed and destruction,” he said. “If there are no indications for conducting this peacefully, we can act decisively to end this situation in a military manner, but we do not wish to do so.”

Sirte, Qaddafi’s hometown, is the last major coastal city still resisting rebel forces, which are backed by the North Atlantic Treaty Organization. The opposition is seeking to capture Qaddafi and his closest aides, including son Saif al- Islam, to consolidate its gains and announce a new interim government after entering Tripoli, the capital, last week.

“We want the wise people of these cities to cooperate,” Abdel Jalil said. “We have been in contact with the elders and the wise men of these cities.”

NATO Attacks

NATO, which has supported the rebels by bombing pro-Qaddafi targets, will continue operations in the North African country as long as necessary, spokeswoman Oana Lungescu told reporters in Brussels.

“It looks as if we are nearly there, but we’re not there yet,” she said.

One of Qaddafi’s sons, Khamis, a military commander, was killed in a NATO air strike southeast of Tripoli, Sky News reported, citing a man claiming to have been Khamis Qaddafi’s bodyguard. A rebel official, speaking on the condition he not be named, said the deaths of Khamis and Qaddafi’s top security adviser, Abdullah al-Senussi, hadn’t been confirmed.

Balance of Strength

“The Qaddafi regime is collapsing and rapidly losing control on multiple fronts,” Colonel Roland Lavoie, spokesman for NATO’s Operation Unified Protector, told reporters. “The Tripoli region is essentially freed.”

Columns of rebel units in armed pickup trucks, some towing artillery and wheeled anti-aircraft guns, left Tripoli Aug. 29 and headed east to Misrata in preparation for an advance on Sirte.

Pro-Qaddafi forces committed possible war crimes in the battle for Misrata, Physicians for Human Rights said in a report released yesterday.

Those crimes include murder, torture and rape, the Boston- based group said, citing interviews with 54 residents of Misrata and its surrounding villages that it said were conducted in June, shortly after rebel forces captured the western coastal city.

“The rule of law must be the bedrock of a new and free Libya,” the group said. The transitional council “must ensure that perpetrators are brought to justice and held accountable.”

Jalil said the transitional council will try members of Qaddafi’s government in the courts.

“The safety and security of everyone is our responsibility,” he said. “We will provide fair trials for each of them, but we will not deal lightly with anyone who poses a threat to the revolution.”

Rebel officials have said that resuming oil production, halted by the conflict, will be a top priority. Oil prices rose to their highest level in almost four weeks in New York. The price of crude oil for October delivery rose by $1.63, or 1.9 percent, to $88.90 a barrel, the highest settlement since Aug. 3 on the New York Mercantile Exchange.

China's military power

China's military power

Modernisation in sheep's clothing


THE good news, as suggested by the Pentagon's latest annual report on China's military power, is that Chinese leaders are still eager to avoid confrontation with other powers and focus on beefing up the economy. The bad news, it hints, is that this might not last. With its rapidly improving military capability (described by the Pentagon in great detail), China has the wherewithal to challenge the security status quo in the Pacific as well as potential motives to do so.

The report is diplomatically couched—though from China's perspective, not nearly enough. It hints at considerable unease about long-term trends in China's military buildup. The last few months have seen some headline-grabbing aspects of this: an assertion by the Pentagon in December that China was making faster progress than expected on an aircraft-carrier-killing ballistic missile, the DF-21D; a new stealth fighter, the J-20, making its first test flight just as Robert Gates, then defence secretary, was visiting Beijing in January; and then this month the maiden launch of China's first aircraft carrier, a refitted Kuznetsov-class ship (as yet unnamed) from the former Soviet Union.

About these particular weapons, the Pentagon avoids sounding alarmed. Of the DF-21D missile, it says that it is still being developed. It does not repeat the claim made by Admiral Robert Willard of America’s Pacific Command in December that the missile has reached “initial operational capability”. The J-20, it says, is not expected to reach “effective operational capability” before 2018 (China, it says, has yet to master high-performance jet-engine production). China is likely to build “multiple” aircraft-carriers with support craft over the next decade. But it will take “several additional years” for China to achieve a “minimal level of combat capability” with them, says the report.

The Pentagon does say, however, that China is steadily closing its technological gap with modern armed forces. The country’s lack of transparency about this, it says, is fuelling concern in the region about China’s intentions, with some of its neighbours fearing that China’s growing military and economic weight is “beginning to produce a more assertive posture, particularly in the maritime domain”. A senior Pentagon official, Michael Schiffer, told reporters that China’s capabilities could “contribute to regional tensions and anxieties”.

Like previous such reports, this one lists forces which could cause China’s self-proclaimed “peaceful development” to become less so. One of these, which was not listed last year, is a growing expectation at home and abroad that China will become more involved in addressing global problems and pursuing its own international interests. This is causing some of the Chinese leaders in responsible positions to worry about taking on more than they can handle, says the Pentagon. Nationalists at home, however, are pushing for a “more muscular” posture.

China is outraged that anyone could doubt its commitment to a peaceful ascent. The Pentagon’s assertions, said China’s state-run news agency, Xinhua, were “utterly cock-and-bull” and based on “a wild guess and illogical reasoning”. Thumping furiously on the table, China apparently believes, is a good way of convincing the world of its pacific intent.

Doing Business in Brazil

Doing Business in Brazil

Rio or São Paulo?


LAST year Paulo Rezende, a Brazilian private-equity investor, and two partners decided to set up a fund investing in suppliers to oil and gas companies. Although this industry is centred on Rio de Janeiro, Brazil’s second-largest city, with its huge offshore oilfields—and fabulous beaches, dramatic scenery and outdoor lifestyle—they instead established the Brasil Oil and Gas Fund 430km (270 miles) away, in São Paulo’s concrete sprawl. Even though it means flying to Rio once or twice a week, Mr Rezende, like many other businesspeople, decided that São Paulo’s economic heft outweighed Rio’s charms. But the choice is harder than it used to be.

For many years, São Paulo has been the place for multinationals to open a Brazil office. It may be less glamorous than Rio, as the two cities’ nicknames suggest: Rio is Cidade Maravilhosa (the Marvellous City); São Paulo is Cidade da Garoa (the City of Drizzle). But as Mr Rezende sadly concluded: “São Paulo is the financial centre, and that’s where the money is.”

Edilson Camara of Egon Zehnder International, an executive-search firm with offices in both cities, does 12 searches in São Paulo for each one in Rio. The biggest mistake, he reckons, is for firms to let future expatriates visit Rio at all. “They are seduced by the scenery and lifestyle, and it’s a move they can sell to their families. But many have ended up moving their office to São Paulo a couple of years later, with all the upheaval that entails.”

From a hamlet founded by Jesuit missionaries in 1554, São Paulo grew on coffee in the 19th century, industry in the first half of the 20th—and then on the misfortunes of Rio, once Brazil’s capital and its richest, biggest city. The federal government abandoned Rio for the newly built Brasília in 1960, starting a half-century of decline. Misgoverned by politicians and fought over by drug gangs and corrupt police, Rio became dangerous, even by Brazilian standards. The exodus gained pace as businesses and the rich fled, mostly for São Paulo.

Now, though, there are signs that the cost-benefit calculation is shifting. São Paulo’s economy has done well in Brazil’s recent boom years and it is still much bigger, but Rio’s is growing faster, boosted by oil discoveries and winning its bid to host the 2016 Olympics (see table below). Last year Rio received $7.3 billion in foreign direct investment—seven times more than the year before, and more than twice as much as São Paulo. Prime office rents in Rio are now higher than anywhere else in the Americas, north or south, according to Cushman and Wakefield, a property consultancy.
Community-policing projects are taming its infamous favelas, or shanty towns: its murder rate, though still very high at 26 per 100,000 people per year (two-and-a-half times São Paulo’s), is at last falling. Brazil’s soaring real is pricing expats paid in foreign currencies out of São Paulo’s classy restaurants and shopping malls; Rio’s recipe of sun, sea and samba is still free. Even Hollywood seems to be on Rio’s side: an eponymous animation, with its lush depictions of rainforest and carnival, is one of the year’s highest-grossing films.

Red-carpet treatment
Rio’s mayor, Eduardo Paes, has big plans for capitalising on the city’s magic moment. The sharp-suited, English-speaking lawyer has set up a business-development agency, Rio Negócios, to market the city, help businesspeople find investment opportunities, and advise on paperwork and tax breaks. Though all investors are welcome, it concentrates on those in sectors where it reckons Rio has an edge: tourism, energy, infrastructure and creative industries such as fashion and film. “A couple of years ago, foreign businessmen would come to Rio and ask what we had to offer,” says Mr Paes. “We had no answer. Now we roll out the red carpet.”

The political balance between the two cities has changed too. In the 1990s São Paulo was more influential and better run: it is the stronghold of the Party of Brazilian Social Democracy (PSDB), the national party of government from 1995 to 2002. Now the PSDB is in its third term of opposition in Brasília, and though it still governs São Paulo state, it is weakened by internal feuds. In Rio, by contrast, the political stars are aligned. The state governor, Sérgio Cabral, campaigned tirelessly for the current president, Dilma Rousseff—and received his reward when police actions in an unruly favela late last year were backed up by federal forces. Mr Paes and Mr Cabral are from the same party, and their pre-Olympic plans for security, housing and transport mesh well.

São Paulo’s socioeconomic segregation, long part of its appeal to expats, is starting to look like less of an advantage. Most of its nicer bits are clustered together, allowing rich paulistanos to ignore the vast favelas on the periphery. In Rio, selective blindness is harder with favelas perched on hilltops overlooking all the best neighbourhoods. But proximity seems to be teaching well-off cariocas that abandonment is no solution for poverty and violence. Community policing and urban-renewal schemes are bringing safety and public services. Chapéu Mangueira and Babilônia, twin favelas a 20-minute uphill scramble from Copacabana beach, are being rebuilt, with a health clinic, nursery and a 24-hour police presence. The price of nearby apartments has already soared. Several other slums are also getting similar make-overs.

Central do Brasil
Rio’s Olympic preparations include extending its metro and building lots of dedicated bus lanes, including one linking the international airport to the city centre. By 2016, predicts City Hall, half of all journeys in the city will be by high-quality public transport, up from 16% today. São Paulo’s metro extensions are years behind schedule, and the city is grinding towards gridlock. Its plans to link the city centre to its main international airport (recently voted Latin America’s most-hated by business travellers) rely on a grandiose federal high-speed train project, bidding for which was recently postponed for the third time.

Rio is still unpredictably dangerous, and decades of poor infrastructure maintenance have left their mark. Its mobile-phone and electricity networks are outage-prone; the língua negra (“black tongue”, a sudden overflow of water and sewage from inadequate hillside culverts) is a staple of the rainy season; exploding manholes, caused by subterranean gas leaks meeting sparks from electricity lines, are a hazard all year round. All in all, still not an easy choice for a multinational business—but it is no longer foolish to let prospective expats fly down to Rio to take a look.

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