May 31, 2007 1:43
Boutique gas and high prices
Gas prices are high at the moment, the highest they've been (adjusting for inflation) since all-time records were set back in 1981. Crude oil prices are high, too, but they were even higher last summer.
What's up with that? The word on Capitol Hill is that refiners and gas retailers are gouging us--the House even passed a bill last week called the Federal Price Gouging Prevention Act, which would outlaw "unconscionably excessive" gas prices. But the bill is a joke, because it doesn't address what is probably the main reason why gas is selling at such a premium over oil.
The refiners and retailers are gouging motorists, if you define gouging as raking in serious profits. Yeah, there have been some refinery breakdowns behind the latest spike in gas prices, but those breakdowns have allowed still-operating refineries to make even more money. But they're able to do this in large part because our lawmakers and regulators have--inadvertently--made it easy for them to do so.
What anybody selling anything wants is what's euphemistically referred to in the business world as "pricing power," which is effectively the ability to gouge customers. You've got pricing power when your product is unique, or hard to transport from afar. When you're selling a fungible commodity that's easily transported, you usually don't have much pricing power at all.
You'd think gasoline would be such a fungible commodity. It used to be, but it isn't so much anymore, in large part because of state and federal rules enacted since 1990 aimed at dealing with specific pollution problems in different regions (and in some cases at helping the ethanol industry). The result is a proliferation of "boutique fuels" sold only in particular regions or states or metropolitan areas. Wrote law professors Andrew P. Morriss and Nathaniel Stewart last year:
These requirements have three primary effects on gasoline markets. First, the fuel requirements may isolate particular geographic markets from the overall gasoline market, making it harder to bring new supplies to a region or uneconomical to shift supplies out of a region. Second ... additional capital investment may be needed to produce the boutique fuels, limiting the number of current plants able to produce a particular fuel, creating an incentive to exit a market, and creating a barrier to entry.... Third, they alter the path of technological change, diverting investment away from improving production processes to meet regulatory requirements.
Morriss and Stewart both strike me as guys who would hate almost any regulation. But their reasoning here is pretty persuasive. In a truly national gasoline market, refiners would be under far more price pressure from competitors than they are under the current setup.
Of course, as the EPA pointed out in its own report on boutique fuels last summer, the only way to create a truly national gasoline market without giving up air quality gains of recent decades would be to impose the rules that now apply in places like L.A. and Atlanta nationwide:
EPA's analysis of the fuel options concluded that there are trade-offs when attempting to simplify gasoline distribution and reduce market volatility. The fuel options identified to produce the greatest benefits under these goals would also entail the greatest production costs and reductions in gasoline production capability.
So gas would still cost a lot. Maybe more than it does now. But much of the money would go to cleaning the air and (probably) improving production technologies in ways that would drive down refining costs over time. Which strikes me as a better tradeoff than the one we're getting now.
May 31, 2007 9:24
So is this what a recession feels like nowadays?
The second version of the first quarter GDP numbers were released this morning, and they mark the economy down to a 0.6% annual growth rate from the 1.3% rate estimated back on April 27. If that gets knocked down a little more when the "final" version comes out June 28, then ratcheted down even more in the benchmark revision a year or two from now, we may learn that the U.S. economy spent the first quarter of 2007 going backwards.
Or not. It will be a close call in any case, and at the moment most economic indicators seem to be back on the upswing. This slowdown may never meet the semi-official NBER recession standard of "a significant decline in economic activity." But then, we just don't seem to have recessions like we used to--sudden, wrenching downturns that throw millions of people (among them the occasional president) out of work but then are followed by surging recoveries. Instead we get mild recessions, disappointing recoveries, and booms that don't really feel like economic booms to many or even most Americans (2005 and 2006 would fit that description, I think). The operating assumption among economists is that this way is better--the moderating of the business cycle over the past quarter century is considered to be a great accomplishment of American monetary policy. And maybe it is.
Update: Paul Lukasiak asks in the comments whether I consider the "Clinton economic miracle" to be a boom. Yeah, I guess 1997-1999 counts as a boom--but it was still more drawn-out and muted than the booms of the past. Real GDP growth hit 4.5% in 1997 and 1999 (it was 4.2% in 1998). Here are a few big growth years from olden times:
1984: 7.2%
1966: 6.5%
1965: 6.4%
1962: 6.1%
1959: 7.1%
1955: 7.1%
1951: 7.7%
1950: 8.7%
May 30, 2007 9:47
You can take this oubliette and, uh, spell it
Curious Capitalist Jr. has asked me to write a post about his friend's older brother, Paul Lindseth, who made it to the quarterfinals of the 80th Scripps National Spelling Bee today before meeting his Waterloo in the word "oubliette." Which apparently means "a concealed dungeon having a trap door in the ceiling as its only opening." What's up with that?
Clearly, the kids who make it to National Spelling Bee can spell every arguably English word in existence. So the organizers have to search the weird fringes of the dictionary for words like oubliette and another big dream-smasher today, "Bewusstseinslage." I speak German reasonably well and I barely know what that means. Plus, it's really spelled Bewußtseinslage. This is un-American, people! It's Wahnsinn!
In other CC Jr. news, I can report that he (sort of) got the joke of an Onion story for the first time today ("I Believe in Evolution, Except for the Whole Triassic Period") and that he proposed an excellent new advertising tagline for Citibank ("Citibank: Come get your money"). I'm so proud.
Update: In the comments, alert reader Henri Tournyol du Clos points me to the Wikipedia entry on the German Spelling Reform of 1996, which decrees that the ß is now used only after long vowels, and the AP Germany confirms that the "u" in Bewusstsein does not count as a long vowel. Another interesting thing I learned from that Wikipedia page was that my boss, Rick Stengel, is apparently misspelling his last name:
Vowel changes, especially ä for e, are to be made to conform with derived or otherwise close forms
* Stengel → Stängel (stalk) because of Stange (bar)
Update 2: Time.com is all over this National Spelling Bee story, with a then-and-now gallery of past winners.
May 30, 2007 2:18
Is illegal immigration the problem or is farming the problem?
My neighbor Nathan Thornburgh (we share an office wall here at Time) has a fascinating article about guest worker programs in North Carolina in the current issue of the magazine that ends on this decidedly subversive note:
So what's the solution? One clue can be found in the failed amnesty of 1986, widely viewed as the genesis of the current crisis. The moment newly legalized farmworkers realized they had better options, they left for the cities instead of staying in low-paying agriculture jobs. Their exodus from the fields opened the door to an even larger wave of illegal immigration. And that raises the question, Will American agriculture ever pay enough to attract American citizens rather than just illegals? If it did, the newly legalized millions who are currently working in the fields might be inclined to stay there. But paying living wages for farmwork would, of course, require the rest of us to pay a lot more for food, become much more protectionist or both. If the country isn't ready to take those steps, here's an apostasy being whispered by some economists: get rid of large-scale agriculture altogether. England did it and is content to buy the bulk of its food from foreign producers. Less food security, perhaps, but also less need for guest workers. It's a difficult discussion in the U.S., a country that has become addicted to cheap labor. But one thing is certain in North Carolina: the immigration solution of the future isn't even working today.
One economist in particular that Nathan is talking about is Christian Dustmann at University College London, who has written a ton about immigration and the problems with guest worker programs.
Anyway, I find this suggestion fascinating. Whenever farmers tell stories about crops rotting in the fields for lack of workers to pick them, the standard view of the enlightened American is to say, 'Man, we can't do without immigrants, legal or otherwise.' Perhaps we ought to instead be at least asking of farmers, 'Why are you planting crops that you can't make money on unless you hire illegal immigrants to pick them?'
The crops in question are large-scale plantings of fruits and vegetables, plus a few other hands-on plants like tobacco. The growing of cotton, corn, wheat and soybeans is mostly mechanized, and I'm pretty sure small-scale farmers like the ones that supply my local Greenmarket aren't all that dependent on illegal labor either. The tradeoff here is that all that cheap supermarket lettuce and strawberries and tomatoes, which now comes mostly from California and Florida, would increasingly be grown in Mexico and elsewhere beyond our borders. But it's not as if those crops are generating a lot of great jobs in the U.S. right now, are they?
May 29, 2007 11:07
Zoellick at the World Bank
The president's choice of Bob Zoellick to be the new World Bank chief seems pretty obvious after the fact. He's a loyal Bush soldier rather than an out-on-a-limb advocate like Wolfowitz, which means he's less controversial among administration critics yet more likely to actually do what the administration wants, whatever that might be. Perhaps most importantly, he gets along with Europeans. And it is the Europeans who, along with the U.S., control the bulk of the World Bank's votes.
According to the Washington Post, Zoellick was actually supposed to get the World Bank job in 2005, "but then Condoleezza Rice claimed him as her deputy at the State Department." Zoellick then left State in 2006 to become vice chairman of Goldman Sachs. Smooth move, Condi.
All in all, he seems like a decent enough choice. But I do think our way of choosing World Bank presidents and the World Bank's way of doing business are both in need of a major overhaul. Is Zoellick the guy to do that? I sorta doubt it, but who knows.
Update: More on Zoellick from Michael Duffy.
May 29, 2007 4:50
Rupert Murdoch auf Deutsch
A special treat for the millions of German-speaking Curious Capitalist readers: An interview I did with the Austrian daily Der Standard about Rupert Murdoch's Dow Jones bid. I don't think there's much of anything in it I haven't already said in this blog, so I won't bother translating. But here's a thrilling excerpt.
DER STANDARD: Warum will Rupert Murdoch eigentlich Dow Jones kaufen? Sieht er darin ein Geschäft, oder ist es bloß Eitelkeit?
Justin Fox: Ich glaube schon, dass da eine rationale Strategie dahintersteckt, auch wenn der Preis einen Schuss Eitelkeit verrät. Aber Murdoch möchte einen Wirtschaftsnachrichtensender gründen, und er braucht ein Aushängeschild für seine Zeitungskette. Er wollte ja schon einmal die "Financial Times" übernehmen, da passt das "Wall Street Journal" gut hinein. Und der Preis, den er bietet, ist jener, zu dem einige Mitglieder der Bancroft-Familie schon einmal zum Verkauf bereit waren.
May 29, 2007 2:39
Saving, spending and crying wolf
Curious Capitalist regular Peter Varhol had an interesting comment on my China column. An excerpt:
I've always been confused by the spend versus save debate ... What is bizarre, I think, is that while economists and economic writers such as yourself bemoan the lack of savings behavior in the US, tax policy decidedly supports spending behavior. In fact, some states go so far as to define interest on savings as "unearned income," with the implication being that since you didn't really earn it, the state is morally justified in taking more of it.
Further, it seems as though consumer spending behavior might be critical to maintaining a healthy level of economic growth in a mature economy (Japan is a good example of the inverse correlation between savings and growth, though I fully realize that correlation does not imply causation).I can draw several possible conclusions here:
1. The economists are wrong. This one is especially attractive, because they have been crying wolf on savings since the 1980s, and no apparent harm has befallen us.
2. Economists have little or no impact on US tax policy. That certainly seems possible, even likely.
3. We are miscounting or misanalyzing the problem, and the measures and relationships are not at all what they appear to be.
4. As long as the economy maintains a healthy growth rate over time, all other problems are insignificant.
The people crying wolf about the U.S. current account deficit and low saving rate have mostly been journalists and what Paul Krugman long ago dubbed "policy entrepreneurs." The economists (at least the ones with PhDs and jobs at fancy universities) have mostly hung back and said things like, "Hmmm, that is interesting." Or they've authored papers proposing that there might be lots of economic "dark matter" floating around out there that, if we measured it correctly, would make America's balance sheet look a lot healthier. And while they're certainly not unanimous on this, I think most economists would favor a tax system that increased the burden on consumption and lightened it on saving.
As for point 4, that's something I've been saying for a while. But the current account deficit--that is, the amount of new foreign investment needed to just keep the U.S. economy going--has gotten so huge lately that it's hard not to worry at least a little bit about how exactly this particular unsustainable trend will come to an end.
The wolf usually shows up right around the time that those who have been crying wolf for years have been utterly discredited. Have we reached that point yet?
May 29, 2007 9:10
Regrets, I've had a few. And so has LeCorbusier
I spent the weekend in a house full of old books. One of them was the Fiftieth Anniversary Report of Harvard's Class of 1922, where I found this remarkable statement from Hartford lawyer/art-collector Joseph Louis Shulman:
To allow myself two regrets, one is that my wife has not been with me the past ten years, knowing as I do what a zest she had for living and the heroic fight she made during her last five years of illness. The other is that when I spent a day in Paris with LeCorbusier shortly before he drowned while swimming alone in the Mediterranean, I did not speak out more forcibly to him that he should have a valet companion in addition to his housekeeper.
May 25, 2007 11:58
The "final frenzy" of the China stock market boom
From the always excellent Bill Powell in Shanghai:
About 18 months ago, Liu Junling, an upwardly mobile single Chinese woman, had a conversation with her boss, the CEO of a large, politically connected real estate developer in Shanghai. For the previous five years, people in China's largest city had lived and breathed the property market—buying apartments, if they could afford to, flipping them for higher prices, and buying again. The government really wanted to cool off the speculation, the boss told her. Probably not a good time to buy. Then, almost as an afterthought, he added: It might be a good time to buy stocks instead. Liu balked. "I don't really understand the stock market,'' says the 35-year-old, "why it goes up or down." Now she is kicking herself. "I can't believe I was so dumb," she says, "but I think it's too late to get in now, isn't it?"
Liu's question—is there a bubble in China stocks?—is of global concern because of the knock-on effect a meltdown could have on markets worldwide. After soaring 130% last year, the Shanghai Composite Index suddenly buckled on Feb. 27, plunging 8.8% and giving investors in the rest of the world a sudden case of the Chinese flu. Since then, however, China stocks have resumed their near-vertical ascent, in recent weeks setting record highs almost daily. By some estimates, there is now more money in the Shanghai stock market than there is in bank savings accounts nationwide—this in a country where the per capita income last year was about $1,750. Yet the mania only seems to grow. On May 9, the total turnover on Chinese bourses exceeded that of all other Asian stock exchanges combined, a first. There are even reports of retail investors borrowing against newly purchased apartments or houses—shades of Japan in the late 1980s—to buy stocks. "I'm afraid this thing is in its final frenzy," says Andy Xie, an independent economist in Shanghai. "People are going to get hurt." Read more.
May 25, 2007 7:34
New column: China, Japan, the oil exporters and their trillion-dollar stashes
My latest column is in the Time with the various not-left-behind kids on the cover and online here. It begins:
Over the course of this year, China's government will find itself with more than $300 billion in new foreign-currency reserves, mostly dollars, that it will have to park somewhere. That's in addition to more than $1 trillion already in the bank. The oil-exporting countries of the world are in a similar predicament, with a trillion petrodollars looking for a home. Japan's got a trillion bucks lying around too.
This is the flip side of the gargantuan trade deficits ($765 billion last year) that the U.S. is running, the result of high oil prices, Asian manufacturing prowess and our spend-and-borrow mentality. That leaves exporters like China the task of figuring out what to do with all those dollars. It's tougher than it sounds.Consider what happened the first time the nations of the Persian Gulf found themselves in a dollar gusher, during the oil crises of the 1970s. They handed back much of that money to Western banks, which loaned it out to developing countries that couldn't repay it. Then, in the late 1980s and early 1990s, Japanese firms recycled their dollars by investing in trophy U.S. properties, including Rockefeller Center and the Pebble Beach resort. Both those deals ended in bankruptcy for the acquirers.
This time around, Japan seems content with U.S. Treasury bonds--a dud investment, but a reliable one. China and the gulf states, though, are aiming higher. On May 20, the Chinese government said that it was paying $3 billion for just less than 10% of the Blackstone Group, the U.S.'s leading private-equity firm, which owns everything from Freescale Semiconductor to Michaels Stores. The next day, Saudi Basic Industries Corp. said it was buying General Electric's plastics division--the storied operation based in Pittsfield, Mass., where former GE boss Jack Welch earned his stripes--for $11.6 billion. Read more.
Two people who helped clarify my thoughts yet were relentlessly cut out of the column (by me--I'm not blaming anybody else. But space was limited) were former Goldman Sachs Asia bigwig Kenneth Courtis (who now has an outfit called Next Capital Partners) and Tuck School professor Matt Slaughter. This one point was all Slaughter:
In one sense, foreigners' buying companies is a good thing for a debtor nation like the U.S., because it's harder to dump those investments in a panic than it is to sell bonds.
Beyond that, neither should get any blame for my conclusions or the way I jumped to them. They aren't really conclusions, either, because I still don't know what I think about America's bizaare trade relationship with the world over the past couple of decades. Sometimes I'm in the Warren Buffett camp of believing that we're impoverishing ourselves as a nation because we spend instead of save. Other times I think that if the rest of the world wants to lend us money at absurdly low rates in our own currency, then we as a nation are just taking appropriate advantage of the bizaare proclivities of others.
But I do think that last year's big shift, in which the net investment income of the U.S. turned negative for the first time on record, was ominous. Milton Friedman once argued to me that, since U.S. income from overseas investments was greater than what foreigners earned here, we weren't actually a debtor nation at all (our assets and liabilities were simply being miscounted). Well, nobody can argue that anymore.
May 24, 2007 5:38
An immigration bill that tries really hard but looks really ugly
I've been thinking it's my duty as a business/economics blogger to say something about the Comprehensive Immigration Reform Act of 2007, but I've struggled to figure out what. Happily, Clive Crook takes care of at least part of the job in today's FT (subscription required):
At a glance, the Senate proposal has much to be said for it. First, it is a painstakingly crafted compromise, supported by Democrats and Republicans alike, with a White House endorsement as well. Second, its chief opponents have set their face against any kind of middle ground, which is an unappealing posture. Third, some such reform is certainly needed: the current system has all but collapsed. Fourth, most of the amendments now being suggested (as the bill moves to a final Senate vote) would make the plan worse.
In short, by Washington standards, the bill is a marvel. What a sad reflection on those standards it is to realise that by any other measure the bill is a flop.
Crook maintains that the bill is a flop because it just won't work. Its "amnesty" provisions are so harsh and, barring some sort of law enforcement miracle, the border will remain so leaky that the incentives that draw illegal immigrants to the U.S. won't go away. I don't know if he's right about that, but it certainly sounds like a reasonable argument. I do really like the fact that the bill would move us towards skills-based immigration quotas (which Australia and Canada already have). And I don't think sticking with the status quo is really tenable. It's an ugly choice. Which is what legislating is all about, I guess.
May 24, 2007 10:47
The view from Battery Park
This morning, at about 9 a.m. The orange-ish blob in the middle is the Staten Island Ferry. And I know, the cameraphone isn't really doing the job. But it was really nice down there, and I felt the need to share.
May 23, 2007 10:33
The U.S. is still the world's biggest manufacturer!?!
From the FT:
China will gradually take over the role of the US as the world’s largest manufacturer but will do this only by 2020, with the US’s position in the global league table of manufacturers remaining surprisingly strong, according to an authoritative economic study.
Global Insight, a Washington-based economics consultancy, forecasts that the US will keep its share of global manufacturing output above 20 per cent at least until 2024 goes against the widespread feeling, at least in the US, that the country is losing ground rapidly.
I actually came across the factoid that the U.S. is still, by far, the world's biggest manufacturer in a report published a little while back by the Council on Competitiveness, and had been meaning to share it one of these days. Amazing, no?
May 23, 2007 3:44
A more typical view of the Hallo Berlin cart
The other day I encountered the famous Hallo Berlin cart on 54th Street with only one guy in line and blogged about it. Here's a shot of a more normal state of affairs, taken today around 1:30.
To readers tiring of the superficial, heavily food-oriented nature of my recent posts: Sorry, I've been busy (and hungry).
May 22, 2007 4:17
Lo res photo of hi net worth individuals
Another in my continuing series of really low-quality cameraphone photos of book parties, this time from the hoedown for Peter Bernstein's Capital Ideas Evolving at the Mercedes dealership on Park Avenue Monday night. I took the photo from out on the sidewalk. Inside were a bunch of people who make a whole lot more money than I do (although apparently less than the "average hedge fund manager"). Goldman Sachs big quant Bob Litterman and hedge fund manager Cliff Asness are chatting at the center of the photo. Not that you could tell.
The book is really good, albeit aimed at a more rarified readership than Against the Gods or Wedding of the Waters. I'm about halfway through, and will report when I'm done.
And maybe one of these times I'll bring along an actual camera.
May 22, 2007 11:27
Beckham: Not washed-up just yet
With David Beckham's hugely expensive arrival in Los Angeles coming ever closer, it might be worth revisiting just what he's been doing back in Madrid. From Richard Williams' blog at Guardian.co.uk:
Last January 13, two days after he announced that he would be moving to Los Angeles next season, Fabio Capello said the Englishman would never play for Real Madrid again. Less than a month later, however, Beckham forced his way back into the team and made such an impact that he has stayed there, when not injured or suspended, ever since. Six weeks out with a damaged knee ligament, caused when he fell into an advertising board after crossing the ball at speed, were ended on April 21 when he came off the bench to set up a winner against Valencia, and his presence since then has helped the team to mount the most improbable of late challenges.
As he shuttled between the centre-right of midfield and the right wing in Huelva on Sunday, his perceptive passing and wickedly curling crosses were at the heart of Madrid's success. He made the opening goal for Robinho, and several other first-half chances were spurned. In the last minute, however, with the score at 2-2 and Madrid needing to win to keep the destiny of the title in their own hands, his energy took him into a position from which he could nudge Gonzalo Higuaín's pass on to Fernando Gago and then watch as Roberto Carlos shot home from the decisive pass.
Williams is making the case that Beckham deserves his old spot back on England's national team. And what's the relevance for a blog called the Curious Capitalist? Well, he is supposed to make $250 million in LA. That's capitalism, no?
May 22, 2007 8:12
Bob Herbert gives hedge fund managers a big raise
From Bob Herbert's column in today's NYT (available to subscribers only):
A lot of New Yorkers are doing awfully well. There are 8 million residents of New York City, and roughly 700,000 are worth a million dollars or more. The average price of a Manhattan apartment is $1.3 million. The annual earnings of the average hedge fund manager is $363 million.
Wow, that hedge fund business really is booming.
Actually, Herbert appears to have gotten his average from the list of the 26 highest paid hedge managers on the planet in 2005 compiled by Alpha magazine. The latest average from Alpha, for the top 25 of 2006, is $570 million. Which is a staggering amount. But the "average hedge fund manager" makes an awful lot less. And Bob Herbert (like most of us, I guess) could use some help with statistics.
May 21, 2007 5:52
Why not tax trans fats?
Last week, Montgomery County, Md., joined New York and Philadelphia in banning partially hydrogenated oils in restaurants. Washington Post columnist/blogger Marc Fisher decried this development:
It's fairly clear that trans fats are bad for you. And lots of food businesses are reacting to the widespread public opposition to trans fats by working on new recipes that eliminate or drastically reduce use of those oils. But a ban on trans fats--very much like the smoking ban, which utterly ignores the fact that the marketplace is effectively reducing smoking in public gathering spots as well as smoking behavior overall--elbows the natural forces of the marketplace out of the way. The result of the government fiat will be less satisfied customers, widespread hysteria, and a growing belief that only the Nanny State can protect us from ourselves.
I guess I agree with him on the ban. But if there's evidence that our nation's heavy use of trans fats is costing us on health care or even worker productivity, it seems like it would certainly make sense to pile a tax upon the stuff. Maybe not at the county level--that would probably be unworkable. But nationally, why the heck not?
Imposing taxes on things we want people to use less of is the most economically sound, liberty-friendly way of affecting human behavior. Yet we in the United States seem mostly allergic to this approach. Why is that?
May 21, 2007 9:18
Wolfowitz a "disastrous" leader, says the man who ousted him
One last bit of Paul Wolfowitz fun, from an interview in this morning's Volkskrant with Herman Wijffels, the Dutch executive director at the World Bank who led the internal commission that investigated the Wolfowitz scandal. (And yes, I too find the repeated involvement of Netherlanders in this mess--former World Bank ethics chief Ad Melkert is also Dutch--deeply suspicious.) As always, the clunky translation is mine:
Was there more going on than just the salary increase for his girlfriend Shaha Riza?
Absolutely. This man led in a disastrous fashion. He made the bank completely insecure. The trust that existed was transformed into suspicion. In addition, he developed no coherent strategy for the World Bank. I talked to him about that. But he had little interest in it.You suggest that another president wouldn't have had to resign over such an affair.
Someone at the top of an institution must of course be extremely careful. But if he was otherwise an excellent leader, maybe it wouldn't have gotten this far.
Wolfowitz's resignation took a while.
Too long. You can't have such a controversy at this kind of organization -- the whole world was able to follow the battle. That caused the bank great damage. In the business where I used to work [Rabobank] the decision would have been made a month ago. But the World Bank is a very political institution.
What did you think of the statement the World Bank issued? The bank said that it accepted that Wolfowitz behaved "ethically" and "in good faith."
I had to swallow hard. Obviously with such a forced resignation there's always an attempt to wrap it in pretty words, especially when the departure is arranged in political circles. But this went really far.
....
What will the successor have to do to repair the damage?
The bank is out of step with the times. In the development arena new players have arisen like the Gates Foundation. Poor countries no longer have to knock on the World Bank's door because they can get loans from the capital markets or countries like China. The World Bank thus needs to think about what its value-added still is. I think the bank needs to focus on the new global dilemmas: the greenhouse-gas problem, pandemics, the looming water shortage, the energy question. All these problems have a huge influence on the poorest.
May 18, 2007 3:15
Hallo Berlin!
The Hallo Berlin cart at 54th Street and Fifth Avenue is among the most acclaimed purveyors of street food in New York. So acclaimed that every time I've walked by in the past the line was so dauntingly long that I kept going. Not today, though.
I got the "single soul food mix": bratwurst, German fried potatoes, and red cabbage. Which is exactly what I always used to order when Hallo Berlin still had a restaurant on 51st Street. It actually is a bit more appetizing arranged on a ceramic plate than shoved in a little paper container, but still: very, very schmecklich.
Here's the man--I guess it was the famous Rolf, but I couldn't really tell because his hair was cut so short--getting my brat ready:
May 18, 2007 12:09
Wolfodämmerung II: So what does the World Bank do now?
Paul Wolfowitz is now really, truly on the way out (although he is, as has become his custom, dragging it out for as embarrassingly long as possible). So now President Bush will pick a replacement. Whose job should be what, exactly?
The answers to this question I've been seeing have mostly been about healing wounds at the bank and figuring out what to do about Wolfowitz's anti-corruption campaign. But the former shouldn't be all that hard as long as the administration picks somebody with interpersonal skills and/or a pedigree in development, and when I was doing the reporting for my column on the World Bank a couple of weeks ago, most of the people I talked to thought Wolfowitz's corruption crusade was a side issue. The much bigger question facing the World Bank is whether it still needs to be a bank:
The World Bank's initial job was to finance reconstruction in Europe. The Marshall Plan rendered that task superfluous, so the bank--in the first of several reinventions--moved on to bankroll development in other countries. The idea was to lend to governments that were creditworthy but had no access to rich-country capital markets. "Now we live in a world where there are huge global capital markets, where, if anything, investors are too willing to invest in developing countries," says Adam Lerrick, a former investment banker who teaches economics at Carnegie Mellon University. The World Bank's net lending has plummeted over the past few years, even as it keeps shopping loans to the likes of Brazil, Turkey, Russia and China, sometimes on hugely generous terms.
Carnegie-Mellon is a hotbed of World Bank and International Monetary Fund bashers whose tough talk I had never taken all that seriously before. But when I spoke to Nancy Birdsall, a former World Banker who now runs the Center for Global Development, and she echoed parts of Lerrick's critique, I knew something was up.
The first issue is that, for most of the "middle-income" countries that the World Bank arm called the International Bank for Reconstruction and Development lends to, more loans are the last thing they need right now. Many of them do probably need credit counseling and advice on how to spend their money--and the World Bank might be well-positioned to provide that if it weren't so busy trying to shove loans down their throats.
The second issue is that the other half of the bank, the International Development Association, structures its aid to poor countries as loans when it would be far more honest just to make grants and leave it at that. As it is, the IDA's lending has often been a matter of throwing good money after bad to avoid messing with the World Bank's pristine record of almost no defaults.
That both those approaches need changing seems to be something that's widely agreed upon outside the bank, but opposed at least tacitly within. And as best I can tell Wolfowitz didn't even try to address these issues. In the early years of the Bush administration, Under Secretary of the Treasury John Taylor made a big push to move the IDA from lending to granting. Wolfowitz never seems to have gotten the memo on that. In fact, as far as previous administration policy on the World Bank went, his appointment was a total non sequitur.
Now I'm not saying there's anything like full agreement on the future course of the World Bank. I think Lerrick would be happy to see the World Bank shrivel up and die, whereas Birdsall believes it can play a crucial role as the global multilateral organization most capable of actually getting stuff done. I'm enough of a multilateralist that I pretty much side with Birdsall on this. But does the World Bank really need a staff of 10,000 and a $230 billion loan portfolio to be effective? Don't think so.
May 18, 2007 8:01
New column: Health-care providers masquerading as carmakers in Detroit
My latest dead-tree effort is out today, in the issue with Al Gore on the cover and online here. It's actually in the magazine as a two-page story, part of the thing called "The Well." But I wrote it as just a slightly longer-than-usual column. Regular readers of this blog will be familiar with the theme:
On May 14, German automaker DaimlerChrysler announced that it would pay private-equity firm Cerberus Capital Management of New York City $675 million to take a bunch of old people's medical problems off its hands.
True, there was a carmaker thrown in as part of the deal, and Cerberus agreed to invest a few billion dollars to help get struggling Chrysler back on its feet. Just after the transaction was announced, DaimlerChrysler CEO Dieter Zetsche (he of the big mustache and the TV ads) bristled when a journalist suggested that he had paid Cerberus to cart Chrysler away: "It was clearly stated that Cerberus invests 7.4 billion U.S. dollars in this transaction, which is not any form of being paid," he snapped.But there's no denying that Daimler, as the company will be known once Chrysler is driven off the lot, is forking over $675 million to make the deal happen--a remarkable repudiation of its $36 billion purchase of Chrysler nine years ago. And there's also no denying that the sums changing hands in the current transaction pale next to the $18 billion in health-care obligations that Chrysler owes its retirees. Read more.
The $675 million figure deserves explanation, since it's been variously reported in the media as $650 million, $677 million, $1 billion and $1.5 billion. DaimlerChrysler said its "net cash outflow" from the transaction was 0.5 billion euros. Depending on the euro-dollar exchange rate you're using, that gets you to $650, $675 or $677 million. The gross negative cash flow (that is, not counting the money Cerberus is paying DaimlerChrysler) is 1.2 billion euros, or $1.5 billion. And the "prepayment compensation," whatever that is, is 650 million euros, or about $1 billion. It strikes me that net cash outflow is the valid measure of what DaimlerChrysler paid out to make the transaction happen. But then I'm no investment banker.
May 17, 2007 5:14
Wolfodämmerung: The least graceful exit ever
Paul Wolfowitz's painfully drawn-out exit from the World Bank continues to draw out painfully, as the man with the holey socks tries to work out some sort of deal whereby the World Bank board apologizes for being so mean to him, and he in turn resigns with head held high. In reality, of course, this insistence is making him look ever less dignified and respectable. What he's starting to look like instead is a total whiner.
Wolfowitz is right that the World Bank ethics committee helped get him into his current predicament by failing to give him very clear directions on the girlfriend-reassignment front. But he did the rest all on his own, then compounded things by failing to be straight about what had happened when news of the sweetheart deal leaked into the press. There's a standard script for government officials and business executives caught up in such controversies: Insist that you did nothing wrong, but resign because it's clear that your continued presence is hurting an institution that you care about. Wolfowitz's refusal to follow it is beginning to make making him look ridiculous.
Update: And now Wolfowitz has agreed to resign, but in the interest of painfully drawing things out a bit further (or maybe he's waiting for his pension to vest), he won't leave until "the end of the fiscal year" (June 30).
Update 2: I've got another post on the subject here. And then I promise, no more World Bank from me for at least a couple of days. Also, Time's Michael Duffy has a nearly opposite take here.
May 17, 2007 3:05
Those highly paid Indians again
The news about the Pasadena website that has hired two people in India to cover city council meetings from 8,000 miles away, which I wrote about last week, stirred up an awful lot of pontification all over the media and blogosphere (a nice collection of links can be found here).
Most of the virtual ink was spilled lamenting the horror (the horror!) of this development and hardly anybody else seems to have picked up on my point that the salaries being paid to the two Indian journalists ($12,000 a year for one in Mumbai and $7,200 for one in Bangalore, according to the LA Times) are actually evidence that pay for educated Indians is skyrocketing.
I did at least get one comment to that effect, from soon-to-be business school professor Girish Mallapragada:
I worked in software product sales in India from 2001-2002. I had an engineering bachelor's and an MBA. I used to earn 13,000 USD per annum (bonuses not included) which was just about the average for a rookie MBA. As of now that figure has just about doubled and a rookie MBA in software sales can hope to get anything ranging from 20-30,000 USD per annum. Yes, salaries are rising but not to an equal extent across all jobs.
It turns out this phenomenon of rapidly rising salaries for skilled white-collar work in India has gotten a lot of coverage in the Indian and IT media. But it's been mostly ignored in the U.S.
Now those salaries are still a lot lower than those for similar jobs in the U.S. I'm not trying to argue, as Robert Samuelson did in his column Wednesday, that the offshoring of white-collar jobs to India is a nonevent. You don't have to have a whole lot of jobs move overseas for the phenomenon to have a significant impact here. Many white-collar workers in the U.S. really are competing in a global labor force now, which wasn't the case a decade ago.
But that means highly educated Indians and Eastern Europeans and Filipinos and so on are able to compete in that global labor force now too, and seeing their pay go up dramatically. That means, first of all, that the cost advantage to offshoring is shrinking. It is also means that more people around the world are getting shots at rewarding, well-remunerated jobs. And that's a bad thing why?
May 16, 2007 5:00
Club Penguin is worth $450 million?!?
The seven-year-old Curious Capitalist Jr. is allowed dominion over the family iMac on Saturday mornings, and one of his favorite destinations is Club Penguin, where he sometimes arranges to chat with friends from school but mainly just plays the lame-seeming games to win more swag for his penguin avatar.
What's his and a whole lot of other kids' penguin time worth? About $450 million. That, according to the hard-working people at paidcontent.org (link via Kedrosky), is what Sony is planning to pay Club Penguin's Canadian creators for the site. Something about this whole thing creeps me out, but I'm not sure why. It's certainly better than Saturday morning TV.
Update: The boy is appalled at the news. Club Penguin "is perfect the way it is," he says.