Category Archives: Global Economics

Microsoft Has Just Blown its Oldest Trick

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My Comments: Why, you may be asking, is Tony Kendzior devoting a blog post to Windows 8. One reason is that Microsoft is a major player in the computer industry and if you are an investor, then knowing what is happening in the computer industry may help you make better decsions about investments.

Another reason is that I switched my office and personal computer over to Apple about three years ago. I doubt that I’ll ever go back to Microsoft except for an application or two that for some unkown reason demand that I use MS Explorer to gain access to. Whoever wrote the application fails to understand that Apple is making significant inroads into the business community. And don’t forget Google’s Android.

And besides, this is interesting and you too may find it so.

By John Gapper | May 8, 2013

In the browser wars that began in the 1990s, it took more than a decade for regulators to stop Microsoft exploiting its dominance with users of Windows software. In today’s mobile battles, customers have done so themselves in six months. Microsoft’s rapid retreat over Windows 8 – the latest, mobile-inspired, version of its operating software – shows wise flexibility rather than its traditional obstinacy. But it also demonstrates that Steve Ballmer, the company’s chief executive, has lost the power to “embrace and extend” the Windows hegemony into new fields.

Nearly three decades of technology history have ended. From the moment in 1985 when Bill Gates released the first version of the Windows operating system for the new IBM personal computer, Microsoft has had a huge entrenched advantage against its competitors. Many of them – from Lotus to Netscape and, for a time, Apple – were flattened.

But that won’t happen to Apple or to Android, the big players in the new world of software for smartphones and tablets. Mr Ballmer’s use of a trusted strategy – to push Microsoft’s latest piece of software on consumers via the Windows desktop – has just backfired badly.

By overplaying his hand, he has spoilt what should be a moment of pride for Microsoft. Windows 8 is widely regarded as a clever piece of software – by no means a repeat of the Windows Vista fiasco. It works reliably and it combines a computer operating system with one for tablets and smartphones, matching Apple’s iOS operating software.

It is also a strategic necessity. Unless Microsoft can somehow thrust its way into mobile computing – a challenge that looks increasingly steep – it will be stuck with its old monopoly in a shrinking part of the market, while the growth is captured by Apple and others.

So far, so good. Had Microsoft launched Windows 8 with the traditional look for PC users and its new tile-based interface for phones and tablets, as it easily could have, all might have been well. It would have kept its existing customers happy while gaining itself a foothold in mobile.

But hubris intervened and it decided to give everyone the mobile interface, no matter whether they were mobile users or – as with 99 per cent of customers – using a PC. They were offered a product designed for another use and, unsurprisingly, they were baffled.

“Windows 8 is a remarkable piece of engineering but the world does not buy remarkable pieces of engineering. It buys useful products,” says Michael Cusumano, a professor at MIT Sloan School of Management. A computer that people do not know how to switch off (it lacks a Start button) and cannot find their way around is not useful.

Far from revitalising a sluggish market, Windows 8 has made things worse – PC shipments fell 14 per cent in the first quarter of 2013 after its launch in October, according to IDC, a consultancy. Windows 7, which rescued Vista, is now installed on two-thirds of corporate PCs and Microsoft has to fix Windows 8 to catch the next cycle.

It is telling that Microsoft has reacted to customers’ resistance to Windows 8 by saying they are using the wrong computers. It hopes that as laptops and desktops with touch screens replace the traditional sort with trackpads and mice, people will learn to love tiles.

This attitude says it all. It would be convenient for Microsoft if, as Mr Gates put it in a CNBC interview this week: “It will be harder and harder to distinguish whether [computers] are tablets or PCs.” Microsoft has been trying to blur the line with its keyboard-enabled Surface tablet, and by persuading PC makers to produce laptops that convert into tablets.

Were it true, Windows 8 would be just the ticket and Microsoft’s dominance would transfer seamlessly to mobile. But, as Mark Anderson, a long-time analyst of the company, wrote last month: “There is absolutely no indication that desktops should have the same operating system and user interface as phones and pads. In fact, the opposite is true.”

Microsoft is wishing away the split between “lean-forward” and “sit-back” devices – between intensive work applications and casual entertainment apps – but it exists for a reason. Apart from anything, it is more comfortable to use a mouse on a PC than to prod a screen.

Steve Jobs, Apple’s founder, could sense what consumers wanted before they did, but Mr Ballmer is trying to make them want something they don’t. “If we soften them up on desktops,” one can almost hear Microsoft’s strategists whisper: “They’ll buy our phones.”

Microsoft’s hardware partners, including Dell and Hewlett-Packard, have also suffered but are complicit. The beauty of Windows 7 was that it was an efficient utility that could be bundled with cheap PCs, offering a rational alternative to Apple’s premium products.

Windows 8 was designed to create an old-fashioned upgrade cycle – a new operating system built for a new set of chips, allowing manufacturers to produce a range of touch devices, with everyone gaining getting higher margins. Consumers were not only confused by Windows 8 but also shocked by the higher prices.

Microsoft hasn’t said how Windows Blue, the update to be unveiled in June, will amend Windows 8. But it is clear what it has to do: give its customers back their desktops, stop trying to force everyone to use touch, and lower prices.

Who is to blame for the setback? Mr Ballmer, obviously, but also Mr Gates, who is Microsoft’s chairman. The pair have worked together since 1980 and Mr Ballmer employed a strategy pioneered by Mr Gates to force the greatest value out of Windows. It just failed.

In Snowden’s Privacy Fight, the Spies Are Likely to Win

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My Comments: I just can’t seem to get worked up about the probablility that my privacy is being invaded by the government. Yes, I do have interactions with people and places that need to remain private, but none of them to my knowledge have anything to do with national security. So the fact that they are out there in cyber space somewhere, being rejected as irrelevant leaves me with no heartburn.

I want to echo the comments of George Barnett who last Monday had a great commentary in the Gainesville Sun. I know George personally and generally agree with much of what he says, especially since he says it so well.

I do understand why there is concern about the government entering areas of our lives where they have no business being. But I think commercial enterprise is probably already there, and their motives are less pure, and not necessarily intended to be in my best interst. So I’m prepared to live with whatever the NSA is doing, and good luck to them.

By Gideon Rachman | The Financial Times | June 10, 2013

Most people accept there are legitimate reasons for states to monitor cyber space.

Edward Snowden makes a good first impression. In his interview on YouTube, he comes across as a thoughtful boy-next-door type. Unlike Julian Assange, the twitchy narcissist behind WikiLeaks, Mr Snowden looks like somebody you would be quite happy to see date your daughter.
First impressions matter because – unless you are a hardline libertarian or a cold-blooded securocrat – Mr Snowden’s exposure of the cyber snooping of the US government will leave you feeling ambivalent. Nobody likes the idea of their emails and internet activity sitting on some giant supercomputer in Maryland or Cheltenham. On the other hand, most people accept that there are legitimate security reasons for governments to monitor what is going on in cyber space.

By temperament, I am on the complacent end of the spectrum when it comes to privacy. I know people who genuinely worry about the number of times they will be caught on closed-circuit television cameras as they wander around London. I cannot say it bothers me. Similarly, while I do not like the idea of all my email being liable to inspection by the American or British governments, it still feels like a fairly abstract concern.

This is not because I am a “law-abiding citizen” with “nothing to fear”, to use the official formulation. Off the top of my head, I cannot think of any recent acts of lawbreaking on my part. But I would like to believe that I have a zone of privacy that extends considerably beyond anything that might be deemed outright criminal.

The reason that I remain relatively relaxed about the thought that somebody could read my emails and scan my Google searches is not because I have “nothing to hide”. It is because, so far, I have never seen or felt any real-world consequences from this theoretical vulnerability. Nor has anyone I know. And nor can I think of any prominent news story in which the snooper state has ensnared or blackmailed some innocent party.

Of course, it could happen. And, if it began to happen, then I – like many other people – would be swiftly jolted out of my complacency. By then, we are sometimes warned, “it will be too late” – whatever that means. But there is a limit to the amount of pre-emptive panicking I am prepared to do.

By contrast, I have recently become much more concerned about my personal cyber security. In the past six weeks, my private email account has been hacked – apparently by somebody in Jordan. My credit card has been hijacked online. And the Financial Times website was also hacked. I have no idea who exactly is behind all these nefarious acts. But I am pretty confident that it is neither the US nor the British government.

I suspect my increasing awareness of cyber security is fairly typical. It used to be the kind of thing that only bothered tiresome people in the IT department. Now all those injunctions to keep changing my password feel more justified.

Why is any of this relevant to the Snowden case? Because internet crime bears out the official argument that cyber space is an increasingly perilous zone. Alongside all the people “liking” cat videos and friending each other on Facebook, distinctly unfriendly criminal networks and terrorists also operate in cyber space. It is the legitimate business of the state to try to keep tabs on the dark side of the internet.

Indeed, while much of the post-Snowden commentary has focused on the security services’ efforts to track terrorists on the internet, the most dangerous threats of the future may not resemble the terrorist spectaculars of the past. Security types, in both the public and private sectors, are increasingly worried about our societies’ utter dependence on a functioning computer network. They worry about the havoc that could be wreaked if a virus were introduced that prevented a major bank from reconciling its books. Or about the chaos that could be caused if the computer systems that run our power systems or traffic lights were disabled. These attacks would come from cyber space – and they might not be the work of a state.

If and when such a cyber assault occurs, the focus of public concern would switch very rapidly. Suddenly, people would not be worrying about security-service intrusion into the private domain. They would be demanding to know why the government had not been able to anticipate and blunt a cyber assault of this nature.

This does not mean I think the questions that the softly spoken Mr Snowden raised are illegitimate. He is right that there should be more public discussion of where to draw the line in cyber snooping. When he says, “these things need to be determined by the public, not by somebody … hired by the government,” I am inclined to agree.

The difference is that I suspect a better-informed public debate could end up in a different place from where Mr Snowden hopes. He says his biggest fear is that – despite all the information he has revealed – the cyber situation will remain unchanged. I suspect that is exactly what will happen. Unless and until somebody can show that security agencies are not only gathering mountains of information but are also actively abusing it, I think this is a debate that western governments can win.

Lessons for Obama From Bush’s Wars

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RK-RAK-MK-Cuyuni-CobhamMy Comments: I was born in Great Britain, with bombs falling within a few miles of the house where my mother lived. My father was across the English Channel, with the British Army, with the as yet to happen escape via Dunkirk. From time to time, my mother and her two sisters retreated to a rural part of the countryside where they had a tiny holiday caravan. Later I was told they would sit in lawn chairs and watch Spitfires battle it out with Messerschmitts in the sky above the caravan.

I survived, as did my mother and father, but thousands didn’t. In the past half century, there have been fewer and fewer conflicts between states where thousands have died. The forces of globalization that emerged after WW II have been a net positive for everyone, and there is not likely to be any fundamental shift in that paradigm for many more years.

So I have a hard time trying to rationalize reasons for the US to inject itself into global issues that will cost lives and treasure, until every possible alternative is explored first. As we discovered in Iraq, it’s virtually impossible to impose our version of democracy on people whose framework for society is still essentially tribal.

By Jurek Martin in Washington May 6, 2013 10:27 pm

There are no good options facing the president – and he knows it

The dogs of war are barking again in Washington, 11 years after they last howled, but this time it is different. They are no longer prowling the corridors of power unleashed, but holed up in external covens and salons. There is a very different president in office and the country is no longer in total thrall to the cataclysm of the terrorist attacks of September 11 2001, inclined to believe anything its government tells it.

Still, the comparisons between 2002, as the administration of George W. Bush set out on its inexorable path to war in Iraq, and today, as President Barack Obama decides what to do, or not to do, about Syria, must be made. We may even learn something from them.

Most striking is that the cast of characters is very similar. The neoconservative brigade, which never met a war it did not like, still features Bush administration hawks Paul Wolfowitz and John Bolton. They fulminate on opinion pages and Fox TV about Mr Obama’s “weakness” in foreign policy. The Washington Post editorial pages often have a neocon bent, which might cause Katharine Graham, the newspaper’s publisher during the Watergate investigation, to turn in her grave. They are supplemented by the usual pundits, such as William Kristol and Charles Krauthammer. Their trope is that a craven president cannot even bring himself to use the word “terror” in the event of something horrible, such as the Boston bombings.

The “do something” regiment in Congress is once again led by John McCain and Lindsey Graham, the inseparable Republican senators. Their remedies are the same, too – no-fly zones, arm the rebels – though it often seems they propose them so as to be able to criticise Mr Obama if he ever puts them into action.

They also have their allies across the political aisle, though perhaps not the cast of “intellectuals” that bayed for war – Christopher Hitchens (now dead), Michael Ignatieff, Andrew Sullivan and so on. Their support had many causes, including humanitarianism, fear of Islam and allegiance to Israel. But it was mostly motivated by the belief, not dishonourable, that the US could not abdicate global leadership just because the tasks were hard.

Thomas Friedman of The New York Times was an influential advocate of going to war to topple Saddam Hussein. He used to write that if the seeds of democracy could be planted in Iraq, the Arab world would become a land of milk and honey. It hasn’t happened that way. There was an “Arab spring”, but it was ignited by a self-immolation in a Tunisian street market not by the fine words of Thomas Jefferson (or Mr Obama, come to that).

This time round, Mr Friedman writes less about the Middle East. But his approach – that the US must lead – has been taken up most notably by Vali Nasr, a disciple of the late Richard Holbrooke, in his new book, The Dispensable Nation. To Holbrooke, Mr Obama’s special adviser for “Af-Pak”, intervention (preferably diplomatic) was second nature and all foreign policy a glorious adventure. Mr Nasr’s book might have been titled Holbrooke’s Revenge – on the Obama administration that froze him out.

Somewhere in the middle of the commentariat are the old hands. Richard Haass, chairman of the Council on Foreign Relations, has a new volume out arguing that the US is underperforming at home and overextended abroad. Dennis Ross, the veteran Middle East diplomat, cautiously advises “stand-off” intervention, such as a no-fly zone over Syria. Ryan Crocker, ambassador in Baghdad in the Bush era, wrote a column recently saying that the US should re-engage with Iraq to stop it following Syria’s path to sectarian destruction.

The truth is that there are no good options facing the president – and he knows it. He also knows there is no public appetite for a third military excursion into the Middle East in little more than a decade, no matter how noble the cause. More than that, he understands that the Iraq war was a disaster of biblical proportions – for the US, its reputation and its economy, for Iraq itself and for the region. It is worth remembering he was saying as much when he first ran for the Senate back in 2004.

Eleven years ago, in the prime of Dick Cheney, vice-president to Mr Bush, it was obvious that the US was proceeding towards war. It might end up that way again but it will not be for want of trying alternative solutions – and that, at least, is something. Wars of choice tend to have bad outcomes and unintended consequences.

Move Over, Saudi Arabia, and Let North Dakota Take Over

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My Comments: How many of us saw this coming as little as five years ago?

By Gil Weinreich, AdvisorOne | May 14, 2013

A buyer’s market in oil is in the making and will bring about disruptive market change that should benefit American manufacturers and consumers and prove challenging for Middle Eastern producers and European refiners.

That is the International Energy Agency’s new forecast, released Tuesday in London, and the anticipated supply boom from North American oil fields in particular should contribute to what the IEA terms a “supply shock.”

America’s shale revolution, and abundant capacity in Canada’s tar sands, is well established, but “supply growth is even steeper than previously expected,” said IEA Executive Director Maria van der Hoeven at an oil summit in London launching the organization’s Medium-Term Oil Market Report (MTOMR).

Van der Hoeven noted the irony that the country that was the cradle of the oil industry 150 years go, but which eventually fell into what seemed like irreversible decline, has now become the center of an oil boom.

But today’s oil bonanza in the U.S., she said, has powerful compound effects as well.

“What makes the tight oil boom truly transformative is not just the sheer production volumes unlocked but the combination of volumetric production growth with other factors: the crude’s distinctively light quality, the unconventional nature of both the plays from which it is extracted and the technologies which have unlocked it, the economic and market impact of the new production, and the chain reaction it is creating in the global transportation, storage and refining infrastructure,” a summary of the report says.

While U.S. law continues to ban crude oil exports, the growth in oil supply should be a boon to U.S. refiners in the coming years. Long a top importer of refined products, the U.S. is already a large net exporter, and steep production surpluses are expected to push the U.S. share of refined products up even more.

As a news release announcing the report put it, “The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.”

The report’s scenario was not entirely rosy for the U.S., citing three categories of challenge: infrastructural and logistical, legislative and regulatory, and environmental.

Though the U.S. contribution to oil production growth is expected to grow by 3.9 million barrels a day from 2012 to 2018, the market changes do not spell the end of OPEC but do suggest a lowering of its relative stature.

The Saudi Arabia-dominated oil cartel will also see its capacity rise, but by only 1.75 million barrels a day—about 750,000 barrels a day less than last year’s IEA forecast. The new report cites social and political turmoil in the wake of the Arab Spring as a factor in OPEC performance.

Another key IEA finding concerns the shift in demand from Western to emerging economies. While this development has been forecast before, the actual shift is expected to occur over the coming five years.

While emerging economies will blow past the developed world, the IEA sees a split within the developed economies—“a bifurcation has appeared between a North America energized by cheap natural gas and a euro area plagued by debt issues,” van der Hoeven said.
Beyond its slow growth and consequent tepid demand for oil, Europe will lose out in another significant way in the coming five years—specifically, it will cede its primacy as an oil refiner.

“OECD refining, notwithstanding a renaissance in the U.S., is increasingly relinquishing market share to the non-OECD region, a form of de facto offshoring not unlike the trend in other manufacturing sectors,” a summary of the IEA report says.

“Already most of the world’s refining capacity is located in non-OECD economies. In the next five years, virtually all net crude distillation capacity growth is forecast to take place in the emerging-market and developing economies.”

Austerity Exposes the Global Threat from Tax Havens

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My Comments: Unless you have been to the Cayman Islands, or happen to make far more money than you actually need to live your life, the idea of an offshore tax haven is pretty remote. You’ve heard about them, but since they are so far removed from your reality, they seem to stay under the rug. Here’s an article from the Financial Times that suggests we should pay more attention to what they represent for all of us.

By Jeffrey Sachs

The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system.

How many politicians and political parties have secret accounts abroad? Inevitably, given the nature of the arrangements, we cannot say for certain – but the list of those that have come to light is long. US presidential candidate Mitt Romney was found to have huge wealth in the Cayman Islands, never adequately explained. In France, Jérôme Cahuzac has resigned in disgrace from his position as budget minister following the revelation that he held a secret account in Switzerland. He has since been charged with tax fraud. Spain’s ruling party has been making payments from secret Swiss accounts for years. One senior Greek politician has been sentenced to jail for falsifying financial declarations. Many more revelations will come, especially now that investigative journalists have their hands on the records of hundreds of thousands of offshore accounts.

Groups such as Apple, Google and Starbucks have been shown in recent months to have used outlandish accounting gimmicks to shelter their profits. These include Google’s claim, approved by the US Internal Revenue Service, that its intellectual capital resides in Bermuda. There are thousands more like them working with the tax authorities to keep their money out of reach. Banks such as HSBC and UBS have been caught in the money laundering that facilitates this process.

How much tax revenue is lost to the global havens? Here, too, we can only guess but the numbers are likely to be vast. Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.

The havens serve countless purposes, yet not one is for the social good. They support massive tax evasion. They underpin a global system of bribery to corrupt officials. They service the accounts of drug runners, arms traders and terrorist groups. They create veils of secrecy through shell companies, which allow tax evasion, land grabs and environmental destruction.

The prime movers of the world’s tax havens are the US, Switzerland and the UK. Indeed, many of the leading havens, including the British Virgin Islands, Cayman and Bermuda, are British Overseas Territories. The secreting of trillions of dollars in the Caribbean has been undertaken with the support of America’s IRS, and with the approval of the US political class and Wall Street.

These playgrounds of the rich and powerful were largely hidden from the public’s view during the long financial boom. In the new world of austerity following the 2008 crash, however, they are increasingly seen as a cancer on the global financial system that must be excised.

The public’s animus was greatly accelerated by the Cyprus crisis. The island has for many years been a notorious secrecy-and-tax haven, especially for Russian money. Yet this was winked at rather than controlled. Then Cyprus blew up – a reminder of how an unregulated financial centre can quickly turn into a mortal threat to the world economy.

Many of the reforms that are required are obvious. All foreign bank accounts in any jurisdiction should be reported back to the national tax authorities of the account holders. Unreported incomes diverted to overseas accounts in the past should then be taxed at national rates with penalties for evasion. The thousands of hedge funds and corporations domiciled in the Caribbean for operations in the US and Europe should be required to redomicile in the US and Europe. Beneficial ownership should be disclosed on all foreign-owned companies.

Angela Merkel, the German chancellor, François Hollande, the French president, and David Cameron, the UK prime minister, have recently acknowledged the need for a serious clampdown, yet the real actions still lie ahead. Barack Obama, the US president, has spoken in the past about cracking down but has not said much recently. All eyes are now turning to US and European leaders in advance of the summits of the Group of Eight leading nations in June and the Group of 20 in September to see whether the politicians are beholden to the needs of the public or to heedless and destabilising private greed.

The writer is director of the Earth Institute and author of the forthcoming book, ‘To Move the World: JFK’s Quest for Peace’

The New Deal for Europe: More Reform, Less Austerity

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My Comments: There has been a disconnect in this country, typically along partisan lines, whether or not austerity is the way to solve the so called debt crisis at the federal level. As an economist, and a Democrat, my instinct has been to set the stage for growth, and as growth and increased economic activity increase, revenue will increase and resolve the debt crisis. Starting with George Bush, and the bailout of the big banks in 2008, we have largely stayed away from pure austerity.

Europe, on the other hand, has largely gone the austerity route, and it’s not working. The rules that apply to a household with a finite time horizon, thought of as “micro economics”, are not applicable to a dynamic society such as the US, where “macro economic” rules apply. This article suggests that Europe is moving in our direction.

By Philip Stephens for the Financial Times April 26, 2013

The War of the Coding Error is a reminder that the economy is too vital to be left to economists

Britain and Spain once went to war over the severed ear of a ship’s captain. The annals of unusual conflicts will surely record that the 18th-century War of Jenkins’ Ear was a pretty unremarkable affair when set against today’s War of the Spreadsheet Coding Error.

Economists have taken up arms. One side has long claimed proof that high public debt suffocates growth. European governments have fallen in behind, rampaging across the continent under the flag of austerity. Now a rival army of academics says the statistical books were spiked. As things turn out, the causality may flow in the opposite direction: it is low growth that drives up debt.

The Harvard economists Carmen Reinhart and Kenneth Rogoff had posited that debt above 90 per cent of national income was almost always associated with significantly reduced growth. The implication was that deep retrenchment was the only route back to prosperity. Now, economists at the University of Massachusetts Amherst say the results reflected a data “coding error” and some questionable aggregation. The assumption that high debt always equals low growth is not sustained by the evidence.

I know whose side I am on, but, after the dismal experience of recent years (remember economists proclaiming liberal financial capitalism to be the philosopher’s stone?), it is tempting to shrug one’s shoulders. That would be a big mistake. This particular fight merits more than a knowing sigh. It is another salutary reminder that the economy is too important to be left to economists. More importantly, it presents policy makers with a chance to escape a flawed orthodoxy.

Excessive austerity has seen much of Europe mired in depression. In spite of swinging spending cuts and tax rises, debt is increasing. The crisis of the euro may be over, in the sense that the existential threat to the currency has been lifted. But the crisis within the euro is extinguishing political consent for European integration. The continent badly needs to reset its course.

The answer is not a new fiscal splurge. A heavy price must be paid for the unchecked spending and credit booms that ended in the global financial crash. But timing and pace matter. Governments with a demonstrable determination to raise long-term economic growth with supply-side reforms should be given more time to cut deficits.

During the past couple of years politicians have prized credibility with markets above real economic performance. It hasn’t worked. Bond traders such as Pimco’s Bill Gross now attack austerity, calling for measures to rekindle growth. Bond markets, like economists, are rarely known for their consistency. In this instance, though, Mr Gross is right.

The present confusion – visible in open debates at the International Monetary Fund – gives politicians and central bankers a chance to think again. The response should be a calibrated policy shift to combine accelerated supply-side reforms with flexible fiscal timetables and increased investment. To the extent fiscal restraint weighs on demand, it should be offset by policies to expand productive potential.

Britain is in as much trouble as the eurozone. After three years of austerity, the economy and borrowing are flatlining. Policies framed to win over financial markets have been rewarded by rating agency downgrades. Inexplicably, the Treasury has slashed growth-enhancing capital investment while increasing transfer payments to the over-65s. Britain’s borrowing will soon be higher than that of Greece.

Elsewhere, there are one or two encouraging straws in the wind. True, Germany is not about to sanction a big stimulus in peripheral eurozone nations; Chancellor Angela Merkel will keep a firm grip on her cheque book before and after the German election in September.

That said, German policy has become more nuanced. The most closely watched statistics in Berlin are measures of competitiveness. Of course, you hear German officials say, Spain, Portugal and others must cut borrowing and debt. But the indicators that matter most are relative unit costs, productivity and exports. Here Germany acknowledges tangible progress.

This leaves room for the new bargain between creditors and debtors. The advantage of an explicit trade-off between more aggressive reform and looser fiscal timetables is that it would at once offer a more palatable political message to voters and buy credibility in markets. Both would be assured that tough reforms offered a route out of the debt trap to the economic growth needed for sustainable public finances.

High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labour markets that lock out young people and discourage investment and innovation. Raising the pension age generates not only more growth but also confidence in markets about fiscal sustainability – and promotes equity between generations.

Cutting taxes on labour encourages business expansion and jobs. Education and skills training are vital elements in competitiveness. Modernising essential infrastructure can secure a long-term income stream from a one-off expense.

What circumstance now demands of politicians is the confidence to break free of the defunct, and debunked, economic theorising. Economists are not always wrong; nor does the real problem lie with dodgy data. The mistake comes when policy makers invest the findings of a faith-based discipline with the certainties of science. They would do better to rely on common sense and observed behaviour. By underscoring this fairly simple lesson, the War of the Spreadsheet Coding Error may yet do Europe a huge service.

America’s Problem is Not Political Gridlock

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My Comment:US-Capitol-Bldg An interesting observation from someone who has spent many years in leadership roles in our society.

By Lawrence Summers | Bloomberg | FT

Throughout US history, division and slow change have been the norm rather than the exception

With last week’s release of the president’s budget, Washington has once again descended into partisan squabbling. In the US today, there is pervasive concern about the basic functioning of democracy. Congress is viewed less favourably than ever before in the history of opinion polling. There is widespread revulsion at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock”. Angry movements, such as Occupy Wall Street and the Tea Party, are present and still active on the extremes of both sides of the political spectrum.

Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging towards the west. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may raise average productivity but will displace large numbers of workers. Public debt is increasing in a way that is without precedent except in times of total war. A combination of an ageing population and the rising prices of health and education will put pressure on future budgets.

Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone in US politics feels there is much that is essential yet unfeasible in the current environment. Many yearn for a return to an imagined era when centrists in both parties negotiated bipartisan compromises that moved the country forward. Yet fears about the functioning of the US government have been a recurring feature of the political landscape since Virginian Patrick Henry’s 1791 assertion that the spirit of the revolution had been lost.

It is sobering to contrast today’s concern about political paralysis with that which gripped Washington during the early 1960s. Then, the prevailing diagnosis was that a lack of cohesive and responsible parties for voters to choose from precluded the clear electoral mandates necessary for decisive action. While there was a flurry of legislation passed in the 1964-66 period after a Democratic electoral landslide, Vietnam and Watergate followed, all leading to President Jimmy Carter’s declaration of a crisis of the national spirit. Despite the rose-tinted view today, there was hardly high rapport in Washington during Ronald Reagan’s presidency. During his time in office Bill Clinton worked hard at compromising with a US Congress controlled by Republicans, only to be impeached by the House of Representatives.

Throughout American history, division and slow change have been the norm rather than the exception. While often frustrating, this has not always been a bad thing.

There were probably too few checks and balances as the US entered the Vietnam and Iraq wars. There should have been more checks and balances in place before the huge tax cuts of 1981, 2001 and 2003, or to avert the many unfunded entitlement expansions of the past few decades. Most experts would agree that it is a good thing that politics thwarted the effort to establish a guaranteed annual income in the late 1960s and early 1970s and the effort to put in place a “single-payer” healthcare system during the 1970s.

The great mistake of the gridlock theorists is to suppose that all progress comes from legislation and that more legislation consistently represents more progress. While these are seen as years of gridlock, consider what has happened in the past five years.

The US moved faster to contain a systemic financial crisis than any country facing such an episode has done in the past generation. Through all the fractiousness, enough change has taken place that without further policy action, the ratio of debt to gross domestic product is expected to decline for the next five years. Beyond that, the outlook depends largely on healthcare costs – but their growth has slowed to the rate of GDP growth for three years now – the first such slowdown in half a century. At last, universal healthcare has been passed and is now being implemented. Within a decade it is likely that the US will no longer be a net importer of fossil fuels. Financial regulation is not in a fully satisfactory place but has received its most substantial overhaul in 75 years. Most schools and teachers are for the first time evaluated on objective metrics of performance. Gay marriage has become widely accepted across the states.

No comparable list can be put forth for Japan or countries in western Europe. Yes, change comes rapidly to some of the authoritarian societies of Asia. But it may not endure and may not always be for the better.

Anyone prone to pessimism about the US would do well to ponder the alarm with which it viewed the Soviet Union after it launched the Sputnik satellite or Japan’s economic rise in the 1980s and the early 1990s. One of America’s greatest strengths is its ability to defy its own prophecies of doom.

None of this is to say that the US does not face huge challenges. But these are not due to structural obstacles. They are about finding solutions to problems such as rising inequality and climate change – where we do not quite know the way forward. This is not a problem of gridlock – it is a problem of vision.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

Obama Planned Big Budget Cuts All Along

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My Comments: I’m trying to decide if the author of this article is fundamentally to the left of the Obama administration and therefore critical of his lack of fire in promoting new revenue sources for the country, ie higher taxes, or whether the writer is critical because virtually everyone on the right is critical, regardless of the message or desired outcome.

I’d appreciate hearing from some of you how you react to this.

By Jeffrey Sachs

The president had a Faustian pact on tax and spending, says Jeffrey Sachs

To hear US President Barack Obama tell it this week, the budget sequestration – the automatic spending cuts that are due to commence on March 1 – will decimate the government. Each party is blaming the other, as if something new and unexpected was about to begin. Many of the cuts are indeed ill-advised – but the fact is that from the start of his presidency Mr Obama has planned a steep reduction in discretionary spending as a share of national income.

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Each year he has put a budget on the table calling for a sharp decline in discretionary spending as a share of gross domestic product in 2012 and beyond. Most of his supporters have been unaware of the contradiction between this and his rhetoric about increasing public investments in America’s future.

The administration is now vigorously blaming the Republicans for the pending cuts. Yet the level of spending for fiscal year 2013 under the sequestration will be nearly the same as Mr Obama called for in the draft budget presented in mid-2012. So deep were the proposed cuts in discretionary spending that the budget narrative pointed out that the plan would “bring domestic discretionary spending to its lowest level as a share of the economy since the Eisenhower administration”.

The squeeze on domestic programmes dates to the start of Mr Obama’s first term. In July 2009, he presented the details of his 10-year budget framework. Discretionary outlays (defence and non-defence) would rise from 7.9 per cent of GDP in 2008, the final full year of George W. Bush’s presidency, to 8.8 per cent in 2009; and 9.8 per cent in 2010, mainly because of stimulus spending and the surge in Afghanistan. But then they would fall to 8.7 per cent in 2011, 7.8 per cent in 2012, 7.4 per cent in 2013, and to just 6.3 per cent in 2019, the final year of the 2009 10-year budget framework.

These cuts are now taking hold, and they will hurt. Mr Obama’s supporters will be puzzled; many will doubt that these cuts have long been ordained by the president, at least in general terms, though not exactly as they will now occur. Why would a progressive leader plan for deep cuts in discretionary spending relative to GDP even as he advocates larger investments in health, education, infrastructure, clean energy, science and technology, job training, early childhood development and more?

There is a simple answer that is the key to the federal politics of our time. Mr Obama ran in 2008 and 2012 promising to make permanent the Bush-era tax cuts for almost all Americans. These tax cuts were unaffordable from the start and were scheduled to expire in 2010. But to say so, while the Republicans were promising to make them permanent for everybody, would probably have cost Mr Obama both elections.

So he made a Faustian bargain. He would champion the permanent extension of the tax cuts except for a tiny number of rich Americans, and he would silently plan for deep cuts in discretionary outlays as a share of GDP to compensate for the lack of adequate budget revenues in later years. In effect, he would allow rising outlays on mandatory programmes such as Medicaid and Social Security and debt servicing to crowd out public investments vital for America’s long-term economic future. And indeed, on January 1, Mr Obama and the Congress agreed to make the tax cuts permanent for 99 per cent of households.

Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. And perhaps they will still do so. Yet he has never presented an alternative with more robust tax revenues in order to fund a higher sustained level of public investments and services.

So the moment of truth has arrived: we are on the path of deep cuts in discretionary programmes relative to national income. The fact is that America needs higher public investments and more tax revenues to fund them. Mr Obama is finally saying some of these things, though still without specific tax proposals.

Yet it is very late in the day. Now the Bush tax cuts are permanent, Mr Obama lacks the political leverage to achieve a boost of revenues. After years of deflecting public attention from the coming budget squeeze, he will now preside over sharp cuts in public services and investments that are the opposite of his stated goals.

The writer is director of the Earth Institute at Columbia University

Austerity Obstructs Real Economic Reform

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MyWorld copyMy Thoughts on This: This article comes from the Financial Times, a primarily English publication. If it has a bias, it is probably toward what we think of as liberal. And I’m usually forced to copy the entire post for those of you who are interested since to create a link forces the reader to subscribe to the Financial Times, which is not my intention.

In the US, we think of austerity as the domain of the Tea Party, of those who ascribe to the doctrine of Mr. Hayek, and those politicians who blithely argue that by simply cutting spending, all our problems will go away. No, they won’t; you’ll just get different problems, many of which earlier politicians tried to solve with our blessing.

I also have a problem with those who argue that since you can’t run a household with ever increasing debt, the same rules should apply to the country. Right now there are two of us in my household. There will never be more than two of us and sooner or later, there will be one and then none. That’s simply not true for the country. There are millions of us and there are going to be more milliions as the days go by. That implies a totally different solution and a mindset that has a basic understanding of economics.

By Wolfgang Münchau February 24, 2013

In Europe, the word “reform” is as misleading as it is ubiquitous. You heard it during the Italian election campaign, when politicians – such as Mario Monti, the country’s outgoing prime minister – were classified as pro-reform. Others, the rest of Italy’s political class, have been deemed anti-reform. It is as though reform has become an issue of religious dogma. You are either in or you are out.

In or out of exactly what, one may ask? What, exactly, is reform? Growing up in Germany in the 1960s and 1970s, I recall Willy Brandt, West Germany’s chancellor during some of those years, talking endlessly about reforms. For him, the word meant more workers’ rights and an increase in welfare payments. This has always been the meaning I first think of when I hear it.

A decade later, in the UK under Margaret (now Lady) Thatcher, reform became synonymous with privatisation and deregulation, and a reduction in the rights of trade unions. This is closer to the meaning that it holds for most people today.

There is certainly a clear, positive – though often overstated – case for structural changes such as the liberalisation of services, changes to labour markets to help younger workers and pension reforms to ensure long-term fiscal solvency. These reforms would probably increase the gross domestic product of several countries by a non-trivial but unknown amount.

A former editor of The Economist used to advise young reporters to “simplify, then exaggerate”. This is exactly what happened to the debate on reform in Europe. You might want to add “distort” as a third element. The simplification consisted of the notion that there is a link between some vague idea of reform and economic success, as measured in GDP per capita. No such link exists.

The richest countries in the world include those with both liberal and regulated labour markets. Per capita GDP in the highly regulated French economy has been higher than in the deregulated UK. The relatively solid performance of a largely unreformed France does not obviate the need for reforms. But it shows that the relationship is much more subtle than the dogmatists acknowledge.

The exaggeration consists of overstating the actual impact of reforms when they take place. Has financial liberalisation really increased long-run economic growth, or may it merely have given us a housing bubble? Has German labour market reform really increased long-term productivity or were other factors at work?

This distortion has become even worse recently, as reform has been conflated with austerity. Whenever you hear a European official applauding Mr Monti’s “reforms”, what they are really praising is his fiscal consolidation. In other words, they applaud the many of his policies that reduced economic growth, and not the few that might have a chance to increase it one day.

Austerity and reform are the opposite of each other. If you are serious about structural reform, it will cost you upfront money. If you want to open your labour market to a hire-and-fire rule, you will need policies to deal with those who are laid off. These costs may outweigh the financial benefits of reforms in the short term but the reforms may still pay off in the long run. Structural reforms, properly done, are not suited to the task of delivering austerity.

By contrast, austerity – higher taxes and cuts in public sector investments – weaken the economy’s capacity in the short run, and possibly also in the long run. If you have youth unemployment of more than 50 per cent for a sustained period, as is now the case in Greece, Italy and Spain, many of those people will never find good jobs in their lives. Economists speak of a so-called “hysteresis” effect – permanent economic damage that will not be repaired even if there is a full recovery. Austerity could well leave an economic and social scar across the eurozone.

Italy and Spain would have been a lot better off to come up with a list of front-loaded targeted structural reforms and backloaded fiscal consolidation. When you do it the other way round, cutting investment and raising taxes in a recession, you never get out of the hole, and you waste your political capital on austerity, leaving none for reforms.

By putting fiscal consolidation first, the political establishment also took a big gamble against what we know from history. A senior Italian official told me a while back that they had the situation under control. There would be a slight bump but the economy would take off afterwards. He was wrong. As last week’s European Commission forecasts confirm, the southern European economies are behaving as was predicted by those who thought austerity would sap growth and using monetary policy to offset it would be ineffective.

I am not surprised that European electorates are rejecting these policies, and the politicians who delivered them. On Monday we will know how Italy has voted. My hunch is that it is not going to be a good evening for the “Austerians”.

Putting China’s “Hacking Army” into Perspective

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My Thoughts on This: As I get older, I become increasingly interested in how the future is likely to unfold. Part of it, I’m sure, is how much of it will I see, what will it look like, will I be there for my grandson’s high school graduation?

We have reason to be somewhat fearful of what will happen in the short term. How hot will it get? Can I afford to keep buying gas? Will the football team continue to outperform? That sort of thing. But on a much larger scale, how life and all its many fascinating components evolve is exciting for me to think about.

As you wonder about your family and the life they are likely to lead, consider these thoughts as they appeared on one of Time Magazine’s internet blogs:

Great New York Times front-pager on Tuesday finally provides a substantive overview of the comprehensive hacking activities of the Chinese military against all manner of U.S. industries (with an obvious focus on defense).

Actually, the title was a bit of soft sell (China’s Army Seen as Tied to Hacking Against U.S.). This unit’s activities have been much discussed within the U.S. national-security community for several years now, so we are far past the “tied to” allegation. It’s clear that Beijing has the People’s Liberation Army conduct widespread cyber- theft all over the world, targeting the U.S. in particular.

One is tempted to label this cyber-warfare, and to declare that bilateral conflict in full swing, but I like to avoid such imprecision in language.

What we have here is industrial espionage on a grand scale – pure and simple. Yes, the PLA wants to know how to cause as much infrastructure mischief as possible in the event of a shooting war with the U.S., but let’s not be naive about the extensive and ongoing U.S. efforts to do the same to China (much less our Rubicon-crossing cyber strikes against Iran).

That sort of spying and military espionage is nothing new. All that says is that both sides plan to go heavy on cyber warfare in the event of war. It does not prove that cyber is its own warfare domain – as in, constituting genuine war in isolation.
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