Amity Shlaes

Wednesday, May 28, 2008

Amity Shlaes

Nobelists Lip-Sync Led Zeppelin in Growth Report

Commentary by Amity Shlaes

May 28 (Bloomberg) -- Rock stars want to be development economists for some reason, and development economists seem to want to be rock stars. Both groups treat economic doctrines like songs: A new doctrine zooms to the top of the playlist. The ex- favorite gets dropped faster than you can say Gini Coefficient.

This pattern seems to be holding for the Washington Consensus, a program for developing countries laid out in 1989 by economist John Williamson of the Peterson Institute for International Economics. Williamson's Consensus has multiple lines, though a summary version would be: stabilize, privatize and liberalize. These days, mere mention of the old Consenus is enough to offend. Some have suggested the rock-honored method of rebranding, calling it the Dublin or New Delhi Consensus instead.

Now comes a formal effort to supplant the unloved Consensus. In a study just presented at various sites, including at the Council on Foreign Relations, where I work, Nobelists Michael Spence and Robert Solow, Danny Leipziger of the World Bank, Ernesto Zedillo of Yale, Zhou Xiaochuan of the People's Bank of China and other big names of economics suggest new rules for developing countries.

The Growth Report, as the authors call it, says countries should push for big increases in gross domestic product, strong political leadership, and government flexibility when it comes to environmental policy.

There's a lot to like in this plan, starting with the name. The authors looked around the globe and found 13 countries able to sustain an average of 7 percent growth for a quarter of a century. Replicating that performance should be the goal of those nations and the rest of the world as well, they argue.

Rock Economists

Income inequality? This matters, yet will narrow after per capita GDP grows. This order is preferable to the reverse, in which equality is viewed as a condition for growth. That sequence is favored by Bono, Bob Geldof and many other rock economists. Even Led Zeppelin has done Live AID.

When it comes to infrastructure, Spence, Solow and the other economists prove refreshingly retro. They suggest that bypass technologies like the cell phone may have offered all they can. It is time, rather, the authors posit, for governments to lay land lines -- that is, to get in the road, dam and bridge business again. This seems reasonable. Why shouldn't Latin American countries spend 10 percent of GDP where they now spend 2, 3 or 5 percent?

Softer ideas put forward by the group are also appealing. ``It is not wise to seek long-term commitments from developing countries to reduce emissions,'' the authors say. This pragmatic position is wonderful, not least because it's likely to drive global-warming ideologues insane.

Anti-Growth Report?

Still, the Growth Report misses some important notes. Instead of reinforcing the solid Washington Consensus rule on taxes -- make marginal rates lower -- the authors call for ``tax mobilization.'' That's development-speak for ``wicked enforcement and higher rates,'' both of which are anti-growth.

The authors also tolerate farm subsidies, saying ``there are many good reasons to invest in agriculture,'' neglecting the distorting effect such subsidies have on even poor economies.

Most jarring is the line on commodities. The authors advise governments to use commodity-wealth revenue for themselves -- it saves the bother of tax collection. They seem unconcerned about the damage to property rights such use can cause.

As one economist put it: ``Countries with good endowments of natural resources and that can build export revenues on mineral deposits or something of the sort, we suggest those ought to appropriate a substantial fraction of the pure rents from those resources and invest them domestically.''

Making Like Mugabe

``Appropriate'' was not a felicitous verb to choose: appropriating is what Robert Mugabe has been doing in Zimbabwe. But the greater trouble is that the authors seem to think that nations' experiences with commodity wealth have been good for stability, growth, property rights and democracy. This despite Venezuela, or Russia, where oil prices seem to determine the volume of the regime's threats to other powers.

Diamond-rich Botswana is one example the authors offer up as a resource success story. It is true that civilians, not colonels, govern there and that GDP per capita is higher than in neighboring South Africa.

But Botswana's population is about the size of that of metropolitan San Antonio. Two in 10 people are unemployed and AIDS so prevalent that one of the country's health officials recently told the U.K.'s Guardian that Botswana was ``faced with extinction.'' A tragic outlier is not a model.

Condescending Toward India

The country that best illustrates the limits of the Growth Report is India. Half a century ago, the World Bank and others poured millions of dollars into infrastructure and agriculture projects in the country.

The lenders worked hard to make Jawaharlal Nehru a strong leader. Yet India seemed to prove Thomas Malthus right in its inability to feed itself. Indian companies had no future, it was said. In 1969, the editors of Time magazine marked a high in the condescension department when they published ``Teaching Business Success,'' a praiseful article about how American professors were, with enormous effort, introducing the entrepreneurial principle in an obscure place called Hyderabad.

It was adherence to the then-new Washington Consensus by Manmohan Singh, first as finance minister in the early 1990s and then as prime minister that made the Indian economic miracle possible. That Consensus is still good. Updating the name may be all the Consensus needs -- the Delhi Consensus works.

You get the feeling that if you presented it to them right, rock stars, too, would see the merit in this. In any case, the growth part of the Growth Report is the best part. Or, as Led Zeppelin would put it, on growth, the song remains the same.

Fiorina Buttresses McCain on Economy, Touting Tax Cuts, Trade

May 28 (Bloomberg) -- By John McCain's own admission, the economy isn't his strong suit. The ace up his sleeve may be a polished corporate executive ranked six times as the U.S.'s most powerful businesswoman, who's also among the most controversial.

Carly Fiorina, 53, who ran Hewlett-Packard Co., the largest U.S. corporation headed by a woman, joined McCain's bid for the Republican presidential nomination in March 2007, sticking with him even as the campaign faltered. This March, as he clinched the nomination, she reaped the reward and was appointed chairwoman of Victory '08, the public face of, and force behind, Republican efforts to win the White House.

Arizona Senator McCain, 71, this week praised Fiorina for playing ``a vital role in the leadership of my campaign,'' saying he's particularly ``grateful'' for her economic advice.

Fiorina is no stranger to television cameras. As chief executive officer of Palo Alto, California-based Hewlett-Packard, she became the telegenic face, in ads and in interviews, of what was then the second-largest computer maker. She also presided over the contentious $18.9 billion acquisition of rival Compaq Computer Corp., thousands of layoffs and the dot-com boom and bust, before being ousted in 2005 in a struggle with her board after the company's shares plunged 55 percent.

Months later, her name was floated for the top job at the World Bank; she was passed over for Deputy Defense Secretary Paul Wolfowitz.

These days, she is equally at ease fielding voter questions, cultivating donors and helping the candidate articulate a platform of low taxes and small government.

`Economic Summit'

Fiorina accompanies McCain from Rust-Belt cities to corporate gatherings. In one week in April, she co-hosted a conference call for reporters previewing a McCain address in Pittsburgh on taxes, then moderated an ``economic summit'' in Milwaukee, taking questions from leaders in business, education and mortgage lending. She advises the candidate on his economic message, often huddling with him on his campaign plane.

Fiorina outlined in an interview the vision she shares with McCain: keep taxes low to encourage small-business innovation and job creation; offer choice in education; retrain laid-off workers, and promote alternative energy -- including nuclear power.

That vision also includes free trade; she said McCain believes trade creates jobs and spurs competitiveness among U.S. companies. ``The protectionist rhetoric out of the Democratic Party terrifies business,'' she said.

`Natural Humility'

Fiorina's importance as an economic adviser looms large because of McCain's self-deprecating remarks about his lack of expertise on the issue. She dismissed those comments, which the candidate has made in a television debate, to reporters and in at least one town-hall meeting, as ``a reflection of his natural humility.'' Most important, she said, ``He knows the role of the government is to unleash the creativity of the American people.''

His campaign, in turn, is banking on her corporate experience, life story and communication skills to attract voters anxious about the economy, as well as women and business donors to McCain, who lags behind his Democratic rivals in fundraising and votes cast in primaries.

McCain has been criticized by women's groups for his anti- abortion views and opposition to equal-pay-for-equal-work legislation. Fiorina says he believes that women should be paid equally, though he doesn't think the government should legislate pay -- the same reason he opposes increases in the minimum wage.

No Single Issue

Fiorina, the daughter of a federal judge, says that while she has always opposed abortion, the Republican Party has room for women on both sides of that issue. ``Most women are not single-issue voters,'' she said.

She said ``women-run small businesses are the fastest- growing sector of the economy'' and women inherit the overwhelming majority of bequeathed wealth, making them receptive to other issues that McCain champions: low taxes, portable health care, blocking Internet porn.

Fiorina, who joined AT&T as a trainee and rose to executive vice president before becoming a top executive at Lucent Technologies Inc., took over at Hewlett-Packard in 1999. Fortune magazine named her the most-powerful businesswoman in the U.S. during her entire tenure at Hewlett-Packard.

Still, she made enemies at the computer maker, particularly with her pursuit of Compaq, which some insiders said would disrupt Hewlett-Packard's corporate culture. Others derided her as all flash and no substance.

Her biggest critic at the time, Walter Hewlett, the son of the company's co-founder, said she engineered ``a big, splashy'' merger ``to distract people from the fact that she wasn't really able to get her job done.''

Share Price Doubles

The company has become the world's largest personal computer and printer-maker and its share price has doubled since she left -- the fruits, say defenders and even some critics, of foundations she laid. Today, it's difficult to find a former adversary in Silicon Valley who will criticize her.

Tom Perkins, 76, a venture capitalist then on the Hewlett- Packard board whom Fiorina has said she considers the architect of her ouster, praised her ``strategic mind'' and ``persuasive powers,'' calling her a natural for politics.

Of the Compaq deal, Perkins said, ``Looking back on it now, it was brilliant, and it wouldn't have happened without her.''

Pragmatist

Fiorina met McCain in 2000, when she testified before Congress against taxation of the Internet. She describes him as a pragmatist who's unafraid to take unpopular positions. She recalled the candidate contradicting a voter at a town-hall meeting who wanted to deport all undocumented immigrants, including the elderly mother of a soldier serving in Iraq.

``People actually recognize the difference between saying what's convenient and what is true,'' she said.

While McCain once opposed President George W. Bush's tax reductions and now wants to make them permanent, Fiorina insists he's ``been entirely consistent in calling for tax cuts accompanied by cuts in government spending.'' That's something, she said, the Bush administration hasn't done, and the result is a record deficit.

She said McCain has also differed with Bush over the execution of the Iraq War, stem-cell research, global warming, worker retraining and overhauling the education system.

Though her name has been floated as a possible choice to run for the vice presidency, a Cabinet post or other top appointment is more likely, given that she's never run for office. And she doesn't rule out a political run of her own in the future.

She half-expected that her foray into politics would make her cynical; instead, she said she's come away with ``renewed faith in democracy, when you get away from all the stuff that's driven by 24-hour news.''

Dow to Raise Prices Up to 20%

Dow to Raise Prices Up to 20% as Energy Costs Surge (Update2)

By Dale Crofts

May 28 (Bloomberg) -- Dow Chemical Co., the largest U.S. chemical maker, will raise prices on all of its products as much as 20 percent because of surging costs for energy, raw materials and transportation.

The increases are needed after a 42 percent jump in first- quarter spending on raw materials and energy, Chief Executive Officer Andrew Liveris said today in a statement. The increases take effect on June 1, Midland, Michigan-based Dow said.

Dow, which makes 3,200 products from Styrofoam insulation to pesticides and plastics, is trying to pass on higher costs amid company forecasts that spending on energy and hydrocarbon-based ingredients will climb to $32 billion this year, a fourfold increase from 2002. The rising costs are symptoms of a ``true energy crisis'' caused in part by the U.S. government's lack of a comprehensive policy, Liveris said.

``Dow is probably leading the charge here in being this aggressive, and others are probably going to follow suit,'' Tom Uutala, who helps manage $60 billion, including Dow shares, at Victory Capital Management, said in a phone interview from Cleveland. ``It's going to be interesting to see if there's some demand destruction.''

Dow gained 35 cents to $40.58 as of 9:32 a.m. in New York Stock Exchange composite trading. The shares fell 11 percent in the year through yesterday.

Liveris, who said today that higher energy costs are ``putting a strain on the entire value chain,'' is seeking acquisitions and joint ventures that will give the company access to low-cost materials.

Joint Ventures

Kuwait-based Petrochemical Industries Co. agreed to buy 50 percent of Dow's commodity-plastics unit for $9.5 billion in December in a transaction Liveris said would provide the world's largest plastics business with cheaper raw materials.

Liveris said today the U.S. government's failure to develop a comprehensive energy policy is causing the nation's chemical industry to lose ground to global competitors.

``The country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,'' Liveris said in the statement.

Crude oil traded in New York surged 98 percent in the year through yesterday and reached a record $135.09 a barrel on May 22. Natural gas climbed 58 percent this year before today.

U.S. Economy: Goods Orders Rose Excluding Transport (Update1)

May 28 (Bloomberg) -- Orders for U.S. durable goods excluding cars and planes unexpectedly rose in April, signaling that international customers are helping factories ride out the economic slowdown.

Excluding transportation orders that tend to be volatile, bookings for goods meant to last several years rose 2.5 percent, the most since July, the Commerce Department said today in Washington. Total orders fell a less-than-forecast 0.5 percent.

Exports are keeping the economy from shrinking as American manufacturers grapple with the slowest economic growth in seven years and oil costs that have doubled in the past 12 months. Dow Chemical Co., the largest U.S. chemical maker, said today that surging expenses mean it will raise prices by as much as 20 percent.

``Here we really see that the effects of a weaker dollar are in fact giving us a lot more juice in this economy than we had expected,'' Anthony Chan, chief economist at JPMorgan Private Client Services Group, said in an interview with Bloomberg Radio. ``When the economy weakens you tend to see the manufacturing sector also weaken,'' though ``this time around, we're not seeing that,'' he said.

Treasuries dropped, sending benchmark 10-year note yields to their highest level since January. The yields were at 3.97 percent at 9:49 a.m. in New York, from 3.92 percent late yesterday. The dollar gained against the euro.

Economists' Forecasts

Economists forecast orders would decline 1.5 percent, according to the median of 72 projections in a Bloomberg News survey. Estimates ranged from a drop of 5 percent to a gain of 0.6 percent.

Excluding transportation equipment, orders were projected to drop 0.5 percent, after a previously reported 1.5 percent gain for March, according to a Bloomberg News survey. Forecasts ranged from a decline of 1.5 percent to a gain of 0.8 percent.

A rebound in demand for electrical equipment and appliances, along with gains in machinery and metals, paced the increase. Orders for electrical equipment jumped a record 28 percent after falling 19 percent in March.

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, climbed 4.2 percent, the most this year. Shipments of those items, a number used in calculating gross domestic product, increased 0.5 percent.

Military Orders

Total orders excluding defense equipment decreased 0.3 percent as bookings for military gear rose 4.8 percent.

Demand for transportation equipment fell 8 percent, as aircraft orders dropped 24 percent. Demand for automobiles decreased 3.3 percent.

Chicago-based Boeing Co., the world's second-biggest airplane maker, said it received 58 aircraft orders in April, down from 99 the previous month.

Ford Motor Co., the second-largest U.S. carmaker, last week said its U.S. sales fell 9.8 percent this year through April as gasoline prices approached $4 a gallon. Ford said it would pare North American production 15 percent this quarter from a year earlier, and would cut third-quarter output as much as 20 percent.

``There is no doubt the slowing economy here in the United States presents a challenge for us,'' Chief Executive Officer Alan Mulally said at the company's annual shareholders meeting earlier this month. ``We are taking further cost-reduction actions.''

Oil Surge

Among the biggest costs to manufacturers, oil rose to more than $135 a barrel last week, the highest ever.

Still, manufacturing has done better than in past downturns. While the Institute for Supply Management's factory index fell to a five-year low of 48.3 in February and moved up to 48.6 in the following two months, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession. A figure of 50 is the dividing line between growth and contraction.

Companies that export have continued to grow during the current slowdown in growth. A shrinking trade gap added 0.2 percentage point to first-quarter economic growth, according to Commerce Department figures.

Honeywell International Inc., the world's largest maker of airplane controls, said last week it is confident in its full- year forecasts as demand outside the U.S. remained robust. Record oil prices have boosted orders for refining equipment and building projects in the Middle East, India and China has pushed up sales of its energy conservation devices.

`Multiple-Engine' World

``We have a multiple-engine world economy, with the euro zone holding up and parts of Asia doing quite well,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London, who had forecast a gain in durables orders excluding transportation. ``Manufacturing is certainly defying the more pessimistic view out there.''

The jump in fuel costs hasn't slowed European growth. The economy in the euro zone expanded 0.7 percent in the first three months of the year after growing 0.4 percent in the previous three months. Growth in Germany was the strongest in 12 years.

The report will be welcome news to Federal Reserve officials, who have said they were concerned about the prospects for business investment. Policy makers lowered their 2008 economic growth projection by about a full percentage point to 0.3 percent to 1.2 percent, according to the minutes of their April 30 policy meeting released last week,

``The outlook for business spending remained decidedly downbeat,'' the minutes said.