The Immateriality of Wealth
If you’re like me, when you think of wealth and poverty, you picture its material manifestations. To have wealth, we imagine, is to have money, stocks, real estate, or valuable commodities, which, in turn, gives us the means to achieve various material ends, such as food, clothing, cars, housing, and healthcare. Poverty, in contrast, is the lack of such goods, which, in turn, leads to a lack of food, shelter, basic medical care, and other such items. These mental associations can make it hard to discover the preconditions of wealth creation, many of which are immaterial, even spiritual, rather than material.
For most of human history, discovering the sources of wealth creation would have been devilishly hard, since most economies, such as there were, tended to be static. If a Mesopotamian farmer or Greek shepherd in the second century BC ever asked, “Where does wealth come from?” he would have assumed that wealth came from rain, common labor, good luck, or some combination of these. He probably also would have assumed that to get really wealthy, you need to plunder other people.
But we now have concrete examples of cultures that have created vast new wealth, moving the majority of their citizens from poverty to relative prosperity. And when we look at these cultures retroactively, we discover answers that, for most of us, are counterintuitive. I’ve argued elsewhere that we’re able to discern ten crucial features allowing such cultures to alleviate poverty and create wealth. The more of these a culture has or does, the more likely it is to be prosperous.
The Top Ten Ways to Alleviate Poverty
1) Establish and maintain the rule of law.
2) Focus the jurisdiction of government primarily on maintaining the rule of law, and limit its jurisdiction over the economy and the institutions of civil society.
3) Implement a formal property system with consistent and accessible means for securing a clear title to property one owns.
4) Encourage economic freedom.
5) Encourage stable families and other important private institutions which mediate between the individual and the state.
6) Encourage belief in the truth that the universe is purposeful and makes sense.
7) Encourage the right cultural mores.
8) Instill a proper understanding of the nature of wealth creation and poverty.
9) Focus on cultivating your comparative advantage rather than protecting what used to be your comparative advantage.
10) Work hard.
There is a striking correlation between societies that exhibit these traits, or some subset of them, and the large-scale wealth creation. But notice that only one of them describes a material good. All the others are intangible, immaterial, spiritual. You can’t find economic freedom or cultural mores on a map or put them in a safe. You can’t bottle diligence or weigh the ingredients for stable families and voluntary institutions on a scale. These goods involve beliefs, social conventions, institutions, commitments, virtues, and creativity. Having listed them in brief, now I want to hold each of the ten immaterial ingredients up to the light and consider how each helps a society move from poverty to prosperity.
Number 1: Rule of Law
Economists in recent years have begun to focus on the importance of rule of law, a precondition rather than a hindrance to a free market. A free market is not anarchy where the strong prey on the weak. As Adam Smith recognized, it requires a system of rules that prods even selfish motives toward socially beneficial outcomes. The butcher, the brewer, and the baker may primarily have regard for their own interest, but in a free market their self-interest encourages them to provide beef, beer, and bread that others will freely buy.
Number 2: Limited Government
Free marketers have tended to emphasize the other side of the coin: while economic freedom may require a government strong enough to maintain the rule of law, it also requires a government limited enough not to trammel the rule of law under its boots.
Number 3: Formal Property System
Mental associations can make it hard to discover the preconditions of wealth creation, many of which are immaterial, even spiritual, rather than material.
Peruvian economist Hernando de Soto has emphasized the economic importance of a formal titling system, which allows land to become property. He argues that the system by which we represent land allows it to become property. Securely titled property, in turn, changes the habits and attitudes of those who own it, as well as others, who must respect it. Titled property allows land to become capital, which can be priced, compared, and traded for other goods in a market. As property, that land can become collateral for a business loan, or inspiration for a farmer to invest in equipment or plant crops that yield greater profit in the long run but take years rather than months before the first harvest.
Of course, a material reality—land—is involved here; but it is the representational system—an essentially immaterial reality—that allows land to become an instrument for moving beyond subsistence and onto the ladder of economic progress.
Number 4: Economic Freedom
Champions of the free market rightly focus much attention on criticizing government barriers that prevent people from freely trading goods and services, barriers such as tariffs, subsidies, price controls, and regulations that incur more costs than benefits. Though such policies may be inscribed in material parchment, to have an effect, they must influence the immaterial beliefs, attitudes, and actions of government officials and ordinary citizens.
Number 5: Strong Civil Institutions
Economists have begun to document the economic importance of vibrant “mediating institutions” such as the family, churches, private charities, and the like, which limit the power of the state. But much of this is common sense. Does anyone now doubt the bad economic consequences of broken families and out-of-wedlock births?
Number 6: Belief in a Meaningful Universe
Though it would obviously be an overstatement to say that wealth creation requires everyone always to believe in God, a number of scholars, such as sociologist Rodney Stark, have pointed out the economic importance of Judeo-Christian assumptions to the emergence and success of Western capitalism. And even common sense suggests that if the majority of a population either languishes in existential despair, or fritters away its time appeasing capricious gods, it will be less economically fecund than a population that sees its daily labors as part of a larger cosmic drama within a rational, orderly universe.
Number 7: Right Mores
This relates to the practical habits and mores that breed economic success, emphasized by Max Weber and others. These include orientation to the future; belief that progress but not utopia is possible in this life; a willingness to take thoughtful risks and delay gratification (which in turn encourages thrift, saving, and investing); habits of diligence; and respect for the rights and property of others. These mores allow wealth not only to be created, but also encourage individuals to save and reinvest some wealth—ultimately creating more—rather than merely consuming it.
Number 8: Right Understanding of Wealth
A cluster of basic economic beliefs also encourages wealth creation. They include the belief that wealth can be created and in creative new ways, that free trade is typically win-win, that risk is essential to enterprise, that trade-offs are unavoidable in the real world, that the success of others need not come at your expense, and that you can pursue legitimate self-interest and the common good at the same time.
Notice that only one of these traits describes a material good. All the others are intangible, immaterial, spiritual.
A good economic education should teach the wealth-creating power of sound economic beliefs, but properly tutored common sense suggests many of the same things. For instance, imagine a world where young people are taught that wealth is acquired by transferring wealth from one person or group to another (burglary, plundering, taxation). Now imagine another world where young people are taught they can create new wealth through diligence, creativity, and enterprise, through ventures that find new ways to serve potential customers in win-win exchanges. Which world do you think will be better off in the long run?
Number 9: Focus on Your Comparative Advantage
This ingredient is a partial exception to the rule. Though your comparative advantage might be an immaterial asset, such as a good education or a sunny disposition, it often involves access to fertile soil, abundant sunlight, or an oil field. And that leads us to sources of wealth creation that may have occurred even to an ancient Mesopotamian farmer.
Number 10: Work Hard
The most intuitively obvious way to create wealth is to apply muscle to increase the natural creative capacities of field, herd, and factory. Even Karl Marx got this one right. But hard work is much more likely to create large amounts of wealth in a setting that includes the other nine ingredients.
Again, this should be common sense. Which country is likely to do better in the long run, the one with a hard-working population, or the otherwise identical one with a population of lazy freeloaders? Obviously, the former. In his recent book, The Battle, Arthur Brooks has extended this intuition by showing that happiness isn’t correlated closely with merely having money, but rather with earned success. Two people may have the same amount of money, but the one who earned it will likely be far happier than the one simply given it by, say, government largesse. The money is the same in either case. But the way it is perceived and received (that is, its immaterial aspect) is entirely different.
So, with the partial exception of number nine, the top ten ingredients for wealth creation all involve immaterial rather than material realities. Indeed, the more advanced an economy, the more important the immaterial and intangible becomes. Recently, even the World Bank has come to appreciate this. In 2006, it released a study highlighting the importance of so-called “intangible wealth,” as distinct from “natural capital” and “produced capital.”
Ironically, many religious people believe in an immaterial reality and yet, sometimes, are the last to understand the immaterial nature of wealth creation. Jews and Christians, for instance, believe that God is essentially spiritual rather than material. And they believe that human beings, a unique hybrid of matter and spirit, are the only creatures made in the image of the creative God. They believe that the spiritual is as real as the material—that, in the ultimate scheme of things, mind precedes matter. Christians believe that in the beginning was the Word and that “the Spirit gives life.” Given all this, most religious believers should not be surprised that immaterial things are the great drivers of wealth creation in human culture.
Yet when it comes to the nature of wealth and poverty, many religious people have accepted the same materialistic assumptions held by many of their non-religious counterparts. These religious people may earnestly desire a solution to third-world poverty, but they support counterproductive wealth-transfer schemes and ignore the moral, cultural, and legal preconditions for long-term wealth creation. This needs to change. If we really want to alleviate poverty, then, whether we’re religious or not, we should seek ways to spread the top ten, mostly immaterial ingredients for wealth creation, and not the many popular, well-meaning plans that fail or do more harm than good.
Jay W. Richards, PhD, is a senior fellow and director of research at Discovery Institute, a contributing editor to THE AMERICAN, and author of Money, Greed, and God: Why Capitalism is the Solution and Not the Problem.
No Recovery for the American Worker
No Recovery for the American Worker
By now it is widely recognized that the U.S. economic recovery, which began in mid-2009, is among the weakest of all postwar U.S. economic recoveries. Scant attention, however, is being paid to how little this recovery is benefiting the average U.S. worker. This is rather surprising, since the present economic recovery will be difficult to sustain without a meaningful increase in labor incomes. It is also surprising in view of the profound social and political implications that continued wage stagnation would have for the U.S. body politic.
During the Great Economic Recession of 2008-2009, the U.S. economy lost a record 8.5 million jobs, or some 6 percent of the labor force. Yet, the U.S. Bureau of Labor reports that, for 2010, the U.S. economy created only 1.1 million new jobs, a rate of increase well short of the number of new entrants into the U.S. labor market. Little wonder that the unemployment rate remains stuck around 9.5 percent, or at practically its highest level in the postwar period.
Including in the unemployment measure discouraged workers and those involuntarily working part time, the unemployment level is around 17 percent.
Sadly, the state of the U.S. labor market is even more appalling than headline unemployment numbers suggest. The present economic cycle has been characterized by a surge in the number of discouraged workers, who have dropped out of the labor force, and in the number of workers involuntarily working part time for want of full-time job openings. Including in the unemployment measure discouraged workers and those involuntarily working part time, the Bureau of Labor estimates that the unemployment level is approximately 17 percent of the workforce. This means that a staggering one-sixth of American workers do not now have full-time employment.
The paucity of new jobs in the current business cycle has been accompanied by virtual stagnation in wage growth. The Bureau of Labor reports that over the past year household incomes increased by barely 1 percent. Adjusting for inflation, wages hardly changed from the previous year.
Stagnating wage incomes are not new to the American economy. Over the past 20 years, wage incomes have only modestly increased. Most mainstream economists have attributed this stagnation in wages to a combination of rapid advances in technology and increasing globalization. This latter trend has seen many U.S. manufacturing and service jobs outsourced abroad and a marked increase in competition from low-priced Chinese and Indian labor.
For 2010, the U.S. economy created only 1.1 million new jobs, a rate of increase well short of the number of new entrants into the U.S. labor market.
New to the current business cycle is the aggressive degree to which U.S. corporations have taken advantage of the unusually high amount of slack in the labor market to extract major concessions from the U.S. workforce in terms of reduced wages and benefits. For example, a recent study found that, between 2007 and 2009, around a third of those workers who held full-time jobs for more than three years and then succeeded in finding new full-time jobs did so at wages that were on average 20 percent below the wages they received in their previous jobs.
Looking to the year ahead, the economic outlook for U.S. workers hardly seems auspicious. It is all too likely that the U.S. economic recovery will remain subpar in 2011 as it faces strong headwinds from the ongoing housing foreclosure crisis, weak income growth, and high international oil prices. As such, there seems to be little prospect for any meaningful decline in unemployment.
One must also expect further downward pressure on wages and benefits in 2011 as companies continue to take advantage of the slack labor market to extract further concessions from employees. At the same time, there is every reason to expect that U.S. workers will continue to suffer from the adverse effects of global competition, especially from those Asian economies that continue to manipulate their exchange rates for competitive advantage.
If President Obama is serious about economic change, little time should be lost in addressing the stagnating living standards of the American worker that threaten to undermine social cohesion in the country. Aside from maintaining measures to stimulate aggregate demand, an overhaul of the education and training programs for the American worker is long overdue to better prepare the workforce for global economic competition. And a much tougher stance should be adopted toward exchange-rate manipulators in Asia, particularly in China, as such countries continue to expose the American worker to unfair competition at a time of national economic distress.
Desmond Lachman is a resident fellow at the American Enterprise Institute.
Clinton Urges Egypt's President Mubarak to Hold `Free and Fair Elections'
Clinton Urges Egypt's President Mubarak to Hold `Free and Fair Elections'
U.S. Secretary of State Hillary Clinton speaking in Washington. Photographer: Tim Sloan/AFP/Getty Images
Demonstrators use a shoe and broom to strike a picture of Egyptian President Hosni Mubarak during a protest at Tahrir Square in Cairo. Photographer: Mohammed Abed/AFP/Getty Images
U.S. Secretary of State Hillary Clinton said Egyptian President Hosni Mubarak hasn’t met demands for democratic reforms and that the U.S. expects “free and fair elections” to be held in the Mideast nation.
“We are hoping and praying that the authorities will be able to respond to the legitimate requests for participation by protesters,” Clinton said on CBS’ “Face the Nation” program yesterday. “Words alone are not enough. There have to be actions, a demonstrable commitment to the kind of reforms we know are needed and desired.”
Clinton said the Obama administration has been in constant contact with top Egyptian leaders since the protests and violence erupted. She said the U.S. wants Mubarak to show restraint toward peaceful protesters, even if a tougher approach is needed for looters.
The State Department told families of its diplomats to leave Egypt and, in a travel warning posted yesterday, also advised U.S. citizens to leave the country because of the violence. U.S. evacuation flights are scheduled to begin today.
Market Reaction
Money-market rates in developing nations are increasing at the fastest pace since 2008 as central banks from China to Brazil lift borrowing costs and banks hoard cash on concern unrest in Egypt may destabilize the Middle East.
The dollar, yen and Swiss franc advanced for a second day against the euro on concern about Egypt, which spurred demand for safer assets.
Mubarak appointed his first vice president over the weekend after three decades in power without one. Clinton said a lot more action is needed. So far Mubarak’s done “the bare beginning of what needs to happen,” Clinton said on ABC’s “This Week” program.
“We are only at the beginning of what is unfolding in Egypt,” she said on NBC’s “Meet the Press” program. “We have been urging free and fair elections for many years,” she said.
Egypt’s ambassador to the United States, Sameh Shoukry, said on ABC yesterday he was confident changes would come quickly, as the protesters demand, “within the institutions that are still in operation.”
Egyptian opposition leaders have formed a committee to negotiate with the Egyptian government, said Ayman Nour, a politician and member of the committee.
The group also includes Mohamed ElBaradei, the former head of the United Nations’ nuclear watchdog agency, along with a senior member of the Muslim Brotherhood, the country’s main opposition group, Nour said in a telephone interview.
ElBaradei as Bridge
“If the Egyptian people want me to serve as a bridge from an authoritarian system into a democracy, I will not let them down,” ElBaradei said on CNN’s “Fareed Zakaria’s GPS” program, when asked whether he would be willing to serve as interim president. He said Mubarak will have to leave the country in “the next few days.” ElBaradei said the U.S. has been pursuing a “failed policy” with Egypt.
Senator Mitch McConnell of Kentucky, the Republican leader, declined to say whether the U.S. would recognize a government including the Muslim Brotherhood. “It’s up to the Egyptians determine what their leadership is. And we’ll take a look at it after that,” he said on NBC. “Hopefully this transition will occur relatively peacefully.”
McConnell pointed to Egypt as a U.S. ally, citing the commerce that flows through the Suez Canal and saying that Egypt has worked with Israel to prevent arms from going into Gaza while maintaining a peace treaty with Israel.
Stabilizing Force
Democratic Senator Charles Schumer of New York, asked on CNN about the impact on Israel, said Egypt has been “a stabilizing force” in the Middle East, including its recognition of Israel’s right to exist.
Clinton was interviewed on the Sunday talk shows before flying to Haiti for a one-day review of relief efforts there. During the flight she called into a secure conference line to discuss Egypt with U.S. officials and U.K. Foreign Minister William Hague, according to a State Department official who wasn’t authorized to speak on the record.
Senator John McCain of Arizona, appearing on CNN’s “State of the Union” program, warned that Egypt’s outcome would affect nations across the Middle East, including Jordan, Yemen and Libya.
“This is a very critical time. What happens in Egypt will directly and dramatically affect what happens in these other countries. There is a real awakening going on,” he said.
Saudi Arabia’s King Abdullah told President Barack Obama there can be “no compromise” over the “stability” of Egypt, the official Saudi Press Agency reported yesterday.
Saudi King
The two leaders discussed the developments in a telephone conversation last night, SPA said. Obama “expressed his understanding for the point of view of the custodian of the two holy mosques” King Abdullah, it said.
Clinton in her television appearances stopped short of calling for Mubarak to step down, a demand of the street protests in Cairo and other Egyptian cities. “There is no discussion as of this time of cutting off any aid,” Clinton said on ABC.
U.S. Secretary of Defense Robert Gates and U.S. Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, spoke with their Egyptian counterparts yesterday, according to their spokesman.
AAA Rating Tough to Defend as U.S. Debt Soars
AAA Rating Tough to Defend as U.S. Debt Soars: Kevin Hassett
Jan. 31 (Bloomberg) -- Kevin Hassett, director of economic policy studies at the American Enterprise Institute and a Bloomberg News columnist, discusses the U.S. economy and outlook for a credit downgrade. Hassett speaks from Washington with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Jan. 25 (Bloomberg) -- Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the outlook for the U.S. economy and stock market. He speaks with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Last week, Standard & Poor’s lowered Japan’s bond rating to AA-, the fourth-highest level. By that standard, the U.S. got away with a slap on the wrist from Moody’s Investors Service, which warned merely that “the probability of assigning a negative outlook in the coming two years is rising.”
If you look at the U.S. budget trajectory with an eye on the lessons from Japan’s recent history, there’s a strong case that the U.S. rating should be cut immediately.
It’s true that the U.S., with total government debt equal to 98.5 percent of gross domestic product, according to Organization for Economic Cooperation and Development data, has many years of unrestrained deficits ahead before it reaches the crisis point of Japan, which has debt of 204 percent of GDP.
A more plausible target, however, is 135.4 percent of GDP. That was Japan’s debt in 2000, just before S&P first downgraded it from AAA in February 2001.
If the U.S. makes no fiscal progress, and continues to run annual deficits at the 2011 level of $1.48 trillion dollars, it will take just six years to reach a debt level of 135.3 percent of GDP. The Japan precedent suggests the U.S. would lose its sacrosanct AAA rating at that point, if not sooner.
To be fair, the Congressional Budget Office, in its forecasting, predicts that the U.S. will do better than that, in part because revenue should increase as the economy recovers.
CBO’s wholly unrealistic baseline forecast suggests the day of reckoning is far off. Don’t believe it.
Doctors’ Pay
The budget agency’s somewhat more grounded “alternative fiscal scenario” reflects “fixes” likely to be passed by lawmakers, such as higher payment rates to doctors under Medicare. If we use this alternate forecast, and factor in CBO assumptions that high debt levels would crowd out capital investment, then the U.S. hits the 135 percent debt mark in 2020 or 2021.
Be happy that Japan, not Greece, is the logical point of comparison here. Greece saw its credit rating downgraded repeatedly in 2009. Its debt was 105.6 percent of GDP at the end of 2008 and 120.2 percent of the nation’s economic output at the end of 2009.
The U.S. could depart from the collision course with a downgrade if it took serious steps to reduce its deficit. But President Barack Obama’s State of the Union address offered pitifully small spending cuts while floating Obama’s fiscal commission out to sea on an iceberg.
I may be old-fashioned, but all of this should mean that rating of U.S. long-term debt should be downgraded -- today.
Uneasy A
A report from S&P last October estimated that “absent policy and other changes” the U.S. could be rated A -- two rungs below Japan’s current status -- by 2020. So start the process now, for goodness sake.
Think of it this way: Somebody buying and holding a 10-year or 30-year U.S. bond today faces a pretty good likelihood of suffering a downgrade. Shouldn’t a bond’s rating have a strong chance of staying the same over the life of the bond?
I should add two important caveats:
First, gross government debt numbers might not be the best measure of country-specific risk. A U.S. with debt of 135 percent of GDP might reasonably still be a safer place to stick money than an equally indebted country. Still, governments everywhere play the same kind of trust-fund games the U.S. plays, so the OECD data provide the best readily available apples-to-apples comparison.
Types of Debt
Also, focusing on gross debt may make the situation look better than it really is for the U.S., since Japan’s is so high relative to debt held by the public. Japan’s publicly held debt was 66.3 percent of GDP when it lost its AAA rating, compared with the current U.S. level of 72.7 percent.
Second, one might argue that it is unthinkable that the U.S. would ever default, so it should always have a solid AAA rating.
Think again. As debt levels rise, a fiscal situation can become simply impossible, making default inevitable.
And it can happen here.
Since its founding, the U.S. has defaulted on its debt twice. The first time, in 1790, it deferred payments on money owed stemming from the Revolutionary War. While the dollar values were eventually repaid -- 10 years later -- the delay was technically a default.
No Gold
The second time, in 1933, the U.S. blatantly broke its obligation with creditors by refusing to repay loans in physical gold. Existing contracts stated that lenders could request payment in either dollars or gold, but President Franklin Delano Roosevelt and Congress, with plans to significantly inflate the dollar, passed a law forbidding repayment in gold. Again, the dollar values were repaid, but unilaterally changing the terms of a contract is the equivalent of a default.
The failure of the ratings companies to identify the riskiness of real estate loans clearly contributed to the financial crisis. If, given the evidence, they fail to act responsibly and change the U.S. credit rating soon, they will be setting investors up for yet another fall.
U.S. Stocks Rise on Consumer Spending Data
U.S. Stocks Rise on Consumer Spending Data; Exxon Mobil Gains
Exxon Mobil gained 1.2 percent as earnings topped analysts' estimates. Photographer: Jeff Kowalsky/Bloomberg
Jan. 31 (Bloomberg) -- Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co., discusses the potential impact of protests in Egypt on financial markets. Lee talks with Betty Liu on Bloomberg Television’s “In the Loop.” (This is an excerpt of the full interview. Source: Bloomberg)
Jan. 28 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. Stocks worldwide plunged the most since November, crude oil posted the biggest jump since 2009 and the dollar rose versus the euro after protesters posed the biggest challenge to Egyptian President Hosni Mubarak’s 30-year rule. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)
Jan. 26 (Bloomberg) -- Ed Butowsky, managing director at Chapwood Capital Investment Management LLC, Rick Bensignor, managing director and chief market strategist at Dahlman Rose & Co., and Antione Drean, founder of Triago SA, talk about the outlook for U.S. stocks. Equities rose today, sending the Dow Jones Industrial Average above 12,000 for the first time since June 2008. Butowsky, Bensignor and Drean speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
U.S. stocks rose, extending the second straight monthly gain for the Standard & Poor’s 500 Index, as businesses expanded at the fastest pace since 1988 and consumer spending and Exxon Mobil Corp.’s profit beat estimates.
Exxon Mobil, the largest company by market value, gained 1.2 percent as earnings topped analysts’ estimates. Massey Energy Co. jumped 9.6 percent after Alpha Natural Resources Inc. agreed to buy the coal producer for $7.1 billion. Intel Corp. slumped 1.4 percent after saying a design error will cut sales and margins. Rival Advanced Micro Devices Inc. rose 5.1 percent.
The S&P 500 advanced 0.5 percent to 1,282.06 at 11:19 a.m. in New York, after falling 1.8 percent on Jan. 28 amid anti- government protests demanding the ouster of Egyptian President Hosni Mubarak. The index is up 1.8 percent in January, poised for the longest monthly stretch since October. The Dow Jones Industrial Average gained 25.32 points, or 0.2 percent, to 11,849.02.
“It’s the economic momentum versus geopolitical risk at this point,” said Eric Teal, chief investment officer at First Citizens Bancshares Inc. in Raleigh, North Carolina, which manages $5 billion. “In my view, the economy wins. There’s been steady improvement in earnings reports. There’s M&A activity going on, which is a sign of confidence in the economy. I don’t see the market as being stretched, and I believe we should continue to grind higher.”
The Dow snapped an eight-week rally on Jan. 28 as intensifying unrest in Egypt overshadowed an acceleration in American economic growth. Egyptian President Hosni Mubarak met with top military commanders as tens of thousands of protesters defied a curfew and gathered in central Cairo, chanting slogans against his new prime minister and vice president.
Egypt Debt
Moody’s Investors Service became the first ratings firm to downgrade Egyptian government debt following a week of protests.
“Things like Egypt just create opportunity to deflate the market before fundamentals slowly work to pull it back up for the next thing to sink it back down,” said billionaire investor Kenneth Fisher, 60, who oversees $41 billion at Woodside, California-based Fisher Investments Inc. “I really don’t see this having legs. But I’m not so bullish as I’ve been and see 2011 as a pretty flat year with fits and starts.”
A gauge of consumer spending in the U.S. rose more than forecast in December, capping its strongest quarter in more than four years. Purchases, which account for about 70 percent of the economy, increased 0.7 percent after climbing 0.3 percent the prior month, Commerce Department figures showed today in Washington. Incomes increased for a third month, and the Federal Reserve’s preferred measure of inflation advanced at the slowest pace on record.
Business Barometer
The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.8 this month from December’s 66.8, reaching the highest level since October 2004. Figures greater than 50 signal expansion. Economists forecast the gauge would slip to 64.5, based on the median projection in a Bloomberg News survey.
The majority of S&P 500 companies are posting higher-than- estimated profits, with 139 of the 187 companies that reported since Jan. 10 beating estimates. Earnings for S&P 500 companies rose 30 percent in 2010, the fastest growth since 1995, and will rally 15 percent this year, according to analyst forecasts.
Energy shares had the biggest gain among 10 S&P 500 industries, rallying 1.4 percent.
Exxon, Massey
Exxon Mobil gained 1.2 percent to $79.91. The world’s largest company posted its fourth consecutive quarterly profit increase as burgeoning energy demand boosted oil and fuel prices. Fourth-quarter net income rose to $9.25 billion, or $1.85 a share, from $6.1 billion, or $1.27, a year earlier. The company was expected to earn $1.60 a share, based on the average of six analysts’ estimates compiled by Bloomberg.
Massey surged 9.6 percent to $62.72. Alpha Natural, the third-biggest U.S. coal producer, agreed to buy the Richmond, Virginia-based coal company for about $7.1 billion in a deal that values Massey at $69.33 a share, 21 percent more than its price at the close of trading Jan. 28. Massey stockholders will receive 1.025 Alpha Natural shares plus $10 cash for each share.
Intel dropped 1.4 percent to $21.16 after trading resumed. It had been halted as the world’s largest chipmaker announced it discovered a design flaw in a chip that will reduce first- quarter sales by $300 million. Gross profit margin will be reduced by 2 percentage points this quarter, the company said.
AMD, Semis ETF
AMD rose 5.1 percent to $7.87. The Semiconductor HOLDRs Trust, an exchange-traded fund of chipmakers, fell 0.3 percent.
“Intel’s a very significant portion of any semiconductor benchmark so it will weigh on industry level returns,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $358 billion. “This is a supply issue, not a demand issue. It’s largely an Intel-specific problem.”
The strongest sign the U.S. economic recovery is accelerating may be coming from the stock market. Rising retail sales, consumer confidence and industrial production are helping propel investors toward U.S. value stocks and away from growth stocks, which lose favor when prospects for economic and revenue expansion are strong. The Russell 1000 Value Index, which includes companies that are cheaper than market averages, rose 7.7 percent in December, the highest relative to the Russell 1000 Growth Index since August 2009.
“Labor markets are stabilizing and even gradually improving,” and companies “will start spending more of the liquidity they have,” said Patrick Moonen, senior strategist in The Hague, Netherlands, at ING Investment Management, which oversees $511 billion. While “we were overweight growth stocks for the second part of 2010,” his team now is reversing that bet because “better economic news and strong earnings are elements that drive value outperformance.”
Obama's Words Put to Test in U.S. Response to Egypt
Obama's Words Put to Test in U.S. Response to Egypt Anti-Mubarak Uprising
U.S. President Barack Obama makes a statement on the situation in Egypt in the State Dining Room at the White House in Washington, on Friday, Jan. 28, 2011. Photographer: Brendan Hoffman/Bloomberg
Jan. 31 (Bloomberg) -- Richard Falkenrath, a principal at the Chertoff Group and a Bloomberg Television contributing editor, talks about the unrest in Egypt and implications for U.S. policy. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
As President Barack Obama calculates his administration’s response to the uprising in Egypt, he will confront a test of his own words.
More than a year-and-a-half ago, Obama told a university audience in Cairo, studded with the next generation of Egypt’s leaders, that the U.S. supports their democratic aspirations. Now, protests against the government of President Hosni Mubarak will force Obama to make one of the more consequential decisions of his presidency before he can know all the ramifications.
“Eventually, he will have to make the decision on standing with Mubarak,” said former U.S. Defense Secretary William Cohen. “Too soon is a mistake. And too late is mistake. No one can say at this particular point in time.”
The administration has sought to calibrate its response, with Obama saying Mubarak must take concrete steps toward addressing the grievances of Egyptians and urging restraint on both sides. Secretary of State Hillary Clinton yesterday called for an “orderly transition” and “free and fair elections,” stopping short of saying Mubarak should step down.
With demonstrations against Mubarak entering the sixth day, Obama, 49, also has directed his aides to stay in close contact with Egyptian leaders outside the government, including the opposition movement, according to an administration official who spoke on condition of anonymity.
‘Fine Line’
“They have deftly been walking a very fine line between their relations with an old ally, Mubarak, and the forces of change within Egypt,” said Edward Djerejian, a former U.S. ambassador to Syria and to Israel who is founding director of the Baker Institute for Public Policy at Rice University in Houston.
The challenge to Mubarak’s 30-year rule has caused widespread ripples. Stocks worldwide plunged on Jan. 28, with the MSCI World Index declining 1.4 percent, while crude oil jumped 4.3 percent, the largest gain since 2009. Dubai’s DFM General Index was up 0.4 percent as of 10:27 a.m. local time today after falling 4.3 percent yesterday.
The risk of exerting heavy pressure for elections is illustrated just across the border, in the Gaza Strip, Cohen said. U.S.-backed parliamentary elections in 2006 resulted in victories for Hamas, the Islamic movement that has attacked Israelis and which the U.S. designates as a terrorist organization.
History’s ‘Right Side’
“When people say he needs to be on the right side of history, it depends on what that history is going to be,” Cohen said. “It’s understandable that the administration is moving as slowly as it is because it has to say, what’s over the horizon and what is coming?”
The tension between prodding a Middle East strongman to liberalize his country and rewarding an ally for the stability he provides is a familiar bind for U.S. presidents, and one that dates back to then-President Anwar Sadat of Egypt signing a peace treaty with Israel in 1979.
“What Mubarak has done very successfully is to position himself as a linchpin of the peace process as a regional intermediary,” said Diane Singerman, co-director of Middle East studies at American University in Washington. “But the U.S. has not understood the costs of this penchant for stability.”
One point of leverage for the U.S. is with the Egyptian military, which gets about $1.3 billion annually in aid. Over the weekend, Defense Secretary Robert Gates was in contact with the Egyptian and Israeli ministers of defense about the situation. The chairman of the Joint Chiefs of Staff, Admiral Michael Mullen, spoke with his Egyptian counterpart yesterday, praising the “continued professionalism” of the Egyptian armed forces in reacting to the protests, his spokesman, Captain John Kirby, said.
Line of Communication
Egyptian armed forces are a “pillar of the regime,” and their close ties with the U.S. military keeps open a significant line of communication with a power center there, Djerejian said. The administration is “relaying the clear message that the military should assure a nonviolent outcome in Egypt and manage an orderly transition,” he said.
The result so far has been restraint from the Egyptian military in dealing with street protests, Djerejian said.
In his Cairo speech on June 4, 2009, Obama drew cheers and applause from the younger members of the audience when he spoke about his “unyielding belief” that all people yearn to have freedom of speech, confidence in the rule of law and a say in how they are governed.
Human Rights
“Those are not just American ideas,” he said, “they are human rights, and that is why we will support them everywhere.”
Later that year, Obama won the Nobel peace prize for helping to create “a new climate in international politics,” said Thorbjoern Jagland, chairman of the five-member Nobel committee. In his acceptance speech, Obama acknowledged that award was mostly aspirational, saying that “I am at the beginning, and not the end, of my labors on the world stage.”
Elliott Abrams, former President George W. Bush’s deputy national security adviser and a leading proponent of that administration’s campaign to spread democracy in the Middle East, said Obama undercut that message with his muted response to protests in Iran in 2009 and to Egypt’s flawed parliamentary elections last year.
While Obama administration officials say they have expressed concerns privately, “If you’re not doing it in public, certainly the Egyptian public doesn’t hear,” Abrams said.
In practice, the administration must weigh what sort of regime might come to power in Egypt, and that consideration has prevented the U.S from denouncing the 82-year-old Mubarak.
Walk the Walk
“Rhetorically, they’ve certainly talked the talk,” Djerejian said. “But the Obama administration, like most of the previous administrations, have found it difficult to walk the walk because of the daily challenges of pursuing U.S. national security interests which require working with existing regimes.”
During the 2008 Democratic primary campaign, Obama’s qualifications for office were challenged in a television advertisement intended to raise questions about how he would respond to a 3 a.m. phone call about an international crisis. The rival candidate behind the ad was Clinton.
“It’s at least a 2 a.m. moment for the president, or a 1 a.m. moment,” Cohen said. “I don’t know if 3 a.m. has arrived yet.”
Money for Math Dummies Won’t Guarantee Einsteins
Money for Math Dummies Won’t Guarantee Einsteins: Caroline Baum
U.S. presidents are always yammering about the need to “invest in education” to prepare our children to compete in the 21st century.
Barack Obama succumbed to the temptation last week in front of a huge, attentive audience for his State of the Union address. The president told the American people every child deserves a chance at an education. He said we have to “win the race to educate our kids.” And he reminded us that the quality of math and science education in the U.S. “lags behind many other nations.”
Whose fault is that? Last time I looked, the Department of Education was a government agency. If Obama believes in top-down policy, all he has to do is tell his bureaucrats to fix it.
The function of the Department of Education, according to its website, is to establish policy for education and to assist the president “in executing his education policies for the nation and in implementing laws enacted by Congress.”
Better education for our kids is a goal, not a policy.
The Education Department’s mission is to promote student achievement and prepare our youth for global competitiveness. Inspirational, to be sure. Where’s the policy to accomplish it?
Running in place. Between 1970 and 2007, inflation-adjusted spending for grades K-12 increased 190 percent without any noticeable improvement in academic achievement, according to Andrew Coulson, director the Center for Educational Freedom at the libertarian Cato Institute in Washington.
Education’s Cost/Benefit
“After $2 trillion and 45 years in the business of education, you’d think we’d have something to show for it,” Coulson said in a telephone interview last week. Instead of better student performance, all that money bought us “a lot more public school employees,” he said.
The U.S. spends more per pupil than most countries, according to the National Center for Education Statistics. In its latest report, “The Condition of Education 2010,” the NCES said the U.S. spent $10,267 per pupil for primary and secondary education, 41 percent more than the average for developed countries. (Data are for 2006.) That amounts to 4 percent of gross domestic product, also above the average.
As for student performance, the U.S. ranked about average in reading literacy and science, and below average in mathematics, compared with other developed nations, according to the Program for International Assessment (PISA), which is coordinated by the Organization for Economic Cooperation and Development.
Constitutional Questions
It sure sounds as if education spending should undergo some of that rigorous cost-benefit analysis Obama plans to apply to federal regulations.
Most of the money for education comes from the state and from local property taxes. Historically the federal government’s share has been 8 percent, doubling with the fiscal stimulus.
“Education is a state and local responsibility,” said Russ Whitehurst, director of the Brown Center on Education Policy and a senior fellow at Washington’s Brookings Institution.
The federal government has no constitutionally enumerated power to determine how to educate our children. (Tea Party Caucus, take note!) Ever since LBJ’s Great Society and the Civil Rights Act, the federal government has taken on the responsibility for providing equality of opportunity through education, Whitehurst told me in a phone interview. No Child Left Behind (Bush) and Race to the Top (Obama) are recent examples of the federal government setting goals and standards and, in the second case, doling out rewards (money) for meeting them.
“The goal is to homogenize education,” Cato’s Coulson said.
Definition of Insanity
Most of us would agree that every child deserves an opportunity at an education, as Obama said in his speech. So why did the president sign a law phasing out the D.C. Opportunity Scholarship Program, begun under George W. Bush? The OSP provided scholarships for children in very low-income districts to attend private schools.
By any metric, the program was a success. “A higher proportion went to college, parents were widely enthusiastic, it cost a lot less than public education in D.C.,” Whitehurst said.
The Democratic-controlled Congress said the money could be better spent on D.C. schools.
Liberals think the answer to underperforming inner city schools is more money. Isn’t that the definition of insanity, doing the same thing over and over and expecting a different result?
Libertarians and conservatives say the solution for improving education is more competition and choice. Who’s right?
Free to Choose
The old way hasn’t worked. Why not try something different? How about tempting the education system with the incentives of the marketplace to see if that will shake it out of its torpor?
Liberals want to spend money more wisely, but the only way that’s going to happen is by introducing the choice and competition teachers’ unions oppose. Low-income parents should be able to make the same kind of choices affluent parents do when they decide to buy a home in an upscale suburb with a good school system, Whitehurst said.
“A surer way over the long term to spend money wisely is a system that is competitive, gives parents the opportunity to choose and has public funds following them to schools selected by parents,” he said.
Forget all that stuff about “investing in education.” That would be money well spent.
Egypt's Military Tightens Control
Egypt's Military Tightens Control Over Regime
A file photo of Egyptian intelligence chief Omar Suleiman. Photographer: Tara Todras-Whitehill/AFP/Getty Images
Jan. 31 (Bloomberg) -- Egyptian billionaire Naguib Sawiris, the chairman of Orascom Telecom Holding SAE, discusses unrest in Egypt. Sawiris speaks from El Gouna, Egypt, with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Jan. 31 (Bloomberg) -- Egypt, following days of anti-government protests, “withdrew” from the Internet after Egyptian authorities shut connections to the outside world, and Vodafone Group Plc said it was ordered to suspend mobile-phone services in selected areas. Bloomberg's Emily Chang reports. (Source: Bloomberg)
Egyptian President Hosni Mubarak’s appointment of a vice president for the first time in his 30- year-reign may herald the end of his rule. It probably won’t end six decades of military control.
“Egypt’s government is not so much a Mubarak government as it is a military government,” said Jon Alterman, director of the Middle East program at the Center for Strategic and International Studies, a Washington-based policy group. “Generals and retired generals control much of the government and much of the economy, and they would stand to lose a great deal if Mubarak were deposed.”
Mubarak, a former air force commander facing unprecedented protests demanding his ouster, named Omar Suleiman, a former army general and head of the intelligence services, as vice president. He also appointed Ahmed Shafik, a former air force commander, as prime minister, putting the top three government jobs in the hands of military men. He named Defense Minister Mohammed Hussein Tantawi as deputy premier.
The army deployed across cities in Egypt after looting and mayhem on the weekend following the withdrawal of the police. More than 3,100 looters and escaped prisoners were arrested, state TV said. The week of protests left 150 dead and 4,000 wounded, Al Arabiya television cited a health official as saying.
The Tunisian military, by contrast, precipitated the Jan. 14 ouster of President Zine El Abidine Ben Ali when they chased off his security forces, Ann Wyman, the London-based head of emerging markets research for Europe at Nomura Holding Inc. said. After Ben Ali was forced into exile, Army Commander Rashid Ammar pledged to “protect the revolution.”
Markets Respond
Stocks worldwide fell, with investors concerned that the turmoil may spread to other countries such as the Persian Gulf states, which control more than 50 percent of the world’s proven oil reserves. Egypt’s benchmark EGX 30 Index slumped 16 percent in its last two trading sessions. The stock market was closed today.
Shares in Dubai fell 0.6 percent today, after sliding 4.3 percent in the previous session. Emaar Properties PJSC dropped nearly 2 percent. The Dubai-based company, which says it’s the biggest foreign investor in Egypt’s real-estate industry, plunged 8.3 percent yesterday. Foreign investors hold about $25 billion in Egyptian assets, according to a Jan. 18 report by Barclays Capital.
Ruling Elites
Close ties between the military and the ruling elites in countries such as Egypt, Iran and Syria makes a repeat of Tunisian-style regime change unlikely, say analysts including Egyptian author Moustafa El-Husseini.
Egypt’s military has enjoyed many political and economic incentives since its July 1952 coup that toppled the monarchy, including top government jobs and access to cheap housing and hospitals, El-Husseini, author of “Egypt on the Brink of the Unknown,” said by telephone from Cairo.
“Upon retirement, senior officers are given hefty retirement packages and appointed as provincial governors or head of municipalities,” he said. One example is Magdy Sharawi, a former commander of the air force, who is Egypt’s ambassador to Switzerland.
The appointment of Suleiman and Shafik may help restore stability and reassure investors, said Naguib Sawiris, chairman of Orascom Telecom Holding, the biggest mobile-phone operator by subscribers in the Middle East. “But it will not be enough unless there is a real intention to have a real democracy established here,” he said.
ElBaradei Backed
All Arab countries except Iraq and Lebanon are classified as autocratic regimes in the 2010 Economist Intelligence Unit Democracy Index. Egyptian opposition leaders formed a committee yesterday to negotiate with Mubarak’s government and appointed Nobel Peace Prize winner Mohamed ElBaradei, the former head of the United Nations’ nuclear watchdog agency, as its head.
Protests will persist until the regime acquiesces to the demands of demonstrators, including amending the constitution to ease curbs on the ability of independent candidates to run for president, said Amr Hamzawy, research director and senior associate at the Carnegie Endowment for International Peace.
“Anything short of that people will not go back,” Hamzawy said by telephone from Cairo. “They will continue to protest.”
U.S. Reviews Aid
The protests prompted the White House to say on Jan. 28 that it will put U.S. aid to Egypt under review, ramping up pressure on Mubarak to carry out political and economic reforms. Egypt’s military relies on weapons from companies such as Lockheed Martin Corp. and General Dynamics Corp., the maker of Abrams battle tanks.
Secretary of State Hillary Clinton yesterday backed off the threat to reconsider assistance, saying on ABC’s “This Week” program, “There is no discussion as of this time of cutting off any aid.”
The U.S. contribution of about $1.3 billion a year in defense assistance provides about a third of Egypt’s annual military budget, said Bruce Rutherford, an associate professor of political science at Colgate University in Hamilton, New York. Many Egyptian military officers received training at U.S. defense institutes.
Defense Secretary Robert Gates and U.S. Navy Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, called their Egyptian counterparts over the weekend, Pentagon officials said. Mullen spoke with Lieutenant General Sami Hafez Enan, the Egyptian armed forces chief of staff, who led a delegation that cut short a visit to the Pentagon last week amid the unfolding turmoil.
‘Continued Professionalism’
Mullen praised the “continued professionalism” of the Egyptian military, said U.S. Navy Captain John Kirby. Both said they want to continue the “partnership” between the militaries, he said. A spokesman for Gates declined to provide any details of his conversation.
In Egypt, looting escalated during the night, spreading from central Cairo to more upscale areas such as Heliopolis and Maadi after the police withdrew during the day. Residents armed themselves with sticks, bats and guns, and blocked off roads into their neighborhoods to protect their property.
The army had acted to restore order in the past. During a period of bread shortages that led to deadly riots in 2008, it opened its bakeries to the public and increased production. In the same year, it set up tents to accommodate families evacuated from a Cairo slum after a rockslide.
‘Military Establishment’
“We have to remember that Egypt is essentially run by the military establishment, who control vast swaths of the economy and essentially dictate regional foreign policy,” John R. Bradley, author of “Inside Egypt: The Land of the Pharaohs on the Brink of a Revolution,” said in an interview.
The Egyptian armed forces control factories that make a range of products ranging from weapons to drugs, and even home appliances such as cookers. It’s the largest army in the Arab world, totaling about 450,000 personnel divided into four services -- the army, air defense, air force and navy, according to globalsecurity.org.
Defense spending in Egypt is 3.4 percent of gross domestic product, according to the CIA World Factbook, two percentage points higher than Tunisia, which had the lowest defense spending in the region.
The military in other countries such as Iran and Syria have also supported the ruling elites in times of crisis. In 2009, units of the Revolutionary Guards, a force loyal to Iran’s Supreme Leader Ayatollah Ali Khamenei, quelled waves of demonstrations protesting the re-election of President Mahmoud Ahmadinejad. In Syria, the military suppressed an Islamist rebellion led from the city of Hama in 1982, killing thousands of civilians in the process.
No comments:
Post a Comment