Thursday, January 27, 2011

A January PauseBy
VERLYN KLINKENBORG NY TIMES
The house is laden with icicles. Looking out my office window, I feel as though I’m living in the maw of some fabulous fanged beast readying to devour the rest of the day.

This is the day that is unimaginable in July — 14 degrees and more than two feet of snow on the ground, a female cardinal resting among the magnolia buds, her feet tucked into her under-down. The horses think nothing of the weather, though I have trouble persuading myself of that. Yesterday, they ran bucking and kicking into a level patch of sunshine, and when Remedy lay down for a rest — flat-out — he almost disappeared beneath the snow-line. Ida curls up in the snow as cat-like as a horse can be. Nell looks like a four-legged Yeti.

I wade knee-deep to the chicken house. I shovel. I plow. I make great heaps of snow with the tractor, the kind I used to tunnel through as a kid. I have the illusion of shaping my environment, putting a sharp edge on the cut-bank path. I defy the elements, and they defy me, and when we’re done, I crawl inside a sleeping bag to get the heat back in my body.

I’m in no rush for things to change. Partly it’s the clarity, the way the most muted colors become more intense against the snow. It’s also the glacial blue when light pierces the snow in the tractor-bucket raised against the sky, the berg-ish way the snow breaks off as I shovel, the avalanche that falls when I rake the roof.

I like the endurance this weather demands. There’s a puritanical pleasure in carrying 50-pound bags of layer mash on my collarbone through two feet of snow, huffing and puffing. I’ve come to like seeing the light from the chicken house almost obliterated by blowing snow at dusk. I wait for the moment when a chill settles all the way through my bones, and then I know I’ve earned the woodstove and the sleeping bag and the next book on my pile.

Friday, January 21, 2011

China Goes to Nixon
By PAUL KRUGMAN NY TIMES
With Hu Jintao, China’s president, currently visiting the United States, stories about growing Chinese economic might are everywhere. And those stories are entirely true: although China is still a poor country, it’s growing fast, and given its sheer size it’s well on the way to matching America as an economic superpower.

What’s also true, however, is that China has stumbled into a monetary muddle that’s getting worse with each passing month. Furthermore, the Chinese government’s response to the problem — with policy seemingly paralyzed by deference to special interests, lack of intellectual clarity and a resort to blame games — belies any notion that China’s leaders can be counted on to act decisively and effectively. In fact, the Chinese come off looking like, well, us.

How bad will it get? Warnings from some analysts that China could trigger a global crisis seem overblown. But the fact that people are saying such things is an indication of how out of control the situation looks right now.

The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.

But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.

One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation. China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage. Some estimates I’ve heard suggest that at current rates of inflation, Chinese undervaluation could be gone in two or three years — not soon enough, but sooner than many expected.

China’s leaders are, however, trying to prevent this outcome, not just to protect exporters’ interest, but because inflation is even more unpopular in China than it is elsewhere. One big reason is that China already in effect exploits its citizens through financial repression (other kinds, too, but that’s not relevant here). Interest rates on bank deposits are limited to just 2.75 percent, which is below the official inflation rate — and it’s widely believed that China’s true inflation rate is substantially higher than its government admits.

Rapidly rising prices, even if matched by wage increases, will make this exploitation much worse. It’s no wonder that the Chinese public is angry about inflation, and that China’s leaders want to stop it.

But for whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — they’re not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.

This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies. More to the point from China’s perspective, however, is that it’s not working. Credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad.

With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)

So what’s left? Well, China has turned to the blame game, accusing the Federal Reserve (wrongly) of creating the problem by printing too much money. But while blaming the Fed may make Chinese leaders feel better, it won’t change U.S. monetary policy, nor will it do anything to tame China’s inflation monster.

Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.

But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

So our newest economic superpower may indeed be on its way to some kind of economic crisis, with collateral damage to the world as a whole. Did we need this?

Wednesday, January 19, 2011

Will We Remember Tucson? Was It Enough? Is Anything?
By The Editors

There is no more moving memorial in America than the one that they built on the place on North Harvey Street in Oklahoma City where the Murrah Federal Building used to be. There is a reflecting pool between two large arches — the time, 9:01 A.M., is carved into one of them, and 9:03 A.M. is carved into the other. The lost minute is represented by the reflecting pool and by the long lines of lonely, empty chairs, all on crystal bases, each representing one of the American citizens killed in the bloodiest act of insurrection since the Army of Northern Virginia hung 'em up. In the accompanying museum, there is a remarkable exhibit — an audiotape of a mundane governmental hearing that was going on not far from the Murrah Building when Timothy McVeigh's bomb went off. Some poor guy is asking for permission to drill for designer water on his land. You can almost hear everyone on the tape yawning. The mundane business of self-government is grinding along. And then there's a tearing in the universe and somebody's screaming for a flashlight.

Outside again, the lonely chairs are reflected in the pool and one truth hangs there between the arches: This is what we can do to each other.

This moment should have been transformational. This should have been a moment of diamond-tipped truth. This is part of who we are. This is a part of our politics. This is something to look at, honestly, and admit to ourselves that, pushed by our own dread and anger, whether or not they are skillfully stoked by demagoguery or not, this is what we can do to each other. This is what we will do to each other.

And the most remarkable thing about what happened in Oklahoma City is how little it matters today. The president of the United States gave a fine speech Wednesday night in Tucson at the memorial for the people Jared Loughner shot. The only mention of Oklahoma City in connection with the president's speech was to compare it with the speech that another Democratic president had given in the aftermath of the memorial service for the 168 people that Timothy McVeigh murdered in 1995.

People mostly remembered that Bill Clinton once had made a passing mention of what he called "the purveyors of hatred and division... the promoters of paranoia" on the airwaves. (At the actual memorial service, Clinton quoted Scripture and talked about healing.) This time, many people struck pre-emptively; Rush Limbaugh may be self-medicating his wounded ego for the rest of his life over what he imagines Clinton said about him. There was a lot of what was called "defensiveness" on the activist Right, but it was nothing of the sort. They were on offense, just the way they have been since they took that heat in 1995. They abide by the order Stalin gave to the Red Army when the Germans invaded in 1942: Ni shagu nazad.

Not a step back.

The activist Right wants this rhetoric for 2012. It wants the same dark energies that helped it win the House last fall. It wants to be able to say the same things with impunity that it's been saying since 2009, as though Tucson never happened. Oklahoma City might as well have happened to the Hittites.

Which is how nothing ever changed. Which is why Oklahoma City wasn't enough.

One-hundred and sixty-eight people.

One-hundred and sixty-eight lonely, empty chairs.

It wasn't enough.

The political culture is not what it was in 1996. It's worse. The wild-assed, Clinton-centric conspiracies — death lists! Vince Foster! Mena airport! — look positively quaint compared to the grand paranoid delusions spouted on television and on radio these days. And the casual mainstreaming of vicious mendacity isn't the property talk radio alone; we have just seen installed a Congress full of thunderous loons. Against all odds — and, arguably, against all decency — what Bill Clinton so carefully criticized has degenerated into a time in which the governors of major states talk glibly about secession, and automatic weapons are casual accessories at political rallies.

One-hundred and sixty-eight people.

That wasn't enough.

(Perhaps the crowning irony is the fact that, of all the repercussions from the Oklahoma City bombing, the most lasting is probably those provisions of Clinton's own 1996 antiterrorism act that were strengthened and codified five years later into what became the constitutional nightmare that is the USA PATRIOT Act.)

So you'll forgive us if we're not impressed by the conspicuous public introspection of Roger Ailes. Why wasn't Oklahoma City enough? Why have there been sixteen years of lucrative invective since then? And you'll forgive us if we are a little dubious about Sarah Palin's contrition, and the maundering of Peggy Noonan, and the generally sanctimonious flummery that passes for comment on this latest outbreak of American political violence.

Oklahoma City happened. The carnival rolled on. It got wilder. It got nuttier. Ideas so long abandoned and destructive that they seemed like primal superstitions from a barbarian age now were shined up for the cameras and presented as legitimate alternatives to the accumulated reason and intellectual progress of two centuries. The complicity in it got broader and deeper and nobody thought much about the empty chairs.

One-hundred and sixty-eight people.

By the reflecting pool, suspended there to represent a single bloody second, we suspect there are prayers offered these days for Gabrielle Giffords and the rest of Jared Loughner's victims. And they will be offered again, some day, for the victims of whatever comes next, because something will come next, and because the 168 souls lost in that place are not enough. That much murder was not enough and, may never be.

Friday, January 14, 2011


Can Europe Be Saved?
By PAUL KRUGMAN NY TIMES
THERE’S SOMETHING peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.

Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t.

Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation.

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

The result is a tragedy not only for Europe but also for the world, for which Europe is a crucial role model. The Europeans have shown us that peace and unity can be brought to a region with a history of violence, and in the process they have created perhaps the most decent societies in human history, combining democracy and human rights with a level of individual economic security that America comes nowhere close to matching. These achievements are now in the process of being tarnished, as the European dream turns into a nightmare for all too many people. How did that happen?

THE ROAD TO THE EURO
It all began with coal and steel. On May 9, 1950 — a date whose anniversary is now celebrated as Europe Day — Robert Schuman, the French foreign minister, proposed that his nation and West Germany pool their coal and steel production. That may sound prosaic, but Schuman declared that it was much more than just a business deal.

For one thing, the new Coal and Steel Community would make any future war between Germany and France “not merely unthinkable, but materially impossible.” And it would be a first step on the road to a “federation of Europe,” to be achieved step by step via “concrete achievements which first create a de facto solidarity.” That is, economic measures would both serve mundane ends and promote political unity.

The Coal and Steel Community eventually evolved into a customs union within which all goods were freely traded. Then, as democracy spread within Europe, so did Europe’s unifying economic institutions. Greece, Spain and Portugal were brought in after the fall of their dictatorships; Eastern Europe after the fall of Communism.

In the 1980s and ’90s this “widening” was accompanied by “deepening,” as Europe set about removing many of the remaining obstacles to full economic integration. (Eurospeak is a distinctive dialect, sometimes hard to understand without subtitles.) Borders were opened; freedom of personal movement was guaranteed; and product, safety and food regulations were harmonized, a process immortalized by the Eurosausage episode of the TV show “Yes Minister,” in which the minister in question is told that under new European rules, the traditional British sausage no longer qualifies as a sausage and must be renamed the Emulsified High-Fat Offal Tube. (Just to be clear, this happened only on TV.)

The creation of the euro was proclaimed the logical next step in this process. Once again, economic growth would be fostered with actions that also reinforced European unity.

The advantages of a single European currency were obvious. No more need to change money when you arrived in another country; no more uncertainty on the part of importers about what a contract would actually end up costing or on the part of exporters about what promised payment would actually be worth. Meanwhile, the shared currency would strengthen the sense of European unity. What could go wrong?

The answer, unfortunately, was that currency unions have costs as well as benefits. And the case for a single European currency was much weaker than the case for a single European market — a fact that European leaders chose to ignore.

THE (UNEASY) CASE FOR MONETARY UNION
International monetary economics is, not surprisingly, an area of frequent disputes. As it happens, however, these disputes don’t line up across the usual ideological divide. The hard right often favors hard money — preferably a gold standard — but left-leaning European politicians have been enthusiastic proponents of the euro. Liberal American economists, myself included, tend to favor freely floating national currencies that leave more scope for activist economic policies — in particular, cutting interest rates and increasing the money supply to fight recessions. Yet the classic argument for flexible exchange rates was made by none other than Milton Friedman.

The case for a transnational currency is, as we’ve already seen, obvious: it makes doing business easier. Before the euro was introduced, it was really anybody’s guess how much this ultimately mattered: there were relatively few examples of countries using other nations’ currencies. For what it was worth, statistical analysis suggested that adopting a common currency had big effects on trade, which suggested in turn large economic gains. Unfortunately, this optimistic assessment hasn’t held up very well since the euro was created: the best estimates now indicate that trade among euro nations is only 10 or 15 percent larger than it would have been otherwise. That’s not a trivial number, but neither is it transformative.

Still, there are obviously benefits from a currency union. It’s just that there’s a downside, too: by giving up its own currency, a country also gives up economic flexibility.

Imagine that you’re a country that, like Spain today, recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too. Two years of intense suffering have brought Irish wages down to some extent, although Spain and Greece have barely begun the process. It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in debt creates new problems.

If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.

Won’t workers reject de facto wage cuts via devaluation just as much as explicit cuts in their paychecks? Historical experience says no. In the current crisis, it took Ireland two years of severe unemployment to achieve about a 5 percent reduction in average wages. But in 1993 a devaluation of the Irish punt brought an instant 10 percent reduction in Irish wages measured in German currency.

Why the difference? Back in 1953, Milton Friedman offered an analogy: daylight saving time. It makes a lot of sense for businesses to open later during the winter months, yet it’s hard for any individual business to change its hours: if you operate from 10 to 6 when everyone else is operating 9 to 5, you’ll be out of sync. By requiring that everyone shift clocks back in the fall and forward in the spring, daylight saving time obviates this coordination problem. Similarly, Friedman argued, adjusting your currency’s value solves the coordination problem when wages and prices are out of line, sidestepping the unwillingness of workers to be the first to take pay cuts.

So while there are benefits of a common currency, there are also important potential advantages to keeping your own currency. And the terms of this trade-off depend on underlying conditions.

On one side, the benefits of a shared currency depend on how much business would be affected.

I think of this as the Iceland-Brooklyn issue. Iceland, with only 320,000 people, has its own currency — and that fact has given it valuable room for maneuver. So why isn’t Brooklyn, with roughly eight times Iceland’s population, an even better candidate for an independent currency? The answer is that Brooklyn, located as it is in the middle of metro New York rather than in the middle of the Atlantic, has an economy deeply enmeshed with those of neighboring boroughs. And Brooklyn residents would pay a large price if they had to change currencies every time they did business in Manhattan or Queens.

So countries that do a lot of business with one another may have a lot to gain from a currency union.

On the other hand, as Friedman pointed out, forming a currency union means sacrificing flexibility. How serious is this loss? That depends. Let’s consider what may at first seem like an odd comparison between two small, troubled economies.

Climate, scenery and history aside, the nation of Ireland and the state of Nevada have much in common. Both are small economies of a few million people highly dependent on selling goods and services to their neighbors. (Nevada’s neighbors are other U.S. states, Ireland’s other European nations, but the economic implications are much the same.) Both were boom economies for most of the past decade. Both had huge housing bubbles, which burst painfully. Both are now suffering roughly 14 percent unemployment. And both are members of larger currency unions: Ireland is part of the euro zone, Nevada part of the dollar zone, otherwise known as the United States of America.

But Nevada’s situation is much less desperate than Ireland’s.

First of all, the fiscal side of the crisis is less serious in Nevada. It’s true that budgets in both Ireland and Nevada have been hit extremely hard by the slump. But much of the spending Nevada residents depend on comes from federal, not state, programs. In particular, retirees who moved to Nevada for the sunshine don’t have to worry that the state’s reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by contrast, both pensions and health spending are on the cutting block.

Also, Nevada, unlike Ireland, doesn’t have to worry about the cost of bank bailouts, not because the state has avoided large loan losses but because those losses, for the most part, aren’t Nevada’s problem. Thus Nevada accounts for a disproportionate share of the losses incurred by Fannie Mae and Freddie Mac, the government-sponsored mortgage companies — losses that, like Social Security and Medicare payments, will be covered by Washington, not Carson City.

And there’s one more advantage to being a U.S. state: it’s likely that Nevada’s unemployment problem will be greatly alleviated over the next few years by out-migration, so that even if the lost jobs don’t come back, there will be fewer workers chasing the jobs that remain. Ireland will, to some extent, avail itself of the same safety valve, as Irish citizens leave in search of work elsewhere and workers who came to Ireland during the boom years depart. But Americans are extremely mobile; if historical patterns are any guide, emigration will bring Nevada’s unemployment rate back in line with the U.S. average within a few years, even if job growth in Nevada continues to lag behind growth in the nation as a whole.

Over all, then, even as both Ireland and Nevada have been especially hard-luck cases within their respective currency zones, Nevada’s medium-term prospects look much better.

What does this have to do with the case for or against the euro? Well, when the single European currency was first proposed, an obvious question was whether it would work as well as the dollar does here in America. And the answer, clearly, was no — for exactly the reasons the Ireland-Nevada comparison illustrates. Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of the tab for Greek pensions or Irish bank bailouts. And while Europeans have the legal right to move freely in search of jobs, in practice imperfect cultural integration — above all, the lack of a common language — makes workers less geographically mobile than their American counterparts.

And now you see why many American (and some British) economists have always been skeptical about the euro project. U.S.-based economists had long emphasized the importance of certain preconditions for currency union — most famously, Robert Mundell of Columbia stressed the importance of labor mobility, while Peter Kenen, my colleague at Princeton, emphasized the importance of fiscal integration. America, we know, has a currency union that works, and we know why it works: because it coincides with a nation — a nation with a big central government, a common language and a shared culture. Europe has none of these things, which from the beginning made the prospects of a single currency dubious.

These observations aren’t new: everything I’ve just said was well known by 1992, when the Maastricht Treaty set the euro project in motion. So why did the project proceed? Because the idea of the euro had gripped the imagination of European elites. Except in Britain, where Gordon Brown persuaded Tony Blair not to join, political leaders throughout Europe were caught up in the romance of the project, to such an extent that anyone who expressed skepticism was considered outside the mainstream.

Back in the ’90s, people who were present told me that staff members at the European Commission were initially instructed to prepare reports on the costs and benefits of a single currency — but that after their superiors got a look at some preliminary work, those instructions were altered: they were told to prepare reports just on the benefits. To be fair, when I’ve told that story to others who were senior officials at the time, they’ve disputed that — but whoever’s version is right, the fact that some people were making such a claim captures the spirit of the time.

The euro, then, would proceed. And for a while, everything seemed to go well.

EUROPHORIA, EUROCRISIS
The euro officially came into existence on Jan. 1, 1999. At first it was a virtual currency: bank accounts and electronic transfers were denominated in euros, but people still had francs, marks and lira (now considered denominations of the euro) in their wallets. Three years later, the final transition was made, and the euro became Europe’s money.

The transition was smooth: A.T.M.’s and cash registers were converted swiftly and with few glitches. The euro quickly became a major international currency: the euro bond market soon came to rival the dollar bond market; euro bank notes began circulating around the world. And the creation of the euro instilled a new sense of confidence, especially in those European countries that had historically been considered investment risks. Only later did it become apparent that this surge of confidence was bait for a dangerous trap.

Greece, with its long history of debt defaults and bouts of high inflation, was the most striking example. Until the late 1990s, Greece’s fiscal history was reflected in its bond yields: investors would buy bonds issued by the Greek government only if they paid much higher interest than bonds issued by governments perceived as safe bets, like those by Germany. As the euro’s debut approached, however, the risk premium on Greek bonds melted away. After all, the thinking went, Greek debt would soon be immune from the dangers of inflation: the European Central Bank would see to that. And it wasn’t possible to imagine any member of the newly minted monetary union going bankrupt, was it?

Indeed, by the middle of the 2000s just about all fear of country-specific fiscal woes had vanished from the European scene. Greek bonds, Irish bonds, Spanish bonds, Portuguese bonds — they all traded as if they were as safe as German bonds. The aura of confidence extended even to countries that weren’t on the euro yet but were expected to join in the near future: by 2005, Latvia, which at that point hoped to adopt the euro by 2008, was able to borrow almost as cheaply as Ireland. (Latvia’s switch to the euro has been put off for now, although neighboring Estonia joined on Jan. 1.)

As interest rates converged across Europe, the formerly high-interest-rate countries went, predictably, on a borrowing spree. (This borrowing spree was, it’s worth noting, largely financed by banks in Germany and other traditionally low-interest-rate countries; that’s why the current debt problems of the European periphery are also a big problem for the European banking system as a whole.) In Greece it was largely the government that ran up big debts. But elsewhere, private players were the big borrowers. Ireland, as I’ve already noted, had a huge real estate boom: home prices rose 180 percent from 1998, just before the euro was introduced, to 2007. Prices in Spain rose almost as much. There were booms in those not-yet-euro nations, too: money flooded into Estonia, Latvia, Lithuania, Bulgaria and Romania.

It was a heady time, and not only for the borrowers. In the late 1990s, Germany’s economy was depressed as a result of low demand from domestic consumers. But it recovered in the decade that followed, thanks to an export boom driven by its European neighbors’ spending sprees.

Everything, in short, seemed to be going swimmingly: the euro was pronounced a great success.

Then the bubble burst.

You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.

In Europe, the first round of damage came from the collapse of those real estate bubbles, which devastated employment in the peripheral economies. In 2007, construction accounted for 13 percent of total employment in both Spain and Ireland, more than twice as much as in the United States. So when the building booms came to a screeching halt, employment crashed. Overall employment fell 10 percent in Spain and 14 percent in Ireland; the Irish situation would be the equivalent of losing almost 20 million jobs here.

But that was only the beginning. In late 2009, as much of the world was emerging from financial crisis, the European crisis entered a new phase. First Greece, then Ireland, then Spain and Portugal suffered drastic losses in investor confidence and hence a significant rise in borrowing costs. Why?

In Greece the story is straightforward: the government behaved irresponsibly, lied about it and got caught. During the years of easy borrowing, Greece’s conservative government ran up a lot of debt — more than it admitted. When the government changed hands in 2009, the accounting fictions came to light; suddenly it was revealed that Greece had both a much bigger deficit and substantially more debt than anyone had realized. Investors, understandably, took flight.

But Greece is actually an unrepresentative case. Just a few years ago Spain, by far the largest of the crisis economies, was a model European citizen, with a balanced budget and public debt only about half as large, as a percentage of G.D.P., as that of Germany. The same was true for Ireland. So what went wrong?

First, there was a large direct fiscal hit from the slump. Revenue plunged in both Spain and Ireland, in part because tax receipts depended heavily on real estate transactions. Meanwhile, as unemployment soared, so did the cost of unemployment benefits — remember, these are European welfare states, which have much more extensive programs to shield their citizens from misfortune than we do. As a result, both Spain and Ireland went from budget surpluses on the eve of the crisis to huge budget deficits by 2009.

Then there were the costs of financial clean-up. These have been especially crippling in Ireland, where banks ran wild in the boom years (and were allowed to do so thanks to close personal and financial ties with government officials). When the bubble burst, the solvency of Irish banks was immediately suspect. In an attempt to avert a massive run on the financial system, Ireland’s government guaranteed all bank debts — saddling the government itself with those debts, bringing its own solvency into question. Big Spanish banks were well regulated by comparison, but there was and is a great deal of nervousness about the status of smaller savings banks and concern about how much the Spanish government will have to spend to keep these banks from collapsing.

All of this helps explain why lenders have lost faith in peripheral European economies. Still, there are other nations — in particular, both the United States and Britain — that have been running deficits that, as a percentage of G.D.P., are comparable to the deficits in Spain and Ireland. Yet they haven’t suffered a comparable loss of lender confidence. What is different about the euro countries?

One possible answer is “nothing”: maybe one of these days we’ll wake up and find that the markets are shunning America, just as they’re shunning Greece. But the real answer is probably more systemic: it’s the euro itself that makes Spain and Ireland so vulnerable. For membership in the euro means that these countries have to deflate their way back to competitiveness, with all the pain that implies.

The trouble with deflation isn’t just the coordination problem Milton Friedman highlighted, in which it’s hard to get wages and prices down when everyone wants someone else to move first. Even when countries successfully drive down wages, which is now happening in all the euro-crisis countries, they run into another problem: incomes are falling, but debt is not.

As the American economist Irving Fisher pointed out almost 80 years ago, the collision between deflating incomes and unchanged debt can greatly worsen economic downturns. Suppose the economy slumps, for whatever reason: spending falls and so do prices and wages. But debts do not, so debtors have to meet the same obligations with a smaller income; to do this, they have to cut spending even more, further depressing the economy. The way to avoid this vicious circle, Fisher said, was monetary expansion that heads off deflation. And in America and Britain, the Federal Reserve and the Bank of England, respectively, are trying to do just that. But Greece, Spain and Ireland don’t have that option — they don’t even have their own monies, and in any case they need deflation to get their costs in line.

And so there’s a crisis. Over the course of the past year or so, first Greece, then Ireland, became caught up in a vicious financial circle: as potential lenders lost confidence, the interest rates that they had to pay on the debt rose, undermining future prospects, leading to a further loss of confidence and even higher interest rates. Stronger European nations averted an immediate implosion only by providing Greece and Ireland with emergency credit lines, letting them bypass private markets for the time being. But how is this all going to work out?

FOUR EUROPEAN PLOTLINES
Some economists, myself included, look at Europe’s woes and have the feeling that we’ve seen this movie before, a decade ago on another continent — specifically, in Argentina.

Unlike Spain or Greece, Argentina never gave up its own currency, but in 1991 it did the next best thing: it rigidly pegged its currency to the U.S. dollar, establishing a “currency board” in which each peso in circulation was backed by a dollar in reserves. This was supposed to prevent any return to Argentina’s old habit of covering its deficits by printing money. And for much of the 1990s, Argentina was rewarded with much lower interest rates and large inflows of foreign capital.

Eventually, however, Argentina slid into a persistent recession and lost investor confidence. Argentina’s government tried to restore that confidence through rigorous fiscal orthodoxy, slashing spending and raising taxes. To buy time for austerity to have a positive effect, Argentina sought and received large loans from the International Monetary Fund — in much the same way that Greece and Ireland have sought emergency loans from their neighbors. But the persistent decline of the Argentine economy, combined with deflation, frustrated the government’s efforts, even as high unemployment led to growing unrest.

By early 2002, after angry demonstrations and a run on the banks, it had all fallen apart. The link between the peso and the dollar collapsed, with the peso plunging; meanwhile, Argentina defaulted on its debts, eventually paying only about 35 cents on the dollar.

It’s hard to avoid the suspicion that something similar may be in the cards for one or more of Europe’s problem economies. After all, the policies now being undertaken by the crisis countries are, qualitatively at least, very similar to those Argentina tried in its desperate effort to save the peso-dollar link: harsh fiscal austerity in an effort to regain the market’s confidence, backed in Greece and Ireland by official loans intended to buy time until private lenders regain confidence. And if an Argentine-style outcome is the end of the line, it will be a terrible blow to the euro project. Is that what’s going to happen?

Not necessarily. As I see it, there are four ways the European crisis could play out (and it may play out differently in different countries). Call them toughing it out; debt restructuring; full Argentina; and revived Europeanism.

Toughing it out: Troubled European economies could, conceivably, reassure creditors by showing sufficient willingness to endure pain and thereby avoid either default or devaluation. The role models here are the Baltic nations: Estonia, Lithuania and Latvia. These countries are small and poor by European standards; they want very badly to gain the long-term advantages they believe will accrue from joining the euro and becoming part of a greater Europe. And so they have been willing to endure very harsh fiscal austerity while wages gradually come down in the hope of restoring competitiveness — a process known in Eurospeak as “internal devaluation.”

Have these policies been successful? It depends on how you define “success.” The Baltic nations have, to some extent, succeeded in reassuring markets, which now consider them less risky than Ireland, let alone Greece. Meanwhile, wages have come down, declining 15 percent in Latvia and more than 10 percent in Lithuania and Estonia. All of this has, however, come at immense cost: the Baltics have experienced Depression-level declines in output and employment. It’s true that they’re now growing again, but all indications are that it will be many years before they make up the lost ground.

It says something about the current state of Europe that many officials regard the Baltics as a success story. I find myself quoting Tacitus: “They make a desert and call it peace” — or, in this case, adjustment. Still, this is one way the euro zone could survive intact.

Debt restructuring: At the time of writing, Irish 10-year bonds were yielding about 9 percent, while Greek 10-years were yielding 12½ percent. At the same time, German 10-years — which, like Irish and Greek bonds, are denominated in euros — were yielding less than 3 percent. The message from the markets was clear: investors don’t expect Greece and Ireland to pay their debts in full. They are, in other words, expecting some kind of debt restructuring, like the restructuring that reduced Argentina’s debt by two-thirds.

Such a debt restructuring would by no means end a troubled economy’s pain. Take Greece: even if the government were to repudiate all its debt, it would still have to slash spending and raise taxes to balance its budget, and it would still have to suffer the pain of deflation. But a debt restructuring could bring the vicious circle of falling confidence and rising interest costs to an end, potentially making internal devaluation a workable if brutal strategy.

Frankly, I find it hard to see how Greece can avoid a debt restructuring, and Ireland isn’t much better. The real question is whether such restructurings will spread to Spain and — the truly frightening prospect — to Belgium and Italy, which are heavily indebted but have so far managed to avoid a serious crisis of confidence.

Full Argentina: Argentina didn’t simply default on its foreign debt; it also abandoned its link to the dollar, allowing the peso’s value to fall by more than two-thirds. And this devaluation worked: from 2003 onward, Argentina experienced a rapid export-led economic rebound.

The European country that has come closest to doing an Argentina is Iceland, whose bankers had run up foreign debts that were many times its national income. Unlike Ireland, which tried to salvage its banks by guaranteeing their debts, the Icelandic government forced its banks’ foreign creditors to take losses, thereby limiting its debt burden. And by letting its banks default, the country took a lot of foreign debt off its national books.

At the same time, Iceland took advantage of the fact that it had not joined the euro and still had its own currency. It soon became more competitive by letting its currency drop sharply against other currencies, including the euro. Iceland’s wages and prices quickly fell about 40 percent relative to those of its trading partners, sparking a rise in exports and fall in imports that helped offset the blow from the banking collapse.

The combination of default and devaluation has helped Iceland limit the damage from its banking disaster. In fact, in terms of employment and output, Iceland has done somewhat better than Ireland and much better than the Baltic nations.

So will one or more troubled European nations go down the same path? To do so, they would have to overcome a big obstacle: the fact that, unlike Iceland, they no longer have their own currencies. As Barry Eichengreen of Berkeley pointed out in an influential 2007 analysis, any euro-zone country that even hinted at leaving the currency would trigger a devastating run on its banks, as depositors rushed to move their funds to safer locales. And Eichengreen concluded that this “procedural” obstacle to exit made the euro irreversible.

But Argentina’s peg to the dollar was also supposed to be irreversible, and for much the same reason. What made devaluation possible, in the end, was the fact that there was a run on the banks despite the government’s insistence that one peso would always be worth one dollar. This run forced the Argentine government to limit withdrawals, and once these limits were in place, it was possible to change the peso’s value without setting off a second run. Nothing like that has happened in Europe — yet. But it’s certainly within the realm of possibility, especially as the pain of austerity and internal devaluation drags on.

Revived Europeanism: The preceding three scenarios were grim. Is there any hope of an outcome less grim? To the extent that there is, it would have to involve taking further major steps toward that “European federation” Robert Schuman wanted 60 years ago.

In early December, Jean-Claude Juncker, the prime minister of Luxembourg, and Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to create “E-bonds,” which would be issued by a European debt agency at the behest of individual European countries. Since these bonds would be guaranteed by the European Union as a whole, they would offer a way for troubled economies to avoid vicious circles of falling confidence and rising borrowing costs. On the other hand, they would potentially put governments on the hook for one another’s debts — a point that furious German officials were quick to make. The Germans are adamant that Europe must not become a “transfer union,” in which stronger governments and nations routinely provide aid to weaker.

Yet as the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar.

Nobody is yet proposing that Europe move to anything resembling U.S. fiscal integration; the Juncker-Tremonti plan would be at best a small step in that direction. But Europe doesn’t seem ready to take even that modest step.

OUT OF MANY, ONE?
For now, the plan in Europe is to have everyone tough it out — in effect, for Greece, Ireland, Portugal and Spain to emulate Latvia and Estonia. That was the clear verdict of the most recent meeting of the European Council, at which Angela Merkel, the German chancellor, essentially got everything she wanted. Governments that can’t borrow on the private market will receive loans from the rest of Europe — but only on stiff terms: people talk about Ireland getting a “bailout,” but it has to pay almost 6 percent interest on that emergency loan. There will be no E-bonds; there will be no transfer union.

Even if this eventually works in the sense that internal devaluation has worked in the Baltics — that is, in the narrow sense that Europe’s troubled economies avoid default and devaluation — it will be an ugly process, leaving much of Europe deeply depressed for years to come. There will be political repercussions too, as the European public sees the continent’s institutions as being — depending on where they sit — either in the business of bailing out deadbeats or acting as agents of heartless bill collectors.

Nor can the rest of the world look on smugly at Europe’s woes. Taken as a whole, the European Union, not the United States, is the world’s largest economy; the European Union is fully coequal with America in the running of the global trading system; Europe is the world’s most important source of foreign aid; and Europe is, whatever some Americans may think, a crucial partner in the fight against terrorism. A troubled Europe is bad for everyone else.

In any case, the odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later. At that point, Europe’s stronger nations will have to make a choice.

It has been 60 years since the Schuman declaration started Europe on the road to greater unity. Until now the journey along that road, however slow, has always been in the right direction. But that will no longer be true if the euro project fails. A failed euro wouldn’t send Europe back to the days of minefields and barbed wire — but it would represent a possibly irreversible blow to hopes of true European federation.

So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.


Paul Krugman is a Times columnist and winner of the 2008 Nobel Memorial Prize in Economic Sciences. His latest book is “The Return of Depression Economics and the Crisis of 2008.”


Wednesday, January 12, 2011

Obama’s Remarks in Tucson

To the families of those we've lost; to all who called them friends; to the students of this university, the public servants gathered tonight, and the people of Tucson and Arizona: I have come here tonight as an American who, like all Americans, kneels to pray with you today, and will stand by you tomorrow.

There is nothing I can say that will fill the sudden hole torn in your hearts. But know this: the hopes of a nation are here tonight. We mourn with you for the fallen. We join you in your grief. And we add our faith to yours that Representative Gabrielle Giffords and the other living victims of this tragedy pull through.

As Scripture tells us:

There is a river whose streams make glad the city of God,

the holy place where the Most High dwells.

God is within her, she will not fall;

God will help her at break of day.

On Saturday morning, Gabby, her staff, and many of her constituents gathered outside a supermarket to exercise their right to peaceful assembly and free speech. They were fulfilling a central tenet of the democracy envisioned by our founders – representatives of the people answering to their constituents, so as to carry their concerns to our nation's capital. Gabby called it "Congress on Your Corner" – just an updated version of government of and by and for the people.

That is the quintessentially American scene that was shattered by a gunman's bullets. And the six people who lost their lives on Saturday – they too represented what is best in America.

Judge John Roll served our legal system for nearly 40 years. A graduate of this university and its law school, Judge Roll was recommended for the federal bench by John McCain twenty years ago, appointed by President George H.W. Bush, and rose to become Arizona's chief federal judge. His colleagues described him as the hardest-working judge within the Ninth Circuit. He was on his way back from attending Mass, as he did every day, when he decided to stop by and say hi to his Representative. John is survived by his loving wife, Maureen, his three sons, and his five grandchildren.

George and Dorothy Morris – "Dot" to her friends – were high school sweethearts who got married and had two daughters. They did everything together, traveling the open road in their RV, enjoying what their friends called a 50-year honeymoon. Saturday morning, they went by the Safeway to hear what their Congresswoman had to say. When gunfire rang out, George, a former Marine, instinctively tried to shield his wife. Both were shot. Dot passed away.

A New Jersey native, Phyllis Schneck retired to Tucson to beat the snow. But in the summer, she would return East, where her world revolved around her 3 children, 7 grandchildren, and 2 year-old great-granddaughter. A gifted quilter, she'd often work under her favorite tree, or sometimes sew aprons with the logos of the Jets and the Giants to give out at the church where she volunteered. A Republican, she took a liking to Gabby, and wanted to get to know her better.

Dorwan and Mavy Stoddard grew up in Tucson together – about seventy years ago. They moved apart and started their own respective families, but after both were widowed they found their way back here, to, as one of Mavy's daughters put it, "be boyfriend and girlfriend again." When they weren't out on the road in their motor home, you could find them just up the road, helping folks in need at the Mountain Avenue Church of Christ. A retired construction worker, Dorwan spent his spare time fixing up the church along with their dog, Tux. His final act of selflessness was to dive on top of his wife, sacrificing his life for hers.

Everything Gabe Zimmerman did, he did with passion – but his true passion was people. As Gabby's outreach director, he made the cares of thousands of her constituents his own, seeing to it that seniors got the Medicare benefits they had earned, that veterans got the medals and care they deserved, that government was working for ordinary folks. He died doing what he loved – talking with people and seeing how he could help. Gabe is survived by his parents, Ross and Emily, his brother, Ben, and his fiancée, Kelly, who he planned to marry next year.

And then there is nine year-old Christina Taylor Green. Christina was an A student, a dancer, a gymnast, and a swimmer. She often proclaimed that she wanted to be the first woman to play in the major leagues, and as the only girl on her Little League team, no one put it past her. She showed an appreciation for life uncommon for a girl her age, and would remind her mother, "We are so blessed. We have the best life." And she'd pay those blessings back by participating in a charity that helped children who were less fortunate.

Our hearts are broken by their sudden passing. Our hearts are broken – and yet, our hearts also have reason for fullness.

Our hearts are full of hope and thanks for the 13 Americans who survived the shooting, including the congresswoman many of them went to see on Saturday. I have just come from the University Medical Center, just a mile from here, where our friend Gabby courageously fights to recover even as we speak. And I can tell you this – she knows we're here and she knows we love her and she knows that we will be rooting for her throughout what will be a difficult journey.

And our hearts are full of gratitude for those who saved others. We are grateful for Daniel Hernandez, a volunteer in Gabby's office who ran through the chaos to minister to his boss, tending to her wounds to keep her alive. We are grateful for the men who tackled the gunman as he stopped to reload. We are grateful for a petite 61 year-old, Patricia Maisch, who wrestled away the killer's ammunition, undoubtedly saving some lives. And we are grateful for the doctors and nurses and emergency medics who worked wonders to heal those who'd been hurt.

These men and women remind us that heroism is found not only on the fields of battle. They remind us that heroism does not require special training or physical strength. Heroism is here, all around us, in the hearts of so many of our fellow citizens, just waiting to be summoned – as it was on Saturday morning.

Their actions, their selflessness, also pose a challenge to each of us. It raises the question of what, beyond the prayers and expressions of concern, is required of us going forward. How can we honor the fallen? How can we be true to their memory?

You see, when a tragedy like this strikes, it is part of our nature to demand explanations – to try to impose some order on the chaos, and make sense out of that which seems senseless. Already we've seen a national conversation commence, not only about the motivations behind these killings, but about everything from the merits of gun safety laws to the adequacy of our mental health systems. Much of this process, of debating what might be done to prevent such tragedies in the future, is an essential ingredient in our exercise of self-government.

But at a time when our discourse has become so sharply polarized – at a time when we are far too eager to lay the blame for all that ails the world at the feet of those who think differently than we do – it's important for us to pause for a moment and make sure that we are talking with each other in a way that heals, not a way that wounds.

Scripture tells us that there is evil in the world, and that terrible things happen for reasons that defy human understanding. In the words of Job, "when I looked for light, then came darkness." Bad things happen, and we must guard against simple explanations in the aftermath.

For the truth is that none of us can know exactly what triggered this vicious attack. None of us can know with any certainty what might have stopped those shots from being fired, or what thoughts lurked in the inner recesses of a violent man's mind.

So yes, we must examine all the facts behind this tragedy. We cannot and will not be passive in the face of such violence. We should be willing to challenge old assumptions in order to lessen the prospects of violence in the future.

But what we can't do is use this tragedy as one more occasion to turn on one another. As we discuss these issues, let each of us do so with a good dose of humility. Rather than pointing fingers or assigning blame, let us use this occasion to expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy, and remind ourselves of all the ways our hopes and dreams are bound together.

After all, that's what most of us do when we lose someone in our family – especially if the loss is unexpected. We're shaken from our routines, and forced to look inward. We reflect on the past. Did we spend enough time with an aging parent, we wonder. Did we express our gratitude for all the sacrifices they made for us? Did we tell a spouse just how desperately we loved them, not just once in awhile but every single day?

So sudden loss causes us to look backward – but it also forces us to look forward, to reflect on the present and the future, on the manner in which we live our lives and nurture our relationships with those who are still with us. We may ask ourselves if we've shown enough kindness and generosity and compassion to the people in our lives. Perhaps we question whether we are doing right by our children, or our community, and whether our priorities are in order. We recognize our own mortality, and are reminded that in the fleeting time we have on this earth, what matters is not wealth, or status, or power, or fame – but rather, how well we have loved, and what small part we have played in bettering the lives of others.

That process of reflection, of making sure we align our values with our actions – that, I believe, is what a tragedy like this requires. For those who were harmed, those who were killed – they are part of our family, an American family 300 million strong. We may not have known them personally, but we surely see ourselves in them. In George and Dot, in Dorwan and Mavy, we sense the abiding love we have for our own husbands, our own wives, our own life partners. Phyllis – she's our mom or grandma; Gabe our brother or son. In Judge Roll, we recognize not only a man who prized his family and doing his job well, but also a man who embodied America's fidelity to the law. In Gabby, we see a reflection of our public spiritedness, that desire to participate in that sometimes frustrating, sometimes contentious, but always necessary and never-ending process to form a more perfect union.

And in Christina…in Christina we see all of our children. So curious, so trusting, so energetic and full of magic.

So deserving of our love.

And so deserving of our good example. If this tragedy prompts reflection and debate, as it should, let's make sure it's worthy of those we have lost. Let's make sure it's not on the usual plane of politics and point scoring and pettiness that drifts away with the next news cycle.

The loss of these wonderful people should make every one of us strive to be better in our private lives – to be better friends and neighbors, co-workers and parents. And if, as has been discussed in recent days, their deaths help usher in more civility in our public discourse, let's remember that it is not because a simple lack of civility caused this tragedy, but rather because only a more civil and honest public discourse can help us face up to our challenges as a nation, in a way that would make them proud. It should be because we want to live up to the example of public servants like John Roll and Gabby Giffords, who knew first and foremost that we are all Americans, and that we can question each other's ideas without questioning each other's love of country, and that our task, working together, is to constantly widen the circle of our concern so that we bequeath the American dream to future generations.

I believe we can be better. Those who died here, those who saved lives here – they help me believe. We may not be able to stop all evil in the world, but I know that how we treat one another is entirely up to us. I believe that for all our imperfections, we are full of decency and goodness, and that the forces that divide us are not as strong as those that unite us.

That's what I believe, in part because that's what a child like Christina Taylor Green believed. Imagine: here was a young girl who was just becoming aware of our democracy; just beginning to understand the obligations of citizenship; just starting to glimpse the fact that someday she too might play a part in shaping her nation's future. She had been elected to her student council; she saw public service as something exciting, something hopeful. She was off to meet her congresswoman, someone she was sure was good and important and might be a role model. She saw all this through the eyes of a child, undimmed by the cynicism or vitriol that we adults all too often just take for granted.

I want us to live up to her expectations. I want our democracy to be as good as she imagined it. All of us – we should do everything we can to make sure this country lives up to our children's expectations.

Christina was given to us on September 11th, 2001, one of 50 babies born that day to be pictured in a book called "Faces of Hope." On either side of her photo in that book were simple wishes for a child's life. "I hope you help those in need," read one. "I hope you know all of the words to the National Anthem and sing it with your hand over your heart. I hope you jump in rain puddles."

If there are rain puddles in heaven, Christina is jumping in them today. And here on Earth, we place our hands over our hearts, and commit ourselves as Americans to forging a country that is forever worthy of her gentle, happy spirit.

May God bless and keep those we've lost in restful and eternal peace. May He love and watch over the survivors. And may He bless the United States of America.

The Old Man and the Internet
By JAY GOLTZ NY TIMES
I started out as a retailer. As time passed, I realized and struggled with the fact that I was also a manufacturer. Eventually, I expanded into being a distributor, a direct-sales organization and now a Web marketer. The first three evolutions were slow and painful, but I figured them out. This latest twist, becoming a Web marketer, is different. This time, it is not just about people and problems. It’s about understanding the realities of a whole new world.

It crept up on me, this whole Internet thing. It’s probably the most powerful development since the Industrial Revolution, but I was a little slow to see it coming. I was slow to realize, for example, that I needed a better Web presence for my custom picture-framing business. Still, in the last five years, I have started to get up to speed. My home furnishings store has a Web site and is now selling a nice amount of furniture and accessories on the Web — although most of the traffic still comes from the mentions we get in home décor magazines (we have cool stuff).

In addition, I have a site that sells wholesale moulding to framers and two Web sites that sell artwork for offices (one that offers art consulting and one that carries a line of framed images ready to ship), but they are not reaching their potential. And I have a Web site for my personal speaking gigs that gets some traffic but does not generate the business I think it should. I also have one other related site that I am working on.

This is the picture that I recently laid out for my new business group. I’ve said it before and I’ll say it again: the insights gained from comparing notes with other business owners, in different businesses, can be phenomenal. After describing my business structure and explaining that I have come to understand that I have to become more Web-driven, the computer geek in the group — I say that with all due respect, admiration and appreciation — responded, “you need to hire a director of Web.”

In about a nanosecond, I realized he was right. I didn’t know exactly what it meant, but I knew he was right. You see, after several meetings with our computer geek, I have learned that he speaks a different language. He has different powers and insights and ways of looking at things. He is from another planet, and I am just an earthling. But it goes both ways. While computer guy has been extremely helpful to the members of the group in explaining the intricacies of technology, we old guys have been valuable to him in dealing with organizational issues, real estate and other problems that come with a fast-growing company. This is not a support group; it is a get-smarter group. The driving philosophy: stop trying to figure it all out on your own.

Anyway, back to my revelation. I now understand that I am operating in a vastly different business environment, and I need to make some adjustments. The Internet, social media and whatever else I am missing are all changing fast, and I need to conquer them. Here is the problem: Business people like me do not know what is going on behind the curtain. Sometimes, we think we know, we want to know, we need to know, but how could we know?

No one who works for me has ever worked in a technology company. When I returned to the office and mentioned my business-group revelation that we needed to hire a director of Web, two of my key people said the same thing: we need to rethink our entire organizational structure.

I should have figured this out a year ago, but I was focused on moving my production facility and cutting costs. This illustrates the reality of today’s business environment. We are s-l-o-w-l-y coming out of a terrible recession, and we are all watching every dollar that we spend — but we should be spending more money on technology. Contrast that to one of these venture capital-fueled tech warehouses we’re always reading about, and you can see why established companies like mine are not just scratching their heads but holding them.

I will soon have seven Web sites — three are e-commerce, the others marketing — and we know just enough about building and maintaining them to be dangerous. We believe we are doing enough of the right things, but I have realized that this goes against my general business philosophy. I don’t want to do “enough.” I want to do things as well as possible (within economic reason).

We are not experts, but in this new world, we need to be experts if we want to hit our potential. Given the number of sites we’re playing with, I always believed that it would be more cost-effective to do most of the work in-house. But after talking to people who seem to know what they are doing, I’m coming to accept that we will never be as effective as someone who does this for a living. The technology changes too fast.

We are now interviewing companies to redo our Web sites and take over our pay-per-click campaign. I believe that incremental sales will pay for the new costs. That is the difference between old-school retail and the Internet: immediate results. I am quickly changing my perspectives so that I can operate in this new world. I’m even willing to get a Ping-Pong table and some bean bag chairs if necessary. I’ll see you on the other side.

Jay Goltz owns five small businesses in Chicago.

Saturday, January 08, 2011


Six dead in shooting that wounds Arizona Congresswoman Gabrielle Giffords
The Democrat was shot in the head when a gunman opened fire at a meet-and-greet at a supermarket. She is responsive after surgery. The dead include a 9-year-old girl and a federal judge, and at least 12 others are injured.
By Seema Mehta and Mark Porubcansky, LA TIMES
A man gunned down Arizona Rep. Gabrielle Giffords and at least 17 other people, six of whom were killed, during a the congresswoman's meet-and-greet Saturday with constituents outside a supermarket in Tucson.

Among the dead were U.S. District Judge John M. Roll and a 9-year-old girl.

Giffords was out of surgery Saturday night and was responsive to some commands from doctors, said Mark Kimble, who works in Giffords' communication office in Tucson.

"The next three days are going to be very critical as far as swelling of the brain. And that's about all we know right now. They're very optimistic though," Kimble said. Giffords' husband, astronaut Mark Kelly, her parents, sister and mother-in-law were by her bedside, he said. Several people wheeling luggage and weeping were seen hugging in the hospital lobby.

Giffords, a 40-year-old Democrat, had been with five staff members and two interns while at the event. Gabe Zimmerman, director of outreach, was killed. Two others, Ron Barber and Pam Simon, were wounded.

The suspect, identified by a federal source as Jared Lee Loughner, 22, was in custody Saturday after being tackled by two people at the scene of the shooting. The gunman may not have acted alone, Pima County Sheriff Clarence W. Dupnik said.

"There is some reason to believe he came to this location with another individual. And there's reason to believe the other individual in some way might be involved," he added. "We have an individual that we are actively in pursuit of."

"We have pictures" of the second person, Dupnik said, but he declined to release them.

He said the weapon used in the shooting was a semi-automatic pistol.

The sheriff had harsh words about the rising level of vitriol in public discourse, which he suggested could have influenced the gunman.

"When you look at unbalanced people, how they respond to the vitriol that comes out of certain mouths about tearing down the government, the anger, the hatred, the bigotry … it is getting to be outrageous. And unfortunately, Arizona, I think, has become sort of the capital. We have become the mecca for prejudice and bigotry," he said.

Dupnik said there was no security at the event and there was no return of gunfire from anyone in the crowd. The gunman still had bullets and "probably would have shot other people had he not been tackled."

Dupnik offered the following narrative of the shootings:

About 10 a.m. on Saturday, the congresswoman was holding an informal town hall meeting called "Congress on Your Corner" outside a Safeway in Tucson. Ten minutes later, a gunman approached and started shooting, and Giffords was struck once in the head.

Judge Roll had come to the meet-and-greet because he was friends with Giffords. "Unfortunately, he was at the wrong place at the wrong time," Dupnik said. He called Roll "one of the finest human beings I've ever met in my life."

Roll was appointed to a federal judgeship by President George H.W. Bush and was recommended for the appointment by Sen. John McCain (R-Ariz.).

Dupnik called Giffords "one of the nicest human beings that has ever been planted on this Earth. She's not only brilliant, she works from dawn until dawn, basically. And she cares for what happens in this country. She's not about Democrats or Republicans. All she cares about is the United States of America."

Retired obstetrician David Beal was sitting with his wife in his car outside his neighborhood Safeway waiting for an opportunity to say hello to his congresswoman when he heard shots.

"It was a lot of shots," he said in a telephone interview. "At first, it was so many shots I thought, that can't be gunfire. Then we saw people diving, and I told my wife to get down on the floor" of the car.

Beal jumped out and ran into the melee, going first to where Giffords went down.

"It was really horrendous," he said. "She was kind of crumpled on the sidewalk."

The physician said he had never experienced anything like it. He said the sidewalk outside the grocery store was a "war zone."

"There were people all over the place," Beal said. "There were five for sure dead when I got there. It was incredibly awful."

A man lying next to Giffords had bullet wounds, he said. "He was bleeding pretty profusely. Someone put pressure on his groin" to staunch it.

That's when Beal turned his attention to a girl who was lying in the fetal position on the sidewalk. "I lifted up her shirt. She had an entrance wound in her right flank, and an exit wound on her left side. She had a low pulse and low respiration, so I started giving her chest compression CPR."

Beal said it was "at least 15 minutes" before paramedics arrived. He assumed they had been delayed by law enforcement trying to make sure the area was safe.

In reliving the ordeal, Beal said he was struggling to figure out how the girl had been shot. The way the bullet traveled through her body, he said it appeared she would have had to have been shot from below.

"She had been kneeling and kind of hiding," he said. "He must have shot her while she was kneeling. She was in a fetal position on her knees."

Dupnik said the suspect in custody has not made any statements to investigators and has invoked his constitutional rights not to provide information that could incriminate himself.

"I have never been so shocked in my life as the events that have happened today. It is not only very sad for Tucson and the family and the friends of all the victims of this horrendous, senseless, unbelievable crime, but it's a sad day for America," Dupnik said.

Giffords had just been reelected to a third term to the U.S. House of Representatives after a particularly vitriolic campaign. In one case, a weapon fell from the pants of a very angry audience member. At another time, windows were shattered at her campaign headquarters.

House officials said all legislation that was scheduled to be heard next week is being postponed, which would put off a vote to repeal healthcare reform legislation.

Loughner had a profile on his MySpace page but it has been taken down. Along with his rants about illegal currency, he listed his top books as Hitler's "Mein Kampf," Marx's "The Communist Manifesto," and Hesse's "Siddhartha." He said he liked a YouTube video of a burning U.S. flag.

Tyler Ramsier, 24, said he attended school with Loughner at Mountain View High School in Tucson and that Loughner graduated in 2007. Ramsier said Loughner hung out with a group of friends who wore trench coats and baggy pants and kept to themselves. Ramsier described them as "contrary."

On a YouTube account believed to belong to Loughner under the username "Classitup10," anti-government statements were made referring to "treasonous laws" that contradicted the Constitution. In sentences that flashed on the screen, Pima Community College was called a "torture facility," referring to teachers as "con artists" and police were castigated for removing students from educational facilities for talking.

"This situation is fraud because the police are unconstitutional!" the text says. "Don't trust the current government, listener!"

"The government is implying mind control and brainwash on the people by controlling grammar," the video says.

Forensic psychiatrist Mark Kalish, a clinical assistant professor at UC San Diego, said the video had many hallmarks of mental illness.

"It's got these paranoid elements," he said. "He probably suffers from schizophrenia. He's very nihilistic. It's delusional. There's a conspiratorial flavor to it. It is nonsensical, but it's psychotic."

Kalish said it seemed like Loughner had a problem with the government, but not necessarily Giffords.

"My guess is he's probably a loner, and he has this bizarre delusion and that the congressperson was involved — either specifically or in general — because she's part of the government," he said. "It's probable that she just happened to be in the wrong place at the wrong time and it had nothing to do with her personally, other than she just happened to be a representative of the government."

Dr. Rafael Quinonez, a trauma neurosurgeon at Providence Holy Cross Medical Center in Mission Hills, said it is not unusual for people to survive gunshot wounds to the head.

"For us, it's almost a weekend occurrence, and some of them survive," he said.

Quinonez said survival and prognosis depend on many factors, including the path, size and velocity of the bullet. In cases where the bullet is no longer in the patient, surgeons must clean out the wound, including bone fragments, to minimize the chances of infection.

As night fell in Tucson, several dozen people held vigil across the street from Giffords' office, which had been blocked off by police. The mourners, some clad in pajama pants, hospital scrubs, scarves and mittens, crowded onto a sidewalk outside a gas station and gripped candles and signs. "No violence," one sign implored the passing drivers, who honked in assent.

The crowd passed a bag of cheese puffs and rumors about Giffords' condition. They also placed more candles and flowers under a tree, alongside a stuffed bear and dog and a small poster that read, "Sad and heartbroken in Tucson! Pray for Gabby and all others."

Hundreds of people also gathered at a prayer vigil at the University Medical Center, where Giffords and other victims were being treated.

Softly weeping and clutching candles, they gathered on a grassy lawn, circling six pillar candles that represented the six known fatalities.

The House Sergeant at Arms issued an alert to lawmakers Saturday that there is "no indication that this incident is part of any larger threat against Congress or has a nexus to terrorism."

The youngest woman ever elected to the House when she joined Congress in 2006, Giffords recently survived a tough reelection campaign, defeating "tea party" candidate Jesse Kelly by just 4,000 votes.

Sheriff's officials cordoned off the area of North Soledad Avenue where Loughner lives, a neighborhood in northwest Tucson of mostly one-story, brick houses.

Bert Escovar, 71, who has been a resident of the neighborhood for 30 years, said he believed the alleged shooter lives with his mother and father. "Every time I saw him, he was by himself," said Escovar, who added that he had seen Loughner but never spoken with him. "He dressed like a normal teenager."

David Cook, who has lived in the neighborhood for seven years, said the family moved there about four years ago and seemed friendly and often waved when they drove down the street. Cook said Loughner's father rebuilds classic cars and owns a 1967 Chevelle.

President Obama called the shooting an "unspeakable tragedy."

"We're going to get to the bottom of this, and we're going to get through this," he declared. "I know Gabby is as tough as they come, and I am hopeful that she is going to pull through."

"It is not surprising that Gabby today was doing what she always does, listening to the hopes and concerns of her neighbors," he added. "That is the essence of what our democracy is all about. That is why this is a tragedy for more than those involved."

Sen. McCain called the shooter a "wicked person who has no sense of justice or compassion" and said he was praying for the recovery of the victims.

"Whoever did this, whatever their reason, they are a disgrace to Arizona, this country and the human race, and they deserve and will receive the contempt of all decent people and the strongest punishment of the law," McCain said.

Arizona's GOP chairman, Randy Pullen, said party members are "deeply saddened and mortified" by the shooting.

"Senseless acts of violence like these are shocking, disturbing and have no place in our country. The thoughts and prayers of all Arizonans are with the victims and families during this terrible tragedy in our state's history. We sincerely hope that the responsible party is prosecuted to the fullest extent of the law," he said.

Just an hour before the shooting, Giffords had posted an announcement on her Twitter account: "My 1st Congress on Your Corner starts now. Please stop by to let me know what is on your mind or tweet me later."

This has been a winning formula in her conservative, border district. Giffords survived a tough challenge from a "tea party" candidate in the November election.

Her district was littered with signs proclaiming, "Giffords Opposes SB1070," referring to her opposition to Arizona's tough anti-immigration measures.

She has been a perennial top target of Arizona Republicans. Her district office was vandalized after she voted for the healthcare reform bill and friends said she had received several unspecified threats.
Mehta and Porubcansky reported from Tucson. Times staff writers Nicole Santa Cruz in Tucson, Kim Murphy in Seattle, Richard Serrano and Lisa Mascaro in Washington, and Maeve Reston, Rong-Gong Lin II and Lisa Girion in Los Angeles contributed to this report.

Copyright © 2011, Los Angeles Times

Friday, January 07, 2011

The Raw Face of Capitalism, Kremlin Style
By CHRYSTIA FREELAND
NEW YORK — For anyone who ever hoped Russia could become a liberal, free-market democracy, the grim trial last month of Mikhail B. Khodorkovsky, the former oil tycoon who was once his country’s richest man, offered a slender solace: it was widely and loudly condemned.

David Remnick, editor of The New Yorker, compared the prosecution to that of the poet and Nobel laureate Joseph Brodsky. Joe Nocera, writing about the business and economic consequences in The New York Times (whose global edition is the International Herald Tribune), described the Kremlin’s tactics as “boneheaded.” Secretary of State Hillary Rodham Clinton warned that the case would “have a negative impact on Russia’s reputation,” and particularly on its “investment climate.”

What was notable about this chorus of foreign criticism was the implication that, even judged by the Kremlin’s own standards of realpolitik, the treatment of Mr. Khodorkovsky was a mistake. Moscow’s leaders want to restore Russia’s wealth and greatness: Western assertions that the Khodorkovsky trial had hurt Russia’s reputation and would discourage foreign investment suggested that the Kremlin was harming its own cause.

But some investors, economists and political analysts are drawing a different, and much starker, conclusion: The Khodorkovsky verdict was an inevitable and logical act of self-preservation by a regime that is fully and lucratively in control of Russia.

In this reading, there is nothing accidental about Mr. Khodorkovsky’s continued imprisonment. It is, instead, the clearest possible statement of the rules of Kremlin capitalism, and of Prime Minister Vladimir V. Putin’s confidence that, at least as long as Siberia has oil, there is plenty of private capital willing to play.

“Within Russia, everyone who matters understands exactly what the Kremlin is trying to say: that there is no one above the rule of the Kremlin,” said Roland Nash, co-founder of Verno Capital, who is a 16-year veteran of doing business in Moscow.

The message, according to Sergei Guriev, one of Russia’s leading economists and rector of the New Economic School, is this: “It is to show that Putin is fully in control. It is not a question of Khodorkovsky getting out of jail, it is a question of other businessmen not following in Khodorkovsky’s footsteps.”

Ian Bremmer, author of a recent book on state capitalism and president of the Eurasia Group, a global political risk and consulting firm, said the verdict was “rational” and “predictable.”

“If you are in a sector the state cares about in Russia,” he said, “you either play ball with the Kremlin, or you leave.”

Mr. Nash did remark that the Khodorkovsky case had exacted a real, quantifiable economic cost. “The Russian equity market would be worth several hundred billion dollars more if it weren’t for the critical Western perception of Russia, and the Khodorkovsky case is the principal example of that perception,” he said.

Critics of Putinism, especially Western ones, like to point to this lost value as proof that the treatment of Mr. Khodorkovsky and the authoritarian politics that his case represents are a mistake. But that analysis, according to Mr. Guriev, a liberal who laments the path Russia has taken, leaves out the essential political calculus of Putinism.

“Economic growth per se is not important to a ruler, if he is not there to enjoy it,” Mr. Guriev said. “Better to stay in control of a stagnant, but large and rich, country than to be kicked out of a growing one. Everyone wants a bigger cake, but better a small cake than none at all.”

And while the Russia cake is surely not as big as it could be, it’s big enough, and growing steadily: Gross domestic product increased 3.7 percent last year, worse than China’s red hot 10.5 percent, but better than the United States’ 2.6 percent. The Russian stock market rose 22 percent in 2010.

One reason the cake is still big enough for Mr. Putin and his allies is that many foreign investors are still willing to tolerate an economy run according to Kremlin rules.

“I haven’t talked to one corporation that used the Khodorkovsky trial, as opposed to corruption more generally, as a factor in their investment decision,” Mr. Bremmer said. Companies in extractive industries, still the dominant sector in the Russian economy, are accustomed to dealing with all kinds of governments. Playing by the authoritarian logic of state capitalism, in Russia and elsewhere, is familiar, even reassuring, he suggested.

Emerging-market investors have similar experiences. As the flows of capital among emerging markets — rather than between emerging markets and the West — become more important, so does tolerance for Russian, or Chinese, or Middle Eastern state capitalism.

“There is a much better understanding of the nuances and the differences in the rules of the game in the emerging world than there is in the developed countries,” said Mr. Nash, whose biggest investor is from Abu Dhabi. “There are now sources of capital that don’t care so much about issues like the Khodorkovsky trial.”

But while the Kremlin is clearly unmoved by foreign criticism of Russia’s human rights record and even of its investment climate, it is increasingly worried about one thing: innovation. Mr. Putin’s Russia is complacent about its ability to attract capital, but it is panicked about its capacity to come up with cutting-edge technologies.

Daron Acemoglu, a Turkish-born professor at the Massachusetts Institute of Technology who specializes in the relationship between political systems and economic growth, believes that in the long run, this will be the big test for today’s swaggering, authoritarian regimes: “Can China and Russia create their own Silicon Valleys? That is the hard constraint these systems face.”

Even as Mr. Khodorkovsky goes back to jail, another oligarch, Alisher B. Usmanov, and his partner Yuri Milner are raising, via Digital Sky Technologies, their stake in Facebook. And another billionaire, Viktor Vekselberg, has been charged with constructing Skolkovo, which the Kremlin dreams will be its version of Silicon Valley. To judge the longevity of Kremlin capitalism, watch his efforts.

Chrystia Freeland is global editor at large at Reuters.

Wednesday, January 05, 2011

Cheney Is Back, With Heart Pump and New Outlook

By HELENE COOPER, LAWRENCE K. ALTMAN and MICHAEL D. SHEAR

WASHINGTON — A few days before Christmas, former Vice President Dick Cheney ended a self-imposed sabbatical from partisan politics to headline a fund-raiser for Maria Cino, a party operative and Bush administration official who is running to replace Michael Steele as head of the Republican National Committee.

The fund-raiser for Ms. Cino, held at the Alexandria, Va., home of Mr. Cheney’s former aide Mary Matalin, was his first major foray into partisan Washington political theater since receiving a mechanical heart pump in July that has, most doctors say, saved Mr. Cheney’s life by taking on the task of helping to push blood through his arteries.

Mr. Cheney, as he did at several holiday receptions in Washington, chatted about his new pump. At one cocktail party, he even opened his coat jacket to show it off. While Mr. Cheney is noticeably thinner — his trademark stiff, one-sided grin now shows up on a markedly leaner face — he is returning, associates say, to his old life, including hunting and socializing.

But for the most part, Mr. Cheney, 69, has put aside his public role as the fiery, combative political figure of the last two years, who seemed to relish every opportunity to engage in verbal jousting with President Obama.

With George W. Bush having decided to stay largely silent during Mr. Obama’s tenure, Mr. Cheney embraced the role of public critic, accusing the new, young president of rolling back Bush-era policies and undermining the nation’s security. In 2009, Mr. Cheney and Mr. Obama gave dueling speeches on the same day.

Now, however, family members and friends paint a portrait of a man less focused on the day-to-day back-and-forth in Washington and one more interested in documenting his years of service in a memoir and navigating life with his new pump.

Mr. Cheney’s heart will never beat at full strength again, doctors say. His new mechanical pump, a partial artificial heart known as a ventricular assist device, leaves patients without a pulse because it pushes blood continuously instead of mimicking the heart’s own beat. Most pulse-less patients feel nothing unusual, but the devices do pose significant risks of infection. They are implanted as a last resort either for permanent use or as a bridge to transplant until a donor heart can be found. Mr. Cheney, who has participated in some of the nation’s toughest decisions for decades, now faces a crucial one of his own: whether to seek a full heart transplant.

It is a decision he will most likely be forced to make within months. He is old enough that soon he will no longer qualify for a transplant, doctors say. And while it is possible for some patients with Mr. Cheney’s device to live for years, the long-term prospects remain unknown.

His family and friends will not talk publicly with any specificity about the former vice president’s heart condition or the steps he might be taking to confront it.

But in the meantime, Mr. Cheney has begun resuming his old activities. Besides the Cino fund-raiser, he attended a round of holiday parties in Washington — leaving whispers in his trail about his weight loss. “For all of the caricatures of him, he never lets it get under his skin,” said Ms. Matalin, a close friend.

Mr. Cheney, who spent the holidays at his ranch in Wyoming, recently had a class of West Point cadets over to his house in McLean, Va., to talk about his experiences working for four of the last five Republican presidents and what it was like to work at the White House. In Wyoming, he has been spotted in local grocery stores, stocking up to make chili and spaghetti sauce, “as well as walking me through how to cook Christmas dinner,” his daughter Liz Cheney said in an e-mail.

But most of all, Ms. Cheney said, her father has been working on his book, which is scheduled to come out this fall. “He still prefers to write in longhand on yellow legal pads despite my efforts to introduce a laptop into his process,” Ms. Cheney said.

By supplementing the amount of blood pumped through the body, Mr. Cheney’s pump allows him to do many things he would do with a working heart. Such patients can bicycle, golf, play tennis, drive, shop and generally do what they did before they developed severe heart failure. They need to take an anticoagulant, like warfarin (sold under the brand name Coumadin), and have blood tests to monitor the amount.

Mr. Cheney’s pump was placed near his heart. With most patients, a power line emerges about waist level and connects to a controller, a minicomputer that plugs into a pair of one-and-a-half-pound, 12-volt batteries. Patients wear a black mesh vest over their clothing that holds the controller and batteries.

Mr. Cheney’s friends and family say he is making plans to get out in 2011 and give more speeches. On Jan. 20, he is to fly to Texas for the 20th anniversary of the Persian Gulf war with the first President Bush, the emir of Kuwait and a host of alumni of that administration, including Brent Scowcroft, the former national security adviser, and Colin L. Powell, who was chairman of the Joint Chiefs of Staff at the time, when Mr. Cheney was defense secretary.

On Dec. 28, Mr. Cheney was the host of a fund-raiser at the home of some friends in Jackson, Wyo., for a scholarship program that he and his wife, Lynne, have begun at the University of Wyoming. They donated $4.5 million to help create scholarships for students to study overseas. In his remarks, Mr. Cheney said that after getting kicked out of Yale twice, he owed getting his life back on track to the University of Wyoming.

Mr. Cheney’s heart pump is also allowing him to go to the movies.

“He and my mom went to see ‘True Grit’ at the Teton Theater here in Jackson a few days ago,” Ms. Cheney said. Her parents, she said, gave it “two thumbs up.”

Rosewood