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"It is better to be drunk with loss and to beat the ground, than to let the deeper things gradually escape."

- I. Compton-Burnett, letter to Francis King (1969)

"Cynical realism – it is the intelligent man’s best excuse for doing nothing in an intolerable situation."

- Aldous Huxley, "Time Must Have a Stop"

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Friday, 1 September 2006
The Other Scare Story
Topic: The Economy
The Other Scare Story
The last week of August was scare week. With support for the war in Iraq tanking and the Republicans facing the very real prospect of losing both the House and Senate, it was time to do something. So Secretary of Defense Rumsfeld told us that if we didn't agree with the administration - policy, strategy or tactics - we were simply trying to appease "a new type of fascism," which made us cowards, confused and morally bankrupt, and also stunning ignorant of history (see Insults). And we were told the fascists are coming, again, even if the argument that the current bad guts are actually "fascists" borders on the absurd, if the word means anything other than they are very, very, very bad people (see What's in a Word? for the details of that). The president launched a series of major speeches to raise alarm, with the last scheduled for 19 September at the UN. The idea is that we've lost our sense of how scary everything is, and might vote for someone other than those who think this is one fine war that's keeping us safer and making the world a better place.

The administration is feeling very misunderstood - no one gets it - war and war more is the only alternative. Or we all die. Why do far more than half of all Americans see the Iraq war as pointless and not having much to so with the main problem? They seem to wonder why we have to stay there and fix their internal disputes. What's wrong with these people?

On the left one has the not-that-scared Matthew Yglesias here -
The idea here is that absent the US military, we would be handing Iraq over to some nefarious - and, admittedly, it would be quite nefarious - coalition of Baathists, Iranians, and al-Qaedists, presumably joined by Dr. Evil and the Cobra Commander. Back in the real world, though, these groups are fighting each other. What's more, the "armed groups with ties to Iran" include the political parties that comprise the Iraqi government. So what is it our troops are accomplishing amidst this frothy mix of bad actors?
It seems you're not supposed to ask questions quite that specific.

On the right there's the not-that-scared and quite frustrated ultra-conservative Stephen Bainbridge, a law professor at UCLA, and a full professor at that, saying this -
There are many advantages to our political system vis-a-vis the British Parliamentary model, but one advantage of the latter is that you can hold a leader accountable. A Prime Minister who has screwed the pooch as badly as Bush very well could have lost his position as party leader.

In an ideal world, it would be possible to win the war in Iraq, which Bush is right we need to do, and hold Bush accountable for having made it necessary for us to win the war in the first place.
The current scare story doesn't seem to gaining traction, as they say. The really scary thing in the mix is, of course, that very real prospect of the Republicans losing control of both the House and Senate. If that happens there will be some major explaining to do, at the top. And Professor Bainbridge will get his wish. It will turn surprising British in Washington.

But there's the other scare story going around, the collapse of the housing market. The economy is sustained by consumer spending, and about a third of all money being spent on consuming this and that comes from home equity - from refinancing your home's mortgage at a much lower rate with some very clever financial instruments, particularly the adjustable rate mortgage (ARM), which, according to Business Week, might be the riskiest and most complicated home loan product ever created, and from all the new homes purchased with such tools.

So what's the problem? Why should we be scared?

That's the cover story for the September 11, 2006 issue of Business Week, Nightmare Mortgages, by Mara Der Hovanesian. The subhead is "They promise the American Dream: A home of your own - with ultra-low rates and payments anyone can afford. Now, the trap has sprung."

And the hard copy cover is classic - a big, green python wrapped around a cute little home, crushing it (image here). And the words wrap around the image - "How Toxic Is Your Mortgage? Deceptive loans. Phantom profits. And coming soon: A wave of defaults."

And here's the opening -
For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a down payment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home - or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules - often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
This could knock the legs out from under the whole economy - the house of cards tumbles. And it's a big house of cards.

So were these people who got themselves into this mess just stupid?

That depends on your point of view -
There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they're not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs. Stock and bond analysts estimate that as many as 1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005. And it's not letting up. Despite the housing slump, option ARMs totaling $77.2 billion were written in the second quarter of this year, according to investment bank Keefe, Bruyette & Woods Inc.
That's a big chunk of the economy.

And there are the stories -
Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that's making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. "The payment schedule looked like what we talked about, so I just started signing away," says Burger. He didn't read the fine print.

After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. "I'm not making any ground on this house; it's a loss every month," he says. He says he was told by his lender, Minneapolis-based Homecoming Financial, a unit of Residential Capital, the nation's fifth-largest mortgage shop, that he'd have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he's unhappy, he should take it up with his broker, the bank said. "They know they're selling crap, and they're doing it in a way that's very deceiving," he says. "Unfortunately, I got sucked into it." In a written statement, Residential said it couldn't comment on Burger's loan but that "each mortgage is designed to meet the specific financial needs of a consumer."

... Most of the pain will be born by ordinary people. And it's already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down - meaning borrowers' homes are worth less than their debt. If home prices fall 10%, that number would double. "The number of houses for sale is tripling in some markets, so people are not going to get out of their debt," says the Ford Foundation's McCarthy. "A lot are going to walk."

Jennifer and Eric Hinz of Somerset, Wis., are feeling the squeeze. They refinanced out of a 5.25% fixed-rate, 30-year loan in June, 2005, and into an option ARM with a 1% teaser rate from Indymac Bank. The $1,483 payment for their original mortgage dropped to as low as $747 with the new option ARM. They say they had no idea when they signed up, however, that the low payment adds $600 in deferred interest to their balance every month. Worse, they thought the 1% would last three years, but they're already paying 7.68%. "What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we're getting now?" says Eric, 36, who works in commercial construction. Refinancing is out because they can't afford the $15,000 or so in fees. "I'm paying more, and the interest is just going up and up and up," says Jennifer, 34, a stay-at-home mom. "I feel like we got totally screwed." They say their mortgage broker has stopped returning their phone calls. Indymac declined to comment on the loan's specifics.

This is a bad business, an essentially unregulated free market. The miraculous "invisible hand" Adam Smith was talking about, unfettered competition, the "hand" that produces the greatest good for the greatest number, is slapping a lot of folks around, and hard.

The political dimension to this, as the election approach, is that the conservatives in control of the government worship this miraculous "invisible hand" Adam Smith was talking about, unfettered competition, the "hand" that produces the greatest good for the greatest number. It is the cornerstone of so much of what we're told is how the world works - deregulate business, help no one with any social programs so they develop personal responsibility, and the nation will thrive.

But what about the angry people?

Duncan Black suggests this -

If, as I cautiously predict, we're about to hit a massive foreclosure wave which is going to hit people at just about every income level there is a certain party whose name starts with the letter 'D' which might find it beneficial to start branding themselves as Friends of Homeowners with some smart policy proposals to back them up.

Off the top of my head this could include cracking down on bad lending practices, providing legal assistance to victims of dishonest lending practices, removing impediments to prepayment and refinancing, and, of course, repealing the bankruptcy bill...
Let's see. That's "more regulation." And the second item is another social "do good" program that makes people think of themselves as victims, and thus undermines their charter and so forth. The third in an intervention to make the bankers and loan companies drop rules that are a stop-loss for their operations. The fourth hurts the banking industry, just last year given the opportunity to stop people from walking away from their financial responsibilities just because those people have no money left. That will never fly.

Here's another UCLA professor - Mark Kleiman (Public Policy, not Law) with this comment -
The coming option ARM train wreck combines consumer fraud with (in this case purely legal) corporate book-cooking. Democrats need to start pounding the table now to take full political advantage of the disaster as it unfolds. I especially like the idea of legal assistance for victims of mortgage brokers' flim-flam tactics.

Of course, the Republicans could beat the Democrats to the punch by actually doing something about the problem before it turns into a catastrophe, but it's a safe bet they won't.
No, they won't.

And Kleiman adds this -
Note that the option ARM crunch has the potential to make the housing-price landing a good deal harder.

Usually, when house prices go down, sellers pull back; you could describe this as speculative holding or as loss aversion, but either way transaction volume drops because homeowners don't want to sell their places for less than they think them to be worth.

But people who can't make their suddenly "adjusted" option-ARM payments, and don't have any equity to refinance, may have no alternative to a distress sale except foreclosure, and the banks aren't going to want to sit on piles of houses either. So we might see the sort of "selling climax" that characterizes the end of a stock-market dive.

The difference is that big institutions don't generally buy individual houses as investments, so it's hard for big pools of speculative money to come in if a selling panic leaves houses under-priced compared to some external standard of value such as the capitalized value of the rent. Being ready to step up and buy in the face of that sort of crisis is an excellent way to get either rich or broke in a hurry.
So the administration wants us to be scared of the "sort of" fascists, and this is going on. One senses this could lead to people to question not just the Iraq business, and the whole idea that wars are good and stability bad, but all of the premises of the guys who have been running things for the last six years. Is their whole theory of government just plain dangerous?

It's almost as if Business Week is changing things up - "So you think that is scary? Try this!" And here the "this" is far more immediate and not abstract at all. It's personal. With our volunteer and relatively small army, and no draft, and no war bonds or special taxes or anything, the war is a bit of an abstraction for many. Losing your house is not an abstraction. And now declaring bankruptcy won't help you at all.

Friday, September 1, Thomas Frank in the New York Times puts what we're told is good for us in historical perspective -
What we have watched unfold for a few decades, I have argued, is a broad reversion to 19th-century political form, with free-market economics understood as the state of nature, plutocracy as the default social condition, and, enthroned as the nation’s necessary vice, an institutionalized corruption surpassing anything we have seen for 80 years. All that is missing is a return to the gold standard and a war to Christianize the Philippines.
We're getting there. Be patient.

In the same issue of the Times Paul Krugman notes the disconnect -
There are still some pundits out there lecturing people about how great the economy is. But most analysts seem to finally realize that Americans have good reasons to be unhappy with the state of the economy: although GDP growth has been pretty good for the last few years, most workers have seen their wages lag behind inflation and their benefits deteriorate.

The disconnect between overall economic growth and the growing squeeze on many working Americans will probably play a big role this November, partly because President Bush seems so out of touch: the more he insists that it’s a great economy, the angrier voters seem to get.
And what's the data?

E. J. Dionne covers the latest just out from the Census Bureau, and says it's worse for the administration than Katrina, as in this -
The "good" news is that the poverty rate, the proportion of Americans who are poor, didn't change much between 2004 and 2005, falling in a statistically insignificant way from 12.7 percent to 12.6 percent. The bad news is that the poverty rate, having risen steadily in recent years, is still higher than it was in 2001, when it stood at 11.7 percent.

Worse is that the proportion of the poor who are very poor has risen. People are considered in deep poverty if they have half or less of the yearly income of those at the poverty line. In 2005 half the poverty line for a family of three was $7,788; for a family of four it was $9,985. (Try living on that.) According to the new report, 43.1 percent of poor people lived in that sort of deep poverty - a record since 1975, when the government started assembling such statistics.

In the six economic recoveries since the early 1960s, this is the first time the poverty rate was higher in the recovery's fourth year than it was when the recession was at its worst.

The number of Americans without health insurance rose, too, to 46.6 million in 2005, up from 45.3 million in 2004 and 41.2 million in 2001. The proportion without insurance is up from 14.6 percent in 2001 to 15.9 percent in 2005.

What about the middle class? Yes, the median income of American households rose by 1.1 percent last year after five years of decline. But most of the growth was in households headed by Americans 65 and over -- who are helped, rightly, by substantial government benefits. In households headed by people under 65, incomes fell yet again.

… The census had some very good news for the well-to-do. The top fifth of American households received 50.4 percent of all income last year, the highest proportion since 1967, when the Census Bureau started following that trend. The biggest gains were concentrated in the top 5 percent.

"The economy is growing, and someone is getting the growth," said Sharon Parrott, a senior analyst at the liberal Center on Budget and Policy Priorities. "So now we know who it is."

President Bush and the Republican Congress, take a bow: You took power to make the well-off even better off, and you have succeeded brilliantly.
Let's see - the line is that the well-off have been made much, much better off because they deserve it, and you'll get yours, eventually. And anyway, the richer they are the better it is for everyone. Right. And the war in Iraq really was necessary, even if the reasons we gave you to start up that all were kind of lame.

One senses that there's the real possibility that people just are not as scared as they're told they're supposed to be, and the possibility that the whole governing theory in play for the last six years is looking to many like smoke and mirrors - a trick to get the goodies and screw everyone else.

Could that shift in public opinion be underway?

No way - people hate the girly Democrats, those do-gooders and tree-huggers who think the government should do things for the people. And people know if they have the right attitude and take personal responsibility they too will get incredibly rich one day, and those tax breaks will come in handy.

But then there's this, noting that last month Rasmussen Reports conducted a national tracking poll of fifteen thousand voters, not the usual 1,012 for minimal statistical validity, and came up with odd results -
The number of Americans calling themselves Republican has fallen to its lowest level in more than two-and-a-half years. Just 31.9% of American adults now say they’re affiliated with the GOP. That’s down from 37.2% in October 2004 and 34.5% at the beginning of 2006.

… The number of Democrats has grown slightly, from 36.1% at the beginning of the year to 37.3% now. Those who claim to be unaffiliated have increased to 30.8% this month. That’s the highest total recorded since Rasmussen Reports began releasing this data in January 2004.

Add it all together and the Democrats have their biggest net advantage - more than five percentage points - since January 2004. In the first month of 2006, the Democrats’ advantage was just 1.6 percentage points. Last month, 32.8% of adults said they were Republicans and 36.8% identified themselves as Democrats.
These figures must be wrong, or maybe people are tired what Rumsfeld only made explicit - tired of being called cowards who are morally corrupt and intellectually deficient, and who don't know their history. And they know they'll lose their homes. And they know the new rules mean they cannot file for bankruptcy for any relief, as that now ruins you forever, not the seven years like before.

The question is just who should be scared here.

Posted by Alan at 22:55 PDT | Post Comment | Permalink
Updated: Friday, 1 September 2006 23:20 PDT home

Saturday, 29 April 2006
Economics: The American Dream and the Economic Facts of Life
Topic: The Economy

Economics: The American Dream and the Economic Facts of Life

In these pages back in late August, 2003, there was a dialog concerning economic issues, as a few conservative friends out here had said some things about what was dysfunctional in our economy.

It was pretty standard Reagan economics, and it ran something like this -

First, there was the great economic Satan - FDR's social policies to get us out of the Great Depression failed miserably. The idea was, and is, all those spending programs to get people into any kind of work - the WPA and all that, and starting up the Social Security Program - made people believe the world, or at least the government, owes them something. These policies and programs took away their initiative and made them into whining "victims" who always expect a bail-out and don't want to actually do anything. FDR is thus the most evil of American presidents, as his policies pretty much destroyed the character of the "frontier" American who was, previous to this, a self-reliant self-starter who, when he saw a problem, fixed it himself and didn't expect some paternalistic government to save his butt. The only thing that saved America is that FDR realized all this crap wasn't working and got us into World War II when we didn't actually have to fight. He finally figured it out - getting in was the only way to cover the total failure of his economic policies. You might have heard that here and there.

And most of us have heard a conservative friend say this of the current Social Security Program, where people have had part of the wages set aside during all their working lives to cover rent and food and such when they retire - "I don't see why my tax dollars should pay for someone else's retirement when they didn't have the brains to set aside money for their old age. Why should I pay because they were just stupid?"

This of course is based on the idea that the funds available after the next decade or two won't cover the contractual obligation to cover the monthly check to the retiree. The demographics are the problem - aging folks who live longer. FDR didn't see that one coming.

Another is the more rarely heard, "Why should I pay for your kids' schooling?" The idea there is that if you choose to have children you should take the responsibility, the personal responsibility, to acquire sufficient money to pay for their education, or school them at home. Why are you turning to the government to provide what you are too lazy or too cheap to provide for your own children? Why do insist on using MY money to educate YOUR kids? The education of your children is your responsibly - there should be no government funding for any of it, and no standards imposed by any government bureaucrats at any level. It's your responsibility and as such, the government has no business regulating it, or even considering it as an issue. And public schools are a dismal failure anyway, as all can see. And over the last three years the calls for home schooling have increased, but oddly enough, not based on any economic argument but rather on a religious one - home schooling will keep the kids from those who undermine the revealed and literal truth of the Bible with evolutionary biology, and the geology that supports it, and the math and chemistry that support the geology (the deeply and sincerely religious who also understand the concept of metaphor, and don't confuse it with the literal, have less problem with publicly funded general education). The number of private Christian academies has exploded, of course.

But the religious issue aside, for now, the Reagan argument has won the public. As he tersely put it, government isn't the answer to anything, it's the problem. And thus the general idea has been that the government should tax as little as possible, provide only essential services - national defense and road repair and such - and get otherwise get out of everyone's lives. And pretty standard laissez-faire economic policy follows, where unfettered business competes to provide goods and services, driving price down and quality up, and no one much gets any support from the government, so no one plays the victim and everyone works hard and everyone achieves what they can. Reagan was fond of mocking "welfare queens" - with their Cadillac sedans, popping chocolates and watching soap operas, when they weren't popping out babies so their welfare check would get bigger.

Sure, there was the not so hidden racism in his comments, but that was beside the point, as Reagan himself was far too genial for sustained racial hatred. He just did little bursts of that. The bigger concept, now ascendant, was the rages-to-riches Horatio Alger view of the American Dream - anyone could be successful without handouts from the government, or support services that provided "special assistance." All you had to do is "take personal responsibility" (and quit whining) and get off you fat, pampered ass and make something of yourself. He had done something like that himself, and so all his supporters and followers said they had. That was the ticket - make something of yourself, and do it yourself. That's what responsible people do. No racism involved.

This of course ties into the long-standing Republican opposition to everything associated with civil rights legislation - from opposing segregation until it was inevitable to affirmative action and all the other anti-discrimination legislation. They were troubled at being called racists, and they had a point. The modern Republican Party, not the Republican Party of Lincoln, operates from a philosophic and economic place where race is simply irrelevant - in a free market an employer should be able to hire whomever he or she wants, for any reason, a landlord should be able to rent his own property to whomever he wishes, for whatever reason, and so on. The government has no business in any of that. And there are, after all, examples of blacks and Hispanics who, in the past, made something of themselves by just working hard and using their brains and talents. These were proof of the ideas - these people took personal responsibility, ignored the slights and abuses, and became successful. Those who didn't? They didn't have the right attitude, that sunny all-American positive outlook.

So that's what we believe. Work hard, be positive, and you can achieve anything.

Then there are the facts of the matter.

Our economy, under this model, directed by a president who considers himself a self-made man, in spite of his life of privilege and power and being the son of a former president, is humming along. Cutting taxes for the wealthy who hold substantial capital, and taxing corporations at the lowest rate in history, seems to have produced results.

On the last Friday of the month there was this from Reuters -
The U.S. economy grew at its fastest rate in 2-1/2 years during the first quarter on strong spending and investment, while moderate price rises reinforced hopes for a pause in U.S. interest rate rises this summer.

Gross domestic product grew at a 4.8 percent annual rate in the January-March quarter, the Commerce Department said on Friday, more than twice the fourth quarter's 1.7 percent rate.

It was the best quarterly GDP performance since a 7.2 percent spurt in the third quarter of 2003.

"This rapid growth is another sign that our economy is on the fast track," President George W. Bush told reporters. Growth is expected to moderate as the year wears on, giving the Federal Reserve room to pause in its rate-rise campaign.
That sounds great, except later in the item we get this -
Separately, the Labor Department said employment costs measuring what employers pay in wages and benefits rose at the slowest pace in seven years during the first quarter, which should temper concerns about potential wage-induced inflation.

Its Employment Cost Index rose 0.6 percent in the first quarter, down from a 0.8 percent rise in the fourth quarter and well short of the 0.9 percent gain that had been forecast.

Financial markets on Friday faced an avalanche of data - not all of it strong - including a University of Michigan survey showing the consumer sentiment index slipped to 87.4 in April from 88.9 in March. In addition, a Chicago Purchasing Managers Index fell to 57.2 in April from 60.4 in March.
In short, business is great, and wages and benefits aren't. So for those who aren't in executive management, or shareholders, hard work gets you what, exactly?

In an item printed in anticipation of Friday report, the New York Times noted this -
In the most recent CBS News poll, conducted last month, 55 percent of respondents rated the economy as good, even though 66 percent of Americans said the country was on the wrong track. In 23 years of polling by CBS, only once - in late 2005 - did a higher percentage of people say the country was on the wrong track.
That's interesting. People aren't dumb. They know the general economy is doing just fine, and it's not doing them much good.

The Times tosses in this -
Spending by upper-income families appears to be driving much of the economy's growth. The average hourly wage for rank-and-file workers - who make up roughly 80 percent of the work force - has fallen by 5 cents in the last four years, to $16.49, after inflation is taken into account.
Eighty percent of the work force has lower wages now, and they know it. Heck, it's hard not to notice, and with gas prices skyrocketing it's getting worse.

Curiously, the new White House chief-of-staff, Josh Bolten, has his new five point recovery plan to boost the standing of his boss, the president. One of the five points is "brag more" - specifically about the economy. The plan is to hit all the business shows and get the talking heads talking even more about how well the economy is doing. Brit Hume on Fox News is always bemoaning how people are so dumb saying the economy is bad in all the polls, when they just don't see how strong the economy really is, based on the data anyone can see.

Of course it's a matter of perspective, and a bit of an 80-20 thing. Perhaps this Bolten should be bragging to the eighty percent, as they are the ones being polled. But then, bragging becomes difficult.

By way of Political Affairs, an openly Marxist magazine, here, they reprint an item from the Labor Research Association - the folks who provide research and educational services for trade unions. So consider the source.

On the other hand, the item cites data from Mercer Consulting and PricewaterhouseCooper's Saratoga Institute, and those of us with long years in the business work know Mercer and Saratoga and have dealt with them. They're basic consulting and research firms with no political axe to grind. They're in business to make money by figuring out what's going on.

The item opens with this -
The new spike in oil and gasoline prices is the last nail in the coffin for workers who hoped to see any real improvement in wages this year. Inflation for 2006 is likely to remain in the 3.4 percent to 3.8 percent range, wiping out average wage increases of 3.0 percent to 3.5 percent and leaving workers with less purchasing power.

Over the past five years, as gasoline prices have steadily increased, profits for U.S. oil production and refinery companies have jumped by an average of more than 30 percent per year, according to the Fortune 500 list released in April.

Revenues per worker are highest in the oil industry, where the top pipeline company pulls in $15.6 million per employee. Exxon Mobil generates $4.1 million in revenues for every worker.

New data released by a number of different sources demonstrate that the rise in profits and the decline in real wages extend well beyond the oil industry.
And those data?

It's not pretty.

"New data on salaries for exempt employees from Mercer Consulting shows that pay for salaried workers at 350 large companies barely kept pace with inflation in 2005" - planned salary increases for salaried employees average 3.5 percent for 2006, "which means that their gains will be obliterated by higher consumer prices."

Production workers? "New data on salaries for exempt employees from Mercer Consulting shows that pay for salaried workers at 350 large companies barely kept pace with inflation in 2005. Planned salary increases for salaried employees average 3.5 percent for 2006, which means that their gains will be obliterated by higher consumer prices."

Corporate profits? "As wage increases for exempt employees fell to 3.4 percent in 2004 among the 350 companies studied by Mercer, profits at those companies rose 23 percent. In 2005, the average salary increase of 3.6 percent for exempt employees was wiped out by the 3.4 percent increase inflation, but profits rose 13 percent."

The CEO guys? " the same 350 companies saw their salary and bonus jump 14.5 percent in 2004 and 7.1 percent in 2005. This does not include their stock grants and other long-term incentives that add millions to their pay packages and represent more than 60 percent of total CEO compensation."

What the worker provides? "The new 2006 Fortune 500 list of the largest companies reveals that median revenues per employee for the Fortune 500 hit $400,000 in 2005, up from $300,000 in 2003 and 2004." And this - "Corporate profits per full-time equivalent employee jumped 190.7 percent from 2001 to 2004."

General employment? There's lot of data, but this jumps out - "Overall, the Fortune 500 increased their number of employees by just 2 percent in 2005, but revenues rose 10.2 percent and profits jumped 18.8 percent."

So for the eighty percent, who work hard and take personal responsibility for their own success, they get... well, they get not much for it, actually.

There may be something wrong with the Reagan model, the current version of the American Dream. Bragging may not help much, nor mocking the "losers" with their "bad attitude," telling them their lack of success is really their own personal fault.

People are catching on. The polls show it. They look in their wallets and figure out those Horatio Alger stories were fiction, after all. You don't base economic policy on a series of turn of the century short novels for readers in their early teens. But we have done that.

But wait. There's more.

That would be this from Reuters -
America may still think of itself as the land of opportunity, but the chances of living a rags-to-riches life are a lot lower than elsewhere in the world, according to a new study published on Wednesday.

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University.

By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said.

"In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.

He also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe.

"Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said.

"In the United States this would be 22 percent; in Denmark it would be two percent," he said.
Oh. So that part of the story wasn't true either.

Maybe the methodology was wrong, as this was sponsored by "a liberal think-tank."

No - "The research was based on a panel of over 4,000 children, whose parents' income were observed in 1968, and whose income as adults was reviewed again in 1995, 1996, 1997 and 1999. The survey did not include immigrants, who were not captured in the original data pool. Millions of immigrants work in the U.S, many illegally, earnings much higher salaries than they could get back home."

And Reuters quotes Bhashkar Mazumder, a senior economist at the Federal Reserve Bank of Cleveland, an expert in this field - "This debunks the myth of America as the land of opportunity, but it doesn't tell us what to do to fix it."

No, it doesn't. It's just data.

And there was the survey for the New York Times last year they mention - the one that found that eighty percent of those polled believed that it was possible to start out poor, work hard and become rich, compared with less than sixty percent back in 1983. The Reagan view of the American Dream not only persists, it is growing to overwhelming proportions.

The facts run the other way. There's a collision coming.

So what's the problem?

This -
Hertz examined channels transmitting income across generations and identified education as the single largest factor, explaining 30 percent of the income-correlation, in an argument to boost public access to universities.

Breaking the survey down by race spotlighted this as the next most powerful force to explain why the poor stay poor.

On average, 47 percent of poor families remain poor. But within this, 32 percent of whites stay poor while the figure for blacks is 63 percent.

It works the other way as well, with only 3 percent of blacks making it from the bottom quarter of the income ladder to the top quarter, versus 14 percent of whites.

"Part of the reason mobility is so low in America is that race still makes a difference in economic life," he said.
So race isn't irrelevant, and maybe undermining public education might be a bad idea?

That seems to be the implication. The modern Republican Party is on the other side.

The full study is here, if you're interested.

Ezra Klein here covers some interesting comparisons Reuters doesn't cover - our peculiar "American lack of fatalism, the belief in opportunity and mobility" -
When asked if people get rewarded for their effort, 61 percent of Americans agreed, versus 49 percent of Canadians, 33 percent of the British, and 23 percent of the French (weirdly, the Philippines wins this one, with 63 percent agreeing). But of all these societies (save the Philippines), America is one of the least mobile, which is to say the least dependent on hard work rather than social station. In Denmark, the relationship between your parent's income and yours is 15% percent or so. In Canada, it's 19% percent. In France, it's 41 percent. And in America, it's 47 percent. The only country more hidebound and hierarchal is ... England (50 percent), also the country most closely approximating the American economic model.

As it is, if you're born in the lowest income quintile, you have a 1 percent chance of reaching the top 5 percent. If you're born rich, you've a 22 percent shot at remaining there. For the middle class, hard work and productivity have begun to count far less. In 2003 and 2004, years when the GDP saw strong growth, the median household was no more upwardly mobile than in 1990-91, during a deep recession. Think about that for a second: Inequality has reached such a height that the average household is actually worse off during today's expansion than yesterday's recession.

There's been a serious increase in downward mobility, too, with only 13 percent of families seeing a $20,000 (in real terms) loss during the 1990-91 recession, while nearly 17 percent experienced such a drop during the 2003-04 expansion. By contrast, households in the top 10 percent have seen a reduction in downward mobility during the same period. And while it used to be the case that you could combat stagnation through hard work, even that's dying out. Households where the adults worked more than 40 hours a week were able, during 1990-91 and 1997-98, to translate their labor into upward mobility. Now, the correlation has disappeared. Americans may believe that hard work ends up offering great rewards, but the data shows that that's simply not the case. Remember that next time you hear some conservative flack - maybe one named Tony Snow? - trumpeting the economy's underreported strength. Why should folks appreciate a muscle-bound economy if it's using those biceps to pummel the working class?
That's good question, but the more interesting question is whether there will be a shift in the core support for the Republican Party, the "values voters." Yes, those in power do the work of Jesus, and they'll keep the gays and the swarthy ones away, and unlike the Democrats these guys will start a major war with any other nation on earth that looks at us funny, but then, when you've worked hard and been positive and asked no one for anything, and you're down to you last dollar no matter how hard you work, and you can't afford the gas to get to work, maybe you start humming Woodie Guthrie songs. Things can change.

Posted by Alan at 18:01 PDT | Post Comment | Permalink
Updated: Saturday, 29 April 2006 18:09 PDT home

Monday, 5 December 2005

Topic: The Economy

The Business of Business

Odd business news, Monday, December 5, 2005 -

This tidbit from the Washington Post, on what happens when you make a major corporation angry -
Hours after New Orleans officials announced Tuesday that they would deploy a city-owned, wireless Internet network in the wake of Hurricane Katrina, regional phone giant BellSouth Corp. withdrew an offer to donate one of its damaged buildings that would have housed new police headquarters, city officials said yesterday.

According to the officials, the head of BellSouth's Louisiana operations, Bill Oliver, angrily rescinded the offer of the building in a conversation with New Orleans homeland security director Terry Ebbert, who oversees the roughly 1,650-member police force.

City officials said BellSouth was upset about the plan to bring high-speed Internet access for free to homes and businesses to help stimulate resettlement and relocation to the devastated city.
Around the country, large telephone companies have aggressively lobbied against localities launching their own Internet networks, arguing that they amount to taxpayer-funded competition. Some states have laws prohibiting them.
There are a number of points of interest here.

Several cities have done what New Orleans is trying to do here, create a public utility actually, like the street maintenance folks filling potholes or a city-run electrical grid providing the juice to light the place, or some other such service, like a police force. Some things for the general good have, in the past, been seen as something everyone should chip in on and let the government do. On the national level one thinks of the interstate highway system, the armed forces, and on the state level roads and bridges and public schools, and prisons.

Now the current crew in power have long held that far more of such stuff should be privatized - as in home schooling is better than kids going to school in schoolrooms, and if they must go to schoolrooms, unregulated market-based private schools are better than synchronized and standards-qualified public schools (distribute vouchers for them and let the public school system wither and die, as Bill Bennett wanted when he was Education Secretary). So now we have private utilities, and for-profit prison systems here and there, and the armed services have contracted out a whole lot of what they used to do to private "security firms" - and the range of what is for everyone and should be a public thing and provided by the government, local, state or national, has gotten narrower and narrower.

Here there is an implicit question with a new technology. You can create a city-wide array of wireless "hot spots" that allow anyone with a computer and the right chip inside to access "the grid" and surf the web and send and receive email - and you can call it a public utility, like roads and bridges, something everyone can use - and pay for setting it up and maintaining it with public funds.

Or you can say that model is not the one to follow - let the private service providers complete, set up incompatible grids, charge what they think will attract costumers and earn them a healthy profit, and see what happens as market forces determine what is available at what price and what level of service and reliability.

Is this something the "invisible hand" of profit-driven economics will create and sustain at maximum efficiency, or is this something that should be just one of those basic things that's better shared? An analogy, perhaps not that close, is to think about whether a privately developed system of tolls roads is better than a network of public taxpayer funded highways. There's no tax burden with the former, there are no pesky tolls with the latter.

Of course, private "pay for use" systems exclude those with low income in one way or another. But that may be the idea - they chose to be poor and live off the dole and be parasites on those with the proper work ethic and positive attitude, so maybe making everything "pay for use" will be one more incentive for them to show some personal responsibility and all that.

Should a wireless grid of "hot spots" be a public utility? It's all how you look at it. It's a matter of where you draw the line between "this is free-market stuff" and "this is something basic everyone uses or could use." That line moves around a lot.

The second point of interest as to do with what the public relations folks at BellSouth were thinking. Yeah, we could give you this damaged building we don't want for your new police headquarters, seeing as how the whole city was pretty much wiped out. But you want to define a wireless network is a utility? Screw you. And screw your police force. We'll leave that building empty, and let it eventually collapse, and your police force can go pound sand for all we care.

This seems unwise. But then again, every Republican in the country is standing up and cheering.

A third point of interest is what ever happened to the massive national effort to rebuild New Orleans and the Gulf Coast? We really do have a short attention span.

On another front, where ideology meets the free-market, one sees here that "Focus on the Family," James Dobson's group out in Colorado Springs, has dumped Wells Fargo Bank. Wells Fargo will handle their funds no longer. This is to protest the bank's "ongoing efforts to advance the radical homosexual agenda." It seems that part of the bank's regular corporate charity program is to match employee contributions to the Gay and Lesbian Alliance Against Defamation. And the bank gave money to the Human Rights Campaign. And there was that gay festival held in the empty parking lot at a Wells Fargo branch in San Francisco. Enough is enough. All the accounts have been moved to the First National Bank of Omaha - a "family-friendly institution."

Wells Fargo Bank pretty much shrugged -
Chris Hammond a vice president of business development for Wells Fargo, said the bank agreed to match contributions to a media campaign fund for the Gay and Lesbian Alliance Against Defamation...

"We simply made a grant to one of many nonprofits Wells Fargo supports in the San Francisco Bay Area," Hammond said. He said he told Focus officials that the bank contributes to many charities, "including nonprofit agencies Focus on the Family believes in."

A bank statement on its Web site said, "We direct our giving to areas that we believe are important to the future of our nation's vitality and success: community development, education and human services."
Dobson may be close with Bush and the administration, but Well Fargo Bank does business in San Francisco and West Hollywood and such places. They do their charities, left and right, to come off as good folks, and narrowing their "focus" is clearly not in their business interest. Dobson can fume. Taking sides here is just bad business.

Note also here Dobson tells the Rocky Mountain News that "gay and lesbian activist groups have picked off all the big companies in the United States."

It seems "the big companies in the United States" see no profit in antagonizing blocks of prospective customers. The idea is to make money, or keep in the black somehow - and joining Dobson's crusade to eliminate the threat of mincing queens overrunning America and making us all listen to the soundtrack to "Cats" while our pure children are forced to watch SpongeBob SquarePants is a loser. The world is a competitive place - you just don't choose sides and narrow your market.

There is the exception of course - the Ford Motor Company has informed gay media outlets that they will no longer place any advertising for their Jaguar and Land Rover lines in those nasty, godless pages. This may or may not be so. You have to take the word of the American Family Association. They say they are calling off their plan to boycott Ford. Their president Donald Wildmon - "They've heard our concerns; they are acting on our concerns."

Maybe. Ford Plans To Axe Factories And Jobs In Bid To Restore Fortunes - closing eight major plants in North America (one in Canada, one in Mexico, the rest here), and some small ones, laying off thousands. One suspects they're just cutting back on their advertising budget, generally. Believe this was the result of pressure from "the truly godly" when each new Ford Focus has picture of James Dobson or the "Focus on the Family" logo on the hood.

As noted here, the American Family Association was all over the Lowe's chain of home improvement stores for advertising Christmas trees as "holiday trees." And they are calling for a boycott of Target to punish it for an effort to "ban Christmas." And there's this Ford thing. Whatever.

The American Family Association wants these businesses to drive away Jewish, Buddhist, Muslim and agonist or atheist customers. Dobson wants Wells Fargo to drive away homosexual customers and "focus on the family." (Gay folks don't have family - they just hang out together - and work on their plans to corrupt our youth and destroy the country.)

Yeah, yeah - but turning away customers with cash in hand seems really dumb. BellSouth doesn't want to lose customers with the City of New Orleans defining one of their products, wireless services, to be a public, shared utility. And no one wants to play along with Dobson and Wildmon and lose customers who are sinners, or haven't found Jesus yet.

Making a buck is getting harder all the time. That fact trumps all the rest.

Posted by Alan at 21:17 PST | Post Comment | Permalink
Updated: Monday, 5 December 2005 21:37 PST home

Friday, 8 July 2005

Topic: The Economy

Business Notes: Oh, Canada!

Note this item from July 1 -
Toyota confirmed Thursday it will build its seventh North American assembly plant in Ontario, but analysts don't expect it to be the automaker's last on this continent.

"I think they're already thinking about their eighth and ninth plants,'' said Kim Hill, assistant director of the Center for Automotive Research in Ann Arbor, Mich.

Hill said there is already speculation Toyota, whose North American manufacturing operations are coordinated out of Erlanger, might eventually build assembly plants in Arkansas and even Michigan, home of Detroit's Big Three.
Dream on. There's a problem here structurally as CBC reports. American states offered twice the subsidies, and the Toyota folks decided, no, that didn't matter.

The factory will cost $800 million to build, with the federal and provincial governments kicking in $125 million of that to help cover research, training and infrastructure costs.

Several U.S. states were reportedly prepared to offer more than double that amount of subsidy. But Fedchun said much of that extra money would have been eaten away by higher training costs than are necessary for the Woodstock project.

He said Nissan and Honda have encountered difficulties getting new plants up to full production in recent years in Mississippi and Alabama due to an untrained - and often illiterate - workforce. In Alabama, trainers had to use "pictorials" to teach some illiterate workers how to use high-tech plant equipment.

"The educational level and the skill level of the people down there is so much lower than it is in Ontario," Fedchun said.
Okay, okay, but what about northern states with, presumably, better educational systems?

Well, its seems that there is a second factor.
In addition to lower training costs, Canadian workers are also $4 to $5 cheaper to employ partly thanks to the taxpayer-funded health-care system in Canada, said federal Industry Minister David Emmerson.

"Most people don't think of our health-care system as being a competitive advantage," he said.

Tanguay said Toyota's decision on where to build its seventh North American plant was "not only about money."

"It's about being in the right place," he said, noting the company can rely on the expertise of experienced Cambridge workers to help get Woodstock up and running.
So when did the United States stop being the right place?

A long time ago.

In the late nineties I spent two years in London, Ontario, managing the systems shop at a General Motors locomotive plant there. When I arrived I faced the task of building a staff, from scratch, to manage the business and manufacturing systems there. I recruited from the local auto plants. There are a few. Toyota already produces the Corolla and Matrix at the old Cambridge plant (they start preproduction of the Lexus RX330 SUV soon). Chrysler was down the way in Windsor. Every Ford Crown Victoria - the US police car - is produced down in Saint Thomas, just south of London. Honda builds its cars in Alliston. Oshawa? That's GM building the Chevrolet Malibu, Buick Regal and Pontiac Grand Prix - and the GMC Sierra and Chevrolet Silverado pickups. Ford builds most of its engines at its Essex engine plant in Windsor.

What is going on here?

We don't want a healthcare system like Canada's, or the one in France, or the one in the UK - or any of those in Europe, or the far east, or wherever. Yes, discussed that has been discussed in these pages before, as it comes down to our holding true to the idea that that would be "socialized medicine" (oh no!) and the government should stay out of the whole thing. The marketplace will take care of it all - the invisible hand of competition lowering costs and assuring everyone gets what they need. That, and pigs will fly. The price for our steadfast purity in these matters of unregulated capitalism? That's pretty obvious. Forty-four million uninsured, hoping they don't get sick. And the Republican mantra of "keep government out of it" will keep us happy as the jobs go north, or south. Better purity than jobs.

And I left teaching for many reasons, but one of them was it paid crap. My first industry job, at entry level, paid more than twice what I earned after a decade of teaching. And I recall being a guest lecturer at the UCLA Extension seminars on "Alternative Careers for Teachers" back then, looking out at the sea of faces, thinking that the best want out and to have a relatively prosperous life, while those who can't get out - who don't have the skills or ambition - are the ones left to teach the kids. The losers have to stay. They wanted to know how I made the transition. I felt as if I was then contributing, in my own small way, to the disintegration of the educational system. But then again, I was not part of the crowd railing against higher taxes for schools, nor ranting that the teachers unions where a bunch of whining crybabies being greedy. And I'm still not part of the crowd who want to make science classes more Christian and true to the Bible, and who want this book or that banned because it makes kids learn what could make some parents uncomfortable and open some kid's eyes. I only did a little harm. The no-tax-increases and keep-our-children-pure party has done far more harm than I, in my small way, ever did.

This is what you get. But it's only one new auto assembly plant we've lost. We lost the main battle long ago.

Posted by Alan at 23:25 PDT | Post Comment | Permalink
Updated: Friday, 8 July 2005 23:34 PDT home

Sunday, 3 July 2005

Topic: The Economy

The Buzz: Picking on France One More Time

Some topics never seem to die. And how strange the French are is one of them.

In a column in late April in the pages you would find an extended discussion of Thomas Friedman's new book The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, April 2005, ISBN: 0374292884) and its implications. The world economy is being "flattened" and the nature of who works on what, and for what wages, is radically changing. Any job can be done anywhere. We all have to work vastly harder, and here in the west, for far less, if there are jobs we can do at all, given what cheap high-speed communications has done to the workplace (which seems to be everywhere and nowhere now - even Bangladesh and all that).

The book states the obvious, but Friedman is still flogging his simple thesis - he's become kind of a one-trick pony - and Friday, July 1 in the New York Times he basically railed on the French and said that if they cannot turn themselves into career-driven hard-working Americans doing seventy-hour workweeks and forgoing all vacations, at least the could try to be more like the Irish. That would be in Follow the Leapin' Leprechaun, as he seems fond of cute titles.
There is a huge debate roiling in Europe today over which economic model to follow: the Franco-German shorter-workweek-six-weeks'-vacation-never-fire-anyone-but-high-unemployment social model or the less protected but more innovative, high-employment Anglo-Saxon model preferred by Britain, Ireland and Eastern Europe. It is obvious to me that the Irish-British model is the way of the future, and the only question is when Germany and France will face reality: either they become Ireland or they become museums. That is their real choice over the next few years - it's either the leprechaun way or the Louvre.
Say what? His contention is that the German and French political systems will experience massive shocks soon as both these nations are asked to work harder and embrace either more outsourcing, or more young Muslim and Eastern European immigrants, to remain competitive. He says the "French may want to take a few tips from the Celtic Tiger." Ireland, it seems, instituted new laws that make it easier to fire people, and without having to pay any severance. He likes that. Why? Because "the easier it is to fire people, the more willing companies are to hire people."

Is that so? That's what he says explains job growth there. And heck, it is hard to fire anyone in France. And if you do, you pay severance. How... stupid?

He does note Ireland invests a lot in education and such. But he likes the "brutal" offense they have mounted against worker privileges. And he says he'll bet on the offense. That's how France can become rich, like us. And like Ireland.

And France is so damned poor. We all know that. And Freidman is writing from Europe where is now on assignment, looking around. It seems he feels sorry for the unmotivated French folk.

Of course this generated a lot of reaction - which will help Freidman sell his new book no doubt.

Matthew Yglesias here -
The key trope of Tom Friedman's columns throughout his European vacation has been that France is poor, and we need to ask why France is so poor, and draw important policy conclusions from this. But is France poor?

In one sense, clearly, yes. If you look at per capita GDP around the world, you'll see that the USA is at $41,557 per person and France is only at $29,203. So something's gone badly wrong in France, right? Well, it's not so clear. Check out table one in "Work and Leisure in the U.S. and Europe" and you'll see that in the US we do 25.13 hours of work per week per working age (i.e. 15-64 year-old) person. The French only do 17.95 hours per working age person. Do a little division, and you'll see that the French are only working 71 percent as long as we are. In return, they're getting a per capita GDP that's 70 percent of ours. In other words, about what you'd expect.
No difference? It would seem for the work done, the results are the same.

But the kicker is in these figures Yglesias trots out - weeks worked per year:

US: 46.16
France: 40.54

And sixty-seven percent of Americans are working age, and only sixty-five percent of French people are.

What does that prove?
... France has fewer workers, working shorter weeks, and taking longer vacations - that is why they make less money. Per hour of output, France is generating much more value than America is. If your buddy made 50 percent more than you because he was working 50 percent longer and had four weeks less vacation than you did, it certainly wouldn't be obvious that your buddy had a better job than you do. Similarly, while it's clear that the French have less stuff than we do, they have more leisure time, and it's not obvious that our situation is better. Indeed, it's not clear what "better" would even mean in this context.

... it doesn't seem to be the case that France's preference for leisure over stuff is an unintended consequence of high levels of taxation designed to fund high levels of social services. Instead, it's the result of labor market conditions that were ? designed to have people work less. France could, were it so inclined, instead adopt rules designed to make people work more. Then they would have American-style quantities of stuff, plus French-style levels of public provision, but they would have less time off.

Personally, I have no desire to adopt the French set of social priorities. I like my stuff, and I like working hard. That said, I see no particular reason to condemn France's decision to adopt a different set of priorities. Working less and earning less seems like a perfectly defensible thing to do.

If they choose to do otherwise, great. If they don't, also great. Live and let live.

But whatever you think about this, it's a separate issue from the question of tax-and-spending levels, and it's totally not the case that France is some kind of impoverished basketcase. It's a nation of slackers.
Yep, slackers. (Note that if you go to the Yglesias he links to the source of all his data - so he's not making stuff up.)

Over at Washington Monthly, Kevin Drum chimes in -
Matt Yglesias points out today that although French GDP per capita is considerably lower than America's, it's mostly because they have "fewer workers, working shorter weeks, and taking longer vacations." Higher unemployment is also a factor, but basically Matt is right: the French have simply chosen to work less and have more leisure than Americans do.

I wonder how many Americans would make that choice if they could? I used to hang out with a bunch of Swiss guys (who eventually bought the company I worked for), and although the Swiss have a reputation for being pretty industrious, they basically thought we were insane for taking only two weeks of vacation a year.

I pretty much agreed with them - although more in theory than in practice. Like a lot of people, I never even used up my two weeks of vacation a year, and when I left the company I got a big check for unused vacation pay. And I was far from the worst. I had people working for me that I literally had to force out the door because they had accrued 300 hours of unused vacation time and would start losing it unless they took some time off.

Still, I wonder: If you had the option of taking an 8% pay cut in return for getting six weeks of vacation per year instead of two, would you do it? I'll bet a lot of people would.
Maybe so. But it's a question of values.

And the question comes up again and again, as in did in these pages last September in The Work Ethic: Is the route to sanity to do as little as possible in your job while saving yourself for your real life outside the workplace? There we note, or at least imply, that there are people who would go insane - they would lose their grasp of who they are at the core - if they had do define themselves by something other than the work they do and their career. And there are a few Americans who often think their jobs will drive them insane, because that's is not who there are - there's more to life, and to who they are. Yes, these are the cheese-eating surrender-monkeys who walk amongst us, even now.

Digby over at Hullabaloo, amused that Richard Perle, one of the key architects of this Iraq war and late of the Defense Policy Board that advises Rumsfeld, own a home in the south of France and can often be found there, adds Everyone Should Hate France -
Tom Friedman is right. France is a real hellhole. Ask anyone who spends any time there. Like Richard Perle, neocon France-hater.

I can't understand those fools who think that France has the best definition of the good life. Who would ever think that great food, great weather, great wine, interesting political conversation, great museums, great writers - long vacations, long meals, light religion, universal health care, laid back sexual attitudes, and beautiful countryside are worth giving up shopping for? They trade money for time to read, think, rest, talk and all those other useless wastes of time.

That's unacceptable. Nobody should go there. Especially workaholic Americans. Not that there's anything wrong with workaholism. I realize it's the highest state of Randian being. Especially if you are working a couple of low-paying, low-satisfaction jobs. God wants you to work hard and buy a lot of shit at Wal-Mart for Jesus. So don't go to France. They don't have anything good to buy.
Digby seems to be one of those cheese-eating surrender-monkeys who walk amongst us.

Ah, France may not have Wal-Mart, but they do have Monoprix - but really not the same thing.

By the way, if you go to Digby or Drum or Yglesias with these links shown you can read many hundreds of comments to each of their posts - as this topic really seems to get to many Americans. There's a whole lot of resentment out there. French dudes are getting long vacations and those who post comments are working seventy hours a week or more with none. Damned French! And for some comments in these pages on Richard Perle, see this, just one of a dozen or more times he has come up.

And on it goes, as in the International Herald Tribune (the Paris-based publication owned by the New York Times) Charles McGrath, the former editor of The New York Times Book Review, on Monday, July 4th gives us Letter from America: Now it's work and work, and grow with the grind, carrying things forward.

His take?
The citizens of France are once again taking a pasting on the op-ed pages. Their failing this time is not that they are cheese-eating surrender monkeys, as they were thought to be during the invasion of Iraq, but rather that they voted to reject the new European Union constitution. According to the pundits, this was the timid, shortsighted choice of a backward-looking people afraid to face the globalized future. But another way of looking at it is that the French were simply trying to hold on to their perks - their cradle-to-grave welfare state and, above all, their cherished 35-hour workweek.

What's so bad about that? There was a time when the 35-hour workweek was the envy of the world, and especially of Americans, who used to travel to France just so they could watch the French relax. Some people even moved to France, bought farmhouses, adjusted their own internal clocks and wrote admiring, best-selling books about the leisurely and sensual French lifestyle.

But no more. The future, we are told, belongs to the modern-day Stakhanovites, who, like the famous Stalinist-era coal miner, are eager to exceed their quotas: to the people in India, say, who according to Thomas L. Friedman are eager to work a 35-hour day, not a 35-hour week. Even the Japanese, once thought to be workaholics, are mere sluggards compared with people in Hong Kong, where 70 percent of the work force now puts in more than 50 hours a week. In Japan the percentage is just 63 percent, though the Japanese have started what may become the next big global trend by putting the elderly to work.
Now there's an idea!

Of course McGrath runs the numbers too - 71 percent of Japanese men between the ages of 60 and 64 still work, compared with 57 percent of American men the same age. In France, on the other hand, by the time they reach 60, only 17 percent of Frenchmen, fewer than one in five, are still working.

What's up what that?
The rest are presumably sitting in the café, fretting over the Turks, Bulgarians and Romanians, who, if they were admitted to the European Union, would come flooding over the French border and work day and night for next to nothing.

How could the futurologists be so wrong? George Jetson, we should recall - the person many of us cartoon-watchers assumed we would someday become - worked a three-hour day, standard in the interplanetary era. Back in 1970, Alvin Toffler predicted that by 2000 we would have so much free time that we wouldn't know how to spend it.
Well, that didn't work out, and McGrath concedes economic globalization obviously has a great deal to do with the change. Yeah, the world got flat.

But you might want to read his history of work hours down through the ages. As in this -
The notion of a regular workweek was a late-18th-century invention, a product of the vastly speeded-up pace of the Industrial Revolution, which instead of liberating workers, virtually enslaved them, dooming entire families to numbing stretches in what Blake called the "dark, Satanic mills." The Mills and Factories Act, passed in England in 1833 to curb the worst labor abuses of the time, limited children 9 and older to 48 hours of work a week and teenagers to 69 hours. Adults worked even longer, and they did so in part simply because they could.
The rat-race is nothing new.

And when we get grumpy about it we can rant about the French, as usual.


For the academically minded, Brad DeLong, that economics professor at UC Berkeley finds this in Dissertation Abstracts -
Alberto Alesina, Edward Glaeser, and Bruce Sacerdote (2005), "Work and Leisure in the U.S. and Europe: Why So Different?" (Cambridge: Harvard University).

Abstract: Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European "culture," but Europeans worked more than Americans as late as the 1960s.

In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.
There you go. Someone suggested "work less, work all" and the fools adopted the suggestion, and people got free time and long vacations. We didn't go that way.


A number of commentators also point to this post from Germany - The Gloriously Relaxed European Work Ethic - by one Andrew Hammel in a blog called German Joys. Hammel seems to be an expatriate American living there, and it also seems the name of his blog is not ironic.

He responds to Kevin Drum's comment (above) - "If you had the option of taking an eight percent pay cut in return for getting six weeks of vacation per year instead of two, would you do it? I'll bet a lot of people would."

Hammel points out the problem -
As I'm sure my dear fellow-countryman Drum realizes, the vast majority of Americans don't have this choice. We educated professionals have a lot of freedom to structure our time how we wish. But how many American Wal-Mart employees could go to their boss and say: "Jeez, I'd like to spend more time with my kids. Can I take all of August off and give up the wage?" The answer is: "Sure, in some other job. I'll give you a friendly incentive to find one in two words: you're fired!"

No, my friend, you'll need to move to another country, one like Germany, to overcome your workaholism.
It seems this guy was never a real workaholic American, though he claims he once worked for four years in American without ever taking a substantial vacation. Well, as most employers here might say, that's a start.

But he moved to Europe, and fell in with habits there. And he has some advice for fellow Americans who consider moving to Europe:
Don't brag to other people about how hard you work. If you go up to someone in Europe and say "I work 10 hours a day, six days a week, 51 weeks a year. Look how much I achieve!" you'll get the same reaction you would in America if you said "I wash my hands exactly 169 times a day. Look how clean they are! Look! Look!!!"
Ah yes, there is a gap in what is understood to be of real worth in this world. Obsessive work. Obsessive cleanliness. Whatever.

Back in May of 2003 in the very first post in these pages the discussion was about a friend's concerns just before his first trip to Paris. He is a very conservative fellow, and the founder and CEO of a successful software firm out here. He's more aligned with the "work" obsession. He was afraid no one in Paris would show him what he called "the proper respect" he deserved, as an American (we saved their cowardly asses in two world wars), and as a successful businessman. As I said back then -
I've had more than a few years of lectures on how the French know absolutely nothing about business and even less about personal responsibility, on how there are really no successful French businesses except by accident, how the French don't know how to really work, how they don't take work and career and career advancement seriously. Those long lunches, four-week vacations and the thirty-five hour workweek amaze him. And there's usually a bit on how the socialized medical system over there is evil and destroys initiative and so on and so forth.
More than three years later there's an answer to that from this fellow in Germany - about how to get with the sense of what is important over there -
... enjoy your free time! Pay attention to the people you are with, and you'll notice that they do things with their free time. They spend lots of time with their friends and family, they pursue hobbies much more complex than catching up on all the episodes of Sex & the City, they visit museums, read complex books, drink a whole lot, go to parties, fairs, and circuses, and take lots of vacations. Imitate them. And then decide whether you'd really give that all up to make $5,000 more a year. If the answer is still "gimme the $5,000," move back to the U.S.
Well, my friend enjoyed himself, but came back. Everyone has his or her priorities.

He still calls the French losers and slackers. And I'm sure they would call him a fool who doesn't know how to live.

One makes one's choices.


For the last five years Pascal Riché has been Washington bureau chief of the French daily Libération. He was previously their economic and business editor in Paris and is the author of L'union monétaire de l'Europe, with Pr. Charles Wyplosz, and la Guerre de Sept ans, histoire secrète du franc fort 1989-1996 with Eric Aeschimann - and that earned the IFG Prize of the best economic book of the year.

And he has a web log - A 'heure Américaine - that explains America to the French (and yes, it is in French).

It seems he's about to go on vacation, as he explains here -
I'm leaving Washington tomorrow evening, for a five-week vacation across the Atlantic.

Did you just read "five-week vacation"?

Yes, you did.

And I'm talking about 100% real vacation. No middle-of-the-night work from my laptop. Zero contact with my employer.

In the French daily press, every journalist can enjoy at least ten weeks of vacation per year. How is that possible?
And he explains. Click on the link for that.

As for America and its workaholic nature?
Do the American people really want this situation? Do they really believe that overworking is a good way to achieve the highest "standard of living" in the world? Do they really think that GDP per capita is the best measure of well-being? I'm not sure. But it would be difficult to even get a debate over the question started in this country. The ethic of work seems too strong, too rooted in American culture to be publicly challenged. And the globalization of economy is not helping: Americans today feel that they have to work "35 hours per day" for remaining the leading country in the world.
Yeah, but what if we suddenly decided we don't want to be the leading country in the world and just want to live better?

No, that'd never happen.

Posted by Alan at 20:47 PDT | Post Comment | Permalink
Updated: Wednesday, 6 July 2005 17:56 PDT home

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