2010 - %3, March

Back to the Future?

| Mon Mar. 29, 2010 11:55 AM EDT

Flat wages and rising consumption are a bad mix. Together, they mean more debt and less savings, exactly the combination that led us off a cliff during the Bush years. Ryan Avent:

But that's all over now, right?

Well, perhaps not. Real personal consumption expenditures grew in February, by 0.3%, following on an increase of 0.2% in January. That's the fifth consecutive monthly increase, which seems like good news; certainly markets are taking it as a positive this morning. The problem is that incomes barely rose in February — by less than 0.1%. And they declined in January. And what happens to savings when spending rising and incomes are flat?

This, of course, encapsulates our current dilemma: in order to escape from the current recession we need more consumption. Government deficits help but aren't enough on their own. So we need more private consumption even though the recession is constraining wages. It's a problem. The obvious response is that rebuilding savings can wait, and that's true. But not forever. Eventually consumption needs to flatten out and wages need to rise. But when?

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The Future of Healthcare Reform

| Mon Mar. 29, 2010 11:16 AM EDT

Over at the New Yorker, John Cassidy has a long post arguing that healthcare reform is going to cost more than either Democrats or the CBO think. Most of the post is a rehash of all the fuzzy accounting arguments we've heard before, so I'm going to skip those. Another part argues that even with a fine in place, lots of individuals will ignore the mandate and choose to go without insurance anyway. I think Austin Frakt does a good job of disposing of that here.

But what about small businesses that currently insure their employees? Today they have two big incentives to offer health coverage as part of their compensation package: (1) they can offer it more cheaply than their workers could buy it on their own, and (2) they can offer it to everyone. In today's system a lot of middle-aged employees would be unable to get insurance at all if they were dumped onto the individual market. But that changes when the reform bill kicks in:

Take a medium-sized firm that employs a hundred people earning $40,000 each — a private security firm based in Atlanta, say — and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500).

In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Now, this is not quite as devastating as Cassidy thinks. For starters, he's cherry picking the absolute sweet spot for gaming the system. Go much below $40,000 and you're mostly talking about jobs that don't offer health coverage in the first place. Go much above it and the subsidies get lower very quickly. And of course unmarried employees are treated differently than married ones. If there were 50 million workers in the position Cassidy describes, that would be a problem. But it's probably a lot less than that. What's more, it's quite possible that Congress will tweak the rules as time goes by to try and maximize coverage while minimizing gaming like this. It won't be entirely successful thanks to pushback from interest groups of various kinds, but I think it's naive to think that there will no legislative response at all to the real-life rollout of the reform bill.

But....that's only part of my response to this. The other part is this: I think this is a good thing. If it hit a huge number of workers at once, it might not be. But if it gradually erodes the employer-based healthcare system in this country and replaces it with an evolving version of the reform bill passed last week — well, I'm all for that. Linking healthcare to employment has always been ridiculous, and anything that pushes in the direction of breaking that link is a positive development.

So: it won't be as bad as Cassidy thinks. And anyway, it's actually an incentive in the right direction. Count me as pleased, not alarmed.

Blunt Rules

| Mon Mar. 29, 2010 10:15 AM EDT

Everyone agrees that excessive leverage was one of the core causes of the 2008 financial crash. So how do we fix this? Stronger capital requirements for banks is the usual answer, but that supposes that regulators can be trusted to impose tough standards on an industry that will fight tooth and nail to resist them. David Leonhardt:

In a way, this issue is more about human nature than about politics....“When things are going well,” Paul A. Volcker, the former Fed chairman, says, “it’s very hard to conduct a disciplined regulation, because everyone’s against you.

....One way to deal with regulator fallibility is to implement clear, sweeping rules that limit people’s ability to persuade themselves that the next bubble is different — upfront capital requirements, for example, that banks cannot alter....“We don’t know where the next crisis is going to come from,” Geithner told me. “We won’t be able to foresee it.We’re not going to pre-empt all future bubbles. So we want to build a much bigger cushion into the system against those basic human limitations. I don’t want a system that depends on clairvoyance or bravery.” He added, “The top three things to get done are capital, capital and capital.”

Sounds good! So what are Geithner & Co. planning to do about it?

Their solution is to depend on capital requirements to prevent another financial crash. They refer to these requirements as cushioning or foam on the runway. So long as a firm has enough hard assets — and can get access to their cash value — it can survive a lot of bad investments and a lot of ineffective oversight.

....But there is reason to wonder whether the capital cushions, at least in their current form, will be enough to overcome human limitations. The administration and Congress have been deliberately vague about what the capital ratios will be. They have not given out numbers or explained a myriad of details: how the ratios will vary by firm size, for instance, or how they will deal with so-called off-balance-sheet assets. Their approach has the advantage of keeping technicalities free of Capitol Hill horse-trading, much as setting interest rates is a process left to the Fed, not Congress. Vagueness also allows American regulators more freedom to coordinate with regulators in other countries. On the other hand, by remaining out of the public eye, capital requirements become yet another issue that will ultimately depend on discretion. Wall Street firms will have a chance to persuade the Fed that maybe they do not need as much capital as people first thought. No doubt, the firms will offer some highly sophisticated mathematical models to make their case.

....What is the alternative? Canada offers another telling lesson. It relies more on blunt rules than the United States does. Canada requires any mortgage with a less than 20 percent down payment to be insured, and those mortgages are much less common there. It also sets a standard leverage ratio of no more than 20. As Julie Dickson, the chief financial regulator in Canada, told me, “We become nasty when banks get close to it.”

Blunt rules inevitably have their problems. But they also send signals that can outlast a given administration or a given moment in the business cycle. In Canada, the well-publicized conservative capital rule not only restrained Canadian banks, but it also served as an immutable reminder to regulators and kept them from falling under the sway of bubble thinking.

At the risk of being branded one of those liberal haters of American exceptionalism, sign me up for the blunt rules approach.

It's not that blunt rules are any kind of panacea. Wall Street bankers dedicate their lives to figuring out clever ways to circumvent regulations, and they'll keep doing that no matter how blunt the regulations are. What's more, Leonhardt is right: the last thing we want is Congress micromanaging the regulation of risk in the financial system.

But that's the whole point of blunt rules: they may not be perfect, but they don't require Congress to do anything more than set them in the first place. You still have to trust regulators to act reasonably, but even if they don't you at least have the backstop of statutory limits that are hard to get around. Not impossible to get around, but blunt rules at least require a little bit of noise and public attention to overcome.

The big question, of course, is that even if you support this approach, just what should those blunt rules look like? They have to apply to all sources of leverage in all kinds of big financial firms, but how do you define that? What limits should regulators labor under? What's the simplest way of making sure that leverage can't just be hidden in someplace that no one anticipated when the orginal rules were written? Etc.

I'm not sure. But there are reasonable answers to these questions, even if they aren't perfect. The first step, though, is agreeing that we need blunt rules in the first place.

Greenpeace Spoofs Offshore Drilling in New Ad

| Mon Mar. 29, 2010 10:07 AM EDT

Greenpeace's PolluterWatch brings us a new love story, this one bringing new meaning to the phrase, "Drill, baby, drill." In their latest, "Rex" (a spoof of ExxonMobil CEO Rex Tillerson) meets "Bob" (Virginia’s new Republican Gov. Bob McDonnell), and the two realize that they’re a match made in offshore heaven.

"I do have exotic tastes, if you know what I mean,” says Rex, referring to his previous lovers from the Middle East. But now he’s looking for "something closer to home." Via PolluterHarmony, he meets Bob, who’s "Full of energy, ready to drill." And Bob’s OK with an open relationship, though he helps Rex see the beauty of the idea "Think globally, drill locally."

The ads, of course, are meant to spoof McDonnell’s pledge to open up Virginia’s coast line to drilling, and Tillerson's desire to drill more domestically (an opportunity he may get via climate and energy legislation). McDonnell campaigned on the issue, and has been pressing the Department of Interior to approve drilling in the region. Earlier this month signed off on plans to develop the coast.

Here’s the latest PolluterHarmony spot:

4 Ways to Help Congo Escape the Cycle of Plunder

| Mon Mar. 29, 2010 10:00 AM EDT

Congo's troubles are legion, and there is no clear, easy-to-define way to fix them; even with every possible lucky break, it will take decades for the country to emerge from the wreckage of war and for the Congolese to start benefiting from their country's vast natural wealth. Nevertheless, there are things Americans could do to help.

1. Get pushy. Aid from the US and Western Europe keeps the Kinshasa government from going bankrupt. We ask for too little in return. The European Union, for instance, has some 55 active or retired military officers attached to the Congolese national army, to make sure—in those units they are able to monitor—that commanders don't help themselves to their soldiers' pay. But no one is even attempting the equivalent in civilian ministries dependent on aid money. Nor are any donor countries demanding that the army rid itself of the notorious thugs who are responsible for an epidemic of mass rapes—one high commander has even been indicted for war crimes by the International Criminal Court. Why such timidity?

2. Send more blue helmets. The UN force in Congo has not been without its problems, among them cases where officers have succumbed to the lure of mining riches. But I did not meet a single Congolese who would not like to expand that force, which has offered at least some protection from warlord militias and marauding Congolese army soldiers. The number of UN troops is tiny for such a vast country, and they lack everything from interpreters to intelligence units that could tell them where someone is planning the next massacre. Particularly needed, to challenge the climate of impunity for mass rape: more female peacekeepers.

3. Support the most effective NGOs. In a country where government accomplishes little, nongovernmental organizations do indispensable work. Look, especially, for those that partner with Congolese groups. Women for Women International, V-Day, Human Rights Watch, Doctors Without Borders, and numerous faith-based agencies, for example, have helped survivors of rape and have lobbied to highlight mass rape as a war crime. The HEAL Africa hospital in Goma has a legal clinic sponsored by the American Bar Association to help people brutalized by the army; in its first year and a half it sent 325 cases to court and won 20 convictions.

4. No more blank checks for Rwanda and Uganda. Eager for stable allies in this part of Africa, both the Clinton and George W. Bush administrations enthusiastically embraced these two regimes and showered them with aid. The Rwandan government has been especially skillful in playing on American guilt over failing to intervene during the 1994 genocide. Yet its PR-savvy strongman, President Paul Kagame, has been more responsible than anyone for orchestrating Congo's war. Rwanda's claim that its troops were pursuing genocidaires was partly true at the beginning, but is by now mostly a cover story. A succession of UN reports (which prompted Sweden and the Netherlands to cut off aid to Rwanda) have documented how both regimes have used troops, weapons, and deals with warlords and unscrupulous multinationals to extract hundreds of millions of dollars' worth of Congo minerals—all of it with seldom a complaint from Washington.

The Congo, one of the world’s richest countries, is also one of its poorest. To find out why, read Adam Hochschild’s special report here.

Click here to see a photo essay of Congo's Midas curse.

Who Eats Geoengineering Risk? (Asilomar Dispatch 2)

| Mon Mar. 29, 2010 8:00 AM EDT

During a panel discussion at last week's Asilomar International Conference on Climate Intervention Technologies, Mashahiro Sugiyama, a researcher for Japan's Central Research Institute of Electric Power Industry, stepped to the microphone to point out the obvious: Nearly everyone in the room was from the United States and the United Kingdom. There were no researchers from China, Russia, or Africa at the conference—and just one from India.

Afterward, Sugiyama stressed to me that while most climate-intervention research is being done in America and the UK, the Asilomar meeting was about more than science. The goal, he said, was to develop ground rules to help scientists navigate the legal, ethical, and political implications of proposed strategies to counter global warming—and to work with governments and global coalitions to regulate them appropriately.

According to David Keith, a researcher at the University of Calgary who has studied climate intervention for 20 years, long-term field tests are the only way to truly predict how spraying sulfur aerosols into the atmosphere—one proposed climate intervention—will affect global temperature, weather, and other factors. The tests themselves could lead to drought and dangerous weather patterns; entire communities could suffer, and people might well die. "You need input from other countries, and I do not see many here," Sugiyama said.

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How Our Cell Phones Kill Gorillas

| Mon Mar. 29, 2010 7:10 AM EDT

Last week, the United Nations Environmental Programme (UNEP) announced that gorillas in the Congo may be extinct by the mid-2020s, a drastic change from its 2002 projection which had 10 percent of the original range surviving in 2030. The culprits behind the demise of one of the world's brightest primates: poaching, logging, mining, the Ebola virus, and...cell phones. Adam Hochschild's piece in the March/April issue of Mother Jones, describes how the Congo's vast natural resources are continuously pillaged to feed foreign interests to the detriment of locals, their environment, and now gorillas. CNN reports:

Militias have seized large chunks of gorilla land and logged and mined it. They have done so because the illegal trade in timber and in metals such as gold and coltan -- used in cell phones -- generates between $14 million and $50 million a year for them.

Said Achim Steiner, UN Under-Secretary General and Executive Director of the UNEP:

This is a tragedy for the great apes and one also for countless other species being impacted by this intensifying and all too often illegal trade. Ultimately it is also a tragedy for the people living in the communities and countries concerned. These natural assets are their assets: ones underpinning lives and livelihoods for millions of people. In short it is environmental crime and theft by the few and the powerful at the expense of the poor and the vulnerable.

Read the full report, "The Last Stand of the Gorilla - Environmental Crime and Conflict in the Congo Basin."  

Follow Titania Kumeh of Twitter.

The Blood Diamonds Myth

| Mon Mar. 29, 2010 7:04 AM EDT

In the 1960s, many Americans boycotted California table grapes to help farmworkers unionize; in the '70s and '80s, we boycotted South Africa to help the anti-apartheid movement. In the late 1990s there was the push to ban "conflict diamonds," which led to the 2002 agreement, now signed by some 75 countries, to boycott diamonds produced by armed rebel groups in Africa and elsewhere. Shouldn't we help war-torn Congo by boycotting "conflict minerals"?

Unfortunately, it's not clear that a boycott would do much more than put tens of thousands of miserably paid miners out of work. Take the rather toothless conflict diamonds accord (which came about only because the international diamond cartel saw "blood diamonds" undercutting its inflated prices): It already applies to Congo, but makes no practical difference since the country's diamonds, like the overwhelming majority of its other exports, don't come from areas currently at war. And even when there is a direct connection between war and mining (as with the minerals sold by the Forces Démocratiques de Libération du Rwanda, the genocidaires who have taken refuge in Congo), those exports are vexingly difficult to trace. You can quickly tell where an imported automobile was manufactured, but even the best laboratory tests cannot easily prove where an ounce of gold comes from. Congo's lengthy borders are impossible to police, and certificates of origin are easily forged.

The real problem is not conflict minerals, but the fact that Congo's long-suffering people reap only a tiny share of their country's vast wealth. Yet an alternate example is only a few hundred miles away from Congo's southern border: Diamond-rich Botswana has used its mines, which are partially owned by the state, to fund infrastructure, education, and health care, as well as set aside a rainy-day fund of nearly $7 billion. A recent joint venture between the government and the diamond giant De Beers is even bringing in some of the cutting and polishing work that used to be done in London, generating thousands of jobs. But Botswana has something essential Congo does not: a government known for being both functional and honest.

The Congo, one of the world’s richest countries, is also one of its poorest. To find out why, read Adam Hochschild’s special report here.

Click here to see a photo essay of Congo's Midas curse. 

Music Monday: My Goldfrapp Top 10

| Mon Mar. 29, 2010 7:00 AM EDT

Goldfrapp
Head First
Mute

Head First, the fifth full album from Goldfrapp, came out last week, and boy, is it lovely! Who knew late-'70s/early '80s synth-pop could be so perfectly compact, so life-affirming and seemingly effortless? Anyone who’s ever roller-skated to the Xanadu soundtrack or listened to the full ABBA catalog too many times, that’s probably who. And yet that extremely gay sentence only begins to overanalyze this marvelous new musical emission from forty-something English songstress Allison Goldfrapp and composer Will Gregory. Here’s a list of 10 flowery observations compiled over nearly a dozen listens in varying states of attentiveness: 

1. "Rocket," the first track and first single: So rebelliously joyous in the face of hard-earned world-weariness, it embodies the creamy illusionism of pop, the compulsive, addictive structure that gives three-minute musical confections this aura: melodic, tightly structured, self-contained solutions to reality that are at once outrageously far-fetched, naively enthusiastic, sincere, and disposable. Things not going so well? Send the bastard away on a rocket! 

Songs for the Planet

| Mon Mar. 29, 2010 6:50 AM EDT

Eight years ago, two business moguls had an inspiration: Why not convince hip companies to donate a fixed portion of their sales to environmental causes? That notion evolved into 1% for the Planet, a network of firms that (as the name suggests) do just that. Early this year, the one-percenters expanded on that idea, releasing a CD of exclusive tracks that directly benefits environmental groups. We hooked up with 1% marketing VP Melody Grote to chat about the project, which involves the likes of Brandi Carlile, Jack Johnson, and Jackson Browne.

Mother Jones: Tell us a bit about 1% for the Planet.

Melody Grote: It's an environmental nonprofit founded in 2002 by Yvon Chouinard, who founded Patagonia, and his buddy Craig Matthews, owner of Blue Ribbon Flies. They were out fishing one day and they said, "every time we do something good for the planet, it's good business. And companies have a real role to play here—more of them should."

They started within Patagonia with a simple model that all companies who are members give 1% of top-line sales to environmental nonprofits of their choice. It grew for a few years and gained momentum, and they said, "You know what? This should really live on its own. It's got enormous potential." Today, we have over 1,200 member companies in 38 countries. And the giving that's been enabled by this company is about $50 million to date. Ironically, it makes us one of the biggest funders of environmental work around. Which tells us how much needs to be done.

MJ: How do companies get involved?

MG: Oftentimes they find us. We have had this wonderful trajectory over the last three years, with more than one new member company a day joining. It's the power of the network. People like Yvon, and member companies like Patagonia, New Belgium Brewing Company, and Clif Bar. These companies are really role models. So companies hear about them and want to be sustainably minded and come to 1% because it's such a clear, credible commitment.

MJ: Why the CD?