An Uphill Battle

It looks like reforming the French labor laws is going to be difficult:

...Unlike the rioting youths in the banlieues, the objective of the students and public-sector trade unions is to prevent change, and to keep France the way it is. Indeed, according to one astonishing poll, three-quarters of young French people today would like to become civil servants, and mostly because that would mean “a job for life”. Buried inside this chilling lack of ambition are one delusion and one crippling myth.

The delusion is that preserving France as it is, in some sort of formaldehyde solution, means preserving jobs for life. Students, as well as unqualified suburban youngsters, do not today face a choice between the new, less protected work contract and a lifelong perch in the bureaucracy. They, by and large, face a choice between already unprotected short-term work and no work at all. And the reason for this, which is also the reason for France's intractable mass unemployment of nearly 10%, is simple: those permanent life-time jobs are so protected, and hence so difficult to get rid of, that many employers are not creating them any more.

This delusion is accompanied by an equally pernicious myth: that France has more to fear from globalisation, widely held responsible for imposing the sort of insecurity enshrined in the new job contract, than it does to gain. It is true that the forces of global capitalism are not always benign, but nobody has yet found a better way of creating and spreading prosperity. In another startling poll, however, whereas 71% of Americans, 66% of the British and 65% of Germans agreed that the free market was the best system available, the number in France was just 36%. The French seem to be uniquely hostile to the capitalist system that has made them the world's fifth richest country and generated so many first-rate French companies. This hostility appears to go deeper than resistance to painful reform, which is common to Italy and Germany too; or than a desire for a strong welfare state, which Scandinavian countries share; or even than a fondness for protectionism, which America periodically betrays.

Saudi Arabia Exposed

I love this book. The British author, an Arabic speaker,worked as a journalist for a few years after 9/11/2001. What I like about the book is that it is written in a casual and concise style, within a few pages I was hooked.

Saudi Arabia sits on top of the largest oil reserves in the world, it is a close "ally" of the U.S., but not many Westerners know much about the House of Saud. I learned a lot reading this book, the author is a great guide, I quickly included it on my list of favorite books on the Middle East.

Prime Minister Olmert

What an interesting family: his wife and kids are leftist/progressive Jews. They agree to disagree on political matters, and in most elections, his wife and kids have voted for other parties. I can't imagine the leaders of Hamas being as tolerant, but then again, I'm not a Middle East expert.

For all the mistakes Israel has made (and continues to make) with regards to the Palestinian situation, there is reason to hope that this vibrant democracy will eventually figure out that a two state solution is in its best interest. I am hopeful that a country with the only world-class Universities and Science/Technology companies in the region, will come to a peaceful settlement with the Palestinians.

Menzie Chinn and the Trade Deficits

Excellent Q & A on the U.S. Deficits.

Economists and Immigration

James Hamilton and Andrew Samwick weigh in on the Immigration debate:

Although I understand the controversies about the economic costs and benefits about immigration, I am personally persuaded that the recent magnitude of the immigration into the U.S. has had some undesirable consequences, such as depressing the wages of lower-skilled native-born Americans and raising the costs of social services. But even if you are convinced of that, it's not clear where you tackle the problem.

It is an extremely complex issue: clearly the U.S. does not have the resources to absorb the number of people who want to move here, so limits will have to be placed. On the other hand, if you look at individual cases, you will get heartbroken. We need to remember that people who go through the proper steps should always be given priority: I know people in Asia who apply for permanent residency, and wait for years to get approved. From a competitive standpoint, students who get advanced degrees in scientific, technical, or quantitative disciplines should be given permanent residency as soon as they graduate.

France in a Bind

Not a good time to be a politician or businessman in France right now. In order to compete globally, France needs to have more flexible labor laws. But French society views the public sector quite differently than the U.S., or even Canada. The best and brightest in France (the equivalent of the Ivy League grads) aspire for goverment positions. The average French citizen wants to maintain current levels of goverment spending and social welfare.

The problem is that most jobs reside in the private sector. Companies want more flexible labor laws, while politicians realize that some reforms are necessary, the public is not willing to accept that they live in a globalized economy. The center right goverment has blocked several proposed takeovers of French companies -- most of the takeovers being initiated by other EU companies. The French policy seems to be: "We want a strong and united Europe, but only if our companies, our language, and our culture prevails." As I pointed out earlier, monetary union does NOT make sense in light of the economic nationalism that seems to be getting stronger.

Vinod Khosla and Renewable Energy

The Economist has a short article on Vinod Khosla's decision to focus much of his time and resources to funding renewable energy start-ups. Vinod has been a partner at Kleiner Perkins (one of top, if not the top Silicon Valley VC firm) for many years and has funded many incredible technology companies. The Economist points out that nurturing renewable energy company start-ups is one thing, but as these technologies start gaining traction in the marketplace, big oil will put up a fight:

So will his grand plan really work? Mr Khosla is convinced that “this fuel is greener, cheaper, more secure than gasoline—and this shift won't cost the consumer, automakers or the government anything.” There are undoubted attractions to ethanol. But making the switch will surely not be as easy or cheap as he suggests. Retail distribution is one obvious problem: fewer than a thousand petrol stations in America sell the most desirable blend of ethanol fuel today. Expanding infrastructure will cost money and take time, and the oil industry is not exactly enthusiastic. And cellulosic technology, which seems so promising today, may take much longer than expected to achieve commercial scale, or might fail altogether.

What is more, the OPEC cartel is suspected by some of engineering occasional price collapses to bankrupt investment in alternative energy. Mr Khosla concedes that after he made his ethanol pitch at this year's Davos meeting, a senior Saudi oil official sweetly reminded him that it costs less than a dollar to lift a barrel of Saudi oil out of the ground, adding: “If biofuels start to take off we will drop the price of oil.”

At some point, energy consumption will be evaluated using the Triple Bottom Line. While price is important, I believe that consumers will start making decisions with climate change and sustainability in mind. The U.S. and Western Europe will also start citing the need for national security and energy independence more frequently. Marketers will have no problem promoting these emerging technologies: just watch.

China's Rebalancing Act

Stephen Roach has access to some of China's top economic policymakers. They are aware that the phenomenal export-driven growth, is ultimately unsustainable. I loved his account of a conversation he had, in China, with Senator Schumer. (In case you haven't heard, Senators Schumer, Graham, and Coburn are in China hoping to pressure the Chinese to revalue their currency.) The one thing that never changes is that "all politics is local" -- so expect changes in economic policy in both China and the U.S. to be SLOW.

Hat tip to Brad Setser:

... Instead, China will focus increasingly on boosting its support from domestic demand -- especially private consumption. This was music to my ears. If China can successfully execute this important shift in the mix of its GDP, it will go a long way down the road of its own rebalancing. The Chinese leadership is, in effect, conceding a very critical point on the sustainability of its all-powerful growth machine -- that it has pushed the export- and investment-led growth paradigm to the limit. It fully recognizes the potentially destabilizing consequences of staying with this formula for too long -- trade frictions and protectionism from open-ended export growth and excess capacity and deflation from open-ended investment spending. Without the solid underpinnings of internal consumer demand, China’s supply-side growth model poses mounting sustainability risks of its own. A major rebalancing is the only answer -- and one that China’s senior leadership now endorses wholeheartedly.

... At the China Development Forum, I challenged Chairman Ma on the execution of this strategy, asking him point blank how China expects to spark a dynamic consumer culture in the face of a daunting sense of job and income insecurity that appear to be unavoidable outgrowths of ongoing reforms. My question: “Don’t the massive headcount reductions brought on by the continuing dismantling of a state-owned system make it very difficult for China to count on a pro-consumption growth dynamic?” Chairman Ma’s response was both candid and very wise. He stressed four keys to success for China’s shift to an increasingly consumer-led growth dynamic: (1) Income support -- always the main driver of consumption -- will be directed at the lower end of the pay distribution, especially in rural and agricultural China. (2) The safety net will be emphasized as the means to cope with consumer insecurity and the related excesses of precautionary saving; this implies heightened emphasis on social security, educational, and healthcare reforms. (3) Emphasis will be placed on improving the retail distribution network; this is a physical infrastructure issue (i.e., roads and rail) but also a commitment to expanding China’s retail and wholesale trade establishments -- part of a broader set of services-based growth initiatives. (4) Improving the quality of the Chinese consumption experience is also a major focus; this includes initiatives on land-price reform, enforcement of hazardous product regulations, and tilting export growth away from the low-labor-cost production model.

Chairman Ma’s response hit the nail on the head, in my view. It was a great exposition of the macro and micro considerations of spurring the shift to a consumer-led growth dynamic. He left us with one critical point: The emergence of a Chinese consumer culture will take time -- and possibly a good deal of it. This is a key point on the coming rebalancing of the Chinese economy. For 50 years, the state provided the people everything from cradle to grave -- from jobs and income to shelter, medical care, education, and retirement stipends. As the state-owned enterprise system gets dismantled, so, too, does that umbrella of all-inclusive support. This is as profound a shock as any nation has to face -- unleashing a powerful surge of precautionary saving to compensate for the Chinese life-style that has been turned inside out. It may well take a new generation of Chinese consumers to overcome that shock.

Charlie Rose Show: Iraq Invasion Anniversary

A great discussion on the state of affairs in Iraq, with proponents of the invasion, as well as skeptics. George Packer, the author of my current favorite book on Iraq, is skeptical that things will change soon. Kanan Makiya, a leading intellectual in the Iraqi exile movement, comes across as chastened, humbled, but still hopeful. Knowing what we know now, Kanan does not dispute that while Iraqis may have benefited from the removal of Saddam, it is not clear if the U.S. gained much from the invasion. Fouad Ajami, a favorite of conservatives, remains convinced that the invasion was necessary ("Where else in the Arab world was the U.S. suppose to act?"). Fouad, how about finishing the job in Afghanistan? Besides, why did we have to act militarily in the Arab world?

Shows like these are what make PBS and NPR great. The Right and Left in this country like to stay within their respective echo chambers. Yes folks, the Left has media outlets just as one-sided as the Right, granted there are far fewer of them. Personally, I believe we are best served when both sides present their arguments respectfully. There are exceptions of course. Think Swift Boat Veterans and their smear campaign against John Kerry. Those guys had no evidence and did not deserve equal airtime.

The Factor

One of the most "important journalists" to emerge in the last few years, Stephen Colbert has his share of role models. His biggest "hero" is profiled in an excellent New Yorker article.

Green Utility Companies

The Department of Energy annoints the utility companies that sold the most renewable energy to business and residential customers. Austin,TX , Portland,OR , and Palo Alto,CA are high on the list. My home town utility (PG&E) is nowhere on the list! Palo, Alto had the highest percentage of customers participating in their renewable energy program.

Fair Trade Coffee Benefits Retailers More Than Farmers?

Does Fair Trade certification benefit farmers? Fair Trade coffee is significantly more expensive, but how much of the added cost trickles down to the farmers/producers? Apparently retailers are taking advantage of consumers' lack of price sensitivity. Consumers are most likely assuming that the higher price benefits farmers. It does, up to a point. From the NYTimes:

Fair Trade labels don't list the amount paid to farmers; that sum requires research. The amount can vary depending on the commodity. An analysis using information from TransFair shows that cocoa farmers get 3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled "organic fair trade" sold at Target. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The coffee farmer who produced the one-pound bag of coffee purchased by Mr. Terman received $1.26, higher than the commodity rate of $1.10. But whether Mr. Terman paid $10 or $6 for that fair trade coffee, the farmer gets the same $1.26.

"There is no reason why fair trade should cost astronomically more than traditional products," Nicole Chettero, a spokeswoman for TransFair USA, said. "We truly believe that the market will work itself out as Fair Trade certified products move from being a niche market to a mainstream option. As the demand and volume of Fair Trade certified products increase, retailers will naturally start to drop prices to remain competitive."

In Europe, where fair trade is more pervasive, some critics complain that retailers have taken advantage of consumers who are not price-sensitive. At one point, Britain's largest chain of coffee shops, Costa Coffee, added 18 cents to the price of a cup of cappuccino brewed from fair trade coffee. Yet the coffee cost the chain just one or two cents extra, according to research by Tim Harford, author of the book "The Undercover Economist." The chain has since reduced its price for the drink.

"Fair trade products make a promise that the producers will get a good deal," Mr. Harford said. "They do not promise that the consumer will get a good deal. That's down to you as a savvy shopper. You can find out how much farmers are getting and reward retailers who don't try to charge you something on top."

... In some cases, the individual farmers may receive less than fair trade rules require because the money goes to cooperatives, which have their own directors who decide how much to pass on to farmers.

"We did a breakdown and saw that sometimes, what they're paying farmers is only 70 cents to 80 cents a pound" for coffee instead of the entire fair trade price of $1.26, said Christy Thorns, a buyer at Allegro Coffee, a roaster in Thornton, Colo., that is owned by Whole Foods. "There are so many layers involved."

Transfair, she said, doesn't "clearly communicate that to consumers."

... SHOPPING activism in the United States has helped funnel $67 million to fair trade farmers and farm workers throughout Latin America, Africa and Asia since 1999, according to TransFair. Without fair trade, supporters say, some farmers have no access to market information and can often be duped into selling to middlemen at below-market prices or, if prices fall, can be forced to quit farming.

Ms. Chettero acknowledges the fair trade system is not perfect but said it is a step toward farmers improving their lives. If not for consumers and the fair trade system, she said, "Who else is going to do it?"

The Hand that Bites You

In light of the Dubai ports controversy, I have been thinking about how much longer the global imbalance can continue. The US Current Account Deficit means that similar deals are going to happen, unless the US reverses this huge deficit. On the other hand, the Asian export powers and the oil rich states can't exactly dump their dollars without consequences. Brad Setser has a great post on exactly that subject:

The US tells China (oops, CNOOC) that it cannot buy Unocal, even though Unocal's energy assets were primarily in Asia and Chinese firms have far fewer overseas assets than American firms. China responds by ... purchasing just as much US debt as before.

In January, China increased its Treasury holdings by $5.9 billion or so, its holdings of Agencies by $3.4b, and its holdings US corporate bonds by $2.7b - for a total of nearly $12b. Feeding the hand that bites you.

The US criticizes China's exchange rate regime. China gets annoyed that another country wants to tell it what to do with its exchange rate regime. But private investors start to think that China just might let the RMB move a bit faster, so money starts to flow into China. China has to intervene more heavily in the market, buys more dollars, and ultimately, buys more Treasury bonds. Feeding the hand that bites you.

... the big money in the Gulf isn't terribly happy that the US isn't willing to let Dubai Ports World operate US ports.

The Emirates is talking of shifting $2 b in reserves into euros.

They don't want to keep on feeding the hand that just bit them.

But I suspect, like the Chinese, they will find it is hard not to.

Suppose oil sheiks start shifting into euros, big time. Forget $2b of the Emirates $23b in reserves. $2b is chump change; it is two days worth of the oil states combined oil windfall. Saudi Arabia and Russia each add over $5b to their reserves (including all SAMA assets) each month. A real shift would imply that the oil states, who are now buying maybe $10b a month in euros, would need to start buying $20b a month in euros. Remember that the oil states now have roughly $35b a month, maybe more, that they have to invest somewhere ...

What happens if the oil states start buying euros? The euro probably rises against the dollar. A $120b swing is big, even in today's global economy. The Gulf states all peg to the dollar. So their currencies fall. And their citizens external purchasing power falls. The value of their existing stock of dollars falls (tough luck; what do you expect financing a country with a $950 b current account deficit?). And since their currencies fall, they will import less. Gucci ain't cheap, even with the euro/ $ at 1.20. And save more. And have even more funds to invest.

How can these countries stop financing the hand that bites them?

Spend more and save less, so they have fewer funds to invest abroad.

But for now, they don't want to change their currency regimes. China clings tenaciously to its (outdated) plan for a super-slow transition to more flexibility. The Gulf states don't even want to talk about the (even more outdated) dollar pegs.

And so they are all, in effect, opting to keep on feeding that hand that bites them.

... The US right now suffers from a bit of cognitive dissonance.

... The US doesn't think of itself as debtor in part because the United States' creditors have been so kind. Financing the US in dollars at low rates. Taking debt and not asking for any equity. And so on.

And since the United States creditors have been so kind, the U.S. hasn't felt pressure to be kind to them.

The only real question is whether those countries now financing the US are willing to change the policies that led them to buy $500b in debt from the US in 2005. Otherwise, they had better get used to feeding the hand that bites them.

The SF Bay Area as a Center for Food Activists

The SF Chronicle has an article on Marion Nestle, an academic who specializes in food policy, nutrition and journalism:

Nestle's first book, "Food Politics" (The University of California Press, 2002, $39.95 hardcover, $19.95 paper), put her on the map by documenting precisely how the food industry influences what we eat and government food policy.

After it came out, she was invited by the World Health Organization to a meeting with food company executives in Geneva.

"They said, 'You don't have to do anything except sit there. Your presence in the room will tell them we mean business,' " she says.

She is visiting UC Berkeley, and Berkeley is hoping that she decides to stay permanently. Nestle is part of the growing number of food activists who have collectively made the SF Bay Area a growing center of food activism:

She's part of a growing East Bay food brain trust, attracted to this area as a center of the small but growing movement toward better, healthier eating.

"The Botany of Desire" author Michael Pollan arrived from the East Coast to teach in Cal's journalism department three years ago. And Renato Sardo, longtime head of the international Slow Food movement, moved from Italy to Oakland last fall.

... The Berkeley position intrigued her because she's teaching in all three fields that are key to turning around what Pollan calls "our national eating disorder" -- public health, public policy and journalism. She and Pollan are co-leading a lecture series with the likes of Alice Waters and Palo Alto food scientist Harold McGee.

Here are the accompanying articles on the head of Slow Food International Renato Sardo, and the investigative journalist Michael Pollan.

Does Trade Promote Peace?

A new working paper weighs in on this longstanding debate. The results are somewhat surprising, I can't wait to see the details. Interestingly, according to the NYTimes, EU countries are blocking EU companies from taking over other EU firms. Economic Nationalism is simply not consistent with Monetary Union.

Regional trading blocs are likely to promote peace within a region, but multilateral trade organizations, such as the WTO, may actually increase conflicts. Since the 1960s, the growth of bilateral trade reduced the probability of war by 9%, but at the same time the growth of multilateral trade increased the probability of a local conflict by 25%, so the overall probability of war increased by 16%. The growth of trade also contributed to change the nature of war, from “world” wars to more localized conflicts. This depends on the fact that the cost of war is large for two countries with intense bilateral trade, while it is significantly lower for two countries with many trading partners.

The relationship between trade and war has long been debated. Empirical studies have had fairly naïve approaches in evaluating it. This paper rigorously examines the trade-war link within a structural model accounting for the effects of many factors. The results of this approach challenge the received wisdom that trade is “always good for peace”, and provide new insightful implications.

Abstract: This paper analyses theoretically and empirically the relationship between trade and war. We show that the intuition that trade promotes peace is only partially true even in a model where trade is beneficial to all, war reduces trade and leaders take into account the costs of war. When war can occur because of the presence of asymmetric information, the probability of escalation is indeed lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country. Using a theoretically-based econometric model, we test our predictions on a large dataset of military conflicts in the period 1948-2001. We find strong evidence for the contrasting effects of bilateral and multilateral trade. Our empirical results also confirm our theoretical prediction that multilateral trade openness increases more the probability of war between proximate countries. This may explain why military conflicts have become more localized and less global over time.

UC Berkeley Researchers Working on Renewable Energy

The SF Chronicle has an article on groups of Berkeley researchers hoping to make significant breakthroughs on a variety of renewable energy initiatives. While I think its great that these folks are motivated by a desire to halt global warming, the economic potential is enormous. The demand for renewables continues to increase, anyone who comes up with low-cost scalable solutions, will reap billions in patents and technology licenses.

Inspired by advances in molecular science and materials technology taking place at Cal and the Lawrence Berkeley National Laboratory, the researchers feel their work could make a difference even in the limited time that may remain before climate change makes real trouble.

"In 50 years, if everything goes on business as usual, CO2 levels will be twice as high," said Paul Alivisatos, who is Gur's mentor and leads the lab's nanotechnology group. "That is a problem we have in society right now. I think the important issue is for people to see this. It's not really a political issue. It's a technological issue that has a real solution if we decided to pursue it."

For Alivisatos, it's not a question of the world running out of oil; he sees plenty of carbon fuels left to exploit.

"We'll run out atmosphere," he said.

Gur is building on Alivisatos' work, first published in 2002. Alivisatos pioneered chemical means to arrange inorganic crystals a thousandth of a human hair in width into structures that have useful properties, such as the ability to conduct electricity.

The test-tube chemistry is surprising simple, which suggests that inexpensive, large-scale manufacturing would be feasible if the crystals' zip began to approach that of silicon.

Andrew Isaacs, a professor at UC Berkeley's Haas School of Business, said the solar work is Nobel Prize-level research and called it part of a trend in which the best minds at Berkeley are combining to make an impact on society's most pressing problems.

"More and more we've discovered that some of these solutions may be technological in nature," said Isaacs, who heads a technology management program that links Cal's engineering and business schools. "What we're combining, which I think is new, is a technological focus on some of these problems.

"That we will find a breakthrough that makes solar cells more efficient is certain. The question is how soon."

Parallel to the work of Gur and others under Alivisatos is the Helios Project, a solar initiative created by Lawrence Berkeley Lab Director Steven Chu. The project's most futuristic vision: vast fields of bioengineered plants designed to break down cellulose to make ethanol and other carbon-neutral fuels, thus eliminating America's need for foreign oil and creating a new market for sustainable agriculture.

"If we could reduce the energy cost of breaking down cellulose by a factor of 5 or 10, the resulting fuel could be competitive," said Elaine Chandler, who leads strategic planning and program development for the lab's materials science division.

The fuel-making plants would have to be more efficient and sturdier than plants that grow by themselves, but researchers say new-found tools to work with natural and inorganic material at the molecular level make this an idea whose time has come. Chandler said the technology is likely to bear results inside of 10 years.

Gur faces a similar challenge with his solar project, as he tests ways to make a super-light material as efficient as today's silicon-based solar panels. So far, the new material is less than a third as efficient as the old. The efficiency must triple -- to a 10 percent solar-to-electricity conversion rate -- before the new technology could be marketed.

"We're doing a lot of different things to try to get there," Gur said. "We're trying to improve on the work we've done but we're always looking at new materials and architectures to see if we can get a big jump in efficiency.

"If we're lucky, we'll make an impact soon. If we're not, hopefully we can still develop this so at the end of the road there's something to move to that's a cheaper alternative. It's going to happen one way or the other.''

Women's Equity in Access to Care and Treatment

We attended a fundraiser for WE-ACTx, a SF-based non-profit and NGO, focused on helping care for AIDS patients in Rwanda. The Rwanda genocide in the mid 1990's has been well-documented, less well-known is the fact that the systematic use of rape and sexual violence, has left a large segment of the surviving population infected with HIV/AIDs. Stories of men infected with HIV being instructed to rape as many women and girls as they can, combined with the systematic use of rape resulted in an explosion of HIV/AIDS cases, and has left the country ill-equiped to cope with caring and counseling the surviving victims. If you want to help the women of Rwanda, WE-ACTx is a great organization to donate to:

WE-ACTx is an international community-based initiative that was launched in fall 2003 by frontline AIDS physicians, activists and researchers with extensive experience in caring and advocating for HIV-positive women. Our primary goal is to increase women's and children's access to HIV testing, care, treatment, support, education and training in resource-limited settings at the grassroots level. We are committed to helping survivors of genocidal rape and sexual violence. WE-ACTx began working in Rwanda in early 2004 to provide HIV care to genocide rape survivors, in active partnership with the Rwandan government and five local NGO partners. We focus on empowering HIV-postive women and girls to take charge of their lives and become leaders in the fight against AIDS.

They are also helping organize a group of performance and visual artists for a fund-raising show (March 23-26), designed to educate and promote awareness of the AIDS crisis in Rwanda. Check here for details. At the fundraiser, we saw inspiring photographs of survivors and heard about the Oral History project being spearheaded by WE-ACTx: the photographs and Oral History project will be part of the exhibit. Hope to see you at the show!

Locating the Closest ATM/Cash Machine

If you own a home in the SFBay area, you are LIVING in it! The mentality seems to be: "Why bother saving, when I am sure I can sell my house for a lot more than I paid for it! In the meantime, I might as well enjoy the equity I have NOW." It seems contradictory doesn't it. If the house represents your savings for the future as you insist, why are you blowing your savings now? To use it to consolidate credit card debt seems reasonable, but betting that home prices will continue to rise above historical rates, is just that, a gamble. From the SF Chronicle:

Traditionally, money "taken out of one's house" has been used to finance home-renovation projects. But according to an informal survey, more and more people are approaching their homes as their own private bank, with the equity line or refinancing serving myriad purposes. Some people use it to ride out difficult times during health crises and periods of unemployment. Others take advantage of its tax deductions (you can write off the interest), using it to consolidate credit card debts, pay for college tuition for their children and finance new cars.

Maggie Vaughn of San Francisco used her equity line to get herself off the credit card merry-go-round by using the money to pay them off all at once. "I was throwing all my cash at [my credit cards] to pay them off, and therefore had very little cash to spend and would often end up using the cards again," she explained. "Now, it's great! I pay cash for everything and do not charge anything and can even save money now."

And because equity loans are flexible -- you only pay for what you spend -- one loan can be used to attack several financial issues over a period of time. Marcus Pun of Oakland is considering getting a new equity line to pay off his credit card debt (used to foot the bill for his daughter's private school tuition), to pay for living expenses during a slowdown in work, to pay for remodeling his house to rent or resell it, to attend technical classes and to take his first real vacation in 14 years.

Although most people I heard from are using equity lines as a lesser-of-two-evils debt (better this than a credit card or a new car payment), some intrepid souls are tapping equity as a source of investment capital.

... Some even factor the monthly payments of the equity line into the equation. My mortgage broker, Michael Simmons, once had a client who took out a $500,000 equity line to pay for her elderly mother's home care and the monthly payments of the equity line itself. When I implied that this was nutty, he begged to differ. "It was a perfect use of the equity line," he said. "It's more flexible than a reverse mortgage and doesn't involve the equity sharing."

Indeed, equity lines -- although they can be abused -- offer homeowners loans with tax-deductible interest that non-homeowners just don't have. After decades of massive appreciation, most longtime homeowners have very different financial pictures than their non-property-owning counterparts. Equity lines of credit are also being used as a way for parents to ensure that their children enjoy similar privilege.

... But now the days of free money are long gone. Last year, the Fed raised interest rates 13 times, and my own equity line has jumped almost two points in six months.

As the short-term interest rates rise, people may begin to be less cavalier about home equity funny money. But the mortgage industry has sold the benign idea of refinancing and equity lines to the American homeowner, and it will take more than interest-rate hikes to change that cozy perception. It's going to take falling home prices, rising rates and the next fiscal crisis.

BTW, while rates are creeping up, they are relatively low because Asian central banks are stepping up their purchases of agency bonds (Fannie and Freddie), not just treasuries. They are saving like crazy, while the U.S. consumes like crazy: over-consumption is not exactly the most productive use of these foreign investment dollars.

Foreign Direct Investment into China

Does not seem to affect the amount of FDI flowing into other emerging Asian economies. For OECD countries, its a different story. New working paper from Eichengreen and Tong:

Contrary to a widely held belief, there is no strong evidence that China’s leadership as a destination country for foreign direct investment made it more difficult for other emerging economies to attract investment flows from abroad. Rather, the rapid growth of foreign investment in China encouraged similar flows into other Asian countries. However, there is some evidence of a diversion of direct investment away from OECD countries too, suggesting that producers have strong incentives to locate their foreign investment directly into the large and fast-growing Chinese market.

Along with the oil-rich gulf states, East Asian countries (not just China) are buying loads of US Bonds. We need those guys to start consuming more, and save less :-) On the other hand, the U.S. needs to consume less and save more: the January numbers weren't pretty, imports are way up on a year-over-year basis.

The Prius and Civic Hybrid Will Save You Money

As long as you own and drive them for at least 5 years. Detroit needs to realize that there is major money to be made in making fuel efficient vehicles. Unfortunately, the US car industry is addicted to the higher margin items: cars and trucks.

Consumer Reports weighs in:

Consumer Reports now says it made an error in calculating the cost of owning a hybrid: Buyers of the 2006 Toyota Prius and Honda Civic hybrids will save money over five years of ownership, the magazine said Tuesday.

Four other hybrid gas-electric vehicles still cost more than comparable gasoline-only models, but the added expenses are much less than Consumer Reports' earlier figures, the magazine said.

Last week, the organization released a statement ahead of its well-read April auto issue that said owners of the six most popular gas-electric hybrid vehicles would pay more than buyers of comparable gas-only vehicles over five years of ownership and 75,000 miles of driving.

Late Tuesday, however, Consumer Reports issued a statement acknowledging math mistakes.

``We deeply regret the error,'' Rik Paul, the magazine's automotive editor, said in the statement.

The new calculations show that owners of the Toyota Prius will save $406 and owners of the Honda Civic hybrid will save $317 compared with owners of their gas-only counterparts. However, owners of four other hybrids -- the Honda Accord, Ford Escape, Toyota Highlander and Lexus RX 400h -- will still end up spending $1,883 to $5,508 more over five years and 75,000 miles, Consumer Reports said.

The writing is on the wall though. California is by far the largest car market in the US, and standards in California are something Detroit cannot ignore.

California has already passed a bill and approved regulations cutting greenhouse gas emissions from new vehicles by 22% by model year 2012 and 30% by model year 2016.

The California Air Resources Board did their own estimates, and I am hopeful the cost will continue to go down. Scale matters folks, as more people buy fuel efficient vehicles, those sales will spur more investments, and ultimately lower costs. Being a used-car buyer, I can't wait to start seeing these things in the used-car market.

According to ARB staff, the average reduction of greenhouse gases from new California cars and light trucks will be about 22 percent in 2012 and about 30 percent in 2016, compared to today's vehicles. Costs for the added technology needed to meet the rule are expected to average about $325 per vehicle in 2012 and about $1050 per vehicle to comply in 2016. The ARB staff analysis concludes that the new rule will result in savings for vehicle buyers by lowering operating expenses that will more than offset the added costs of the new vehicles and provide an overall cost savings to consumers.

Budget Deficits Do Matter

According to VP Cheney, no? According to respected Economist James Hamilton, yes. Cheney is a politician, whose only notable stint in the private sector was with Halliburton -- let's just say he was hired for his rolodex and connections with foreign leaders. The deficits are out of control, what else can he say?

Given that the US government has been, and is running for the foreseeable future, large deficits against a backdrop of low household savings without nary a budge in long term interest rates, one might think that Vice President Cheney's conclusion is correct (although it must be said that he denies having made this remark). A variety of studies suggest that debt and deficits matter, but these effects have been masked by the tendency of foreign monetary authorities and individuals to save U.S. Treasuries. (Note that there is some evidence that long term rates are now finally rising despite this effect of capital inflows.)

Long-term interest rates are rising, but Americans still expect home prices to keep rising. Go figure.

Emmanuel's Gift

This is one of the most inspiring documentaries I have seen. Emmanuel Ofosu Yeboah of Ghana is one of those special people, blessed with a generous heart, and driven to help other people. Born with a disfigured leg, he was able to overcome his disability through his determination, and with help from a variety of sources. What sets him apart is his quest to improve the lives and standing of all disabled people in his native Ghana. I have a feeling that when all is said and done, his impact will be felt internationally as well.

A brilliant debut from Lookalike Productions. Buy or Netflix it ASAP.

Those Worrisome Deficits

The global imbalance can't go on forever. People in the hot real estate markets, need to occasionally remind themselves why those rates are so low. From Brad Setser:

Make no mistake, real estate has boomed over the past few years in part because it has gotten lots of government support. From China. In order to maintain its exchange rate peg, China has to spend 10% of its GDP a year, give or take, buying dollars - dollars that it then invests in Treasuries. That helps to keep Treasury yields down. And recently, the connection has gotten more direct: the US data suggests that China has stepped up its purchases of "corporate" bonds - widely thought to be mortgage-backed securities. Put differently, in order subsidize Chinese exports, China's central bank has to subsidize American real estate.

Even Warren Buffet, devoted part of his annual letter to the challenges ahead:

The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours. Finally, the third component of the current account, unilateral transfers, is always negative.

The U.S., it should be emphasized, is extraordinarily rich and will get richer. As a result, the huge imbalances in its current account may continue for a long time without their having noticeable deleterious effects on the U.S. economy or on markets. I doubt, however, that the situation will forever remain benign. Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own.

Globalization and Inequality

Globalization is a good thing. The largest countries in the world, China and India are seeing rising incomes, purchasing power, and opportunities to large segments of their population. But there are also a lot of people being left behind, and we need to strive to improve the lives of as many people as possible. We need to find better ways to deliver the benefits of free trade, perhaps through harnessing a fraction our collective purchase power to support companies who favor the Triple Bottom Line approach. I do not support the anti-globalization/anti free-trade movement: I think free trade is good, but we can definitely improve the system at the edges.

Consider the case of the world's hottest economy, China. As Stephen Roach points out, the vast majority who live in the countryside are increasily getting left behind. Hat tip to Brad Setser.

China remains very much a tale of two economies -- a booming development model at work in the increasingly urbanized coastal part of the nation in stark juxtaposition with relatively stagnant economic conditions persisting in the rural central and western portions of the country. While fully 560 million urban Chinese are now participating in the economy’s rapid development dynamic, that still leaves a rural population of some 745 million on the outside looking in. Interestingly enough, the accelerating trend of rural-to-urban migration has done little to arrest the inequalities of the Chinese income distribution over the past 15 years. This is somewhat surprising in that urban per capita incomes in China (US$1,531 in the top 35 cities in 2004) are slightly more than three times those in rural areas ($488). But the increase in China’s overall Gini Index from 35 in 1990 to 45 in 2003 not only reflects the impacts of an ever-widening income disparity between coastal China and the rest of the nation, but it is also a function of the increased divergence in the distribution of urban incomes. On this latter point, a recent report of China’s Academy of Social Sciences notes that average incomes in the bottom quintile of urban Chinese workers are less than 5% of average incomes in the upper quintile.

Movie Recommendations, Vol. 2

Here are some films we have seen and loved, over the last few months:

• Country Boys
  
• Grizzly Man
  
• Or (My Treasure)
  
• Apres Vous
  
• Thumbsucker
  
• Junebug
• The War Within
  
• Proof
• Reel Paradise
  

Movie Recommendations, Vol. 1, can be found here. Happy Viewing.

Malcolm Gladwell on Employer-based Healthcare

I love his subway analogy. His piece in the New Yorker, on the US Healthcare system, is a must-read as well.

The NYTimes has a nice piece on Gladwell's change of heart. Did he even blink the first time around?

Wordcount: A Tool for Wordsmiths

Recently, I have been doing some Text Mining and Natural Language Processing and appreciate how tough the underlying problems are. Nevertheless, with the amount of "text" information just in the Blogsphere, the ability to use algorithms to process data is definitely valuable.

This week I ran across this fun visualization tool. Type in a word, and the tool will display where in the Power Law Probability distribution you word falls, and what words closely resemble its frequency. The universe of Words in the tool is a mere 86K, so really obscure Words will not show up.

AJAX is cool, but as this example shows, Flash is another fun way to deliver interactive web apps.

KYOTO Protocol Revisited

New working paper from Yale. The excerpts are a bit wonkish, but I thought it might be of interest to those who follow global warming policy arguments. Is it better to impose emission caps or limits (a la Kyoto), or are taxes and fees more effective? The author gives 5 reasons why fees and/or taxes will lead to more reductions. I especially think the 5th reason is the most persuasive: more goverments will prefer to collect fees and taxes, rather than spend on the monitoring and enforcement systems required by having caps.

Designing an international greenhouse emission plan implies the choice between two alternative policies: the imposition of specific limits on the quantity of each country's emissions or the use of prices, fees, or taxes as an incentive to reduce emissions. The author’s analysis demonstrates that the second policy is preferable: not only is it simpler to implement but it is also more efficient economically. In fact, the author shows that since technological progress is uncertain and emission reduction techniques vary worldwide, internationally harmonized carbon taxes will help to reach policy targets at a lower cost.

... With this accurate, original analysis the author shows that harmonized carbon taxes are very useful, flexible and efficient mechanisms in environmental planning: will world leaders be convinced as well?

This form of taxation is preferable to quantity limits for different reasons:

• First, introducing an international carbon-tax system is simpler than setting quantity limits and regulating the permits market.

• ... Second, taxes are more flexible than quantity limits.

• ... Third, the author proves that a harmonized carbon-tax system is economically more efficient than a quantity cap.

• ... Fourth, a further point in favor of carbon taxes is tied to the evolution of permission prices over time. Since the demand for and supply of permits is quite inelastic in the short term, it is very likely that their trading prices will fluctuate a lot.

• ... A fifth advantage of a tax system mechanism is its positive effect on government budgets. In fact, from governments' point of view a quantity limit only generates costs (due to monitoring emissions and trading of permits), while a price mechanism compensates these monitoring costs with a certain revenue. This tax revenue may constitute a significant incentive for governments to join the scheme and may therefore increase the impact of the policy on global warming.

Al-Jazeera

Hugh Miles takes us behind the scenes of this controversial Arab TV network, including it's history, and reputation among viewers in the Middle East. After reading this book, I'm looking forward to re-watching Control Room, this time with a better understanding of what this network is all about.

In the West Al-Jazeera is portrayed as extremely biased, somewhat like a "Fox News" for the Arab world. The more accurate analogy is probably that of an Arabic "BBC World News". Coincidentally, a lot of Al-Jazeera's early employees came from the BBC.

What Al-Jazeera is known for is covering stories from all sides, which basically means they offend all sides! The reasons why Al-Jazeera has been accuse of bias against the West, are well-documented. In terms of war coverage I think it comes down to opposing goals: the US administration wants coverage to shield the American public from the ugliness and the destruction brought about by military action, Al-Jazeera shows what war is like for the population on the ground. On the other hand , the Arab public are suspicious of the network, especially its propensity for interviewing Israelis/Jews, something that was/is unheard of in Arab TV. Arabs are also suspicious of who founded and funds this network, and various Zionist/CIA conspiracy theories abound. Finally Al-Jazeera is extremely annoying to the Arab goverments in the region: here is network that operates outside of their control, and which does not hesitate to criticize them. The one Arab goverment Al-Jazeera is not critical of? Surprise, surprise: their benefactors in Qatar.

Al-Jazeera, like most networks, understands what their audience are interested in, and covers those issues relentlessly. Their audience is Arab, they are an Arab network, so the issues tend to be the hot-button issues of the region: especially the Israeli/Palestinian dispute. Al-Jazeera does have a tendency of repeating footage and stories that have the potential to enflame sentiments and emotions, but in that regard, Western networks also suffer from the need to chase and keep high ratings. But it is naive to think they do NOT have some bias against the West:

"Al-Jazeera does not present the news from a completely objective point of view - that would be impossible - but during the war in Iraq its tone was notably sympathetic to the Iraqis and hostile towards the Americans. Similarly, in Afghanistan, the Taliban were often presented as the noble underdog and America as the vengeful colonial aggressor. There are other trends in the network's coverage: a general cynicism about the Arab regimes allied to America is detectable. Although Al-Jazeera has employees from various religions, including Jews, it is clearly sympathetic towards Palestinians and their geopolitical goals. It is obvious the channel did not agree with the way the coalition set about deposing Saddam Hussein. Since the war ended Al-Jazeera has been critical of the coalition's mishandling of the occupation in Iraq. But Al-Jazeera has never supported violence against Americans."

Al-Jazeera provides a perspective that does not exist elsewhere: an Arab bias and coverage of war with all the ugliness that comes with it. Personally, I really like NPR and find that it provides balanced coverage MOST of the time. What NPR lacks are the logistical and technical capabilities to cover wars without relying on the blessings of the US administration. Embedded journalism and official press briefings provides too narrow a perspective.

This book is a great read and is an entertaining way to learn more about the Middle East.

China and India

The fact that China is a single-party state and decision-making is highly centralized, makes it a more streamlined place to invest in. India is known for corruption, poor infrastructure, and a lively democracy. Nevertheless, a lot of observers suspect that in the long-run, India's democracy, demography, and ex-pat community, might make it better positioned to thrive in this globalized world. As the Financial Times notes, there are serious debates going on inside China's ruling class. Hat tip to Brad Setser:

China is now less equal than the US and Russia, according to the World Bank, and income inequalities are still widening. And while incomes have mostly risen across the board, the social wage ... which provided free health, education, housing and an old-age pension – has been drastically cut, all but disappearing in the countryside.

... China spends less than one-fifth of the developed-country average on health and education.... In rural areas, where China’s poorest communities live, nearly 90 per cent of health costs are borne by individuals. ... education researchers are discovering that drop-out rates among rural children from junior secondary schools average 30-40 per cent. “This is the most under-reported story in China – the country’s massive failure to educate its rural youth in the 1990s,” says Yasheng Huang of MIT Sloan School of Management.

... To old Marxists such as Mr Liu, Mr Hu and Mr Wen have not done enough to uphold government – and, by implication, party – control of the economy. Alongside them, as part of a loose ragtag coalition that marches under the “anti-reform” banner, celebrity economists such as Lang Xianping, who fronts a popular television show in Shanghai, have criticised privatisation as a slow-motion Russian-style theft of state assets.

Many mainstream economists counter that the Hu-Wen administration is shaping up as a disaster precisely because it refuses to tackle the state’s still dominant role. For these economists, pushing the rich-poor gap to centre stage is simply a device by the leadership to increase the role of the state in business...

More excerpts here. India suffers from inequality too. The difference is that discussions take place in the open, there are no communist backbenchers itching to undo all the structural changes.

Low Mercury Fish

Cool! They are conducting a market research test, to see if there is demand for low merc fish. To those who have access to this groceries, please help create a market for low merc fish. But try to stick with seafood that are not endangered.

From the SF Chronicle:

Shoppers browsing the seafood counters at Holiday Quality Foods' 19 grocery stores in rural Northern California now have a new option: the Safe Harbor brand, the nation's first line of certified low-mercury fresh fish.

The label, introduced Monday, is part of a market test by the supermarket chain and Pacific Seafood Group, one of the nation's largest fish wholesalers, to see if customers would buy more fish if they had more information about mercury content. Holiday is using a new technology that takes just minutes rather than days to measure the mercury concentration in fish.

"This is a way to regain the confidence of consumers who worry about seafood and mercury," said Chuck Holman, retail sales manager for Pacific Seafood, Holiday's supplier. "The technology is available, so we might as well use it."

Studies have found that high concentrations of mercury in pregnant women, nursing mothers and young children are harmful to brain development. Big fish, such as swordfish, shark and tuna, tend to be contain more mercury than smaller fish such as salmon.

Advisories warning women of childbearing age to avoid fish with high mercury levels have eaten into Holiday's sales. During the past two years, the chain's sales of fresh fish have fallen 3 percent while the number of questions shoppers ask about mercury has risen, said David Parrish, Holiday's director of perishables.

That's a worrying trend for Holiday, as well as for Pacific Seafood, headquartered near Portland, Ore. Holman hopes that, by providing more information about the mercury in fish, the industry can win back customers.