Alexander Hamilton hip-hop tribute

Because Alexander Hamilton has always been my favorite Founding Father; because I am in the "actually writing" mode and otherwise away from the internet; because no one else on the Atlantic's team has yet called attention to this; and because it is a very diverting four-minute interlude, here is Lin-Manuel Miranda's tribute to Hamilton from the "White House Evening of Poetry, Music, and the Spoken Word" this past May. In case you have missed it.
 
For more, you can't go wrong with Ron Chernow's great 2004 biography. Now back to, ahem, work.

FT, Economist, and me

- Very nice brief review of my Postcards book today, by Rahul Jacob in the FT. I am grateful for his seeing just the points I was trying to make.

- From the Economist's online site, a thought-experiment designed to show the ultimate folly of protectionism. This item has also been picked up by the Atlantic's own Andrew Sullivan.

This isn't the place for a full discussion of the differences between the world as laid out in a first-semester ec course and the world as it actually operates. My unified field theory on the topic is in this Atlantic story, "How the World Works," from 1993.

But this is the place to point out the basic logic error in the "thought experiment." Here's what the Economist's site said:

"But the idiocy of the whole idea [of tariffs and protectionism] can be understood with a simple thought experiment, which I haven't seen used elsewhere.

"If tariffs are such a good economic idea, then why stop at national boundaries? If they make everyone richer, why not have customs posts between New York and New Jersey? Cars entering and leaving the Lincoln tunnel would have to pay, on top of the toll, a surcharge on all the goods they contain. Why not, indeed, make New York and New Jersey self-sufficient in all their needs, making all their own cars, growing all their own food etc?"

Here's the difference between commerce involving New York and New Jersey, and commerce involving, say, the U.S. and China. New York and New Jersey are in the same country. Why does this matter? Let's try a little thought experiment.

Suppose you grow up in New Jersey. By the time you're looking for a job, the flow of capital, ideas, and innovation may mean that the best opportunities are in New York. Or Idaho, Or California. Sentimentally, perhaps you'd rather not move away from home. But in a pure economic sense, it doesn't matter in where the action is. You're free to move there. Within the national borders of the United States, there are only trivial, incidental impediments to citizens moving wherever they want. All "factors of production" -- money, material, people -- can flow freely throughout the country, for maximum efficiency. That's what the ec textbooks call for, and that's how it can work within a given country, or a free-movement zone like in Europe.

But it's not the same between countries. If you grow up in New Jersey and the real opportunities are in Shanghai, you can't necessarily move there. You may not be able to move there even if you grow up in Qinghai province, China. People do move across national borders, legally and illegally. Immigration is America's distinctive strength, so I'm glad as many move here as do. But in general, people's economic well-being depends very heavily on the industries and opportunities in the country where they are born.

Pointing this out doesn't prove protectionism right -- or wrong, as a strategy for developing a national economy. I'm on record as arguing that open Chinese-US trade has been good for both sides. But it does mean that the "thought experiment" makes no sense. There's a first-order difference between the flow of factors within a country and the flow between countries. I suspect this is the reason we haven't seen this powerful analogy "used elsewhere."

More on obesity, geography, and class

Gary Chapman, of the University of Texas, has created this way of envisioning the relationship between income and obesity. Concept: the shading varies with the obesity rate divided by median household income. This is a not-immediately-obvious way to present the data, in order to highlight one particular phenomenon: The darker the shade, the likelier you are to find people who are both poor and obese. Map created via Datamasher.org.

Continue reading "More on obesity, geography, and class" »

Weight, class, and Wal-Mart

From a friend in Boston, a note that gives an extended version of a theme in many responses I've received. Background here and here. Charts and data on this point shortly. The argument here -- that, along with smoking, obesity has become a class-bound marker and problem in America -- is hardly surprising, but the power of the connection is what many people emphasize.

"i wonder if your seeing fewer overweight people than you expected when you got back to the states might be, at least in part, a function of class. this is a point i'm somewhat uncomfortable making, but it shouldn't be ignored. people who, just as a for instance, run and listen to npr and read (not to mention write for) the atlantic are both likelier to be fit and likelier to associate with people of the same ilk. (as a nation, we've not only gotten fatter but also, as you know, much less likely to mix with people who don't share our educational or cultural background.)

"i remember walking  through harvard yard back in 1986 during the university's celebration of its 350th anniversary. the place was awash in alums, and there was something noticeably different about most of these people. it wasn't that they were expensively dressed or looked like preppies, i realized. it's that almost everyone was so *trim.* none of  these people would likely be found shopping in wal-mart, where waistlines look a lot different.

"as an aside: i've long thought it would be an interesting commentary on the stratification in this society to have political candidates asked during a debate if they'd ever shopped at a wal-mart. i have to think that very few could honestly answer yes--and the higher the office the fewer the yeses. to think that a democracy's leadership class should  have no connection (other than owning stock--or, in hillary clinton's case, being once on its board) to the biggest corporation in the country, how strange! back when the biggest corporation was gm or exxon, even the wealthiest people likely had *some* dealings with it, even only being chauffered in a cadillac."

To answer the last question: I'm not a political candidate, but I have not only shopped in W-Ms around the US but have also been to many outlets inside China. That's a story on its own -- the one in Shanghai has whole pig carcasses suspended by hooks right inside the front door, and tanks full of live carp, which the shopper-housewives let flop around on the floor to see which ones look best for the evening's dinner. No one will ever convince me that W-M doesn't know how to globalize/localize.

But I digress. To sharpen my friend's question: a candidate should be asked when was the most recent time he or she enjoyed Every Day Low Prices.

Reactions on Chinese tires

In this item two days ago, I mentioned that most of the mainstream economics press had gone (predictably) berserk in overreacting to the shock-horror nightmare of the Obama administration's tariff on imported Chinese tires.

First point: I neglected to mention the honorable exception of Andrew Peaple, reporting in the WSJ and playing down "Oh no! Smoot Hawley!" hysteria from the start. The online version of his initial story:

"WSJA(9/15) Heard On The Street: Tires, Chickens, Common Sense
   (From THE WALL STREET JOURNAL ASIA)
   By Andrew Peaple
"Fought over the likes of bras and bananas, trade wars always give off a whiff of the absurd.

"With a measure of good sense, a spat between the U.S. and China involving tires and chickens won't devolve into a trade war as well."

Unfortunately, the version of the story that is now online has a much more alarmist headline, though the common-sense content of the article itself is still the same. Here's the new headline:


Next, from someone with on-scene experience, making a point left out of most of the reflexive, "Oh no! Smoot Hawley!" original coverage

"I was a senior International Trade consultant with 2 major firms in China 2003-2007.   Approximately one third of the over 100 projects I managed during that four year period involved assisting foreign companies (US, EU, some Japanese) in defending themselves against either investigations by, or anti-competitive practices perpetrated by, the Chinese Customs authorities. 

"I believe that I can safely say that without fail, each project of this type that I was involved in was predicated by a distortion or willful misunderstanding of both Chinese and WTO/WCO trade law and operational norms by the Customs authorities.  Nor were these actions limited to provincial backwaters (though the most egregious did take place there); many of our projects involved Shanghai or Beijing Customs entry ports.  Practices such as demanding improper HTS classification of goods (HTS classification determines applicable duty rate) or arbitrary valuation of goods (the Customs declared value upon which duty and VAT are assessed) are practiced daily throughout the country and cost foreign companies substantial amounts.

"I very seldom see this issue addressed in any article concerning China trade and thought I would bring it to your attention."

Main point: this is a far more complicated issue, with a far longer and more tangled history, than 95% of the western-press reaction would indicate. I urge everyone to keep up with this "China Financial Markets site before expressing heated opinions on the subject.

Update: there's actually no material after the jump; original posting included some background notes, by mistake. But our system retains the "continue reading" link even with nothing there any more.

Continue reading "Reactions on Chinese tires" »

About those Chinese tires

I keep putting this off, so before it finally disappears into the mists of time, here is a bullet-point summary of what I would have said at greater length when the Chinese tire tariff first arose.

1) There is not now, and there never was, a serious possibility that this would escalate into some sweeping, self-intensifying, global-recovery-threatening "trade war."  The many publications and commentators who raised their hands in "Oh no! It's Smoot Hawley again!" horror need to calm down -- and to have their tendency toward over-reaction noted for the record. Yes, I'm talking about you, Economist magazine cover-designers (last week's cover image, below), but you had tons of company.
 

There is too much going on, on too many other fronts, involving affairs of incomparably greater consequence between China and America, for this to have been more than a contained, specific dispute -- contained in both duration and sweep. This was clear at the time and should have buffered the shock-horror tone of the stories. Why this matters: because of the  boy-who-cried-wolf principle. There are issues between China and the outside world in which a small disagreement could spiral into a very dangerous confrontation. Many of these involve Taiwan, for reasons to be spelled out another time. But tire tariffs, agree with them or not, were never going to set off a global economic confrontation.

2) Larger point about the nature of this reaction, by analogy to Al Sharpton. Not to pick on him, but why did Sharpton's reputation as a careful, precise commentator on national affairs suffer during the 1980s? Especially after the unfortunate Brawley case? I would say it was the magical combination of predictability, exaggeration, and tendentiousness. His reaction to any news event was predictable (it was always about racism); it was exaggerated (it was always really terrible racism); and it was tendentious, in being uninterested in the details of the specific case. On the other hand, he was witty! I often think of the bad, non-witty side of the Sharpton of that era when I see the mainstream reaction to any trade dispute. It's predictable (oh no! Trade war!); exaggerated (oh no! Smoot Hawley!); and tendentious, in not being interested in any contextual point other than the evils of unions and protectionism.

3) What's the context that does matter? Usefully, two people with whom I often disagree on trade questions -- the former editor of the Economist, Bill Emmott, and Robert Samuelson of the Washington Post -- have both pointed out that there is a more important issue here than whether one agrees on the merits of the tire decision. They both criticize the decision  -- but as the headline on Samuelson's column puts it, "Bad Policy, Right Message." (My own view would be: Maybe bad policy, certainly right message.)

The right message concerns the historic transformation of the Chinese economy that began a year ago, when demand from its biggest overseas customer, the United States, dried up all at once.  This story, which I wrote from China six months ago, discussed the magnitude of the adjustments China was trying to make -- and also emphasized the parallel that Michael Pettis, an economist at Peking University, drew between China's situation in 2009 and America's 80 years earlier. The details are laid out in that article, but the main point was this: Like America in the 1920s, China in the 2000s had been the dominant "global surplus" country, manufacturing and selling to everyone else and piling up big surpluses. When customers suddenly stopped buying -- America's because of the Great Depression, China's because of this recent freezeup -- the surplus countries lost disproportionately many jobs, because they'd had more than "their share" to begin with. That happened to America in the 1930s, and it is happening to China now.

This kind of loss is painful for any country under any regime. In terms of human suffering, it's all the worse for China, since so many of the displaced workers are so hard-pressed to begin with. In the long run, everyone agrees that both the Chinese and the U.S. economies need serious adjustment: the US toward more savings and investment, China toward more domestic consumption and less reliance on export markets, so that its own, still-poor population can enjoy more of the fruits of their own labor. But in the short run, the adjustment is difficult -- for each country. And the drama that Pettis foresaw six months ago, and which provides the proper background to the tire dispute, is the Chinese government's (natural) attempt to resist the inevitable and keep its trade surplus up as long as it can.

That's the significance of stories like this, which I've mentioned  (eg here and here) over the months.


This is not at all a matter of "blaming" China. Moralizing has no place in these sorts of economic adjustments -- whether we're talking about the Chinese government's currency-management to keep the RMB's value artificially low (details here), or the US imposition of tire tariffs. The real question is how the economies can manage the complementary adjustments each of them has to make, with minimal damage to their own populations and to world business as a whole. These are big, woolly, complicated, world-historical processes underway. There are a lot of useful things to say about them -- not including "Oh no! Trade war!"

Now I see why I put this off so long.

Continue reading "About those Chinese tires" »

Festival of updates #2: China business!

Recently I mentioned an enjoyable discussion session at the Motley Fool, which is available in this podcast. Today there was a followup analysis here, at the Fool's site. The low-road reason I mention it is that it's very complimentary about my assessment of life and business in China. But there's a high-road reason too, which involves an aspect of making sense of China that, IMHO, needs to be stressed again and again, even if you've already stressed it a lot -- as I certainly have.

This aspect, which indeed can never be stressed strongly enough, concerns the chaos, diversity, internal contradiction, unknowability, and general "many different countries and cultures coexisting under one name" nature of today's China. It's harder to keep track of such a confusing reality than it would be to say, "We must be afraid of China" or "The Chinese want XXXX" or  "With its new power, China will do YYYY." But it is certainly more interesting and stimulating to embrace all this contradictory reality than to stick to a monolithic view of one big, "rising," potentially menacing power. It is also much truer to life. In any case, I am glad to see the Motley Fool analyst underscoring this point. And I think the author of this item, Sean Sun, has added a very interesting born-in-China perspective. As he says:

"I was born in China and raised in its countryside in a small, mountainous village. I've worn a suit and tie in tier-1 metropolises, donned hard hats in tier-2 and 3 cities, and marveled at the rapid growth in rural areas like my hometown. When someone wants to ask me about China, I ask: Which one?"

Worth reading, as part of your holiday weekend fare.

Holiday festival of updates! #1 in a weekend-long series

Labor Day Weekend wouldn't be the cherished American ritual it is, without cookouts, beer, one last beach weekend frequent updates on past technical, political, and aviation matters. To kick off this special all-weekend series, an airline industry insider's account on why the Transportation Security Administration condones class-war in the airport security system: Shorter lines for high-mileage passengers (like me! until my China-travel miles time out), all the longer waits for everyone else. Here's the inside view:

"You might have already gotten this from other sources, but as a 25-year airline industry veteran, the discriminatory TSA lines are easily explained.

"They exist because the Legacy Airlines cut a deal with senior-level political appointees in the early days of the TSA, and no one has ever challenged them, and it is set up so no one can challenge them. The airlines are, of course, not actually paying anything for the privilege of deciding which taxpayers have first-class/second-class access to federally mandated security screening. The "justification" is that airline rents and fees "pay" the costs of the airport, therefore they have the right to control how "public" spaces in the terminal are used. Neither airports or the TSA gets an incremental dollar for allowing this discrimination.

"The floor space used to sort passengers into different queues is officially controlled by the airlines, and is separate from the space (just behind it) that is controlled by the TSA. Thus the situation is quite different from discriminatory queues you might have experienced in London and other overseas points, where the airlines actually paid money to fund separate "business-class" airside access points. All that money you paid United to earn Platinum status pays for the lounges and upgrades you get. But your preferential TSA access is a gift from the government, and a "wealth" transfer from all of us in steerage to all of your friends in business class.

Continue reading "Holiday festival of updates! #1 in a weekend-long series" »

Even more on GDP, economics, and "rational insanity"

A number of China and technology issues in the queue (plus frogs), but for the moment, a few extra references on the "does GDP really matter anyway?" front. Previously here and here.

1) A group in Nova Scotia called GPIAtlantic has applied a "Genuine Progress Indicator" to social and economic developments in its region. The idea of GPI rather than GDP has a long history; for further information, see here, here, and here. (Yes, there are a variety of other "sustainability indexes" or measures of overall welfare; more info at sites above, plus here for another "can money buy happiness?" study.) Below, a sample GDP/GPI comparative graph from the Redefining Progress site.




2) Another in the ever-expanding cadre of first-rate Atlantic online Correspondents is Ben Heineman Jr., who has this very valuable post on the perils of paying attention to statistical indicators of any sort. Part of living in the modern world is accepting that opposite-sounding principles can both be true. (Hey, living in China makes such acceptance easy! The country is rich -- and it is poor. It is open - and it is closed. It is one ancient culture -- and it is a thousand little baronies. But I digress.)

In the area we're talking about now, the contradictory principles are: a) "big data" can reveal truths that would escape normal human reasoning power. Easiest illustration: hundreds of millions of people, all creating links among web pages, can together produce a vast and nuanced guide to what is where on the web, which Google put to use through its "PageRank" system.  b) numerical data can lead to incredibly stupid mistakes, if users forget that numbers and models inevitably oversimplify real, messy reality. Easiest illustration: the apologia from Robert McNamara in Errol Morris's The Fog of War.

In his post Heineman talks about how the "idolatry of numbers" -- worship of the spurious precision of mathematical models -- can lead to terrible real-world misjudgments. This was a powerful lesson I took from my time in graduate school studying economics: the formulas were so neat and powerful, yet their connection to the real world was so hit-and-miss. In a way this is also a theme of Liaquat Ahamed's outstanding book Lords of Finance, about the way financial "experts" helped bring on the Great Depression. They had great faith in their models; unfortunately, the models and principles didn't match reality.

3)  While I'm at it, here is my article "How the World Works" from the early 1990s, which was an attempt to explain the mismatch between the nice, clean models of Anglo-American economic textbooks and the brand of economics believed in by many governments in East Asia. Mainly Japan in those days and China now. Japanese and Chinese economic strategies differ from each other in very important ways, but in both countries governments have often applied a "strategic development" model of economics, not just the "consumer welfare" approach that arises from textbooks in Ec 101. More explanation in that article -- and for a bonus, this one from 2005, "Countdown to a Meltdown," about the imbalanced economic growth that the financial models of the "derivatives / subprime" era were creating and why it would end in tears.

More on GDP, airplanes (updated)

I mentioned yesterday that a good NYT op-ed this week on the limits of GDP-as-Holy-Grail paralleled a similar argument in an also very good Atlantic cover story from 1995. To round out the trio of excellence, I should mention a NYT column last year by the economist Robert Frank, of Cornell, on the ways in which money does and does not buy happiness. The column comes up as a PDF here. The three are worth reading together.

In the same item yesterday, I mentioned that an NPR correspondent had sounded Chicken Little-ish about the recent tragic aerial crash over the Hudson, the only such collision in the many decades in which planes and helicopters have flown that route. Miles O'Brien -- ex of CNN, now of True/Slant, and pilot himself -- is much less polite about such coverage, in two items, here and here. Eg:

"Those of us who fly through this airspace are responsible for seeing and avoiding each other. There are no air traffic controllers serving as traffic cops here.

"And before you get yourself all spun up about this (I am talkin' to you Sen. Schumer! [and the NPR guy]), before this tragic crash there has never been a mid air collision like this in New York City.

"Over the years, many thousands of airplane and helicopters have successfully and safely plied their way through this corridor of airspace wherein the responsibility for collision avoidance rests entirely in the cockpit.

"And the real truth is it makes flying in the New York City airspace safer - because all the aircraft who fly in this zone are not taxing already maxed out air traffic controllers.

"If tour helicopters had to check in with ATC every time they alighted with a load of tourists, the system would bog down in a hurry.

"It is NOT the Wild West up there... It is a busy place with a lot of traffic and you have to pay attention all the time. But that's New York for you. When two cars collide in Midtown Manhattan, do we instantly insist the traffic laws be changed?"

I'm with him.

UPDATE: I am also with my colleague Jeffrey Goldberg, here, in his life-extension maxim of "never take a helicopter ride for fun." I love airplanes and aviation; in the three China-based years that I've been away from flying I've actively missed the "aerial view," the particular perspective you get on the world from a few thousand feet up; like everyone who has thought seriously about flying, I know it brings risks. But helicopters are to me a different matter. If you've studied aerodynamics, you know that airplanes "want to stay in the air" -- if the engine fails, they turn into gliders, not plummeting objects. Helicopters "want to fall out of the air" -- yes, despite the limited ability to "autorotate" and avoid a direct plummet. I respect people who fly them, which is harder than flying airplanes. But I keep a respectful distance.

On why I can't get in to see my doctor

I mentioned yesterday that, in this slack economy, every part of the service sector seemed poised for instant response at the slightest chance of business -- with one exception. When I called to get a back-from-China physical from my doctor, the first opening was more than three months away. (Among his other virtues, my doctor subscribes to the magazine -- but does not frequent the web site!)

Two reader-hypotheses about the difference: that it's simple medical economics, and that it's because America is not Canada.
 
1) From the "medical economics" reader:

My girlfriend (spanish/japanese, lives in Spain) is always amazed by the service sector when she visits... It is almost always quick, efficient and relatively cheap (compared to Europe).  That is changing in Europe with cheaper labor, but the sophistication of the US service markets (24 hour call lines, next day delivery) can never be matched.

On the pricing note, the delay in office visits is mostly price related, no?  My father (a GI) makes about $50 an hour on office visits, before taxes and overhead.  That is a lot less than all the other wonderful service experiences you describe. [Plumbers, electricians, tree-trimmers, etc.]  At that price point, what incentive do you have to make yourself available?  Given access to doctors is the biggest interaction most healthy people have with the medical system, increasing those basic services would make most people feel better about reform, no?

2) On the Canada front, from Parker Donham:

I live in a tiny Nova Scotia community, about 45 minutes from the nearest small city. When I want to see my "good-but-normal" doctor (the same one I've had for 35 years), I don't make an appointment. I call and ask what hours he will be in the office that day, then show up at a time convenient for me. I bring The Atlantic to read for the 10-20 minutes it takes to see him.

As we watch Americans debate the future of their health care system, it's galling for Canadians to hear opponents of reform demonize our single-payer system with discredited tales of health care denied. I am in good health, and enjoy excellent medical care. A close relative whose serious congenital heart condition leads to frequent, sometimes grave emergencies and occasional surgical interventions likewise receives superb care.

Yes, Canadians sometimes wait months to see certain specialists, a problem that varies from place to place, from speciality to speciality, and by degree of emergency. A lot of effort is now focused on reducing wait times, with some progress.

Canadians live three years longer, on average, than Americans; we have lower infant mortality, less chance of dying before age five, and much less chance of dying between 15 and 60. We spend barely half what you do, per capita, on health care, and no one loses their home to pay for needed medical care. Except for American ex-pats, no one stays in a Canadian job for fear of losing health coverage without it. Our system is very popular, and in our perennial, rather touching quest to identify cultural factors that distinguish us from Americans, single payer health care always ranks near the top of the list.

Sources here, here, and here.

Smoot-Hawley redux watch

Several months ago in this Atlantic story, I explained what some economists thought was the biggest danger in the Chinese government's response to the world business collapse. Obviously the Chinese government had to do something to offset the tens of millions of layoffs happening all at once. Its predicament was in a way like America's at the start of the Great Depression: having had an abnormally large share of the world's manufacturing jobs and export earnings when times were good, it had more of them to lose when demand crashed. But China's situation was worse, because it is so much poorer than America was, and because exports represented a bigger share of its employment base.

So China had to do something. The danger, as with the US recovery measures now, came from the long-term implications of the necessary short-term damage-staunching measures. And here the main fears were: (a) that the government would try to maintain its huge trade surplus (through subsidies, Smoot-Hawleyesque trade barriers, "buy Chinese" rules, etc) even as foreigners were forced to cut back on their buying, thereby triggering understandable resentment and retaliation; (b) that its stimulus efforts would aggravate trade-imbalance problems in the future, since so much was devoted to new productive capacity which could further glut world markets; and (c) that the stimulus would lead to a big destabilizing bubble, since a lot of it was propelled by China's version of sub-prime loans. (Ie, shaky, under-collateralized, dubiously repayable loans to sweetheart or shady companies).

These are problems to keep watching, and toward that end, two worthwhile resources: The first is this essay by R. Taggart Murphy, longtime investment banker in Japan and now a finance professor there. (The link opens a Word .DOC file for download.) Murphy -- for the record, a friend from my Japan days -- compares China's nascent attempt to prop up its trade surplus to what Japan did in the 1970s. He says:

"If the parallels continue with the 1970s, what might we expect?  First, hostility directed away from the United States and towards China. ... Once your economy is so large that whatever you do affects global economic architecture, the "free rider" option [of permanent trade surplus] begins to close.  If you manage your economy in such a way as to maximize exports and trade surpluses at a time when global growth is sluggish or non-existent, you are willy-nilly forcing other countries to run trade deficits.  What happens if they refuse to go along?"

He suggests some cautionary answers to that last question. Also, we have yet another illuminating item from Guanghua School of Management's Michael Pettis, about the pitfalls built into the stimulus package. Here. Worth reading as a complement to this week's "Strategic and Economic Dialogue."
 

Two articles from Counterpunch (updated)

Two of my friends of longest standing (note how I avoid saying two of my "oldest friends") have articles online at counterpunch.org  that deserve notice.

Eamonn Fingleton, who has been based in Japan for years and has been both contrarian and right in emphasizing the residual strength of Japanese manufacturing (even as the Japanese financial system collapsed), now has an article about the American media's coverage of Detroit. It is mainly a corrective to the automatic sneer at U.S. automakers that characterizes much political and press commentary about them. The article says:

As press commentators have generally spun it, the Detroit story has been a simplistic  morality tale of "incompetent executives," "lazy workers," and "intransigent unions." Detroit in other words has richly deserved its fate and, in the opinion of many of the more callous observers, the sooner it is put out of its misery the better.
          

The real story is a complex one in which the American auto industry has often been more sinned against than sinning.         

Full Aspen session, Fallows v Ferguson, now posted

In several posts from Aspen (here, here, and here) I mentioned my "full and frank" discussion, as the diplomats would say, with Niall Ferguson over the future of Chinese and American interactions. Main summary of our disagreements is, again, here.

A streaming video of the whole session is available now, here. My memories of it are clear enough that I don't think I need another immersion. But if you missed it and/or are interested, it's now online.

One more viewing tip on the 'Chimerica' tape (updated)

As a reminder: sooner or later the full video of the "Chimerica" discussion between Niall Ferguson and me, this week at the Aspen Ideas Festival, will be posted at the Aspen site. (Previous mentions here and here.) If you see or read the full version, you will note that an absolutely fundamental premise in the argument (Ferguson's) for the inevitable collision of US and Chinese interests is that the Chinese leadership has recently lost all faith in the U.S. economy and the U.S. dollar and is determined to move away from the dollar as an international currency.

You will note too that statements by Chinese officials, taken strictly at face value, are the main pieces of evidence for this contention. In that regard, this latest statement by a senior Chinese official deserves notice: 


--------
My argument, as you'll see, is that China and the United States will continue to disagree over countless issues but are too thoroughly connected to be pushed by the current world economic crisis toward what Ferguson declares a "divorce." If a real separation occurs, it would probably be over Taiwan or some other non-routine-economic issue.

Bear this statement from He Yafei (genuine influential official) in mind when you hear "academic discussions" about moves away from the dollar. And, as I've mentioned many times, if you're looking for an "academic" perspective on the Chinese economy and US-Chinese tensions that is based on its actual realities rather than sweeping generalizations, start here.
____
UPDATE:  Thanks to Andy Rothman of CLSA in Shanghai for the reminder that one week ago, Zhou Xiaochuan, the People's Bank of China governor who touched off original speculation about China's move away from dollar holdings, declared that China would be making no sudden moves to change its currency holdings. Why this matters: the "impending breakup" thesis depends crucially on the idea that China is quickly and unstoppably undoing its links to the U.S. economy and U.S. holdings. 

This does not bode well

Front page of yesterday's China Daily, my favorite newspaper, echoing stories throughout the Chinese press (for instance, here, in the English version of the leading economics magazine Caijing). I am referring to the "Exporters get sops" story.




For the background on why this spells trouble, check out this Atlantic article from two months ago, on the risks of China's trying to defend its trade surplus when demand is collapsing around the world. After the jump, a relevant excerpt from the article. More tomorrow, in between last-minute packing and other imperatives.
______

Continue reading "This does not bode well" »

Not death of newspapers but death of advertising

As I mentioned earlier, there is a lot of response on the "who's killing the press?" theme. Because the theme has been so very heavily worked over in recent months, I'm not reposting much of this. But here is a note that reflects a theme in a number of messages: that the newspapers are only the first casualties in what will be a more sweeping elimination of ad revenue in general. It is a response from a reader named Hal:

Among my friends, we've had this discussion before.  Here's what I said then, edited to fit addressing you directly:
*^*^*

The real problem is, advertising is dying. It's just pulling down newspapers along the way. Next up: TV, radio, and Google.

This is why I was warning anyone who would listen that traditional media's schadenfreude when the internet bubble popped in 2001 was probably misplaced. Because the reason it popped was one finally had the metrics to show Advertising Doesn't Work. Google has forestalled the inevitable by doing the Net equivalent of the "tiny little ads" schtick of a decade or two back, but I think they see the writing on the wall, which is why they keep trying so desperately to find something, anything, other than search that'll make money....

Continue reading "Not death of newspapers but death of advertising" »

In case you've been wondering about Macau

You should, of course, start by reading my description of the casino economy as it was fully  opening up two years ago, here and here.

But on the remote chance that's not enough, it is surprisingly interesting to get the email updates from an operation called "Destination Macau." At first glance I thought it was just another local-booster site. But here is a representative passage from the latest newsletter:

"If a president of most companies we know were to stand up in public, after having recently posted a solid rise in quarterly earnings amid a bearish economic environment, and announce he is looking to cut nearly a quarter of his workforce, his audience might be forgiven a gasp of astonishment. Not when that president runs the Las Vegas Sands Corp.

"This week, the company's recently installed president, Mike Leven, announced in Las Vegas that he was going to cut another 3,000 to 4,000 jobs at the Macau subsidiary, taking the total workforce to around 13,000-14,000 from its current level of around 17,500, and down from a high that once scraped the 20,000 mark. This is despite the fact that the Venetian Macao posted a 10 per cent rise in first-quarter EBITDA and continues to hoover up the city's visitor market... Job cuts and the redrawing of organization charts seem to have become routine at Macau's most profitable gaming concessionaire as it struggles under the weight of a massive debt load.

"Needless to say, the Venetian Macao is not a happy camp for an expatriate to be in at the moment. Given that locals are protected by divine right to employment in an election year, every Filipino, Nepalese, Malaysian, Singaporean and, yes, American and Australian that walks the floors of LVS's Macau properties can be forgiven their long faces...

"A black joke doing the rounds yesterday was that all of these cuts could be made without having to go beneath the vice-president level."

For specialized tastes only, but engagingly done.

Nonfiction writing class: how it should be done

Suppose you were writing about the financial-policy mistakes that helped bring on the Great Depression. And you wanted to dramatize the damage done by adherence to the gold standard, which meant that the central banks of Britain, France, Germany, etc could issue only as much money as they happened to have gold in their vaults.

As the world financial crisis spread after the 1929 stock market crash, the flow of gold became highly unbalanced. The United States, with its undamaged industrial-export base (and its determination to collect on wartime loans to the Allies) was piling up gold. So were the French, for various reasons of their own. This meant big trouble most of all for England, which was losing gold and therefore had to imposes a domestic credit squeeze. You could put it that way -- or you could write this:

"Unknown to most people, much of the gold that had supposedly flown into France was actually sitting in London. Bullion was so heavy -- a seventeen-inch cube weighs about a ton -- that instead of shipping crates of it across hundreds of miles from one country to another and paying high insurance costs, central banks had taken to 'earmarking' the metal, that is, keeping it in the same vault but simply re-registering its ownership. Thus the decline in Britain's gold reserves and their accumulation in France and the United States was accomplished by a group of men descending into the vaults of the Bank of England, loading some bars of bullion onto a low wooden truck with small rubber tires, trundling them thirty feet across the room to the other wall, and offloading them, though not before attaching some white name tags indicating that the gold now belonged to the Banque de France or the Federal Reserve Bank. That the world was being subjected to a progressively tightening squeeze on credit just because there happened to be too much gold on one side of the vault and not enough on the other provoked Lord d'Abernon, Britain's ambassador to Germany after the war [WW I] and now [1930s] an elder statesman-economist, to exclaim, 'This depression is the stupidest and most gratuitous in history.' "

This paragraph is from Liaquat Ahamed's Lords of Finance, recommended here previously. There are many touches I love in this passage, from the "small rubber tires" detail and mot juste "trundling" term, to the vivid real-world description of how grand policies worked in practice, to the perfectly used quote at the end. No larger point here; just worth noticing admirable examples of explaining the world.

Highly recommended: 'Lords of Finance'

If you were engrossed by today's NYT saga about Timothy Geithner as head of the NY Fed -- and even if you skipped past the story or didn't hear of it at all -- please make haste to read the saga of a previous incumbent of the job. Lords of Finance: The Bankers who Broke the World, by Liaquat Ahamed, tells the story of Benjamin Strong, head of the NY Fed through the 1920s, and of his central-banker counterparts in England, France, and Germany who, together and unwittingly, helped bring on the Great Depression.

Lords of Finance as it appeared to me on the trusty Kindle1 here in Beijing; physical copy not easy to get locally.
 

Economic theory has its place (and for me its place was grad-school classes). Well-done economic history is often far more illuminating. This is extremely well done history, and is worth mentioning now because of the obvious resonance between this tale of cleaning up after a bubble and today's predicament. Sample passage, about the 1920s but somehow sounds familiar:

Watching other people become rich is not much fun, especially if they do it overnight and without any effort. It was therefore inevitable that all this frenetic activity -- the thriving stock market, the new issues, the ballyhoo about a new era, the buying and selling of Florida real estate -- provoked a chorus of voices demanding that the Fed do something to stop the "orgy of speculation," a phrase that would become so commonplace over the next few years as to lose all meaning.

As it happens, Liaquat Ahamed and his wife Meena are friends of mine and my wife's, but I would recommend this book even if we'd never met.

The elusive Lou Pai

I mentioned last week, after watching the excellent Enron documentary The Smartest Guys in the Room, that one of the questions it provokes is whatever became of Lou Pai. He is the lesser-known comrade of the now infamous Skilling, Lay, and Fastow, who (apparently) took more cash out of the company than anyone else.

This long, fascinating investigative piece about Pai by Alan Prendergast, in Denver's Westword, can't completely answer that question, since it was published in 2002, before the ramifications of the Enron debacle had fully played out. But it tells me a lot more than I had known before. It is also the source of the illustration to the left, by Jay Bevenour. It concludes with reports on the efforts of Ken Salazar -- then Colorado Attorney General, now Secretary of the Interior -- to make peace between Pai and the neighbors around his hermit-like mountain stronghold.  Thanks to Alf Hickey.

Shanghai, Beijing, and the face of Chinese cities

This is an incomplete, opening entry on a subject that's increasingly on my mind: who is responsible for the look and feel of today's enormous, expanding Chinese cities, and who is happy and unhappy about their emerging character.

Two reasons it's on my mind at the moment:
 - Spent several days again in Shanghai, my former home, after being away for eight months;
 - Recently went to the top of Beijing's first true skyscraper, the newly-opened Park Hyatt hotel, and saw the city from an entirely different perspective while on the building's 65th floor.

This is not a "which do you like better?" discussion, which I've learned to finesse in a way that is both politic and true. Having now spent an equal amount of time based in each city, my wife and I have learned to appreciate the virtues of both. Their virtues are different, as Chicago's are from LA's, but are both real. (In short: we've learned more from being in Beijing, and we enjoyed the texture of daily life more in Shanghai. We feel fortunate to have lived in each place.)

Rather the question is why the look and feel of Beijing seem so clearly to represent the direction Chinese cities are heading. To oversimplify what this means: although Shanghai probably contains more people than Beijing, it feels smaller. The roads are narrower, they're more likely to bend or twist, the city unfolds on a smaller scale of neighborhoods and courtyards and little houses. Beijing is bigger and squarer and broader and more grandly imposing. To illustrate: a photo of the intersection outside our building in Beijing, followed by a place we were walking ten days ago in Shanghai.

Crossing the street at the Guomao intersection, as I do when leaving my apartment each day in Beijing:
 


Looking across a street in the French Concession district of Shanghai:

Yes, yes, I could have chosen pictures of each city that looked more like the other -- a little hutong in Beijing, an elevated highway in Shanghai. But anybody who has been in both cities recognizes the difference in tone and scale. This view southward from the Park Hyatt's 65th floor China Bar -- which really is the first time this view of Beijing has ever been available (since airplanes almost never fly overhead) -- gives more of the idea.

 

A few more pictures, and the question they suggest to me, after the jump.

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Continue reading "Shanghai, Beijing, and the face of Chinese cities" »

Correction: Chinese coal mine deaths

In my story about the Chinese economy in the latest Atlantic, I say, "You never know which statistics to believe in China, but in January a local official in Dongguan told me..."  The never-know problem is a real challenge here, and a reason to view any number concerning China with skepticism.

Part of the problem arises from what we might call a "transparency" issue. The government has committed itself to a growth rate of at least 8 per cent this year. Whatever else happens, it is safe to assume that at year's end the reported growth rate will be about 8 per cent. Part of the problem is the sheer impossibility of really knowing what is going on in so vast a country containing such geographic, economic, and social extremes. Is China's population closer to 1.3 billion -- or 1.4 billion? It's a difference of 100 million, and I don't think anyone knows for sure.

And for foreigners there's a particular problem of having your usual standards of judgment mismatched to China's scale. I have been in cities that looked middling-size. Based on the street grid and downtown area, I would have estimated the population at maybe 100,000 -- then I'm told that two million people live there. (True? I don't know.) Every reporter in China knows about the government statistics reporting 60,000 to 70,000 mass disturbances throughout the country each year. Could that possibly be true? Two hundred a day? It doesn't seem plausible, but I see the figure quoted all the time.

Very late in the process of writing my latest article, I saw a release from the government-controlled Xinhua news agency, saying that coal mining fatalities had declined to a total of over 90,000 in 2008. Could that possibly be true? Two hundred and fifty people per day? So I double-checked with Xinhua, and so did our fact-checker, and that was the number the government was officially putting out. As a result, one passage in my story said:

So if China's rise is not undone by the risks that have been evident for years--pollution, water shortage, corruption, the widening rich-poor social gap, safety standards so primitive that on average more than 250 people die each day in coal-mine accidents--might China prove vulnerable to Soviet-style discontent born of a slowing economy?...
My guess is No. [And on to the main argument of the article.]

Twelve days later, Xinhua put out this correction.
 


In the corrected version, ninety thousand people had died in accidents of all sorts in China last year, not just in coal mines. The coal mine fatality rate was more like nine per day, not 250. I was out of China when this correction was posted, and I didn't see it until just now. (You don't routinely go back to sources you've already checked, to see if they've happened to change their figures.) If I'd seen it immediately we could have made a change just before our issue went to the printer, but I probably wouldn't have seen it even if I were sitting in Beijing.

I regret the error, though I am glad for the differential 240 coal miners per day, and wanted to take the initiative in putting the revised number on the record. The larger points about workplace safety -- and the resilience of the Chinese economy, and the shakiness of statistics -- remain.

First signs of an upturn?

As I've mentioned several times (eg here and here), the air in Beijing has seemed much better in the six months since the Olympics ended than in the incredibly murky six months before. Seasonal difference? Probably. Unusual prevalence of strong, cleansing winds from the northwest? Important too. Residual effect of some Olympic-caused restrictions on pollution sites and traffic? Perhaps.

But the general slowdown in factory and powerplant activity during those same six months has to have played a part. So, is the economy picking up again? View out the window, Guomao area of Beijing looking south, on March 18, 2009, at noon China time, a relatively balmy day:
 


For a different kind of discussion about when and whether things will turn around for China, I have this story in the current issue of the magazine.

For the Netflix list: 'Smartest Guys in the Room'

In case you missed this the first time around (as I did), highly recommended: Alex Gibney's 2005 documentary on Enron, The Smartest Guys in the Room. Apart from its original, intrinsic interest in telling the sordid tale of Skilling, Fastow, Lay, et al, the film has surprising new resonance now.

On the one hand, the sums involved in this previous-world-record-scandal now seem quaintly small. Enron was a $60 billion (or whatever) corporation that went bust. Ooooooohh, say it isn't so!  That is practically a rounding-error financial disaster now, except when achieved by a single person like Madoff.

But the fundamental dynamics of the fraud are very, very similar to what we've heard about from a dozen other institutions in the past year. And -- the part that really got my attention -- the second-tier villains in the Enron story, the enablers and blind-eye-turners for the active fraud Enron had underway, included many that have emerged in full villainy since then, Merrill Lynch, Citibank, and boosterish business journalists prominent among them. Also: if you happened to be living in California during the Enron-intensifiedinduced rolling blackouts of nearly a decade ago, as I was, you will find yourself wishing that mob justice could have been applied to the Enron team. You'll also wonder why a guy named Lou Pai is not as notorious as the rest of them -- and how he escaped with his fortune mainly intact (and accompanied by what the film refers to as his "stripper girlfriend").

Worth seeing a first time -- or a second or third, with the new eyes of 2009. Alex Gibney, the director, is known to the world as last-year's Oscar winner for  Taxi to the Dark Side and within the Atlantic as the brother of our colleague James Gibney.

The US, China, and saving the world

Anyone who has looked seriously into China's environmental and energy-use emergencies ends up thinking, saying, or merely hoping that the US and China will work together urgently on these fronts. That would be good for China because it needs all the help it can get to avoid poisoning its own people. It would be good for America and everyone else because China's approach to carbon-emissions control will largely determine whether the world has any chance of dealing with climate problems.

Or to put things in a cheerier way, precisely because so many Chinese farms, factories, power plants, and buildings are now so inefficiently run*, there are more opportunities to make big environmental improvements here than practically anywhere else. (My contribution to this school of thought in this article.)

Everybody understands this point in the abstract. Now there's a useful new guide to what it might mean in very particular detail. For many months a scientific/technical task force run jointly by the Asia Society's Center on the US-China Relations and the Pew Center on Global Climate Change has worked on specific recommendations, which were unveiled last week. Press release is here; overview here; PDF of the report in English here; in Chinese here. Introductory video, with overview rather than specifics, below.

Promising Kremlinology note: the co-chair of the project was Steven Chu, who stepped down from that role only because he had been nominated (and now confirmed) as the new US Secretary of Energy. The report is very much worth checking out -- and, in my view, worth supporting and implementing.
 

___
* Chinese farms and factories "inefficient"? Yes, very much so -- as I explain at length in my Atlantic article. Their output is often inexpensive, mainly because Chinese labor rates have been so cheap. But, as is typical for developing countries, they tend to be wasteful in their use of energy and other inputs. Chinese office buildings take much more energy to heat and cool than Western ones, because the insulation is so poor. Farmers often use more water and chemicals per bushel of yield than in advanced countries. Out-of-date Chinese factories use more fuel and create more pollution per unit of output than in Europe, Japan, or the US. This profligacy helps explains why the air is so murky in China, but it also illustrates the opportunity for big, relatively easy gains through efficiency here.

I'm not so sure about the timing of this business concept....

From the e-mail inbox:
 

Hello,

You have been invited by Xxxxx Xxxxx to join Affluence.org.

Affluence.org is an exclusive community of affluent people dedicated to making life better for both themselves and others.

As a member of Affluence.org you will have the ability to find and interact with other affluent people from around the world, evaluate and contribute to your favorite charities, and gain access to exclusive lifestyle guides to luxury living, travel and the latest trends.Within this elite community you will be provided with access to a dedicated Affluence Concierge, receive priority access to the world's most exclusive premieres, nightclubs, parties, hotels, events and much more.

To accept the invitation to our exclusive network, please follow the link below.  XXXXXXXX.

Best Regards,

Affluence.org Administration

It appears to be a legit operation. Anyone who joins, let me know how it goes.

UPDATE: I see I'm not the first to be asked.

Meet Mr. China!

Several times I've written in the Atlantic about the Irish businessman Liam Casey, who in the past few years has built an outsourcing empire in the southern Chinese manufacturing center of Shenzhen. (Original Atlantic article here. Slideshow including snapshots of Casey here.)

In these articles I gave Casey the jokey honorific "Mr. China," derived from Tim Clissold's hilarious book of the same name. The title is a campy way of indicating the person most in touch with the Chinese trends of this exact moment.

BBC Radio 4 has just posted a 28-minute interview with Casey, called "The Remarkable Mr. China."  They make you work to get at the interview: at least from outside the UK, you have to listen within the next seven days, before it disappears, and it is compatible only with RealPlayer.* Nonetheless, if you've been asking yourself, "Hmmm, I wonder what it would be like to talk with Mr. China down in Shenzhen," you now have a chance to satisfy your curiosity. Thanks to Hillel Schwartz for tip.

UPDATE: Here is a better link, plus a podcast.
 
Mr. China (right) shopping for art in Shenzhen's famed Dafen factory art district last year:



* You can download RealPlayer free from links at the BBC site, but as anyone who has tried it knows, its installation is very aggressive and can easily make RP more of an in-your-face presence in your life than you intend. With careful configuration you can tame it and hear this interview.

Adjusting a mistuned policy: what a thought! (Public diplomacy with China dept)

In talking about Timothy Geithner's warnings on Chinese "currency manipulation" several days ago, my main criticism involved proportion.

Yes, the dollar/RMB exchange rate is one important element of US-Chinese interactions. But even if we're talking only about economic issues, it is not (in my view) the most important among them. And as soon as we think about the vast range of political, strategic, scientific, cultural and other ways in which the two countries will affect each other, it falls far down the list. I bet that from later historians' perspectives, whether the two countries can successfully grapple with climate/environmental/energy issues will matter most about their dealings in these next few years.

So why would the Administration choose to kick things off by talking about currency wars -- and nothing else?

Two positive developments today. One is a column by Rebecca MacKinnon which lays out very clearly why it is worth thinking about proportion and public opinion even in China, where the media are still heavily controlled and no national policy is subject to popular vote. She has a lot to say, in the form of a "Dear President Obama"-style open letter, but here's the gist:

if you really want to take U.S.-China relations to a new strategic level that rises above the day-to-day issues, you need to find new ways to engage the Chinese people themselves -- not just their government....The point is that while these people are not citizens of a democracy, they are by no means an undifferentiated mass of brainwashed drones.

The other is a set of comments to reporters by Secretary of State Hillary Clinton (first time I have typed those five words), in which she provided exactly the proportion missing in earlier remarks. The gist here, via Centrist Vector:

Continue reading "Adjusting a mistuned policy: what a thought! (Public diplomacy with China dept)" »

Broader point about Geithner, Obama, China, and "manipulation"

Here's what increasingly bothers me about the recent flap over Timothy Geithner's "currency manipulation" criticism of China. I am showing this in "extract" format below not because I am quoting someone else because I am quoting the thought that has been running around in my head:

Because Barack Obama has been so knowing-sounding and aware of complexities on so many issues, it's natural to assume that he and his team will display the same sophistication when it comes to dealing with China. But in reality, virtually nothing that the President or his appointees has said or done on the subject has shown much sophistication at all. I made this point at various stages in the campaign. But as time goes on you inevitably start wondering: If these people are so smart, when will they get around to acting smart about the country whose cooperation they need more than any other's to avoid true financial catastrophe?

Now, the reasoning behind that assertion:

- During the campaign, Obama did not (to my knowledge) give a speech about relations with China, unlike his major addresses on his European tour or his speech about Israel when at AIPAC. Fine: it wasn't a big, direct in the campaign.  What he did say was pretty much confined to "I won't buy poisonous Christmas toys for my kids" in early campaign debates. Meanwhile, his web site did have an all-points China policy, noting the various ways in which the countries cooperate and compete.

- Since the election, there has been one indirect but important signal of the new Administration thinking creatively about how to handle China. That is the nomination of Steven Chu as energy secretary.This was significant not because Chu's parents were immigrants from China (though that was huge and celebrated news inside China) but instead because in recent years Chu has been deeply involved in efforts to work out US-Chinese collaboration on environmental and climate-change issues. Anyone who has thought about this problem understands that if America and China are not both seriously committed to dealing with this issue, it's not going to be dealt with.

- The all-star economic team we're relying on to avoid true financial/economic catastrophe will need to work with China on just about every aspect of this plan. China has been the main buyer of Treasury notes (as you might possibly have heard). It has its own domestic economic emergency to deal with, and the tools it chooses in responding to that crisis will either ease or aggravate other countries' problems.

- Yet what is the most famous thing we've heard about China from any member of the Administration since the time the transition began? This, as reported in the China Daily:

As I argued here recently, China's management of the RMB's value (as opposed to the huffy and hyperbolic term "manipulation") is one part of the economic snarl that the US, China, Europeans, and others need to contend with. And it could become a more important and more dangerous part, if the Chinese authorities decide for their own reasons that they will try to push the RMB's value back down again, after letting it rise for years. (For details, here.)

But at the moment the exchange rate is not the most important element of US-China relations, even the financial aspect of those relations. And it most certainly is not the only element in US-China relations, which is the impression the Chinese readership and leadership could get from recent Obama Administration signals. This would be as if the only thing Obama had said about Mexico so far was, "Stop flooding us with illegal immigrants."  It may seem unsporting, but it's worth pointing out that the reason Geithner's tax problems are being overlooked is that his expertise is thought to be so necessary in dealing with China among others.

So where does this lead? Mainly to a hope that the Administration will start recognizing all the different elements of this important relationship -- good and bad, financial and otherwise, business and academic, scientific and purely personal, ones where the US needs to adjust its policy (after the Bush years) and ones where China does too.

There are lots and lots of areas where Chinese government policies deserve criticism. (For a recent example, ridiculous censorship policies.) But there are many other where it deserves support -- and most of all there are areas where the US simply needs China's cooperation for its own and the world's survival. So: less gum-flapping about "manipulation," and more serious recognition of the thousand other issues where, no joke, the two countries really do need each other. Save the harsh criticism for the questions that really deserve it.

Might as well make this an all-Geithner day

Usually journalists are in the position of being told that they have lamentably "oversimplified" or "hyped" their discussion of topics -- and told this by the real policy experts in academia or think tanks or specialized government agencies. Often enough, the accusation is true. Part of journalism's basic function is to explain, in simpler (and often necessarily less nuanced) terms, what the real experts are trying to say. If they do that well enough, they can reach people who would never sit still for the full, rococo, expert version and give them a better understanding of important ideas and problems than they would otherwise have.

But now we've got a situation where a journalist (moi-meme) is listening to a renowned expert and wondering, Can he possibly believe that things are as simple and bald as what he's just said?

The expert in question is our old friend Timothy Geithner, who when he was not being grilled about his tax problems today was saying (in his written answer to questions) that China is "manipulating" its currency. Oh my. Where do we start with this.

- That the Chinese government manages the value of the RMB against the US dollar and other currencies is not an accusation but an observation of universally-accepted plain fact. Until about three years ago, the RMB's value was flat-out pegged against that of the dollar, at a rate of just over 8:1.  Was that "manipulation"? Yes, in the same sense that the yen was for years "manipulated" at a steady rate against the dollar, or perhaps in the sense that the US "manipulates" its national borders by controlling them. Here's the basic pattern of the dollar's value against the RMB from mid-2003 to mid 2008 (via Yahoo Finance), with the  big change to a "managed float" happening in the middle of 2005. It went from more than 8 RMB to a dollar, to less than 7, during this period:


(Update note: There is no Y-axis scale on the left side of this chart, because I couldn't find a chart with a scale at the time. But as noted above, the chart shows a decline from about 8.2 RMB/$1 to about 6.8/1 -- so the dollar lost about 1/5th of its value against the RMB, not 90% as this truncated chart might suggest. Still, the main point is the change from the absolute peg of the pre-2005 years to the managed float since then.)

So, to the completely obvious extent that the Chinese government was manipulating (ie, fixing) the value of the RMB before 2005, they're manipulating it less now. Obviously they are preventing it from rising as fast as it would in an entirely uncontrolled market exchange, but again that's hardly secret from anyone on earth.

- Is the Chinese suppression of the RMB's value a fundamental reason Americans don't sell more goods there? It makes a difference but -- as I argued at very great length in this article two years ago, it's nothing close to being the main reason. Wage rates, Chinese infrastructure, US fiscal patterns, and a lot of other factors play a huge part. Details too exhaustive to go into here.

- Is the Chinese determination to control the RMB's value within a set band an important factor in current world financial patterns? In this article I argued that it was, but in the non-obvious way of directing the fruits of China's labor disproportionately into foreign investment rather than higher living standings for its own people. That is, "manipulating" the currency has been an important part of subsidizing US living standards in recent years. Details in the piece.

- Could a Chinese government attempt to protect its own recently-ravaged manufacturing work force by pushing the RMB's value back down -- after many years of letting it drift higher -- cause problems for the rest of the world? Yes indeed -- as explained in this very valuable post by the  Beijing-based financial authority Michael Pettis. So they should be strongly discouraged from doing so.

- Do we think that the Chinese authorities who have put some $2 trillion into US assets will respond blandly to being labeled manipulators -- or to a policy that would effectively devalue the investments they've already made here? If Americans think that, they're naive -- in my view, based on this interview with a man at the center of Chinese decision making.

I lack the energy to go any further down this list, and this is enough to make the point. These are just a tiny few of the factors that go into any US government consideration of how the RMB/dollar relationship affects the economies of both countries. And to boil it down to the bald assertion that "China is manipulating its currency" ignores, vulgarizes, and misconstrues a lot more than it clarifies.

Oh well. My personal pledge: as many cheery things as possible to say about our future Treasury Secretary from this point on. We all have a stake in his success -- including the "manipulative" Chinese!

Pensee dept: followup on the "no buffer, no resiliency" economy

Yesterday I mentioned a summary of the latest John Boyd conference, which included the argument that today's lean, hyper-efficient, "just in time" economy was magnifying the effects of today's economic collapse. Problems in one sector instantly become problems in another, since so many businesses were fine-tuned to await the next order, the next payment, the next shipment from someone else.

Via reader Evan Oxhorn, I learn that the novelist David Brin has recently expanded on just this theme. Anyone interested in the first dispatch will find it worth reading Brin's thoughts, here. As a preview:

I refer to a brittle weakness in our economy, courtesy of the same smartaleck caste of MBAs who brought us derivatives and hyper-leveraged finance.  A frailty that could, potentially, turn some short-term crisis into full-scale disaster -- and all because of a good theory that's been taken way too far.

For decades, we've been told -- by the same fellows who brought us "efficient finance" -- that manufacturing and commerce should be fine-tuned to squeeze every penny of profit, by trimming away all "fat." ... Under this principle, any reserves that are kept on-premises will only encourage sloppy management and incur unnecessary storage costs -- a calculation that has long been exacerbated by shortsighted tax policies that punish warehousing and inventory-keeping.

This approach, called "Just-In-Time," is based upon ... a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption. 

The whole question of what today's economic seize-up does to comfortable, accepted economic creeds -- from management theory, as above; to the pluses and minuses of full globalization; to the role of regulators; to theories of trade -- will be with us for many years. I do not remember a time when so many ideas seemed to be pressed so hard by fast-breaking events. Probably the last time it happened quite this way was in the 1930s.

I am enough of an optimist to think that the process of working out new ideas won't be as protracted as that last time, and that it need not end in world war. My cheering thought for the day.

First in a series of year end pensees: grand strategy

Could end up being a very brief series, but here is one to start:

As my wife and I near our third consecutive Christmas/New Year stretch outside the United States, mainly we feel lucky for all that we've been able to see and do and experience in China and its environs.

But of course there are costs. And while I wouldn't exactly put this at the top of the list of things we regret missing out on (compared, say, with seeing our families and friends etc), I am in fact sorry not to have been around for the last few installments of the John Boyd Conferences, where people interested in Boyd's theories of competition gather to apply them to topics ranging from financial meltdowns to handling Iraq. Much more about Boyd via links you can find here, here (second item), here,  here, and here, for starters.

(Left: the classic photo of Boyd in his days as a Korean War fighter pilot.)

So I wasn't at the University of Prince Edward Island early this month for the Boyd 2008 session. But I am struck by this summary of the session from its organizer, Robert Paterson, and how many sobering truths about the years just past and just ahead it presents.  Here is one sample from a long list of bullet points:

• The search for efficiency and the urge to consume has set us all up like a row of dominoes - there is no buffer, no resiliency. As one problem rises it causes another. As one solution is tried it drives another problem. We all pull back and the consumer economy stalls. The auto industry and credit firms feeds the media (40% of conventional advertising). Papers and TV and Radio networks, many subject to LBO's will have to fail as per the Tribune. Every sector will be laying people off. Sales of all things fall off a cliff - driving more business failures and layoffs. Cities and states that depend on sales tax and property tax and the credit markets can rely on none of these. So they too will have to lay off millions - thus making all the problems worse. National governments will be asked to save us all and of course cannot. As States and Cities get squeezed and cannot borrow, they will too lay off millions - teachers, firemen police. No one will be safe.

This is very close to what I was trying to explain three and a half years ago in my "Countdown to a Meltdown" imagined-history article in the Atlantic. The way that everything really is connected -- I recently saw a school in southern China that will be in trouble because its donors are losing money through the Madoff fraud in New York  -- and that no one has "any buffer, any resiliency" is something we've known in theory but are only now comprehending in its daily, cascading reality. It's worth looking at the summary for similarly uplifting thoughts.

Very useful shopping advice from Roy Blount Jr.

We all know that the retailers are in trouble because of collapsing consumer demand. (For years Americans spent too much; now....) We all know that the automakers domestic and foreign are in trouble because people don't want to buy cars. Real estate is in trouble because people can't or don't want to buy houses. The stock market is in trouble because people don't want to buy stock. And, arguably most ominous for the republic, newspapers are in trouble because people are losing the habit of buying papers.

There is not much any one individual can do about this. I'm not going to buy a new house or car just because it would have useful tonic effect on the market. There are only so many papers I can buy per day. But after the jump, Roy Blount Jr, through the years a frequent Atlantic contributor and current president of the Authors Guild, suggests a voting-with-your-dollars strategy that is within people's means and can make a significant difference.

Starting now, I've changing my Christmas shopping plans based on Blount's tips. The presents he suggests are good ones -- and although I can't visit independent bookshops myself where I am, the ones I like and have shopped at (Elliott Bay, Powell's, Politics & Prose, etc) have web-based order systems.  Seriously, this is a good idea -- as are, of course, gift subscriptions to our own magazine.

Blount's letter to Authors Guild members* below.
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Gao Xiqing interview in the new Atlantic

I think highly of Gao Xiqing. He is the president of the China Investment Corporation, which oversees about $200 billion of China's overseas investment, largely in U.S. markets. (You think you're worried about the market's collapse....) He knows the United States and American culture well: he went to Duke Law School in the 1980s, was the first Chinese citizen to pass the NY State Bar, and practiced at Richard Nixon's old firm, Mudge, Rose. And he gives every sign of having enjoyed this immersion in America. Twenty years ago he came back to help build China's securities industry, and he took his current position when the CIC was created last year.



Gao has an earthy, jokey command of colloquial English and -- at least on my exposure to him -- he laughs frequently, including about himself. (The picture above is how he would look just before cracking a joke.) I was grateful that he agreed to an on-the-record interview, in Beijing, shortly before the U.S. presidential election. I think it is worth reading with some care: the article about the interview is in the new issue, here.

In the previous issue of the Atlantic, I complained that Chinese officialdom generally has a tin ear when it comes to explaining itself to the outside world. It is trapped in formulations and stilted language -- "jackal with a human face" to refer to a certain "splittist" leader of Tibetans, for instance -- and seems unable to present arguments that actually engage the thought processes of the outside world, as opposed to reflecting internal-Chinese concepts and power plays. Gao is a striking exception. I am in no position to assess his financial expertise, but I can judge his ability to engage seriously with outside questions. If more powerful Chinese people spoke more often to more outsiders this way, things would be better all around. 

Harping on the RMB

I truly love the (state controlled, voice to the outside world) China Daily. There is a wonderful purity to the worldview it conveys. It never disappoints -- as with this front page story yesterday setting the stage for the latest meetings in the US-China "Strategic Economic Dialogue" series.

 

Those urging the U.S. to stop harping on currency values turn out to be two Chinese analysts, one at a government agency. Who needs to hear from financiers, business people, economists, or, ahem, experts from any other country!

As it happens, I too have been continually urging American politicians to stop harping on beating their gums about the "rigged" Chinese currency, notably here and here -- mainly because, until quite recently, it was already rising in value. Moreover, the obsession with the RMB seemed mainly to show a failure of imagination on the US side: it was the only thing Americans could think of to "do" about China's trade surpluses.

Yes, the Chinese government was obviously "managing" the currency's rise and keeping it unnaturally low to help exporters (as explained blow-by-blow here). But U.S. discussion seemed based on the assumption that this was the secret of China's export boom. As I heard constantly from the foreign and Chinese business people I visited in factories and export shops and quoted in those stories, it was at best a secondary factor.

Now things are different. China's exporters, like businesses in every part of this recession-slowed world, are losing orders and laying off workers. This is tough for them -- as the counterpart is tough everywhere else. In response, governments elsewhere in the world are taking steps that, at a minimum, should not worsen conditions for other economies. That is, they mainly are mounting stimulus programs to keep people buying, whether from domestic  suppliers or foreign sources. China too has of course announced a huge stimulus program.

Yet there are increasing rumbles of China's desire/intent to do something that would in fact aggravate problems elsewhere: trying to help its exporters by pushing the RMB's value down again, after two-plus years of letting it rise.  In essence, this would be a game of exporting unemployment -- yes, yes, with all caveats about Chinese people being on average so much poorer than Americans or Europeans and suffering so much more when laid off.  

Some very interesting economic discussions in and around China concern exactly this issue. Will the government try to devalue the RMB again? Should it try? Could it succeed? And if it tries, how will other countries respond? Could this be the step that turns a "contained" international economic crisis into something worse?

This subject is so complex, deep, and fast-changing that there are countless angles to explore. For now, as a first installment, after the jump are excerpts from my friend Andy Rothman's "Sinology" newsletter for CLSA, arguing that on balance the Chinese authorities won't take this step. (Proprietary newsletter, so no web link.) More on this theme to come.
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The Asian angle on the Geithner nomination

In an email from Bill Bikales, the senior economist for China/Mongolia with the UN Development program, based in Beijing:

Two nice things about this pick - I should say first that I do not know him personally.
 
First, his Asia background.  Geithner's father, Peter Geithner, was a development specialist who opened the Ford Foundation's China office - the first foreign NGO here, under a special agreement that continues to this day.  That was just before Tiananmen Square, and the father was part of the Foundation's difficult but, ultimately, undoubtedly correct decision to remain engaged.  Tim apparently also studied Chinese, was posted in Tokyo for Treasury, and focused on Asia studies as undergraduate and graduate student.  This is all great background for Treasury's international dealings in the coming years.
 
Second, he was head of the IMF's Policy and Development Review Department (PDR) for two years.  PDR are the people there who provide the intellectual framework for, and monitor and sign off on the work that the country missions do.   Some of the best people I ever dealt with at the Fund.  I like this because I've thought more than once in recent years that what the US needs to do is take a step back and look at itself just as the IMF looked at, say, Argentina, during those years, and develop a tough IMF program; get your fiscal act in order, get serious about risks in the financial sector, establish external sustainability.   Basic flow of funds accounting techniques, the core IMF methodology, would be extremely helpful. Obviously nobody will impose anything on the Congress a la IMF conditionality - but US macroeconomic policy has been seriously off track for 8 years, and a strong IMF style program is precisely what is needed.  I will take pleasure these coming months in speculating about what must be going through Geithner's mind.  It won't only be bail-outs and stimulus packages - the short-term fixes --  I am quite sure.

Our U.S. banker overlords

As my friend Joe Nocera pointed out in his terrific piece yesterday in the NY Times, some of the (shameless) banks that have benefited from the huge public bailout bill are (shamelessly) planning to use the money not to loosen up lending to their client businesses, helping to offset the inevitable damage to the "real" economy that the credit freeze-up is causing. Instead they are using it as cheap capital for their own expansion plans.

Grrrrrrr.  Or as Nocera put it, after hearing a JP Morgan Chase official indiscreetly confess this plan:

[T]he dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who's been indiscreet enough to say it within earshot of a journalist.

 I asked another industry insider about this -- and about whose fault the misallocation (waste, diversion, rip-off -- choose your term) was. This person made clear that the same behavior should be expected from other banks, starting with Citibank, and he gave this explanation:

Frankly I think the fault lies with Paulson (and his boss...). The bankers didn't ask for it. Paulson pushed it on them. (Read WallStreet Journal commentary on the meeting, from witnesses) but after the bankers realized they had no choice but to say yes, they also saw it was an incredible gift which floated from the sky: cheap equity

I don't think there's sufficient public awareness of a profound diversion of $ 250 BILLION which got shifted deftly from "starting to fix the mortgage-backed security crisis" to "relatively low cost equity to banks for them to use however they see fit".

Remember that 35-year old guy who Paulson was going to appoint to oversee the purchasing program of the mortgage-backed securities? What's his job now? I imagine he has little to do anymore (because $ 250 billion of the initial $ 350 billion -- within the total $700 billion TARP program [Troubled Asset Relief Program]-- has already been earmarked for this "nice new equity" deal" hence the 35-year old only has the rump $ 100 billion to play with).

Ps I don't think it was design. I think it was impromptu. Paulson had been fixated on the asset purchase program up until time Congress approved the $ 700 BN TARP. Then Gordon Brown in UK applied the bank equity deal in England for some UK banks. And a day or two later, Paulson followed the UK practice shifting away from asset purchase to equity donation.

Financial press has made it clear that the UK came up with the formula which Washington (ie Paulson) eventually adopted. But US public is very much unaware

This will become a bigger issue.

More on the lean times / VC / startup front

In three accounts over the last week and a half (here, here, and here), I've mentioned how the chaos of financial markets is spreading to the tech sector, and what that might mean for the timing, scale, and duration of damage to the "real" economy in which companies make products and create jobs. 

Continue reading "More on the lean times / VC / startup front" »

Sobering news dept: The Hobbesian world of startups

Twice in the last week (here and here) I've mentioned the presentation that a leading California VC firm, Sequoia Capital, gave to CEOs of the companies it had funded. The message was: severe turbulence ahead, strap yourselves in, and to survive you must throw every bit of surplus weight and cargo (ie, employees and expansion plans) off the craft.

My friend the business strategist Lawrence Wilkinson (who is involved in a company with one of my family members) recently posted a fascinating item on his "Scenarios and Strategy" site about the other side of this interaction: the ways some private equity firms are using tough times to get very tough on the companies they have backed.

The tension between funders and entrepreneurs is familiar and well-explored territory. Any interesting account of the tech economy presents it as a major theme. To take one example from many possibilities: Charles Ferguson's High Stakes, No Prisoners, the tale of creating and selling his own tech company. Yes, this is the same Ferguson who last year produced the influential Iraq documentary No End in Sight. The basic tension of course arises from the fact that VCs want to use the scarce resource they control -- money -- to get more of the scarce resource that company founders control, namely shares of corporate ownership, including the cut of the rewards if a startup makes it big.

But Wilkinson, who has seen many rounds of this battle before, says it has taken on a newly nasty tone. According to him, many of VCs and other funders are now saying: bad times mean your company isn't growing as fast as we hoped. So, we will take more of "your" share:

I've been awash in reports, some in the press, some from friends, of private equity investors leaning on the companies in which they have stakes to reprice those stakes- to give the investors more.  The arguments from one case to the next are idiosyncratically different in their details, but they all have the same general thrust:  "we made our investments expecting more growth than it now seems likely the company will achieve, so you (the company) should give us a bigger stake."...

The issue is in no way misrepresentation... The issue that called the question was.. the sudden dramatic downturn in the economy:  credit is tight; anxiety is high; spending has dropped like a rock...  a situation triggered- and to some extent at least, abetted, if not indeed caused- by the excesses of the very financial firms now doing the demanding.

I've been around long enough to have gone through several busts; I've learned that many (if not most) investors understand opportunism to be not just their right, but their obligation.  (And indeed, I've seen some forms of opportunism contribute powerfully to turn-arounds.)  But I've never seen opportunism practiced in such a rapacious way as these recent days- nor, I'd suggest, so desperately nor short-sightedly selfishly....

It's a situation all too resonant with the first version of the Paulson Bail-out Plan: privatize the upside; socialize the risk.

The whole thing is worth reading, and is another illustration of the ways in which the recent  financial turmoil, serious enough on its own, is taking on a more destructive and longer-lasting form as it begins to burden the operations of the "real" economy.

More on the Sequoia Capital presentation

Yesterday I mentioned a presentation by the tech VC firm Sequoia Capital, about what the financial contraction would mean for start-up businesses and the tech economy in general.

After the jump, extra notes on the presentation from someone at the meeting.

This account appeared first on a subscription-only site, TheFunded.com, so I won't quote very much of it. But even a brief sample suggests that when future economics teachers want to give their classes a concise lesson in how economic downturns spread, or what a "vicious cycle" means (a term prominently misspelled in the Sequoia presentation itself, one of several signs of a rush job), they can use this session as a convenient example. Thus:

The VC firms warn that tough times are at hand; their advice is that all their startup companies cut, cut, cut, laying off as many people as possible and eliminating every purchase or investment they don't absolutely need to survive. The startups do that-- and then the companies they used to buy from have to begin cutting drastically themselves, as do the people all these firms have just laid off. Everyone is buying less, and... The point is right out of Ec 101, but this is a particularly clear and real-time example.
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Continue reading "More on the Sequoia Capital presentation" »

Very sobering report from Silicon Valley

A number of friends in the SF Bay Area have directed me toward this recent slide show by Sequoia Capital, one of the biggest-deal tech VC firms. It's been widely viewed in the tech world and is said to reflect, and no doubt partly shape, the prevailing sentiment. (Update: Also, I see now, it was recently mentioned on the NYT tech blog.)

At least for me, with an ever-shaky internet connection here in Beijing, the 56 slides of this presentation are quite slow to load. But they have a lot of useful data about the origins of the current crisis, plus a lot of chastening advice for companies that want to survive. I introduce them here as part of the effort to shift attention from the purely financial-market disasters of the moment, important as they are, and toward the longer-term implications for the companies that create products, jobs, and real wealth.  

Clickable version below; or this direct link to "Sequoia Capital on Startups and the Economic Downturn." Caveat lector -- by which I mean, in this case, not so much that the reader should beware of the source as that we should beware of the conditions ahead. 

Last word on my "ignore the DJIA" crusade

In the last few days I've made a quixotic complaint -- that we spend too much time thinking about stock-market prices -- and proposed a wildly quixotic solution. It is that we devise real time credit-congestion maps, showing where companies are about to be financially starved out of viability for lack of working capital, modeled on real time traffic-congestion maps now popular around the world. For visual amusement, here is the traffic situation in greater Melbourne, Australia just now:



Obviously my proposal is in the "thought experiment" category, rather than something that is actually going to occur. (Thus it is in the same category as another longstanding crusade I'll rev up again soon: to get rid of what is commonly but erroneously referred to as the "Nobel prize" in economics. More on that another time. Interim reading here.)  One problem with the real-time credit map is that the underlying data points -- the countless daily business decisions based on available credit, among other factors -- can't quickly or easily be tracked down, and are held by people who often have a strong interest in keeping them private.

After the jump, a reader's note that spells out some of the further complexities of amassing and publicizing such data. But the reader also underscores my main point: the need to find some way to dramatize the reality that today's financial crisis involves things more serious than collapsing share prices.
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More on credit crises and financial indices

I mentioned two days ago my wish that the press and politicians would pay less attention to daily gyrations in stock market prices and use that time, space, and effort to concentrate on other economic indicators and issues. Yes, even though this would require radical shifts in the way CNBC and other news organizations do their work.

The folly of focusing on stock prices is true enough in normal times, because the daily close on Wall Street has much less to do with the real economy than the obsessive level of coverage would suggest. It's all the more true during real economic crises, like the current one, because it intensifies fear while diverting attention from the truly most threatening problems. At the moment, the situation with the greatest potential to destroy companies, jobs, and lives is not the loss of paper value on the stock exchanges, gigantic as that has been, but the run-on-the-bank style credit freeze that is forcing good companies out of business.  

To refine the previous point, it's not that no measures of credit tightness exist. Originally I mentioned LIBOR, essentially a measure of banks' confidence in other banks' ability to repay loans. Many people have written in to suggest that the better measure is the unappealingly  named "TED Spread," which is essentially a measure of how risky commercial loans as a whole seem, compared with parking the money in no-risk US Treasury securities. (Explanation here; also see special features from Slate's Big Money and NPR's Planet Money,  which appeared just before my item.)

Yes, TED is a help. But it has limits of its own -- it's  one generalized measure of sentiment in one big financial center. I still feel the lack of a measure as compelling, as interesting, as able to direct attention, emotion, and action as the ups and downs of the Dow.

My dream would be something equivalent to on-line real-time traffic congestion maps, which show you, in red, the areas that are jammed and, in green, those that are flowing OK. (This one shows the conditions a little while ago in my former home of Kuala Lumpur. These features are not just for Americans any more.)



I'd love to see some comparable dynamic, real-time, real-company credit congestion map. In green, lines of credit that are open and are letting firms employ workers and sell goods. (Ideally, the lines would run from the location of the bank offering the line of credit to the company's HQ or main factory.) In orange, lines that are being withdrawn. In red, companies that being forced to close operations or lay off workers simply because they can't get working capital. It's not going to happen anytime soon, but we'd be better off if it did.

On presidential statements in time of crisis

To follow up the item from a few minutes ago:

When a president speaks on live TV in a moment of crisis, he should be prepared to do one or both of the following things:

1) Announce some solution, plan, change, initiative, or other specific effort that will address the source of public concern.

2) Explain the problem, or set a mood for coping with it ("we shall fight on the beaches, we shall fight on the landing grounds.. we shall never surrender"), in a way that changes the public's outlook from what it was before the speech.

If a president doesn't have the ammo to do either of those things, he should not bother. Thus, unfortunately, President Bush should not have bothered to make his statement this morning, which essentially re-stated the arguments he has presented before that did not suffice to stop the panic. Let's hope for more real action over the weekend.

I wish we emphasized some other measures

I have argued for decades that the press pays too much attention to daily stock market movement. Their immediate fluctuations are of interest mainly to day traders (ah, remember when that was a popular pastime). Their longer term connection to real national wealth, welfare, and happiness is imprecise, to put it mildly. This is especially so in the volatile and panicky mood of the moment.

Obviously my effort to get the daily market reports pushed to the inside pages is a doomed crusade. But in the short run, I wish that, instead of the DJIA / S&P 500 / NASDAQ etc, we had some comparably precise seeming, attention-getting, publicized* measure of credit availability. From all evidence, that is the real emergency driving real destruction of real companies creating real products and about to eliminate real jobs.

While waiting to see what President Bush (ah, remember him!) might have to say on the topic, anecdotage that is getting my attention:

Three weeks ago, I mentioned that DayJet, the pioneering air-taxi company, was shutting down not (it claimed) because of overt business problems but because of the impossibility of getting short-term finance. At the time, the credit squeeze might have seemed an excuse for the inevitable diceyness of the air travel business.

But just in the last few days, I've heard separately from three friends who run objectively "viable" businesses that they are on the verge of closing permanently, or laying off much of their staff, because they can't get short-term working capital. One said he was on the verge of having to close a manufacturing facility in the Midwest that, as he put it, "realistically will never open again." And this is from a group of friends that is heavy on writers, political people, academics, etc rather than a lot of business owners. I have never heard stories like this before. When I was living in northern California during the tech crash early this decade, the story was about the relatively slow deflation of (mostly) unrealistic plans rather than the widespread destruction of enterprises with a future.

My minor point: mainly because they're so precise and fast-moving, financial-market measures crowd out attention from what we really need to worry about, the imminent destruction of businesses and jobs that "should" survive.

My major point: the United States is near a moment of fundamental political choice. To have the discussion distracted by -- well, it would be nice to be even-handed about this, but the truth is that the distraction has been 99% from the McCain side, with the ongoing crap about the Weathermen in the 1960s -- is suicidal. A few weeks ago Senator McCain "suspended" his campaign because of what now seems a mild early phase of the financial crisis. Maybe he and Barack Obama could agree over the weekend to suspend discussion of any topic other than avoiding real economic devastation for the time being, at a minimum until their debate next week on economics.

Now waiting to hear Bush.
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* The LIBOR, the London Interbank Offer Rate, is one well known proxy; my point is that the DJIA gets 100 times the attention but is not 100 times as important right now.

Personal economics in three easy pictures

Here's how the dollar's value against the Chinese RMB has changed during the two years I have been in China.

Yes, yes, I realize that this is a truncated scale, and that the dollar's value has fallen by around 15% (from 8 RMB/$1 as we arrived to just over 6.8 now) rather than by around 90% as the graph might suggest. Here's the 5-year graph, with similar scale, showing the trend since China switched from a strict peg to a "managed float" three years ago.

Continue reading "Personal economics in three easy pictures" »

Valuable NYT story on air taxis

Today's NYT story on DayJet and other new air taxi companies makes the important point that what has slowed them at the moment is not (necessarily) a flaw in their own business model but the general collapse of the U.S. credit market. Joe Sharkey of the NYT says of Ed Iacobucci, CEO of DayJet:

Just as his company, DayJet, had proved that there was a business in using small jets for short-haul, on-demand service and was poised to expand its market, the credit market froze.... "All of the metrics are wonderful," [Iacobucci] said. "We're getting repeat buys. We're getting people paying at the price points we want. But we haven't been able to raise the capital.

In case it's not obvious, companies like DayJet need to expand to succeed because of the same network-efficiencies principles that determine the value of cell phone systems, social-networking sites, companies like FedEx and eBay, and modern networks in general. The more people who are already connected, the more attractive it becomes for each new member to join. Thus the familiar Metcalfe's Law, from Bob Metcalfe: the value of a network is proportional to the square of the users it connects.

For an air taxi company, this means: the more cities it can fly to (that is, the more "nodes" in its nework), the more attractive it becomes to new customers and the more efficiently it runs (because fewer wasted return trips and "deadheads.") That is why the DayJet plan called for adding new cities every month. And this is why, according to the DayJet officials and others, their business plan would have supported continued expansion through this year and beyond -- in "normal" credit circumstances. Their plans had allowed for oil at well over $100 a barrel -- but not for an inability to get working capital at all.

Where, when, and whether small-jet taxi services will become successful is impossible to say. But it's worth noting, as this Times story does, that the impediment to date has not been the airplanes or the cost structure or customer demand but rather the current credit freeze, and whoever you want to blame for that.

The China price (updated)

My wife's new favorite food is fresh yogurt, which comes in individual ceramic pots at the local grocery store. (Full one in the middle; already-enjoyed ones on the sides.)

The pots are about four inches tall, and quite solidly made. Empty ones could serve as nice little vases or general knick-knacks and could easily go for a dollar or two apiece, or more, in a U.S. housewares store. Here each yogurt plus its pot costs two and a half RMB (35 US cents). It's either two RMB (28 cents) for the yogurt and one-half RMB (7 cents) for the pot, or vice versa. My wife didn't remember which the sign said. We're building up quite a supply. Maybe the foundation of a specialty-import business if we can get them back to America? The spirit of Chinese entrepreneurialism is infectious.

Update: Several correspondents have usefully pointed out that the pots can be returned for a deposit, just like beer bottles. Makes sense! It turns out that my wife knew this (I have never bought them myself) but just didn't mention it to me! Now I know -- the real communications problems are within one language, not across language boundaries -- and we can haul a bunch of them back to the store for pockets full of cash.

Not about NC/Indiana: significant air-taxi update

The excellent industry newsletter AVweb has just reported that DayJet, subject of this story in the current Atlantic, is scaling back expansion plans and laying off (an undisclosed number of) employees. Here is the story from AVweb:

Start-up air taxi operator Dayjet has announced it will "scale back" its immediate growth plans and lay off employees in all areas of its operations. In an email release today, company founder and CEO Ed Iacobucci did not detail the numbers of people let go. Iacobucci blamed weak capital markets and not the company's early performance for the decision. He said expanding the company to the point of profitability would require a $40 million capital infusion and he apparently couldn't find that money. "I won't dwell on this point, but suffice it to say that given the current state of the U.S. capital markets, the timing of our planned financing could not have been worse," he said.

Iacobucci said the "proof-of-concept phase" the company is now in has proved the market is there for the small-jet people mover system he envisioned but it has to grow from its current fleet of 28 aircraft serving 11 "Dayports" to as many as 50 aircraft branching out from up to 30 hubs to be profitable and that's why it needed the $40 million. While DayJet seems confident that it will eventually find the money and markets it needs, the larger question might be what the delay in doing so will do to Eclipse Aviation. DayJet is reported to be Eclipse's largest customer with orders for 1,400 of the estimated 2,500 aircraft on Eclipse's order book. Calls requesting comment from Eclipse were not immediately returned.

When I was at the DayJet headquarters three and a half months ago, the company was hiring like crazy and talking about its month-by-month expansion plans in cities served, passengers carried, and aircraft in the fleet. At the time it had five (I think) "DayPort" centers -- bases from which flights go to a variety of smaller cities. Apparently it has now grown to 11 DayPort centers serving 60-plus cities. The plan that was laid out to me was to get to 30 DayPorts serving 100-plus cities by the end of the year.

Whether this is a "growth slowdown" or an actual cutback, and what it portends, I obviously don't know. For now just passing on the news.

The horror

CCTV just ran a news feature on the nightmare possibility that someone might copy the official broadcast of Olympic events and then distribute it in a pirated or unauthorized form. The newscaster pointed out that this would be in flagrant disregard of the intellectual property rights of the Beijing Olympics themselves and of CCTV, the official broadcaster.

I can barely imagine the horror of some group in China copying someone else's proprietary material and distributing it outside the proper channels.

(Below, from the latest trip to the local video store. Click for larger version.)

For the record: stupidest moment in policy ever?

Usually I see no reason to chime in on an issue that many other people have discussed. But, perhaps because I've just come back to China, I feel obliged to register a view for the record about destructive nuttiness in my homeland:

The pandering and ignorance-across-party-lines represented by the John McCain-Hillary Clinton united front for a temporary reduction in the gasoline tax should make Americans hold their heads in their hands and moan. No one who has thought about this issue thinks that it will actually reduce prices or -- more important -- help the the people disproportionately hurt by $100+/barrel oil and $4 gasoline. And to the extent it has any effect on America's long-term approach to energy policy, transportation, oil dependence, and climate change, the effect will be perverse.

I can imagine that John McCain, who boasts about his sketchy command of economics, might consider this a good idea. But the master of policy, Hillary Clinton??

Please. This is embarrassing. It makes me long for the good old days of debating about flag pins on the lapel. And I wonder: has there been bipartisan agreement to stupider effect in, say, the last fifty years? The US Senate's 88-2 vote in favor of the Gulf of Tonkin resolution in 1964 doesn't count: they didn't know what lay ahead. Hillary Clinton, at least, knows why what she is saying is wrong. I will pay for a year's subscription to the Atlantic for anyone who can come up with a more foolishly destructive bipartisan example.

Update: The 2002 Authorization for Use of Military Force vote that paved the way for war in Iraq doesn't count either. That vote reflected terrible judgment, in my view, but not outright stupidity or, as with the current gas-tax charade, certain foreknowledge that the policy being recommended would do no good.

Just a little data point

I have been planning on making a quick trip to Russia, which for reasons unrelated to my comments here will not occur. But in preparing to apply for my visa at the Russian embassy in Beijing, I was just adjusting to the quite amazingly thorough visa form ("List every educational institution you have ever attended... Give name, supervisor, and supervisor's telephone number for everywhere you have worked for the last XX years...") when I encountered the real problem. US cash!

Depending on how quickly I needed the visa, the fee would be $150 (for five-day service) or $300 (same-day). But the fee had to be in cash, U.S. greenbacks, and not just any old dollars but "new bills with the watermark and large portrait." Hmmm.

Since I have about $28 in US cash with me in China, I was asking American friends for help ... when I recently learned that the policy has changed. No more Yankee dollars! Only Chinese RMB accepted -- no word on required newness. And at a punitive exchange rate too. (The rapidly-sinking dollar is worth just about 7 Chinese RMB now, so $300 would be 2100RMB. But the Russians are multiplying it at the rate that applied more than a year ago, 7.8 to 1. So the "$300" visa now costs 2340RMB, or about $334.)

Of course the exchange rate is not the issue. It's the "your money is no good here" aspect that I found interesting. Another round in the Bush-Putin war of nerves? Just a scheme to profit on exchange rate arbitrage? A sign of respect to their local Chinese hosts? Or maybe the Russians are reading the U.S. financial pages too?

Reality check

This is the kind of scene I wish I could convey to people who worry about China as the all-conquering juggernaut that has coped with every internal challenge and is sitting around thinking about how to take over the world.

My wife and I spent the afternoon at a public "High Tech Middle School" in Ningxia autonomous region, in western China bordering Inner Mongolia. The students could not have been more charming or open-spirited. Here's how a few of the girls looked:

There are wearing school uniforms in the picture -- it's a Sunday afternoon, and they'd returned from their homes and villages in a 25-mile radius, to spend the next six days at school. During the week they live in dorms eight to a room. But you'll notice something about the uniforms:

Continue reading "Reality check" »

The Atlantic's motto (cont.): Today's news three years ago

Just one last reminder, this one prompted by the Bear Stearns news and the collapse of Asian stock markets around me as I type, of the Atlantic's "Countdown to a Meltdown" cover story, by me, from the summer of 2005.

The point of steering readers toward the article once more is its attempt to explain, while it was going on, the origins of the credit bubble whose collapse is now causing problems.

Some "predictions" in this fictional history are looking pretty shaky now -- for instance, the assumption that the first black American with a serious chance at the presidency would be a four-star Army general running as a Republican. (Our 45th president in this scenario, the "Desert Eagle," becomes a hero by leading the raid that captures Osama bin Laden just before the 2012 elections.) But some of the other predictions, about the spread of panic from the real estate markets to the international financial system.....

Life in the gray zone, aka Region 5

About a third of the pirate videos we get in China are fine, in the sense that they play properly and are in the advertised language. About a third are studio-promo copies, which were originally handed out "for your consideration" at Oscar time. When you watch these, you see "Property of Columbia Pictures" or some such label across the screen every few minutes, like this.

The other third of the videos are in Russian. (The really cheapo videos, shot by somebody sitting in a movie theater with a concealed camera, and chock-full of audience noise and people walking around, are pretty rare now.) I don't mean movies made in Russia or starring Russians. I mean the standard American or British studio film dubbed into Russian language. For instance, the lightweight Hollywood aerial-action movie about the WW I Lafayette Escadrille, Flyboys. Here's its opening menu

Russian? Why so many films in Russian, and not, say, Spanish or Thai? What does it say about a country that China looks to it as a source of pirated videos? I wonder this every time I play pirate-video-roulette and wonder whether this new video will be another unintended step in my familiarity with the Russian language.

Reader Ed Fisher helpfully provided the answer, which appears to check out:

Regarding your knockoff DVDs: The reason so many of them are dubbed into Russian is because the studios have started releasing movies for Region 5 (which includes Russia) much earlier than in the US, to combat piracy. Of course, it's had the opposite effect - Russian releases are immediately pirated and then either distributed as-is or merged with US audio from the theatrical release.

More on the Region 5 topic here.

Next on the trail of gray-zone inquiry: Who, exactly, in China controls the business that makes these billions of DVDs, and how are they so thoroughly protected against enforcement? Like most people here, I have my suppositions; and like most people here, I prudently keep them to myself.

The $1.53 Trillion Question

The perils of even a modest lead-time: when my article in the latest Atlantic about China's holdings of foreign assets went to press, the best and safest estimate we could find of the size of these holdings was $1.4 trillion. Thus the title: "The $1.4 Trillion Question."

This weekend the People's Bank of China, China's equivalent of the Federal Reserve, announced that the holdings had now reached $1.53 trillion. They went up by more than $460 billion in 2007, and they're still rising by more than $1 billion per day.

In any case, the forces explained in that article still apply -- and maybe we'll have to update the title for the web version of the piece (which is free, outside the normal firewall), to reflect the mounting total month by month. By the end of the year: "The Almost-$2 Trillion Question"? Which would mean that, on average, each American would not have borrowed about $4,000 from China; the figure would be closing in on $6,000.

Passage from the original, days-of-innocence article:

This is the real meaning of the vast trade surplus-$1.4 trillion and counting, going up by about $1 billion per day-that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

On the actual, you know, "issues" the next President will face

Enough of this campaign hubbub! Whoever is left standing to be sworn in 377 days from now will suddenly have to worry about things like.... the Chinese government's enormous hoard of U.S. dollar assets.

My attempt to explain how exactly that pile of money was stacked up, and what the Chinese government has in mind for it, in this article from the Atlantic's new January-February issue. If you been yearning to know how the dollar you spend at Wal-Mart or CVS is eventually reincarnated as a Chinese-held Treasury note, or why Stephen Schwarzman of Blackstone is about the most reviled foreigner in China at the moment, your dreams have come true.

Unlike most previous such announcements, I don't have to say "Subscribers Only" for this one. It's in the free section of our site. Nonetheless, as always, Subscribe! Among other reasons, you'll get to see the wonderful full-sized version of the wonderful Guy Billout's illustration for the piece, reproduced in miniature online and below.

By their tiny banknotes you shall know them

Odd little Shanghai/Beijing difference:

In Shanghai, the smallest currency bill I routinely saw was the 5 kuai (RMB) note. It's the violet-colored, Mao-adorned one at left in the picture below. (Click on the photo to see it enlarged.) It's worth about 67 cents US. Anything smaller was a coin.

In Beijing I very rarely get coins and instead wind up with pockets full of amazingly penny-ante notes. The 1 kuai note (13.5 cents) is omnipresent. It's the greenish one with Mao on the right, above. What I still can't quite believe are the 1/2, 1/5th, and 1/10th kuai notes, the latter worth just over one cent, that I virtually never saw in Shanghai and frequently get in change at stores in Beijing, as I have in rural China. The 1 jiao note, one tenth of an RMB, is the brownish one at top, featuring ethnic peoples rather than Mao. Indeed this afternoon my wife and I used the very bills in this picture to pay all-paper-money exact change for purchases of 2.3 kuai (31 cents) and 3.5 kuai (47 cents) at a the local outdoor produce market. And we came home with a lot of onions, apples, and potatoes...

No master theory here, but the difference is striking. It may help explain why Shanghai thinks it is more moderne -- and why there are so many more coin-operated vending machines there. And I suppose the use of 1 jiao notes is no odder than the continued existence of the U.S. penny, which costs more to produce than it is worth.

Executive hypercompensation: this time it's personal

So it appears that Stanley O'Neal will leave Merrill Lynch with > $160 million in stock options and other retirement benefits, after being paid nearly $50 million last year and immediately after the company reported a gigantic loss, based largely on sub-prime mortgage risks O'Neal had decided it should take on.

I know that markets are markets, that financiers go into finance because they like the dough, that compared with 99.9% of people on earth I myself am rich, and so on. But every now and then one of these sticks in the craw. For me, it's this one -- and probably because of the years-long struggle I have waged to get my retirement-style savings out of ML, where I put some of them 15 years ago and where the meter immediately started running on high and not very well disclosed fees.* You would think that a brokerage itself would not be too comfortable with so flagrant a reminder of how hefty its fees must be, if it can afford this kind of payout.

I also wasn't crazy about the news, during the 2004 election, that O'Neal had ginned up nearly $300,000 in donations to the Bush-Cheney campaign from Merrill Lynch employees -- you know, the people whose future and careers he controlled. I probably also would have objected if he had been pressuring his own people to give to Kerry-Edwards. In either case, the idea of my (steep) account fees supporting this kind political activity didn't sit well.

Enjoy the money, Mr. O'Neal. That's what it's all about.

* Where are they now? It would not be very hard to guess: a well-known low-fee, not-for-profit investment organization. Why is the fight still going on? Because ML tied some of the money up in annuities that I still must spend several years waiting out -- while the fee meter keeps turning over.

Maybe the dollar's stronger than we thought!

Or else they're taking pity on us.

Luggage-cart rental stand, Tegel Airport, Berlin, this afternoon:

So, if you want to rent a cart, you can pay: one Pound, one Euro, one Swiss Franc, or one shiny American quarter, which at today's rates means:

Brits pay ~ $2.06
Europeans in general pay ~ $1.44
Swiss pay ~ $1.16
And my wife and I paid $0.25 each for our two carts, delighted as we were to find two quarters wedged into our pockets after the redeye from the U.S., en route to our new home in Beijing.

Is this legacy pricing from the days when the dollar really was strong? A means-tested scheme, reflecting Europe's patronizing view toward the puny dollar of modern times and what Yanks can afford? An expression of karmic gratitude for the American role in defending Berlin through the long decades of the Cold War and the intense months of the Berlin Airlift, when planes full of supplies for hungry Berliners landed at this very Tegel airfield?*

Could be any of 'em. But -- oooops! Five minutes later it turns out that when you return the cart, you get back whatever coin you put in. So technically all the chart means is that the quarter is physically about the same size as the other, mightier coins. Still, in the era of the shrinking dollar, something about this chart sticks in your mind.

* Before anyone feels obliged to mention it: Yes, I know that Tegel was in the French sector of Berlin, while Tempelhof was the main airport in the American sector. But you get the point. Footnote update!!: Andrei Cherny, who has a book on the Berlin Airlift out next year, reminds me that the airport was in French-controlled territory but most of the airplanes were of course American. I guess this is why we don't hear so many references to "the vast French air force darkened the skies" in accounts of the post-war era...

Now this truly amazes me (Commentary magazine and AIPAC)

Yesterday I mentioned the parallels among the lobbying efforts and influence of three special interest groups, or "factions": the (mainly Orthodox) Armenian-Americans who pushed the Armenian Genocide resolution; the (mainly Catholic) Cuban-Americans who have pushed the US embargo of Cuba; and the (mainly Jewish) supporters of AIPAC who have been making a case for a military showdown with Iran.

Today Gabriel Schoenfeld of Commentary Magazine quotes only the part about AIPAC -- and then asks why I am singling out the Jews!?!?! "Why is this game played only one way, with America’s Jews the primary target?" (Full text after the jump)

Not much amazes me any more, but....

I wonder which is the more plausible interpretation: That the author heard I'd written something objectionable and attacked it without reading it? Or that he did read it -- and deliberately left out everything that didn't fit his case, including through artful cutting of quotes?

I took it for granted that Commentary wouldn't see the Iran issue the way I do, given their recent cover story on "The Case for Bombing Iran" etc. But wow, this makes me nostalgic for the comparative "honesty" of the Chinese state media I've been dealing with recently.

Continue reading "Now this truly amazes me (Commentary magazine and AIPAC)" »

Maybe I was too hasty on this "world is not flat" business?

The debate will go on about whether the world is merely "flattening" in an economic and cultural sense, as everyone would agree it is; or whether it has in any meaningful way become "flat," as Thomas Friedman has so prominently argued. Before a TV appearance with Friedman last year, I calculated that more than a billion pages of his thoughts about the "flat earth" now exist. A big thick book, millions of copies in print, it adds up. Not nearly as many pages as the Harry Potter series, but still.

(And since I'm disagreeing with Friedman on the shape of the world, I should probably say that in his current "geo-green" campaign he is truly doing the Lord's work. On this theme his worldwide audience makes him a force for enormous good.)

On a recent very long, very draining, very interesting Chinese tour-bus trip through Xinjiang Province, China's northwest frontier, with all-Chinese travel companions and all-Mandarin language operations (except for the lessons in how to greet people in Uighur), my wife and I saw evidence on both sides of the flat-world case. I'll leave for another time the many, many, many illustrations of how bumpily different things can be from country to country and city to city. Instead, I'll stick with a heartening reminder of the common heritage that connects the diverse peoples of the modern world.

After trekking for hours across a stark, lunar desert landscape awesome in its harsh beauty, our bus rolled into a former Silk Road waypoint where today's craftsmen still specialize in hand-knotted rugs. We passed through a beaded curtain to see, on the place of honor on the main wall, this:
`

Yes, around the world, people truly are brothers and sisters, united by their love of poker-playing dogs.

(For context, the 4' x 6' rug in its natural setting:)

Golden Oldies: the world is not flat

This in a sense old news, since the academic review I'm about to mention was officially published a few months ago, and a working version was available a year before that and was discussed at many economic sites. But it is so much worth reading that, on the off chance some people might not have come across the March, 2007 edition of Journal of Economic Literature, let me heartily recommend: "A Flat World, A Level Playing Field, a Small World After All, or None of the Above?" by Edward Leamer of UCLA. (An abstract, from the Journal's subscriber-only site, is here. An authorized full text PDF, from a UCLA site, here.)

Leamer's topic is of course Thomas Friedman's ubiquitous The World Is Flat. I have known and liked Friedman personally for years. As an opinion-shaper, he can only inspire awe -- even, or especially, when you disagree, as I obviously have about Iraq. But the flat-world concept has bothered me from the beginning, since in my view and experience it is so imprecise a version of what is going on economically these days. This would not shock Friedman: I tried to indicate as much when we appeared together on the Charlie Rose show last year.*

But I have not seen anything that put the case against flatness as clearly as Leamer's very, very long review does. Usually I am grateful to be a journalist and not a professor. We can be clear; they have to hem and haw. A paper like this shows what professors are for.**

(Notes and excerpt from the review after the jump.)

Continue reading "Golden Oldies: the world is not flat" »

How to protect your children against those lead-covered Chinese toys?

Take it from me, someone who lives on scene (Shanghai) and has been through scores of Chinese factories: I have no idea.

No family without its own metallurgy lab can reliably tell safe toys from risky ones. This is a useful reminder that while market forces are marvelous, they're not the answer to all problems. (Let's spell it out: a strictly market-based answer would mean waiting to see which kids got sick, hoping parents could figure out why, and assuming that their knowledge would guide future parents' purchases.) Public health regulations, enforced in both China and America, are a crucial part of the answer.

But I know who's responsible at the moment: less the Chinese manufacturers than the American "outsourcing" purchasers. China is a big, sprawling, under-regulated, and still very poor country. Its factories can produce first-rate products: if you own any hardware from Apple, Sony, Siemens, HP, Bose, or any fancy-sounding brand name, chances are it came from China.

When those products are good, that is because the brand-name company insisted that they be good. This is essentially the saga I laid out in my recent Atlantic article on Chinese factories. (Article itself subscriber-only; free slide-show here.) The companies I wrote about came to China because its suppliers were fast, and cheap. But to make their output good, the purchasers invested the necessary time, money, and effort.

Purchasers just looking for something cheap from China will get it -- cheap in every sense of the term. That's not China's fault: it's early stage industrialization. Britain's factory life was dirty, slipshod, and dangerous in Charles Dickens's era, and America's was in the day of Upton Sinclair. And, frankly, American consumers just looking for something cheap will get it too.

So avoid Chinese toys if you feel you must. But let's not make this the basis for a big fiesta of anti-China-ism. The factories here can be perfectly safe -- as the best ones are, when middlemen and consumers around the world are willing to pay the price. And before you imagine a giant Chinese plot to poison Americans, think of the people who pay the greatest personal price for unsafe food and products: the average Chinese citizens who eat and use this stuff every single day. Along with me.

More on the "smiley curve": China makes, Apple takes

My current Atlantic article about the Chinese factory-world of Shenzen talks about the famous-in-China concept of the "smiley curve." This is a way of expressing the principle that although Americans import huge volumes of manufactured goods from China, most of the money spent on those imports stays in American hands. (Quote from the article, explaining the smiley curve, after the jump.)

An academic study I had heard about during my reporting, but which wasn't ready in time for my article, sets out a detailed and dramatic illustration of "smiley curve" principles. It involves the Apple iPod (which I have seen manufactured in China).

According to a summary of the report, in the new issue of Richard McCormack's Manufacturing News:

Not much of Apple's iPod is manufactured in the United States, but the majority of value added is captured by Apple... Apple made $80 in gross profit on a 30-gigabyte video iPod that retails for $299. Its profit is 36 percent of the estimated wholesale price of $224. [Not to mention the retail profit, if it is sold in an Apple store.] The total cost of parts was $144.

Many more dollars-and-cents details in the Manufacturing News story and the original academic study, from the Personal Computing Industry Center at the University of California, Irvine, here.

Continue reading "More on the "smiley curve": China makes, Apple takes" »

Last word on "two-class" ownership structure

At least the last word here -- at least unless something new and interesting turns up. It's not just newspapers, or Google, or the Ford Motor Company, or a slew of other firms where a family or group of founders want to retain disproportionate control. After the jump, details from a reader in Ohio about a successful real estate firm in Cleveland and its use of the technique.

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Why we love the Chinese press

Today’s front-page English-language headlines, from the (state-controlled) China Daily and Shanghai Daily:

Why we love them:

Continue reading "Why we love the Chinese press" »

Observer vs. Economist, or Yanks vs Redcoats yet again

The fraternity of American journalists who have dared speak irreverently of The Economist in public has just grown by 25%:

Previous members were: Michael Lewis (soon after Liar's Poker); Richard Stengel (in his pre editor-of-Time days); "Humphrey Greddon" (not in Zuleika Dobson but in yesteryear's Spy, under what must have been a pseudonym, and if I were a New York guy I'd know who the writer really was); and me, 15+ years ago. We now welcome to the club Tom Scocca of the Observer, on the strength of this offering, which (disclosure) refers back to other members, especially Stengel and me.

The 1991 Washington Post article of mine that Scocca mentions is here, and the updated intro to it is here.

If I've lost track of other people who meet the eligibility standards, sorry! And, by the way, the people I've come to know from The Economist are actually very nice. You can't help admiring the feat they have pulled off.

Market Crash Day in Shanghai

As I write it is Wednesday morning in Shanghai. Last evening, on Tuesday night, my wife and I went to dinner at a local Thai restaurant with three foreign friends, two young Americans and a European. It was 7pm here, and the Shanghai Stock Exchange had already closed after its 9% drop. It was 6am in New York, and the markets there had not yet opened for what would become the 400-plus point drop in the Dow.

Continue reading "Market Crash Day in Shanghai" »

Archive: "Tough but fair" article about The Economist Magazine, from 1991

"The Economics of the Colonial Cringe," published in the Washington Post's Outlook section on October 6, 1991, now in archives section, here. (Posting is largely for my own convenience, since it's not otherwise available online.) Main update: In the 15 years since have met and become friends with a number of Economist editors, who are generally wonderful folk! One is now a close colleague at work. Still.....

"The Economics of the Colonial Cringe," about The Economist magazine; Washington Post, 1991

The Economics of the Colonial Cringe: Pseudonomics and the Sneer on the Face of The Economist.

By James Fallows; Washington Post "Outlook"section; October 6, 1991.

Last summer, a government man who helps make international economic policy told me (with a thoughtful expression) he was reading "quite an interesting new book" about the stunning economic rise of East Asia. "The intriguing thing is, it shows that market forces really were the explanation!" he exclaimed in delight. "Industrial policies and government tinkering didn't matter that much."

By chance, I had just read the very book -- Governing the Market by Robert Wade. This detailed study, citing heaps of evidence, had in fact concluded nearly the opposite: that East Asian governments had tinkered plenty, directly benefiting industry far beyond anything "market forces" could have done.

I knew something else about the book: The Economist magazine had just reviewed it and mischaracterized its message almost exactly the way the government official had.

Had he actually read the book? Maybe, but somehow I have my doubts.

What I saw that day, I suspect, was just another illustration of the power of Washington's current Sacred Cow: The Economist magazine, which each week unwholesomely purveys smarty-pants English attitudes on our shores.

Like other sacred cows, The Economist obviously has its virtues. Compared to any of the American newsmagazines, The Economist gets by with a skeleton staff of mainly young writers, who turn out a prodigious amount of copy each week. The news stories have lots of informative tidbits, and the "leaders," or editorials, in the front of the magazine often take up usefully quirky subjects. My recent favorite is one explaining why the rise of English as an international language is a short-term convenience but a long-term disaster for Americans and Englishmen. The Koreans, Russians, Japanese and even Dutch can listen in on what we're saying. We have no private language to scheme in, as they do.

But what signifies a sacred cow is that people revere it for fashionable reasons, and out of all proportion to its real strengths and weaknesses. The Economist, whose American circulation has risen from 40,000 to 183,000 over the last 10 years, seems to have reached that point among America's professional class.

For example: Several weeks ago, The New York Times Magazine ran a profile of Bill Gates, the "boy billionaire" founder of Microsoft. Here is someone with many good reasons to be vain, but the main vanity he seemed to push in the article was his association with The Economist. (Gates said that he didn't have a TV in his house, because if he had one he'd never have time to read The Economist cover to cover, "as I do now.")

As part of a feud with Newsweek's Robert Samuelson, Robert Reich, of Harvard, wrote a letter-to-the-editor that said: "I, for one, don't get my economics news from Newsweek. I rely on The Economist -- published in London." Humphrey Greddon wrote of this episode in Spy: "If so, then Reich resembles many semipretentious undergraduates, bankers and newsmagazine business writers in this country. The omniscient tone and pedantry of The Economist must impress the insecure American cousins in its readership." [2006 Update: I was then in the middle of my own little squabble with Reich, long forgotten on both sides -- I think!]

In functional terms, The Economist is more like the Wall Street Journal than like any other American publication. In each there's a kind of war going on between the news articles and the editorial pages. The news articles are not overly biased and try to convey the complex reality of, well, the news. Meanwhile, the editorials and "leaders" push a consistent line, often at odds with the facts reported on the news pages of the same issue.

For The Economist, the tension is most obvious in its coverage of Japan. According to the editorial line, Japan is becoming more and more market-minded, its trade surplus is bound to disappear, its economic mandarins are losing power by the minute and its people are about to revolt against the onerous 'salaryman' life. Meanwhile the news stories point out that things aren't evolving quite according to editorial plan. [Update: Japan's financial markets and real estate were headed for problems right about then. But its exports and trade surplus have kept chugging right along, and its mandarins and salarymen have essentially retained their same roles.]

To give one example from several hundred possibilities, last year The Economist's correspondent in Tokyo detailed the Japanese government's plan to keep foreign companies from selling advanced "amorphous metals" to Japanese customers, until Japanese firms could gear up to make the products on their own. A few pages later in the same issue, a book review announced, with great confidence but without noticeable evidence, that Asia's "stunning growth was built on efficient investment and innovation, which in turn owed everything to openness to trade."

More recently, an Economist article pointed out that Japan's trade surplus is on the rise with nearly all its partners. Its conclusion was not that the magazine should revise its theories but that readers should prepare for "whining" (translation from the British "whingeing") from the small-minded protectionists in the rest of the world.

The editorial line pushed by The Economist is also functionally similar to the Journal's. Markets nearly always work, and government meddling nearly always fails. If some fact seems not to fit this schema -- for instance, the success of Asian governments in meddling with their economies -- the fact should be harumphed out of the way. [Updated example: China.] Political leaders must above all be firm, like the Divine Mrs. T. Writers and thinkers should above all be "clever," The Economist's highest term of praise. (The Journal's counterpart is "realistic.") Those who disagree are to be mocked -- as sissies by the Journal and dim bulbs by The Economist. The world should be viewed, from above, with a pitying amusement. Why can't they be as clever as we?

The real question about this editorial approach is why it's paid off better for The Economist than for the Journal. Why is it impossible to imagine a professor boasting in print, "I rely on the Wall Street Journal -- published in New York"? Why do people apparently buy the Journal (or The Washington Post or the New York Times) only if they want actually to read it -- rather than just to carry it around, as a suspiciously large number of Economist "readers" seem to do?

The roots of the explanation stretch back to 1776 and America's incomplete separation from the motherland. England is a perfectly nice little country, with many achievements to its credit. If you like to attend plays, want to read comic novels, hope to spare your skin the damaging effects of the sun, then England's the place for you. Countries once part of its empire, including America, are much better off than those that were under the Spanish or French. But England has two completely loathsome traits, which in exported form are involved in the reverence for The Economist.

The first is, of course, the English class system. Yes, America has its own tangled class problem, which is becoming worse as public schools and the military lose their democratizing function. But Americans can still be embarrassed by obvious reminders of class difference. Except perhaps in Beverly Hills and Manhattan, when the refrigerator repairman comes to the doctor's house, the doctor is supposed to treat him as if they're equals -- not as "My good man."

Perhaps it is not England's fault, or The Economist's, that those Americans who would love to have a similar class system here -- with themselves on top! -- take on English airs. (As Henry Allen of The Post has pointed out, the right response to this phenomenon is not Anglophobia but Anglophilophobia.) But The Economist has certainly, if only half-consciously, traded on the "published in London" snob appeal. "Americans imagine that The Economist is better written," says Time magazine's Richard Stengel, "because they impute an English accent to what they read."

There are certain English products whose quaintness is put on mainly for export purposes -- they're the equivalent of Ye Olde Tea Shoppe-style tourist traps, which the locals avoid. Something similar is going on with The Economist. The Economist now has considerably fewer readers -- and is strangely less influential -- in England than in America. Indeed, it is disdained by the very Englishmen whom many American readers would most love to emulate: the secure upper and upper middle classes.

In America, the magazine presents itself as a kind of voice of the super-confident English aristocracy, whereas its advertisements within England play on the status-anxiety of its readers there. For example, one billboard displayed in England reads in bold print: "I never read The Economist." The punch line comes in the identification of the hapless confessor of this dereliction, a "Management trainee -- aged 44."

Another key to the magazine's boom in America during the 1980s must lie in its sycophancy toward Ronald Reagan in particular and American culture in general. We are all so used to being sneered at by the French or Swedes. To hear someone who poses as a British aristocrat celebrating American vigor -- it's just irresistible! If it came from the Wall Street Journal or USA Today, we'd consider it plain boosterism, but it works from The Economist, since we imagine we're overhearing the foreigners' real views. I think the flattery is actually the most refined and vicious version of the old British condescension toward the colonies. These Yanks! They'll believe anything! Let's give them another dose of how the world looks up to them!

The other ugly English trait promoting The Economist's success in America is the Oxford Union argumentative style. At its epitome, it involves a stance so cocksure of its rightness and superiority that it would be a shame to freight it with mere fact.

American debate contests involve grinding, yearlong concentration on one doughy issue, like arms control. The forte of Oxford-style debate is to be able to sound certain and convincing about a topic pulled out of the air a few minutes before, such as "Resolved: That women are not the fairer sex." (The BBC radio shows "My Word" and "My Music," carried on National Public Radio, give a sample of the desired impromptu glibness.)

Economist leaders and the covers that trumpet their message offer Americans a blast of this style. Michael Kinsley, who once worked at The Economist, wrote that the standard Economist leader gives you the feeling that the writer started out knowing that three steps must be taken immediately -- and then tried to think what the steps should be.

A certain modesty would seem appropriate in The Economist's leaders these days, considering that after 10 years in which the Thatcher government essentially did what the magazine said, Britain has the weakest economy in Europe. (Remind me, again, why we're looking to the British for economic advice.) But the implied message of the leaders often seems to be, "I took a First at Oxford. I'm right."

The cover of anonymity for the magazine's writers is an important part of its omniscient stance, among other reasons because it conceals the extreme youth of much of the staff. "The magazine is written by young people pretending to be old people," says Michael Lewis, the author of "Liar's Poker," who now lives in England. "If American readers got a look at the pimply complexions of their economic gurus, they would cancel their subscriptions in droves."

This brings us back to Robert Wade's book. The crucial paragraph of The Economist review -- the one that convinced my friend the official, and presumably tens of thousands of other readers, that Wade's years of research supported the magazine's preexisting world view -- was this:

"The [Asian] dragons differed from other developing countries in avoiding distortions to exchange rates and other key prices, as much as in their style of intervening. Intervention is part of the story -- but perhaps the smaller part. That being so, Mr. Wade's prescriptions seem unduly heavy on intervention, and unduly light on getting prices right."

These few lines are a marvel of Oxbridge glibness, and they deserve lapidary study. Notice the all-important word "perhaps." Without the slightest hint of evidence, it serves to dismiss everything Wade has painstakingly argued in the book. It clears the way for: "That being so . . . " What being so? That someone who has Taken a First can wave off the book's argument with "perhaps"?

The "that being so" style of discourse is not wholly alien to the United States -- think of William Buckley on TV. But Americans know how to put his views in perspective. The complications of Anglophilic snobbery and Oxbridge-style swagger prevent most American readers from realizing that, when they read Economist leaders, they're essentially reading Wall Street Journal editorials, written with even less self-doubt.

Several months ago, when I was visiting Australia, I walked through the spectacular botanical gardens in Melbourne with a native-born Australian and a British expatriate. I was bedazzled by the lushness, and said how much I admired it. The Australian deferentially said to the Briton, "Well, I suppose it can't quite compare with Kew." "Ah, Kew!" the Englishman said, and then said no more, as if he were too polite to detail all the ways in which London's Kew Gardens were superior. A few seconds later, the Australian slapped himself on the forehead. "The colonial cringe!" he said. He'd made himself feel inferior about something that was objectively superb.

Ah, Economist! Ah, Kew!

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James Fallows is Washington Editor of the Atlantic Monthly. He used to live in England.