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April 8, 2012 7:00 pm

America reassembles industrial policy

Matt Kenyon illustration



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What if Gene Sperling, director of the White House’s national economic council, declared that a manufacturing renaissance would be strongly in America’s interest? Imagine he added that the US’s manufacturing decline was an aberration that should be reversed. Suppose he came close to breaking a real taboo by saying industrial policy may now make sense. Since Mr Sperling is President Barack Obama’s chief economic adviser – and thus speaking on his behalfpeople would take notice, wouldn’t they?



That is precisely what Mr Sperling said in a carefully researched speech in Washington 10 days ago. Almost no-one paid attention. The lack of interest may stem from it being an election year nothing diverts eyeballs like a horse race. Poor White House marketing may also not have helped. In addition, few observers would expect Mr Obama to get anything important through a gridlocked Congress this yearlet alone something unorthodox. And they would be right.

 

 

Yet Mr Sperling’s words offered evidence of what is starting to sound like a change of world view in the White House. It is true that Mr Obama has created a few incentives here and there for favoured types of manufacturing – the 2009 stimulus contained boons for battery makers and clean energy. He entitled his state of the union address “An America built to last”. In his largely hypothetical 2013 budget proposal (Congress will almost certainly not pass a budget for the fourth year running) he offered incentives for manufacturers to “reshore” to the US.




At the time it smacked of electioneering. Most of his proposals, including a slightly lower tax rate for domestic manufacturers, looked gimmicky and stood no chance of enactment before 2013. Mr Sperling, President Bill Clinton’s senior economic adviser in the late 1990s, seemed the least likely person to announce the abandonment of a sacred plank of Clintonomics. But all this is starting to look like an underestimate of how much Mr Obama is in earnest. Could industrial policy be creeping back into fashion?



The correct answer is that it never went out of favour, even if the term itself became taboo. Whether it is the schooner-rigging of tax incentives for Wall Street – and the federal tax system’s subsidies for debt over equity – or the panoply of write-offs for Big Oil, Washington never stopped promoting favoured sectors. Manufacturing was simply not among them.



Most are of long pedigree. Some might say it would be easier to pass through the eye of a needle than to separate the fossil fuel sector from its Washington subsidies, which date from the second world war. No presidential hopeful would dare to suggest scrapping Depression-era farm subsidies because they skew so heavily towards key states such as Iowa.




That you can dismantle every nut and bolt of a US manufacturing plant and shift it to China while finding it impossible to relocate the corn fields of Nebraska, is beside the point. Nobody familiar with the US tax code would confuse it with the design of a rational mind. Better to glimpse in its layers a rough snapshot of the past and present of US corporate influence.



The more interesting answer is that industrial policy is no longer unmentionable in Washington. Given the prominence nowadays of people such as Jeff Immelt, chief executive of GE, one of America’s largest manufacturers, and John McNerney, chief executive of Boeing, perhaps this is unsurprising. Both agreed last year to head separate presidential advisory councils on the economy.



Both have also shared critical technology with Asian counterpartsGE’s avionics arm recently went into a joint venture with a Chinese state-owned partner. And yet bothMr Immelt in particular – vent about how the US has to compete with countries that haveindustrial policy on steroids”. Their frustration is gaining adherents, notably one or two Republicans, including Rob Portman, the senator from Ohio.



Many things could kill this apparent trend. Mr Obama could lose in November, or he could win and face an even more intransigent Congress. Conversely, a miracle could happen and Congress could agree after November to replace the US corporate tax code with a system free of loopholes. That would end all industrial policies, past and near future. It is also the least likely scenario. Or maybe this is really election-year kite flying after all.



But when figures such as Mr Sperling emphasise that manufacturing accounts for three-quarters of US research and development, and 90 per cent of its patents, something interesting is being signalled. Facebook and Twitter may bring disruptive social change. But the most valuable innovation still comes from making products such as semiconductors, batteries and robotics.



America’s competitors, from China to Germany, which have lured away so much research and development, have long recognised that researchers need proximity to their production linesmost innovation comes through trial and error. Only in Washington, and perhaps London, does this still fail to convince.



Yet when the facts change, people often change their minds. Sometimes even a hegemon may revisit its assumptions when its global influence is on the wane. Might we be seeing the stirrings of a recalibration in America?


Copyright The Financial Times Limited 2012

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The Mismeasure of Wealth

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.05 April 2012
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Partha Dasgupta, Anantha Duraiappah



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CAMBRIDGE – Despite many successes in creating a more integrated and stable global economy, a new report by the United Nations Secretary-General’s High-Level Panel on Global SustainabilityResilient People, Resilient Planet: A Future Worth Choosing – recognizes the current global order’s failure, even inability, to implement the drastic changes needed for truesustainability.”



The Panel’s report presents a vision for a “sustainable planet, just society, and growing economy,” as well as 56 policy recommendations for realizing that goal. It is arguably the most prominent international call for a radical redesign of the global economy ever issued.



But, for all of its rich content, Resilient People, Resilient Planet is short on concrete, practical solutions. Its most valuable short-term recommendation – the replacement of current development indicators (GDP or variants thereof) with more comprehensive, inclusive metrics for wealth – seems tacked on almost as an afterthought. Without quick, decisive international action to prioritize sustainability over the status quo, the report risks suffering the fate of its 1987 predecessor, the pioneering Brundtland Report, which introduced the concept of sustainability, similarly called for a paradigm shift, and was then ignored.



Resilient People, Resilient Planet opens by paraphrasing Charles Dickens: the world today is “experiencing the best of times, and the worst of times.” As a whole, humanity has achieved unparalleled prosperity; great strides are being made to reduce global poverty; and technological advances are revolutionizing our lives, stamping out diseases, and transforming communication.



On the other hand, inequality remains stubbornly high, and is increasing in many countries. Short-term political and economic strategies are driving consumerism and debt, which, together with global population growthset to reach nearly nine billion by 2040 – is subjecting the natural environment to growing stress. By 2030, notes the Panel, “the world will need at least 50% more food, 45% more energy, and 30% more waterall at a time when environmental limits are threatening supply.”



Despite significant advances in the past 25 years, humanity has failed to conserve resources, safeguard natural ecosystems, or otherwise ensure its own long-term viability.



Can a bureaucratic reporthowever powerfulcreate change? Will the world now rally, unlike in 1987, to the Panel’s call to “transform the global economy”? In fact, perhaps real action is born of crisis itself. As the Panel points out, it has never been clearer that we need a paradigm shift to achieve truly sustainable global development.



But who will coordinate an international process to study how to encourage such a shift, and who will ensure that scientific findings lead to meaningful public-policy processes?



First, there must be a significant international and interdisciplinary research effort to tackle these issues comprehensively; the Panel’s recommendation to establish an international science panel is therefore a step in the right direction. But creating such a body will take time, and the challenge is to get the best science to policymakers quickly.




The 2010Report by the Commission on the Measurement of Economic Performance and Social Progress, commissioned by French President Nicolas Sarkozy, echoed the current consensus among social scientists that we are mismeasuring our lives by using per capita GDP as a yardstick for progress. We need new indicators that tell us if we are destroying the productive base that supports our well-being.



The United Nations University’s International Human Dimensions Program (UNU-IHDP) is already working to find these indicators for itsInclusive Wealth Report” (IWR), which proposes an approach to sustainability based on natural, manufactured, human, and social capital. The UNU-IHDP developed the IWR with support from the United Nations Environment Program, to provide a comprehensive analysis of the different components of wealth by country, their links to economic development and human well-being, and policies that are based on social management of these assets.
The first IWR, which focuses on 20 countries worldwide, will be officially launched at the upcoming Rio+20 Conference in Rio de Janeiro. Preliminary findings will be presented during the Planet under Pressure Conference in London in late March.



The IWR represents a crucial first step in transforming the global economic paradigm, by ensuring that we have the correct information with which to assess our economic development and well-being – and to reassess our needs and goals. While it is not intended as a universal indicator for sustainability, it does offer a framework for dialogue with multiple constituencies from the environmental, social, and economic fields.


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The situation is critical. As Resilient People, Resilient Planet aptly puts it, “tinkering around the margins” will no longer suffice – a warning to those counting on renewable-energy technologies and a green economy to solve our problems. The Panel has revived the call for a far-reaching change in the global economic system. Our challenge this time is to follow words with action.







Copyright Project Syndicate - www.project-syndicate.org

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April 8, 2012 8:00 pm
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Banks test ‘CDOs’ for trade finance

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Japan exports



Some of the world’s biggest banks are trying to extend the principles of securitisation to the plain-vanilla world of trade finance – a market worth an estimated $10tn a year – as concern mounts that regulatory changes could constrain a key lubricant of the global economy.



JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity.

 

 

Trade finance supports more than 80 per cent of global trade. But it has been disrupted by the financial crisis, as some lenders got into trouble, and by the regulatory response to the crisis, as banks have been ordered to hold more capital against lending.


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Banks have lobbied hard against the constraints imposed on trade finance by the Basel III global rule book, due to be phased in from 2013.



The new rules for overall bank borrowing – the leverage ratiotreat a typical three-month trade finance loan as a year-long exposure, effectively forcing banks to hold far more top-quality capital against the loan.



That is deterring some banks from staying in the business and could push up trade finance prices by 300 per cent or more, critics predict.



Regulators have made some adjustments but have been reluctant to rewrite the rules, which they see as a critical backstop to keep banks from becoming over-leveraged.



“The industry needs to develop new instruments,” said Jeremy Shaw, JPMorgan’s head of trade services for Europe, Middle East and Africa. “We have tested the water with potential buyers. Institutional investors have the appetite.”



French banks, previously big players in trade finance, have retreated from the market in dramatic fashion in recent months, as they raced to shrink balance sheets in line with new European capital targets and their access to dollar funding – the currency of much global tradedried up.



JPMorgan, one of the leading trade financiers, believes there is particular scope to “slice-and-diceexposures to export credit agencies – the quasi-government entities that support export business – and repackage them as simple CDO-like instruments. A similar process is common for credit card debt.



Finding a legal structure that can pass regulatory scrutiny is proving difficult, however. Partners at several London law firms say they have been asked by clients to work on possible deals, but none have come off to date.



By transferring the bulk of such exposures off a bank’s own balance sheet, and on to third-party investors, the capital requirements would be reduced. There is also scope to syndicate, or restructure, trade finance exposures to corporate customers, JPMorgan believes.

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Copyright The Financial Times Limited 2012

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Five myths about water

By Charles Fishman

Published: April 6, 2012

 

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1. We’re running out of water.

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We see it in the headlines almost every day: Drought in Texas and China. Nevada’s Lake Mead in danger of going dry. The Colorado River and the Rio Grande no longer flowing to the sea.
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Water seems to be getting more and more scarce. But it’s not. The amount of water on Earth isn’t changing, and as a planet we’re in no danger of running out.
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One of the most misleadingfacts” we learn about water, starting in the second grade or so, is that 97.5 percent of the water on Earth is unusable by humans, because it’s salty ocean water.
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Actually, the oceans are Olympian springs of fresh waterevery day, the sun, the sea and evaporation combine to make 45,000 gallons of rainwater for each man, woman and child on Earth. Even in the United States, where we use water with profligacy, the oceans are making more fresh water for each of us in a month than we’ll use in a decade.
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And one of the most remarkable qualities of water, of course, is that we never really use it up. Water reemerges from everything we do with it, whether it’s making coffee or making steel, ready to use again.
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The problem is that we’ve built our communities, our farms and our reservoirs in places we expect water to be. The scarcity we’re seeing is a result, in part, of a shifting climate — it’s still raining, but it may not be raining in the watersheds of our reservoirs. Water scarcity is also a result of population growth; more people need more water. And it is often a hidden cost of economic development. As people get wealthier, they use more water for things such as bathing and running the dishwasher, and more energy, which requires huge volumes of water.
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2. Bottled water is better than tap water.

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Tap water in the United States is among the safest in the world. And it is much more closely monitored than bottled water. Cities must test their water every few hours and report any safety issue within 48 hours. Bottled-water companies are required to test their water only once a week, and they are not required to report problems.
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Occasionally, there are issues with municipal water in the United States. The presence of lead in some parts of Washington’s water system is a vivid example. But those exceptions underscore how important safe water is and how rare problems are.
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Anyone who is worried about safety should use a commercial faucet or pitcher filter. And anyone who thinks tap water tastes bad compared with bottled water should remember that you usually buy bottled water from a cold case, when you’re really thirsty. That’s why it tastes so great. Keep a pitcher or bottle of tap water in your refrigerator, and it will taste just as good as bottled water. In fact, in blind taste tests, people can’t reliably pick bottled from tap.
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3. This is going to be a century of water wars.

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Although we hear all the time that “water is the next oil” — that it will become a source of international conflict, that its price will soar — there aren’t likely to be water wars anytime soon.
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We fight over oil because it is essential. We also fight over it because it is transportable over long distances; there is an elaborate system of pipelines, ships and trucks for moving it wherever it’s needed. If you secure oil in a war, you can actually use it. And there is an economics of oil that supports moving it — and fighting over it.
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When oil was cheap — it cost $30 a barrel as recently as 2003 10 gallons of crude cost $7. Ten gallons of tap water, meanwhile, costs 3 cents. Water is simply too cheap to fight over, and too hard to move around the world on demand.
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Aaron Wolf, a professor at Oregon State University, has looked back more than 1,000 years and has found no instance of armed conflict between countries in which water was a primary issue. Indeed, Wolf’s research shows that when nations sit down to resolve water issues, they often end up resolving wider conflicts.

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4. With more people and a growing economy, America is using more water all the time.
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Actually, one of America’s greatest conservation stories of recent years is that, as a country, we use less water today than we did in 1980. In that span, the United States has doubled the size of its economy and added 70 million people, yet we use 10 percent less water than we did 30 years ago.
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Most of that savings has come from farmers and power plants using less water, while producing dramatically more food and more electricity. Agriculture and electric power generation are the two largest consumers of water each day, accounting for 80 percent of water use.
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Of course, this doesn’t mean we can take 20-minute showers or cultivate lush lawns in Phoenix. Even as total water use has fallen, water use at home has risen in the past 30 years, although modestly. The average American in 2005 used about 3.5 gallons more per day than in 1980. That’s one extra toilet flush for each of us.
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But municipal water is the most expensive and complicated water to get, deliver and dispose of. The economic vitality of cities requires water pipes, pumps and treatment plants. So for cities, the cheapest water is water that residents don’t use. And conservation liberates existing water for new residents and businesses.
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Even small steps add up: not flushing the toilet if you don’t need to, using all those half-empty water bottles to fill the dog bowl, paying close attention to how much water your garden or lawn actually needs.
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5. You need to drink eight glasses a day.

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Although this bit of health advice has stuck around like a discarded piece of gum, there is no medical basis for it.
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For most healthy people, the best signal to drinkwater, juice or even caffeinated beverages — is thirst. Our sense of thirst is incredibly alert. It’s triggered if our internal water balance gets just 1 percent out of kilter.

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This sense does dim a bit as people age, so for elderly people, consciously drinking several glasses of water, or any other beverage, is a good daily habit.
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But to puncture the eight-glasses-a-day myth, all you have to do is try to follow the advice for a couple of days. Most people would have to work hard to gulp down an eight-ounce glass of water once an hour, every hour, from 9 a.m. to 5 p.m. And you’d quickly be reminded what your body does with excess water.



Charles Fishman is the author of “The Big Thirst: The Secret Life and Turbulent Future of Water.” He writes for Fast Company magazine and blogs about water for National Geographic.



April 8, 2012 7:32 pm

US union pensions hole deepens to $369bn


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The hole in the pension plans of US labour unions now stands at $369bn Credit Suisse has calculated with the aid of new reporting standards. This raises the prospect of higher pension contributions for employers and deteriorating industrial relations.



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Multi-employer pension schemes, managed by trade unions on behalf of members working for many different employers, are now just 52 per cent funded, the bank calculates with most of the burden to close this gap likely to fall on small and midsize companies.


S&P 500 companies’ share of this obligation is estimated at just $43bn. However Credit Suisse identifies seven large companies in the S&P, including Safeway and UPS, where the pension liability is a significant proportion of their market capitalisation.




There is also a “last man standingrisk for companies if other contributors to a fund fail. In 2007 it cost UPS $6.1bn to withdraw entirely from the Central States Pension Fund, capping its liability.


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More than 10m people are covered by such multi-employer schemes with contribution rates typically set by the collective bargaining agreements that cover pay, benefits and working conditions.



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Membership of these funds, and the businesses contributing to them, tend to be concentrated in industries with highly unionised workforces, such as construction, transport, retail and hospitality. The Financial Accounting Standards Board, which regulates reporting of US pensions, now requires companies to disclose more details about their involvement with such plans in their annual regulatory filings.
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Credit Suisse combined these with separate filings from over 1,350 multi-employer plans. FASB provided the key to unlocking the door”, said David Zion, head of accounting research for the bank. The bank’s findings contrast with the approach used by the plans themselves whereby funding levels are calculated on an actuarial basis which smooths investment returns over several years and discounts the size of future payments to beneficiaries at an expected rate of investment returns of 7.5 per cent annually.


.Critics argue that this produces an overly optimistic view of assets and liabilities: on this actuarial basis multi-employer plans are 81 per cent funded, a gap of only $101bn. Safeway last week said that its liability was $1.88bn “on the basis established by the Pension Protection Act of 2006”. Credit Suisse estimates that a fair value for the liability is $7bn, more than the company’s market capitalisation.



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The Pension Benefit Guaranty Corporation, which insures US pension schemes, estimates that at the start of 2009, the most recent figures it has published, multi-employer plans were 48 per cent funded, with $331bn of assets to fund $686bn of liabilities. .

Copyright The Financial Times Limited 2012.