Month: June 2006


  • Ellison rescinds $115 million Harvard donation


    GIFT WOULD HAVE BEEN SCHOOL’S LARGEST


    By John Boudreau

    Mercury News

    Oracle Chief Executive Larry Ellison decided against making a $115 million donation to set up a research center at Harvard University after Harvard President Lawrence Summers decided to resign, an Oracle spokesman said Tuesday.


    Instead, the Oracle chief is planning to announce another major gift “in the next few weeks,” Oracle spokesman Bob Wynne said.


    Ellison started talking publicly in 2005 about giving $115 million to Harvard — which would have been the school’s largest gift ever — to create a research center on global health.


    Three senior managers for what would have been the Ellison Institute for World Health were hired, then laid off recently, even though Ellison never formally agreed to the gift, Wynne said. The center planned to hire 20 research fellows and 130 staff members by next summer and had already chosen its board of trustees.


    “It was Larry Summers who was really the brainchild of this whole concept, and it was Larry Summers with whom Larry Ellison had the relationship,” not the university, Wynne added. “There was never any formal agreement.”


    They were discussing the creation of an institute that would study and rank the effectiveness of government health programs around the world. After months of campus controversy surrounding his leadership, Summers announced in February that he would resign. His last day is Friday.


    As the controversy intensified, Ellison reconsidered his plan to fund the institute, Wynne said.


    “Larry Summers developed an economic model to get at this question,” he said. His impending departure caused Ellison to “change his decision to make his contribution to Harvard.”


    Wynne would not provide details about Ellison’s next philanthropic move, though he said it could be a donation to an academic institution.


    Separately, Oracle said Monday that Ellison is giving $100 million to the Ellison Medical Foundation of Bethesda, Md., over the next five years to settle a shareholder lawsuit claiming he improperly sold $900 million of company stock in 2001.


     


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  • From Robert Reich’s blog . . .


     


    Saturday, June 24, 2006



    On Turning 60




    I’m sixty years old today. So is Cher.

    That’s old as hell, but not as old as it used to be. In 1946, when I was born, life expectancy in the United States was 62.9 years. So I’m glad I’m sixty now and not then. Eligibility for Social Security began at 65 then, which made Social Security a rather unsatisfactory deal for the majority of the population who never became old enough to enjoy it.

    I’m at the early edge of the baby boom bomb that started when Ed Reich and millions of other returning GI’s impregnated their wives. By 1964, when the boom ended, 76 million boomer babies had been born. Now I and my other early-edge boomer colleagues are seven years away from collecting Social Security, five years away from getting Medicare. In actuarial terms, we’ll live until we’re about 80.

    You don’t have to be a math wizard to see the problem. The economy will probably grow fast enough to keep the Social Security trust fund adequate to the task, but Medicare will go bust unless the nation does something to reign in rising health-care costs. That something is actually three things: (1) reduce the huge administrative costs of health care, which include soaring advertising and marketing expenses designed to identify and sign up young and healthy people and avoid older and sicker people; (2) slow the growth of new spending on new medical and pharmaceutical technologies, which are also driving up costs; and (3) devise some system to limit medical spending on extremely sick elderly people who would, at most, have their lives prolonged for only a few months anyway.

    While I’m at it, happy 60th birthday (soon) to Bill Clinton, George Bush, Laura Bush, and Ken Starr. Also, happy 60th birthday today, Cher. I know what you’re going through.

     

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  • exclusiveexclusive

    Larry Summers: Harvard’s Fallen Star

    Outgoing Harvard President Explains Why He Resigned From the Nation’s Top Collegiate Post

    //

    By ED O’KEEFE

    June 25, 2006 — Embattled Harvard University president Larry Summers expressed regret over the controversial statements that led to his abrupt resignation from one of the country’s most prestigious posts, telling ABC News’ George Stephanopoulos in an exclusive TV interview, “The signal that got sent from those remarks that many people took from that was totally different from what I intended or believed.

    “People took the impression away that


  • June 22nd, 2006


    Ellison gift to Harvard absent


    $115 MILLION PLEDGE FOR HEALTH INSTITUTE STILL NOT FULFILLED


    By Michelle Quinn

    Mercury News

    Oracle Chief Executive Larry Ellison has yet to follow through on a verbal promise to give Harvard University $115 million to set up a research center for the study of global health, although what exactly happened between Ellison and Harvard remains unclear.


    As a result, plans for the Ellison Institute for World Health at Harvard are on hold, and three senior managers who had already been hired have been dismissed. The center planned to hire 20 research fellows and 130 staff members by next summer and had already chosen its board of trustees.


    “As of today, the gift agreement hasn’t been signed,” Sarah Friedell, a spokeswoman with Harvard’s Office of Alumni Affairs and Development, said in an interview Wednesday.


    But why it hasn’t been signed remains a mystery.


    Ellison surprised the philanthropy world in May 2005 when he began to talk publicly about the $115 million gift, which would have been the biggest in Harvard’s history. The university has an endowment of $25.9 billion.


    But at the time, Harvard did not confirm that an agreement had been reached with Ellison.


    People familiar with Ellison’s ideas for the project said the idea for the center came from conversations Ellison had with Lawrence Summers, Harvard’s president and a former U.S. secretary of the treasury. The two men discussed the center as an economic research project, using database technology to track improvements in world health. Summers, who is an economist, would have played a role in shepherding the project.


    But for the past 18 months, Summers’ tenure at Harvard has been rocky, with internal clashes with professors, a legal scandal involving a friend and colleague and a firestorm over comments he made about women and science. In February, Summers announced he would resign June 30. According to some people familiar with the discussions over the center, without Summers, the deal lost momentum.


    According to the Financial Times, which first reported the story Wednesday, officials at Harvard say that Ellison made the promise to give the money in March 2005. Ellison’s associates then told Harvard it would begin to see the money after Ellison settled an insider trading suit brought by Oracle shareholders.


    In November, Ellison settled a shareholders suit in San Mateo County court by agreeing to donate $100 million to charity.


    But Harvard has not heard directly from Ellison since November, according to the Financial Times.


    “This happens, but it is very rare,” said James Ferris, director of the Center on Philanthropy and Public Policy at the University of Southern California. “There’s a dance that goes on.”


    Ellison has been involved in another donation controversy. In 2001, Ellison talked with Stanford University about giving $150 million to create an institute to study technology’s effect on politics and economics. Then Harvard began to vie for the money. So far, neither university has announced the creation of a center.


    An Oracle spokesman declined to comment.


    Ellison has created a name for himself in the medical world with the Ellison Medical Foundation, based in Bethesda, Md., which funds biomedical research into the understanding of the aging processes and age-related diseases and disabilities.


    “The innovation and creative impact of the Ellison Institute has moved the field in aging research,” said Barry Bloom, dean of Harvard’s School of Public Health, who is also a board member of the Ellison Medical Foundation.


    Bloom says he has not been involved with the funding of the Harvard center. His work on the board of Ellison’s foundation would have created a conflict of interest, he said.


    Although projects sometimes get started before the financing arrives, Bloom said he was surprised that Harvard counted on the money and began to recruit people before the agreement was signed.


    “I hope to hell they have learned their lesson,” he said.


     


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  • June 23rd, 2006


    Editorial


    A Look at Republican Priorities: Comforting the Comfortable



    Two weeks ago, the Senate killed an effort to repeal the federal estate tax on multimillion-dollar fortunes. The “no” votes were a stand for budget sanity and basic fairness. But the pro-repeal camp doesn’t want to take no for an answer.


    Yesterday, the House of Representatives passed an estate-tax cut that is a repeal in everything but name. The so-called compromise would exempt more than 99.5 percent of estates from tax, slash the tax rates on the rest and cost at least $760 billion during its first full decade. Of that, $600 billion is the amount the government would have to borrow to make up for lost revenue from the cuts, which would benefit the heirs of America’s wealthiest families, like the Marses of Mars bar and the Waltons of Wal-Mart Stores. The remaining $160 billion is the interest on that borrowing, which would be paid by all Americans.


    No lawmaker who voted for the compromise gets any points for moderation. Like the earlier full repeal bill, this one is unfair and grounded in intellectual dishonesty. The goal is not to pass good legislation, but to get this top priority for big-shot constituents nailed into law before the November elections produce a legislature that’s more responsible on fiscal matters.


    In an attempt to rally support, House lawmakers have included in the bill another, totally unrelated, tax cut — for timber companies, worth $900 million over the next three years. The measure, based on the theory that American timber companies are at a disadvantage in the global marketplace, is essentially a special-interest giveaway that would encourage every business with international competitors to demand its own tax break. There is much to reform on the competitiveness front, but it should be done comprehensively, not on the basis of who has the senators best positioned to carve out a special deal.


    The timber provision is a blatant attempt to extort “yes” votes out of four Democratic senators who have supported the timber industry in the past, but who have opposed estate-tax repeal: Senators Maria Cantwell and Patty Murray, both of Washington, Mark Pryor of Arkansas and Mary Landrieu of Louisiana. The idea is that if a few Democratic opponents can be enticed to vote for the estate-tax cuts, Republicans who have previously broken with their party over the issue might also go along, notably Senators George Voinovich of Ohio and Lincoln Chafee of Rhode Island.


    All this effort for a bill that would put $760 billion in new debt on the backs of Americans in the name of making a handful of extremely rich people even richer. Congressional leaders may know how to count votes, but otherwise their math is pathetic.


     



    June 23, 2006

    Editorial

    A Look at Republican Priorities: Afflicting the Afflicted



    At the same time that Republicans are fighting to exempt the richest estates from taxes, they are blocking a raise for the nation’s poorest workers.


    Senate Democrats tried unsuccessfully this week to raise the federal minimum wage, which stands at just $5.15 an hour. It has not been increased in nearly a decade, and at its current stingy level, the rate flies in the face of Americans’ belief that those who work hard and play by the rules will be rewarded. A minimum-wage worker earns just $10,700 a year, nearly $6,000 below the poverty line for a family of three. Since the minimum wage was first adopted, there has been a long tradition of bipartisan support for regular raises. Presidents Dwight Eisenhower, Richard Nixon and George H. W. Bush all signed increases into law. Americans across the political spectrum strongly support the minimum wage, and believe it should be significantly higher. A recent poll by the nonpartisan Pew Research Center found that 83 percent of Americans favored increasing the minimum wage by $2.


    Nevertheless, since 1997 minimum-wage increases have regularly been blocked in Congress. The restaurant industry and other low-wage employers that make heavy campaign contributions have thrown their weight around with great success. A bill sponsored by Edward Kennedy, Democrat of Massachusetts, to increase the minimum wage by $2.10 over two years drew the support this week of 52 senators, including eight Republicans, but Republican leaders threw up procedural barriers. And in the House, Republican leaders are not letting a minimum-wage increase come to a vote, apparently because it would pass.


    Just 23 percent of Americans approve of the job Congress is doing, according to a recent New York Times/CBS News poll. These dismal ratings are no surprise when Congress’s highest economic priority is handing out tax cuts to millionaires and oil companies, and its one point of fiscal restraint is protecting employers from having to pay a decent wage to factory workers and waiters.


     


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  • Bombay’s Boom

    Brash, messy and sexy, India’s biggest city embodies the nation’s ambition. How Bombay is shaping India’s future–and our own



    The streets are wet with the dew of the coming monsoon as Rajeev Samant unveils his latest enterprise in midtown Bombay. The Tasting Room is a softly lit tapas bar built into a high-end furniture store in the old textile district. The idea is to showcase Samant’s range of Indian wines in a space that oozes class and cash–with bottles costing twice the average Indian weekly wage, it’s meant to be exclusive. Tonight the guests include local investment bankers, venture capitalists and a group of students from the business school in Fontainebleau, France, on a two-week trip to India to see what all the buzz is about. Over Chenin Blanc and Reserve Shiraz, the patrons swap investment tips and gossip about recent sightings of Richard Gere and Will Smith. “You’re so lucky to be here now,” says Samant, 39. “This is an incredible time. It’s all happening. Right here, right now.”


    He’s right. If you want to catch a glimpse of the new India, with all its dizzying promise and turbocharged ambition, then head to its biggest, messiest, sexiest city–Bombay. Home to 18.4 million people and counting, the city, formally known as Mumbai, is projected by 2015 to be the planet’s second most populous metropolis, after Tokyo. But it’s already a world of its own. Walk down its teeming streets, and you’ll encounter crime lords and Bollywood stars, sprawling slums and Manhattan-priced condos, and jam-packed bars where DJs play the music of the Punjab, bhangra–a pulsating sound track familiar to clubgoers in London and New York City. Bombay is where Wall Street gets equities analyzed, where Kellogg, Brown & Root sources kitchen staff for the U.S. Army in Iraq, and where your credit-card details may be stored–or stolen. It’s where a phone operator who calls herself Mary (but is really Meenakshi) sells Texans on two-week vacations that include the Taj Mahal and cut-rate heart surgery. Chances are those medical tourists will touch down in Bombay, since 40% of international flights to India land here, delivering thousands of new visitors every day–an increasing number of whom are staying for good. The reason is simple: to know Bombay is to know modern India. It’s the channel for a billion ambitions and an emblem of globalization you can reach out and touch, a giant city where change is pouring in and rippling out around the world.


    But if India’s biggest city is its great hope, Bombay also embodies many of the country’s staggering problems. The obstacles hampering India’s progress–poor infrastructure, weak government, searing inequality, corruption and crime–converge in Bombay. Although India boasts more billionaires than China, 81% of its population lives on $2 a day or less, compared with 47% of Chinese, according to the 2005 U.N. Population Reference Bureau Report. That class divide is starkest in cities like Bombay, where million-dollar apartments overlook million-population slums. For all its glitz, Bombay remains a temple to inefficiency. In 2003 it had one bus for every 1,300 people, two public parking spots for every 1,000 cars, 17 public toilets for every million people and one civic hospital for 7.2 million people in the northern slums, according to a report for the state government by McKinsey & Co. At least one-third of the population lacks clean drinking water, and 2 million do not have access to a toilet.


    Whether Bombay’s entrepreneurial energy can be directed toward lifting more of its people out of despair will help define the nation’s future. The country’s pro-growth Prime Minister, Manmohan Singh, has said he dreams that Bombay will someday make people “forget Shanghai”–China’s financial capital, whose modern gleam is a reminder of the gap between India and its eastern rival. Right now it’s not much of a contest. India’s GDP (gross domestic product) growth was 8.4% last year vs. 10% for China, while foreign investment in India was an estimated $8.4 billion, compared with $72.4 billion in China.


    But India does possess one indispensable asset, which has sustained its democracy and catapulted it to the cusp of global power: the ingenuity of its citizens. And nowhere is it in greater supply than in Bombay. “Things just happen here,” says Sanjay Bhandarkar, managing director of investment bank Rothschild’s India. “Because people have to make things work themselves.” The rise of China has been the product of methodical state planning, but India’s is all about private hustle, a trait that Americans can appreciate. Rakesh Jhunjhunwala, a billionaire trader in Bombay, says initiative represents Bombay’s–and India’s–advantage over its competitors. “It’s people who make countries,” he says, “not governments.”


    BOMBAY HAS BRIMMED WITH COCKY entrepreneurs since the Portuguese took possession of seven malarial islands off the west Indian coast in 1534 and called them Good Bay, or Bom Baia. Big talk attracts big crowds, and five centuries of migration have made Bombay the largest commercial center between Europe and the Far East. Nobody actually comes from Bombay. Even families who have lived there for generations still refer to an ancestral village 1,000 miles away as home. That sense of a place apart is reinforced by geography and architecture. You cross the sea or an estuary to reach downtown. And once there, you find a tropical British city of Victorian railway stations, Art Deco apartment blocks and Edwardian offices. Christabelle Noronha, a p.r. executive who has lived in the city all her life, says the sense of being in a foreign land gives Bombay an uninhibited air. “If everyone is a stranger, then everyone is free,” she says.


    As the subcontinent’s New York City, Bombay is built not on tradition but on drive. “Pull anyone out of any part of India, and put them in Bombay,” says Rothschild’s Bhandarkar, “and he’ll acquire that sense of purpose.” India’s great industrialists–the Tatas, the Ambanis, the Godrejs–all began in Bombay. The city’s stock exchanges account for 92% of the country’s total share turnover, and the nation’s central bank and hundreds of brokerages and investors have set up their Indian headquarters there, including such global powerhouses as HSBC, JPMorgan Chase and Bank of America. Bombay’s port handles half of India’s trade, and its southern business district is one of the centers of the global outsourcing boom. India’s music industry and much of its media are based in Bombay, as is India’s Hindi film industry, Bollywood. Such a concentration of business activity breeds a sophisticated, cosmopolitan outlook–hence Bombay has India’s best hotels, bars, restaurants and nightclubs. And every day, according to the official census, hundreds move to the city to seek their fortune.


    To migrants from India’s poor states, the metropolis is known as Mayanagri, the City of Dreams. To its slums come people from India’s villages, hitching rides and dodging train fares, prepared to sell spicy peanuts at traffic lights for a few cents a day and pay $1 a month to live in a tin hut. For some of them, the principal opportunity the city offers is a life of crime–running bootlegging operations or gambling dens–or renting out the hovels in which millions of Bombay’s inhabitants live. Just as for Bombay’s gilded élite, the city is the place to be. “I came from nothing,” says a Bombay gangster who grew up in Bihar, India’s poorest state and owns 30,000 huts in four slums. “Now I have money, phones, cars, houses, a wife and two girlfriends. If you were me, you’d love Bombay too.”


    That not to say it’s easy to love. If you judge Bombay by governance, it sounds as though the city is falling apart. In a calamity last July that was mercifully forgotten with the advent of Hurricane Katrina weeks later, heavy monsoon rains flooded Bombay for a week as the city’s 150-year-old drains and sewers collapsed. At least 435 people died. The infrastructure bears other scars of neglect. In the city’s small and ancient stock of trains, each is crammed with an average of 4,500 people, although most have a capacity of 1,750. As a result, passenger groups say, an astonishing 3,500 travelers die every year on the tracks, hundreds simply falling from the trains. City rent controls have kept the price of its swankiest apartments almost unchanged since 1940, encouraging landlords to let them crumble–as several blocks do, fatally, every year. Visitors to the most prestigious offices in the country in south Bombay run a gauntlet of homeless people outside. Movie director Shekhar Kapur, who returned after years in London and Los Angeles, says living in Bombay means confronting the class divide daily: “This must be one of the few places on earth where the rich try to work off a few pounds in the gym, step outside and are confronted by a barefoot child of skin and bones begging for something to eat.”


    Those urban extremes can be hard to take, but locals pride themselves on their pluck and self-reliance. When the floods hit last year, rescue workers were nowhere to be seen, but shanty dwellers sheltered businessmen, slum children rescued film stars, and untouchables saved holy men. “There was a feeling that went through people,” says film producer and director Mahesh Bhatt, who is suing the city for its alleged mishandling of the crisis. “We realized no one was going to descend from the heavens to solve our problems, and we were going to have to do it ourselves.” The same is true of Bombay’s economy. “On the face of it, the city’s screwed,” says wine impresario Samant. “Look at the traffic, the bureaucracy, the sewage, so much poverty next to so much money. You’d think the place would erupt.” Yet look at how nimbly the city negotiates those obstacles, he says. “There’s no better place to be in business right now.”


    Five centuries after the first foreigners arrived, Bombay is once again attracting fortune seekers from far away. Yana Gupta’s journey began in Brno, Czechoslovakia, in 1988 when she was 9 and her mother Dedenka stitched money and jewelry into her two daughters’ clothes and took them on vacation to Croatia. “On the bus on the way back to Czechoslovakia,” remembers Gupta, “we got down somewhere and went into some forest. The idea was to get to Germany. But the border guards caught us.” The next year, Vaclav Havel led Czechoslovakia’s revolution. But Gupta’s mother had sown the seeds of escape deep in her daughter. By 15, Gupta was modeling in Prague. By 17, it was Milan. And by 19, she was sharing a models’ flat in Tokyo. “It was a great experience,” she says. “I was learning English and making money. And when I was 21, I came to India for a vacation, met someone in an ashram, and in two months I married him.”


    Gupta later separated from her husband. But she stuck with Bombay, and the city quickly became attached to her. She did her first fashion shoot in January 2001, and within three months she was signed as the face of Lakme cosmetics. Today she is India’s top model, representing Christian Dior, 7Up and Kingfisher Airlines. She has an annual calendar and a song-and-dance show, and is a fixture on the gossip pages; a book and an album are up next.


    Gupta is the most prominent of the foreigners who have moved to Bombay yet is far from alone. The last official count in 2005 estimated that there were just 30,000 foreigners working in India, but that number is rocketing. Delhi-based market researcher Evalueserve says an additional 120,000 are needed by 2010 to fill the skills shortage in the IT industry alone, and Bombay real estate agents report that foreigners are fueling a run on luxury properties. The reason for the influx, says Gupta, is that anyone in any profession can rise faster and higher in Bombay than almost anywhere else. The author E.B. White said, “No one should come to New York to live unless he is willing to be lucky,” which could just as easily be said of Bombay today. Says Gupta: “That’s the thing about Bombay. It’s the place of possibility.”


    That promise is luring others home. When Samant left school 20 years ago, any Indian with ambition and means got out, and Samant followed a well-trodden path to Stanford and on to Oracle in California’s Silicon Valley. Then in 1991 Singh, at the time the country’s Finance Minister, began to open up India, dismantling a creaking socialist command economy that had chained India to poverty and stagnation since independence. Samant returned home with a mad new plan: to make wine in a country where alcohol was taboo and the closest thing to sophisticated intoxication was hooch. Thirteen years later, Samant runs Sula, one of India’s largest vintners, producing more than a million bottles a year. And he lives large, employing a chauffeur and a butler, vacationing in Europe and California, and partying every night in Bombay.


    India’s great hope runs on hope itself. Hope is the reason Gupta stays in Bombay, despite falling ill from diesel fumes each time she crosses the city. Samant says it’s why, unlike in New Orleans, the people didn’t disintegrate with their city after the floods. Hope brought Bombay together and keeps it together. “Look at Dharavi,” he says of the city’s notorious slum, the biggest in Asia. “The place has a GDP of $1 billion a year. Dharavi makes you realize everyone has a stake in keeping Bombay going.” One day all those millions of expectations will have to be satisfied. But for now, the City of Dreams is living up to its name.



     


     





    India Awakens

    Fueled by high-octane growth, the world’s largest democracy is becoming a global power. Why the world will never be the same



    Even if you have never gone to India–never wrapped your food in a piping-hot naan or had your eyeballs singed by a Bollywood spectacular–there is a good chance you encounter some piece of it every day of your life. It might be the place you call (although you don’t know it) if your luggage is lost on a connecting flight, or the guys to whom your company has outsourced its data processing. Every night, young radiologists in Bangalore read CT scans e-mailed to them by emergency-room doctors in the U.S. Few modern Americans are surprised to find that their dentist or lawyer is of Indian origin, or are shocked to hear how vital Indians have been to California’s high-tech industry. In ways big and small, Indians are changing the world.


    That’s possible because India–the second most populous nation in the world, and projected to be by 2015 the most populous–is itself being transformed. Writers like to attach catchy tags to nations, which is why you have read plenty about the rise of Asian tigers and the Chinese dragon. Now here comes the elephant. India’s economy is growing more than 8% a year, and the country is modernizing so fast that old friends are bewildered by the changes that occurred between visits. The economic boom is taking place at a time when the U.S. and India are forging new ties. During the cold war, relations between New Delhi and Washington were frosty at best, as India cozied up to the Soviet Union and successive U.S. Administrations armed and supported India’s regional rival, Pakistan. But in a breathtaking shift, the Bush Administration in 2004 declared India a strategic partner and proposed a bilateral deal (presently stalled in Congress) to share nuclear know-how. After decades when it hardly registered in the political or public consciousness, India is on the U.S. mental map.


    Among policymakers in Washington, the new approach can be explained simply: India is the un-China. One Asian giant is run by a Communist Party that increasingly appeals to nationalism as a way of legitimating its power. The other is the largest democracy the world has ever seen. The U.S. will always have to deal with China, but it has learned that doing so is never easy: China bristles too much with old resentments at the hands of the West. India is no pushover either (try suggesting in New Delhi that outsiders might usefully broker a deal with Pakistan about Kashmir, the disputed territory over which the two countries have fought three wars), but democrats are easier to talk to than communist apparatchiks. Making friends with India is a good way for the U.S. to hedge its Asia bet.


    Democracy aside, there is a second way in which India is the un-China–and it’s not to India’s credit. In most measures of modernization, China is way ahead. Last year per capita income in India was $3,300; in China it was $6,800. Prosperity and progress haven’t touched many of the nearly 650,000 villages where more than two-thirds of India’s population lives. Backbreaking, empty-stomach poverty, which China has been tackling successfully for decades, is still all too common in India. Education for women–the key driver of China’s rise to become the workshop of the world–lags terribly in India. The nation has more people with HIV/AIDS than any other in the world, but until recently the Indian government was in a disgraceful state of denial about the epidemic. Transportation networks and electrical grids, which are crucial to industrial development and job creation, are so dilapidated that it will take many years to modernize them.


    Yet the litany of India’s comparative shortcomings omits a fundamental truth: China started first. China’s key economic reforms took shape in the late 1970s, India’s not until the early 1990s. But India is younger and freer than China. Many of its companies are already innovative world beaters. India is playing catch-up, for sure, but it has the skills, the people and the sort of hustle and dynamism that Americans respect, to do so. It deserves the new notice it has got in the U.S. We’re all about to discover: this elephant can dance.


     


     

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    Robert Reich is the nation’s 22nd Secretary of Labor and a professor at the University of California at Berkeley. This is his personal political-economic journal.





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    Thursday, June 15, 2006



    There’s No “Inflation Genie.”




    I’ve spent much of the day on the phone, talking with financial reporters about inflation and the “consensus” view on Wall Street that Bernanke and the Fed must raise short-term rates again in order to stop the inflation genie from getting out of the bottle. Wall Street is wrong. It’s still haunted by the double-digit inflation of the late 1970s. It forgets the double-digit depression of the 1930s.

    The fact is, this economy is not at all like the economy of the 1970s. Labor unions don’t have nearly the power they did then to demand wage increases. Big companies don’t have nearly the power they did then to raise prices. Globalization and computer software have radically increased wage and price competition. So the inflation genie won’t get out of the bottle. The price rises we’re seeing now are due to energy and raw-material commodity price increases, which are NOT being driven by excessive demand by American consumers and NOT being driven by inflationary expectations. They’re the result of soaring increases in demand for energy and raw materials by China and India, and by uncertainties over energy supplies from the Middle East, Nigeria, Russia, and Venezuela.

    In addition, productivity has grown enormously in the US during the last five years. Wages have not. Wages comprise 70 percent of the costs of business. One last thing: There’s still lots of unemployment in the US. The payroll survey shows only small increases in hiring. A smaller proportion of adults are employed now than in 2000. The ranks of people too discouraged to look for work are very large.

    So forget the inflation genie. Worry more about the 1930s. I don’t mean to suggest a full-fledged depression is on the horizon. But I do worry that the economy is slowing. Consumers are reaching the limit of their capacity to go deeper into debt. Their one cash cow — the value of their homes — is in poor shape. To make matters potentially worse, not only is the Federal Reserve Bank raising interest rates too high, so are central bankers all over the world. Take a look at long-term interest rates and you see how worried lenders are about the economy overall. If the Fed keeps raising short-term rates we’re heading for a major downturn.

    Me thinks Bernanke wants to show Wall Street he’s a tough guy. But tough guys often over-estimate the importance of acting tough.

    In the end, the people who get clobbered when the Fed raises rates and the economy slows are those at the end of the job line — people who need jobs, or are in low-paying ones. They’re the first to be let go. At a time when the number of working poor in America are already ballooning, and the ranks of the impoverished are growing, it’s not only economically wrong for the Fed to go on raising rates. It’s ethically wrong.

     

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  • The American Way of Debt







    Published: June 11, 2006


    Americans are awash in red ink. Consumer indebtedness is soaring, the savings rate is down to zero and people are filing for bankruptcy at record rates. To many observers, these are symptoms of cultural decline, from sturdy thrift to flabby self-gratification — embodied in the current obesity epidemic. The fattest nation on earth is also the greediest consumer of global resources and now is borrowing more than ever to satisfy its appetites. There is a large core of truth to this indictment.



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    Magazine



    Off to the Races Again, Leaving Many Behind

    The Money Issue
    America’s scariest addiction is getting even scarier.

    But as the history of debt in America shows, condemnations of extravagance can obscure more than they illuminate. The equation of debt and decline assumes that once upon a time Americans lived within their means and saved for what they bought. This is fantasy: there never was a golden age of thrift. Debt has always played an important role in Americans’ lives — not merely as a means of instant gratification but also as a strategy for survival and a tool for economic advance.


    Yet our moral traditions have concealed this complexity. “Owe no man anything,” St. Paul warned, and from the New England Puritans forward, legions of Protestant ministers made this their text. Indebtedness signified a sin against the Protestant ethic of self-control; it also threatened the ideal of independent manhood that underwrote the founders’ vision of a virtuous republic. The indebted man “must smile on those he hates, he must extend his hand where he would strike, he must speak pleasantly with a curse in his throat,” a Harper’s contributor wrote in 1894. “He wears dependence like a yoke.” Benjamin Franklin coined similar lessons in aphorisms later memorized by generations of Victorian-era schoolchildren: “The Borrower Is a Slave to the Lender.” “Be frugal and free.” The link with lost freedom was more than metaphorical: you could still be imprisoned for debt in many places (including New York City) down to the early 1900′s.


    Still, the case against debt was more principled than practical. Every generation of moralists imagined the same fall from financial rectitude. In their novel “The Gilded Age” (1873), Mark Twain and Charles Dudley Warner mourned the disappearance of the antebellum “horror of debt” amid the speculative borrowing of the post-Civil War years.


    In 1924, the editor of The Saturday Evening Post complained that “the firmly rooted aversion to debt in any form which prevailed a generation ago has almost completely evaporated.” In 1958, John Kenneth Galbraith noticed that “there has been an inexplicable but very real retreat from the Puritan canon that required an individual to save first and enjoy later.”


    In fact, debt is as American as cherry pie. For George Washington and Thomas Jefferson, debt was the price they paid to participate in the world of big-spending Southern planters. Among plainer rural folk, through most of the 19th century, cash was scarce, and country-store ledgers carried local peoples’ debts for years, sometimes forever. Factory workers and laborers used debt to make ends meet, resorting to pawnshops, loan sharks, relatives and friends.


    Even moralists admitted distinctions between good (“productive”) debt and bad (“consumptive”) debt. The other side of debt, after all, was credit — “Beautiful credit! The foundation of modern society,” as Twain and Warner called it in “The Gilded Age.” They had a point. The root of credit was credo — “I believe” — and faith was a necessary component of most transactions in an expanding economy. Borrowing money was “getting trusted,” in the argot of Victorian commerce. Among businessmen, indebtedness was a sign that you were “a man of importance in the community,” as a euphoric young John D. Rockefeller said after he was “trusted” by a Cleveland bank for $2,000. Not financial obligations but the failure to meet them was what made you “good for nothing.”


    Among the failures in the late 19th century were farmers, whose crop prices fell while they struggled to pay for threshers and combines. Desperate for relief from creditors, they demanded an expansion of the money supply through the free coinage of silver. The “money question” peaked in the election of 1896, when the Northeastern creditors’ candidate, William McKinley, defeated William Jennings Bryan, the spokesman of the agrarian South and West. Those last two regions, a writer for The Atlantic Monthly observed, had “nothing in common but a lack of thrift.” Imprudent borrowers took on debt “with only a speculative opportunity to pay” — and this, the magazine charged, violated the trust required to maintain the credit system. This rhetoric of “sound money” concealed a clash of interests between bankers and farmers, Wall Street and Main Street. It would not be the last time that moralism would mask class conflict in debates over monetary policy.


    After 1900, the proliferation of mass-marketed products encouraged a more open tolerance for consumer debt. By the 1920′s, millions of middle-class Americans bought durable goods on time payments — sewing machines, washing machines, radios, automobiles, houses. Lenders acquired legitimacy, reinforced by reassuring names like Household Finance Corporation or General Motors Acceptance Corporation. “Acceptance” implied membership in a national community of responsible borrowers. Indebtedness could discipline workers, keeping them at routinized jobs in factories and offices, graying but in harness, meeting payments regularly. Good consumers would be good producers. The economist who proposed this idea was Simon Nelson Patten, in “The New Basis of Civilization” (1907). By providing new sanctions for spending, Patten helped create a cultural landscape where consumer debt could find a decent suburban home. He predicted that workers’ desires for things would not undermine their capacity for disciplined achievement, as generations of moralists had claimed; rather, the multiplication of wants would become part of the civilizing process, as workingmen and their wives would broaden their horizons and take pride in their accumulating possessions. Patten’s New Basis began the project that E.R.A. Seligman would complete in “The Economics of Installment Selling” (1927) — the abolition of the distinction between “productive” and “consumptive” debt.







    Patten was onto something. The disciplining power of debt was undeniable. Even during the Depression, while Americans cut back on new borrowing, they also denied themselves food and clothing to avoid repossession of refrigerators or real estate. “Oh, the tension in the house,” one of Studs Terkel’s informants recalled in “Hard Times,” “when Pa used to scramble around trying to get enough money to pay that installment loan. That was the one degrading thing I remember.” In 1932, a Harper’s contributor observed that the middle-class homeowner “no longer has possessions but only obligations.” This homeowner did not exactly represent an ethos of self-gratification.

    The true fulfillment of Patten’s vision depended on an economically secure working population. These conditions awaited the rise of strong industrial unions and the comparative prosperity of the post-World War II era. The acquisition of appliances, cars and houses was often financed on the installment plan or with the assistance of government agencies like the Federal Housing Administration. Thanks largely to union power, more fortunate workers could depend on steady wages that allowed them to pay off big-ticket items over time. Patten would have been pleased.


    The upward spiral of earning and spending survived until the 1970′s, when the midcentury ideal of corporate citizenship evaporated in the harsher climate of renewed international competition. Fearing foreign rivals, American business ended its implicit social contract with unions by seeking cheap labor in overseas markets. During the 1980′s, while real income continued to stagnate for most Americans, the ascendancy of Ronald Reagan gave government sanction to unprecedented consumer spending. Reagan’s rhetorical refusal of limits combined with the deregulation of the lending industry to detach dreams of luxury from previous constraints. As money worship mounted, job security disappeared and inequalities widened, pundits spoke of a new Gilded Age. By the 1990′s, bloated icons of affluence proliferated: the gargantuan pseudo-military vehicle, the 10,000-square-foot hacienda. A bigger standard package of household goods demanded deeper debt and accelerated the pace of the consumer treadmill. No one wanted to look like a “loser.”


    But for many borrowers, debt has not been just about keeping up appearances. Less-affluent Americans have resorted to borrowing for groceries as well as cars. Public policies have intensified their plight. The freezing of the minimum wage, the tightening of unemployment insurance and workmen’s compensation programs, the shifting of the tax burden from the rich to the rest — these changes have starved public services while leaving ordinary Americans more dependent than ever on debt. One of the most consistent statistical findings of recent years is that about half of all personal bankruptcies have been caused by medical bills. Whatever else our current indebtedness may signify, it is hardly a riot of hedonism.


     


     


  • The Energy Challenge


    Pollution From Chinese Coal Casts a Global Shadow







     


    Pollution From Chinese Coal Casts a Long Shadow


     



    HANJING, China — One of China’s lesser-known exports is a dangerous brew of soot, toxic chemicals and climate-changing gases from the smokestacks of coal-burning power plants.


    In early April, a dense cloud of pollutants over Northern China sailed to nearby Seoul, sweeping along dust and desert sand before wafting across the Pacific. An American satellite spotted the cloud as it crossed the West Coast.


    Researchers in California, Oregon and Washington noticed specks of sulfur compounds, carbon and other byproducts of coal combustion coating the silvery surfaces of their mountaintop detectors. These microscopic particles can work their way deep into the lungs, contributing to respiratory damage, heart disease and cancer.


    Filters near Lake Tahoe in the mountains of eastern California “are the darkest that we’ve seen” outside smoggy urban areas, said Steven S. Cliff, an atmospheric scientist at the University of California at Davis.


    Unless China finds a way to clean up its coal plants and the thousands of factories that burn coal, pollution will soar both at home and abroad. The increase in global-warming gases from China’s coal use will probably exceed that for all industrialized countries combined over the next 25 years, surpassing by five times the reduction in such emissions that the Kyoto Protocol seeks.


    The sulfur dioxide produced in coal combustion poses an immediate threat to the health of China’s citizens, contributing to about 400,000 premature deaths a year. It also causes acid rain that poisons lakes, rivers, forests and crops.


    The sulfur pollution is so pervasive as to have an extraordinary side effect that is helping the rest of the world, but only temporarily: It actually slows global warming. The tiny, airborne particles deflect the sun’s hot rays back into space.


    But the cooling effect from sulfur is short-lived. By contrast, the carbon dioxide emanating from Chinese coal plants will last for decades, with a cumulative warming effect that will eventually overwhelm the cooling from sulfur and deliver another large kick to global warming, climate scientists say. A warmer climate could lead to rising sea levels, the spread of tropical diseases in previously temperate climes, crop failures in some regions and the extinction of many plant and animal species, especially those in polar or alpine areas.


    Coal is indeed China’s double-edged sword — the new economy’s black gold and the fragile environment’s dark cloud.


    Already, China uses more coal than the United States, the European Union and Japan combined. And it has increased coal consumption 14 percent in each of the past two years in the broadest industrialization ever. Every week to 10 days, another coal-fired power plant opens somewhere in China that is big enough to serve all the households in Dallas or San Diego.


    To make matters worse, India is right behind China in stepping up its construction of coal-fired power plants — and has a population expected to outstrip China’s by 2030.


    Aware of the country’s growing reliance on coal and of the dangers from burning so much of it, China’s leaders have vowed to improve the nation’s energy efficiency. No one thinks that effort will be enough. To make a big improvement in emissions of global-warming gases and other pollutants, the country must install the most modern equipment — equipment that for the time being must come from other nations.


    Industrialized countries could help by providing loans or grants, as the Japanese government and the World Bank have done, or by sharing technology. But Chinese utilities have in the past preferred to buy cheap but often-antiquated equipment from well connected domestic suppliers instead of importing costlier gear from the West.


    The Chinese government has been reluctant to approve the extra spending. Asking customers to shoulder the bill would set back the government’s efforts to protect consumers from inflation and to create jobs and social stability.


    But each year China defers buying advanced technology, older equipment goes into scores of new coal-fired plants with a lifespan of up to 75 years.


    “This is the great challenge they have to face,” said David Moskovitz, an energy consultant who advises the Chinese government. “How can they continue their rapid growth without plunging the environment into the abyss?”


    Living Better With Coal


    Wu Yiebing and his wife, Cao Waiping, used to have very little effect on their environment. But they have tasted the rising standard of living from coal-generated electricity and they are hooked, even as they suffer the vivid effects of the damage their new lifestyle creates.


    Years ago, the mountain village where they grew up had electricity for only several hours each evening, when water was let out of a nearby dam to turn a small turbine. They lived in a mud hut, farmed by hand from dawn to dusk on hillside terraces too small for tractors, and ate almost nothing but rice on an income of $25 a month.


    Today, they live here in Hanjing, a small town in central China where Mr. Wu earns nearly $200 a month. He operates a large electric drill 600 feet underground in a coal mine, digging out the fuel that has powered his own family’s advancement. He and his wife have a stereo, a refrigerator, a television, an electric fan, a phone and light bulbs, paying just $2.50 a month for all the electricity they can burn from a nearby coal-fired power plant.


    They occupy a snug house with brick walls and floors and a cement foundation — the bricks and cement are products of the smoking, energy-ravenous factories that dot the valley. Ms. Cao decorates the family’s home with calendar pictures of Zhang Ziyi, the Chinese film star. She is occasionally dismissive about the farming village where she lived as a girl and now seldom visits except over Chinese New Year.


    “We couldn’t wear high heels then because the paths were so bad and we were always carrying heavy loads,” said Ms. Cao, who was wearing makeup, a stylish yellow pullover, low-slung black pants and black pumps with slender three-inch heels on a recent Sunday morning.


    One-fifth of the world’s population already lives in affluent countries with lots of air-conditioning, refrigerators and other appliances. This group consumes a tremendous amount of oil, natural gas, nuclear power, coal and alternative energy sources.


    Now China is trying to bring its fifth of the world’s population, people like Mr. Wu and Ms. Cao, up to the same standard. One goal is to build urban communities for 300 million people over the next two decades.


    Already, China has more than tripled the number of air-conditioners in the past five years, to 84 per 100 urban households. And it has brought modern appliances to hundreds of millions of households in small towns and villages like Hanjing.


    The difference from most wealthy countries is that China depends overwhelmingly on coal. And using coal to produce electricity and run factories generates more global-warming gases and lung-damaging pollutants than relying on oil or gas.


    Indeed, the Wu family dislikes the light gray smog of sulfur particles and other pollutants that darkens the sky and dulls the dark green fields of young wheat and the white blossoms of peach orchards in the distance. But they tolerate the pollution.


    “Everything else is better here,” Mr. Wu said. “Now we live better, we eat better.”


    China’s Dark Clouds


    Large areas of North-Central China have been devastated by the spectacular growth of the local coal industry. Severe pollution extends across Shaanxi Province, where the Wus live, and neighboring Shanxi Province, which produces even more coal.


    Not long ago, in the historic city of Datong, about 160 miles west of Beijing, throngs of children in colorful outfits formed a ceremonial line at the entrance to the city’s 1,500-year-old complex of Buddhist cave grottoes to celebrate Datong’s new designation as one of China’s “spiritually civilized cities.”


    The event was meant to bolster pride in a city desperately in need of good news. Two years ago, Datong, long the nation’s coal capital, was branded one of the world’s most-polluted cities. Since then, the air quality has only grown worse.


    Datong is so bad that last winter the city’s air quality monitors went on red alert. Desert dust and particulate matter in the city had been known to force the pollution index into warning territory, above 300, which means people should stay indoors.


    On Dec. 28, the index hit 350.


    “The pollution is worst during the winter,” said Ji Youping, a former coal miner who now works with a local environmental protection agency. “Datong gets very black. Even during the daytime, people drive with their lights on.”


    Of China’s 10 most polluted cities, four, including Datong, are in Shanxi Province. The coal-mining operations have damaged waterways and scarred the land. Because of intense underground mining, thousands of acres are prone to sinking, and hundreds of villages are blackened with coal waste.


    There is a Dickensian feel to much of the region. Roads are covered in coal tar; houses are coated with soot; miners, their faces smeared almost entirely black, haul carts full of coal rocks; the air is thick with the smell of burning coal.


    There are growing concerns about the impact of this coal boom on the environment. The Asian Development Bank says it is financing pollution control programs in Shanxi because the number of people suffering from lung cancer and other respiratory diseases in the province has soared over the past 20 years. Yet even after years of government-mandated cleanup efforts the region’s factories belch black smoke.


    The government has promised to close the foulest factories and to shutter thousands of illegal mines, where some of the worst safety and environmental hazards are concentrated. But no one is talking about shutting the region’s coal-burning power plants, which account for more than half the pollution. In fact, Shanxi and Shaanxi are rapidly building new coal-fired plants to keep pace with soaring energy demand.


    To meet that demand, which includes burning coal to supply power to Beijing, Shanxi Province alone is expected to produce almost as much coal as was mined last year in Germany, England and Russia combined.


    Burning all that coal releases enormous quantities of sulfur.


    “Sulfur dioxide is China’s No. 1 pollution problem,” said Barbara A. Finamore, a senior attorney at the Natural Resources Defense Council’s China Clean Energy Program in Washington. “This is the most serious acid rain problem in the world.”


    China released about 22.5 million tons of sulfur in 2004, more than twice the amount released in the United States, and a Chinese regulator publicly estimated last autumn that emissions would reach 26 million tons for 2005, although no official figures have been released yet. Acid rain now falls on 30 percent of China.


    Studies have found that the worst effects of acid rain and other pollution occur within several hundred miles of a power plant, where the extra acidity of rainfall can poison crops, trees and lakes alike.


    But China is generating such enormous quantities of pollution that the effects are felt farther downwind than usual. Sulfur and ash that make breathing a hazard are being carried by the wind to South Korea, Japan and beyond.


    Not enough of the Chinese emissions reach the United States to have an appreciable effect on acid rain yet. But, they are already having an effect in the mountains in West Coast states. These particles are dense enough that, at maximum levels during the spring, they account at higher altitudes for a fifth or more of the maximum levels of particles allowed by the latest federal air quality standards. Over the course of a year, Chinese pollution averages 10 to 15 percent of allowable levels of particles. The amounts are smaller for lower-lying cities, like Seattle, San Francisco and Los Angeles.


    China is also the world’s largest emitter of mercury, which has been linked to fetal and child development problems, said Dan Jaffe, an atmospheric scientist at the University of Washington.


    Unless Chinese regulators become much more aggressive over the next few years, considerably more emissions could reach the United States. Chinese pollution is already starting to make it harder and more expensive for West Coast cities to meet stringent air quality standards, said Professor Cliff of the University of California, slowing four decades of progress toward cleaner air.


    Nothing Beats It


    China knows it has to do something about its dependence on coal.


    The government has set one of the world’s most ambitious targets for energy conservation: to cut the average amount of energy needed to produce each good or service by 20 percent over the next five years. But with an economy growing 10 percent a year and with energy consumption climbing even faster, a conservation target amounting to 3.7 percent a year does not keep pace.


    All new cars, minivans and sport utility vehicles sold in China starting July 1 will have to meet fuel-economy standards stricter than those in the United States. New construction codes encourage the use of double-glazed windows to reduce air-conditioning and heating costs and high-tech light bulbs that produce more light with fewer watts.


    Meanwhile, other sources of energy have problems. Oil is at about $70 a barrel. Natural gas is in short supply in most of China, and prices for imports of liquefied natural gas have more than doubled in the last three years. Environmental objections are slowing the construction of hydroelectric dams on China’s few untamed rivers. Long construction times for nuclear power plants make them a poor solution to addressing blackouts and other power shortages now.


    For the past three years, China has also been trying harder to develop other alternatives. State-owned power companies have been building enormous wind turbines up and down the coast. Chinese companies are also trying to develop geothermal energy, tapping the heat of underground rocks, and are researching solar power and ways to turn coal into diesel fuel. But all of these measures fall well short. Coal remains the obvious choice to continue supplying almost two-thirds of China’s energy needs.


    Choices and Consequences


    China must make some difficult choices. So far, the nation has been making decisions that it hopes will lessen the health-damaging impact on its own country while sustaining economic growth as cheaply as possible. But those decisions will also add to the emissions that contribute to global warming.


    The first big choice involves tackling sulfur dioxide. The government is now requiring that the smokestacks of all new coal-fired plants be fitted with devices long used in Western power plants to remove up to 95 percent of the sulfur. All existing coal-fired plants in China are supposed to have the devices installed by 2010.


    While acknowledging that they have missed deadlines, Chinese officials insist they have the capacity now to install sulfur filters on every power plant smokestack. “I don’t think there will be a problem reaching this target before 2010,” said Liu Deyou, chief engineer at the Beijing SPC Environment Protection Tech Engineering Company, the sulfur-filter manufacturing arm of one of the five big, state-owned utilities.


    Japan may be 1,000 miles east of Shanxi Province, but the Japanese government is so concerned about acid rain from China that it has agreed to lend $125 million to Shanxi. The money will help pay for desulfurization equipment for large, coal-fired steel plants in the provincial capital, Taiyuan.


    The question is how much the state-owned power companies will actually use the pollution control equipment once it is installed. The equipment is costly to maintain and uses enormous amounts of electricity that could instead be sold to consumers. Moreover, regulated electricity tariffs offer little reward for them to run the equipment.


    In 2002, the Chinese government vowed to cut sulfur emissions by 10 percent by 2005. Instead, they rose 27 percent. If Chinese officials act swiftly, sulfur emissions could be halved in the next couple of decades, power officials and academic experts say. But if China continues to do little, sulfur emissions could double, creating even more devastating health and environmental problems.


    Even so, halving sulfur emissions has its own consequences: it would make global warming noticeable sooner.


    China contributes one-sixth of the world’s sulfur pollution. Together with the emissions from various other countries, those from China seem to offset more than one-third of the warming effect from manmade carbon dioxide already in the atmosphere, according to several climate models.


    But the sulfur particles typically drift to the ground in a week and stop reflecting much sunlight. Recent research suggests that it takes up to 10 years before a new coal-fired power plant has poured enough long-lasting carbon dioxide into the air to offset the cooling effect of the plant’s weekly sulfur emissions.


    Climate experts say that, ideally, China would cut emissions of sulfur and carbon dioxide at the same time. But they understand China’s imperative to clean up sulfur more quickly because it has a far more immediate effect on health.


    “It’s sort of unethical to expect people not to clean up their air quality for the sake of the climate,” said Tami Bond, an atmospheric scientist at the University of Illinois at Urbana-Champaign.


    The Hunt for Efficiency

    The second big decision facing China lies in how efficiently the heat from burning coal is converted into electricity. The latest big power plants in Western countries are much more efficient. Their coal-heated steam at very high temperatures and pressures can generate 20 to 50 percent more kilowatts than older Chinese power plants, even as they eject the same carbon-dioxide emissions and potentially lower sulfur emissions.


    China has limited the construction of small power plants, which are inefficient, and has required the use of somewhat higher steam temperatures and pressures. But Chinese officials say few new plants use the highest temperatures and pressures, which require costly imported equipment.


    And Chinese power utilities are facing a squeeze. The government has kept electricity cheap, by international standards, to keep consumers happy. But this has made it hard for utilities to cover their costs, especially as world coal prices rise.


    The government has tried to help by limiting what mines can charge utilities for coal. Mines have responded by shipping the lowest-quality, dirtiest, most-contaminated coal to power plants, say power and coal executives. The utilities have also been reluctant to spend on foreign equipment, steering contracts to affiliates instead.


    “When you have a 1 percent or less profit,” said Harley Seyedin, chief executive of the First Washington Group, owner of oil-fired power plants in Southeastern China’s Guangdong Province, “you don’t have the cash flow to invest or to expand in a reasonable way.”


    A New Technology


    The third big choice involves whether to pulverize coal and then burn the powder, as is done now, or convert the coal into a gas and then burn the gas, in a process known as integrated gasification combined combustion, or I.G.C.C.


    One advantage of this approach is that coal contaminants like mercury and sulfur can be easily filtered from the gas and disposed. Another advantage is that carbon dioxide can be separated from the emissions and pumped underground, although this technology remains unproven.


    Leading climate scientists like this approach to dealing with China’s rising coal consumption. “There’s a whole range of things that can be done; we should try to deploy coal gasification,” said Dr. Rajendra K. Pachauri, chairman of the United Nations-affiliated Intergovernmental Panel on Climate Change.


    The World Bank in 2003 offered a $15 million grant from the Global Environment Facility to help China build its first state-of-the-art power plant to convert coal into a gas before burning it. The plan called for pumping combustion byproducts from the plant underground.


    But the Chinese government put the plan on hold after bids to build the plant were higher than expected. Chinese officials have expressed an interest this spring in building five or six power plants with the new technology instead of just one. But they are in danger of losing the original grant if they do not take some action soon, said Zhao Jian-ping, the senior energy specialist in the Beijing office of the World Bank.


    Another stumbling block has been that China wants foreign manufacturers to transfer technological secrets to Chinese rivals, instead of simply filling orders to import equipment, said Anil Terway, director of the East Asia energy division at the Asian Development Bank.


    “The fact that they are keen to have the technologies along with the equipment is slowing things down,” he said.


    Andy Solem, vice president for China infrastructure at General Electric, a leading manufacturer of coal gasification equipment, said he believed that China would place orders in 2007 or 2008 for the construction of a series of these plants. But he said some technology transfer was unavoidable.


    Western companies could help Chinese businesses take steps to reduce carbon-dioxide emissions, like subsidizing the purchase of more efficient boilers. Some companies already have such programs in other countries, to offset the environmental consequences of their own carbon-dioxide emissions at home, and are looking at similar projects in China. But the scale of emissions in China to offset is enormous.


    For all the worries about pollution from China, international climate experts are loath to criticize the country without pointing out that the average American still consumes more energy and is responsible for the release of 10 times as much carbon dioxide as the average Chinese. While China now generates more electricity from coal than does the United States, America’s consumption of gasoline dwarfs China’s, and burning gasoline also releases carbon dioxide.


    An Insatiable Demand?


    The Chinese are still far from achieving what has become the basic standard in the West. Urban elites who can afford condominiums are still a tiny fraction of China’s population. But these urban elites are role models with a lifestyle sought by hundreds of millions of Chinese. Plush condos on sale in Shanghai are just a step toward an Americanized lifestyle that is becoming possible in the nation’s showcase city.


    Far from the Wu family in rural Shaanxi, the Lu Bei family grew up in cramped, one-room apartments in Shanghai. Now the couple own a large three-bedroom apartment in the city’s futuristic Pudong financial district. They have two television sets, four air-conditioners, a microwave, a dishwasher, a washing machine and three computers. They also have high-speed Internet access.


    “This is my bedroom,” said Lu Bei, a 35-year-old insurance agency worker entering a spacious room with a king-size bed. “We moved here two years ago. We had a baby and wanted a decent place to live.”


    For millions of Chinese to live like the Lus with less damage to the environment, energy conservation is crucial. But curbing that usage would be impossible as long as China keeps energy prices low. Gasoline still costs $2 a gallon, for example, and electricity is similarly cheap for many users.


    With Chinese leaders under constant pressure to create jobs for the millions of workers flooding from farms into cities each year, as well as the rapidly growing ranks of college graduates, there has been little enthusiasm for a change of strategy.


    Indeed, China is using subsidies to make its energy even cheaper, a strategy that is not unfamiliar to Americans, said Kenneth Lieberthal, a China specialist at the University of Michigan. “They have done in many ways,” he said, “what we have done.”


    Keith Bradsher reported from Hanjing and Guangzhou, China, for this article and David Barboza from Datong and Shanghai.


     


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  • When Bernanke speaks, the markets freak


    FED CHIEF CLEARER THAN PREDECESSOR; INVESTORS DON’T SEEM TO LIKE IT


    By Kevin G. Hall

    Knight Ridder

    In his fifth month on the job, Federal Reserve Chairman Ben Bernanke is learning the hard way that his pledge to make U.S. monetary policy clearer comes with a price.


    Bernanke became chairman Feb. 1, and he’s off to a rocky start after roiling the markets in recent weeks. His sin, it seems, is speaking too clearly about interest rates and inflation, as he promised to do after taking the helm from the opaque Alan Greenspan, who turned vague statements into an art form.


    Comments Monday by Bernanke sent the markets plunging most of the week. The technology-heavy Nasdaq composite index fell for six days in a row, finishing the week 3.8 percent lower at 2,135.06. The blue-chip Dow Jones industrial average — which includes Silicon Valley tech heavyweights Intel and Hewlett-Packard — slid 3.2 percent to 10,891.92.


    The new chairman’s rough patch began April 27, when he signaled before the Joint Economic Committee of Congress that after 16 consecutive interest-rate increases since June 2004, a pause might be in order. Stocks rallied.


    Days later, however, in what he thought was a private conversation with a CNBC reporter, Bernanke said the markets had misunderstood his message and that a pause was in no way certain. CNBC reported it May 1, sparking a Wall Street roller-coaster ride.


    Soon after, data came out suggesting that energy prices were driving inflation to the upper limits of the Fed’s comfort zone. The implication: A late June rate increase was now more likely than a pause.


    Bernanke’s words in April had proved too optimistic, given that the Fed’s main mission is to quell inflation, primarily by setting short-term interest rates.


    Testifying before the Senate in late May, Bernanke apologized for “a lapse in judgment on my part” in talking loosely to a reporter. In the future, Bernanke said, he’d stick to formal channels to communicate to the public.


    But even speaking that way roiled the markets. In a speech to a conference Monday in Washington, Bernanke left little doubt that future rate increases should be expected because price inflation had reached a danger zone.


    The Fed chief also said the U.S. economy is showing signs of slowing down. He pointed to slowing consumer spending, the cooling housing market and slower job growth. A slowing economy normally prompts an end to rate increases or spurs rate cuts to rekindle economic embers. But Bernanke left no doubt that he’s more worried about rising inflation than slowing growth — and their combination is troubling.


    “These are unwelcome developments,” he said.


    The Dow Jones industrials promptly plunged 200 points, and stocks slumped further through the week. What the markets heard was that rate increases might extend beyond the next expected bump up to 5.25 percent at the Fed’s June 28 and 29 meeting.


    Why such volatility? Bernanke, after all, was just engaging in the “plain speak” he’d promised.


    Blame Greenspan, who for more than 18 years as Fed chairman developed an oft-impenetrable language to communicate the Fed’s thinking.


    “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said,” Greenspan once famously quipped.


    The markets, it appears, don’t want straight talk.


    “The markets and Bernanke haven’t quite learned how to listen to each other,” said James Glassman, a senior economist for investment bank JPMorgan Chase. “I’m sure he thinks he’s leaving the door open . . . but the market needs simple messages, and the markets have sort of been used to getting spoon-fed.”


    The danger in Bernanke’s plain talk is that it creates expectations that can be dashed by new contradictory data. When he said future Fed rate decisions would be dependent on emerging data but looked favorable for a pause, he didn’t leave the Fed much wiggle room for unexpected data — as the next set of inflation numbers promptly proved.


    “The problem here is that Bernanke came in when the easy work was over,” said Laurence Meyer, a Fed governor from 1996 to 2002. “Bernanke was not able to give the kind of more precise guidance” that comes earlier in a rate-raising cycle, Meyer said.


     


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    New Treasury chief is seen as insurance against crisis


    ANALYSTS ASK WHY PAULSON ACCEPTED POST


    By Kevin G. Hall

    Knight Ridder

    When President Bush nominated Wall Street titan Henry Paulson last week to be his next Treasury secretary, there was universal praise for the rock star of investment banking.


    This week, as Paulson met with leaders on Capitol Hill, analysts are pondering why he accepted a post that critics say Bush has rendered impotent.


    Traditionally, a Treasury secretary’s powers touch on nearly everything important to the U.S. and global economies, from trade, debt and taxes to Social Security and the minting of money. Men who have held the job in decades past seemed larger than life and kept a firm hand on the tiller of national economic policy.


    President Reagan had James Baker III, whose 1985 Plaza Accord coordinated global currency values and trimmed a mammoth U.S. trade deficit. President Clinton leaned heavily on Robert Rubin, who like Paulson once headed investment bank Goldman Sachs and like Baker took the lead in averting global financial crises, his from Mexico, Asia and Russia.


    Bush’s two terms, to date, have been markedly different. His first two Treasury secretaries were men firmly rooted in the old economy, wary of Wall Street and unbridled financial markets. Paul O’Neill headed aluminum giant Alcoa and the departing John Snow ran railroad power CSX. They took on the cheerleader role usually reserved for the commerce secretary, while the White House set economic policy and managed day-to-day decisions.


    “I don’t remember ever seeing that happen before. The White House played a role, but I don’t think you would ever find a period where day-to-day” decisions were made by the White House, said Barry Bosworth, a senior fellow at the Brookings Institution, a center-left research center.


    Bosworth served President Carter as the director of the Council on Wage and Price Stability.


    Paulson met Friday with Senate Majority Leader Bill Frist, R.-Tenn., who said he expects Bush’s choice to win Senate confirmation by July 4.


    Donald Evans, Bush’s commerce secretary from 2001 to 2005 who reportedly was on the president’s short list of potential Treasury candidates, thinks Paulson sees a chance to be the spokesman for addressing the longer-term liabilities that jeopardize the nation’s financial future.


    “I think Hank, as well as anybody in the world, does have a real-time understanding of the state of the economy. . . . He has a very real-time understanding of what the real challenges are and what the real dangers are to the economy as we look into the future,” said Evans, now president of the Financial Services Forum, a trade association for the financial sector. “He can articulate those issues with a tremendous amount of credibility.”


    Sen. Charles Grassley, R-Iowa, agreed.


    “I believe he was selected to be more of a spokesman,” said Grassley, chairman of the influential Senate Finance Committee, which must approve Paulson’s nomination.


    As Bush’s administration nears lame-duck status, few expect the president to push for any significant economic-policy changes. Paulson’s credibility in global financial circles then becomes the political equivalent of a rainy day fund, something of great value should the stock market drop precipitously or some financial crisis emerges on a global scale.


    “If there were a crisis, he’s very well suited to take the leadership and make the adjustments,” Bosworth said.


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    Stocks fall again in market’s worst week of the year so far


    FOR WEEK, NASDAQ SHEDS 3.8%, DOW 3.2%, S&P 500 2.8%


    Mercury News Wire Services

    Wall Street finished its worst week of the year with a moderate decline Friday as persistent unease over inflation and interest rates kept investors nervous about buying.


    The technology-heavy Nasdaq composite index lost 10.26, or 0.5 percent, to 2,135.06.


    Silicon Valley’s largest tech stocks by market value were mostly lower. Cisco Systems, Intel and Gilead Sciences were up. Google, Hewlett-Packard, Oracle, Apple Computer, eBay, Yahoo and Applied Materials were down.


    The Dow Jones industrial average slid 46.90, or 0.4 percent, to 10,891.92. The Standard & Poor’s 500 index fell 5.63, or 0.4 percent, to 1,252.30.


    For the week, the Nasdaq plunged 3.8 percent, the Dow dropped 3.2 percent, and the S&P 500 sank 2.8 percent.


    Next week’s reports on wholesale and consumer prices will provide the latest clues on the economy’s health and could spark more investor debate on the battle between economic growth and inflation, and whether the Federal Reserve will continue raising short-term interest rates.


    “People will be thinking about what the Fed will be debating at their June 28-29 meeting,” said Jack Caffrey, equities strategist for JPMorgan Private Bank. “Investors are scared not necessarily about what the Fed will say, but of the possibility that the Fed may overtighten rates.”


    In corporate news, Dallas chip maker Texas Instruments raised its earnings and revenue targets for the second quarter, but attributed the gains to a legal settlement and a tax break. Texas Instruments dropped $1.04, or 3.4 percent, to $29.68.


    Prudential Equity Group gave further good news to the semiconductor sector with an upgrade to “favorable” from “unfavorable.” Prudential said inventories are at all-time March-quarter lows in a number of places in the supply chain. “We view lean inventories at these critical areas as a positive for the semiconductor sector,” the brokerage said.


    Santa Clara chip giant Intel was up 5 cents, or 0.3 percent, to $17.16.


    Genelabs Technologies rose 11 cents, or 5.9 percent, to $1.98. The Redwood City drug developer said it expects a mid-year cash level of about $15 million. The company also said it received $12.5 million in up-front payments from Novartis.


    Take-Two Interactive Software fell $2.94, or 17.5 percent, to $13.83. The video-game publisher, which sells titles including “Grand Theft Auto: San Andreas,” reported a wider-than-expected quarterly loss despite a 20 percent jump in sales.


    Bond prices drifted, with the yield on the 10-year Treasury note, which moves in the opposite direction, slipping to 4.98 percent from 5.01 percent late Thursday. Short-term yields continued lingering above long-term rates, signaling greater expectations of slowing economic growth.


    Elsewhere, the U.S. dollar dipped against the Japanese yen and was flat compared with European currencies, while gold prices stood near $610 an ounce.


     


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    U.S. trade deficit up to $63.4B in April


    MARTIN CRUTSINGER

    Associated Press

    The trade deficit is rising again after two months of declines, pushed by oil prices and a flood of imports from China. Analysts warned that global oil prices above $70 per barrel will swell the deficit more in coming months.


    The Commerce Department reported Friday that the gap between what the United States sells abroad and what it imports rose to $63.4 billion in April, 2.5 percent higher than the March imbalance of $61.9 billion.


    The trade deficit fell in both February and March after hitting an all-time high of $66.2 billion in January.


    While economists noted that the April deficit was smaller than the $65 billion that had been expected, it was still the sixth largest imbalance on record. They said deficits in comings months were likely to be worse given the jump in global crude oil prices.


    On Wall Street, stocks finished their worst week of the year as investors remained nervous over worries about inflation and interest rates. The Dow Jones industrial average fell 46.90 points Friday to close at 10,891.92, ending the week with a loss of more than 355 points.


    Investors’ worries about inflation increased after the Labor Department reported that prices for imported goods jumped 1.6 percent in May. Excluding the big rise in petroleum products, import prices were still up 0.6 percent last month.


    The April deterioration in the trade deficit came from a $1.44 billion increase in America’s foreign oil bill, which rose to $23.8 billion. That reflected a big jump in crude oil prices which overwhelmed a drop in volume. Oil traded on Friday at $71.45 per barrel in New York, up $1.10 from the previous day. Oil hit an all-time high of $75.17 in late April.


    Through the first four months of this year, the trade deficit is running 12.9 percent above the same period a year go, putting the country on track to run up a record trade deficit for a fifth straight year. Last year’s deficit was $716.7 billion.


    Critics of the administration’s trade policies seized on the new imbalance as further evidence that President Bush’s strategy of striking free-trade deals with countries around the world was not working and was contributing to a loss of nearly 3 million manufacturing jobs since Bush took office.


    “These figures are a jarring reminder that our nation needs a new approach to its trade policy,” said Rep. Benjamin Cardin of Maryland, the top Democrat on the Ways and Means trade subcommittee.


    Sen. Byron Dorgan, D-N.D., said that the new deficit figure highlighted the “total failure of U.S. trade policy” and showed that the country was handing over $2 billion a day to foreigners to cover the trade gap.


    But new U.S. Trade Representative Susan Schwab said the country’s trade picture was “much less dire” than critics were contending. She noted that the overall economy is performing strongly at present with unemployment dropping to 4.6 percent in May, the lowest jobless rate in nearly five years.


    The increase in the April trade deficit reflected a 0.7 percent rise in imports, which climbed to $179.1 billion, the second highest level on record.


    In addition to a higher oil bill, imports of autos and auto parts were up and shipments of consumer goods from China of such items as furniture, televisions, video recorders and toys all rose.


    That helped to push America’s total deficit with China to $17 billion in April, up a hefty 9.4 percent from March. That was likely to add to pressure in Congress to force China to revalue its currency as a way of helping narrow the deficit.


    American manufacturers contend China’s currency is undervalued by as much as 40 percent, making Chinese goods cheaper for U.S. consumers and American products more expensive in China.


    Some analysts said that Treasury Secretary nominee Henry Paulson will likely face tough questioning on the administration’s approach to China during his upcoming Senate confirmation hearings.


    U.S. exports of goods and services slipped 0.2 percent to $115.7 billion, just slightly below the all-time high set in October, reflecting a big $310 million drop in commercial aircraft shipments and smaller declines in sales of farm products and consumer goods.


    The deficit from last year was revised down from an earlier estimate of $723.6 billion, reflecting annual benchmark revisions that increased America’s surplus in services based on more complete data.


    Analysts believe the deficit will set another record this year, although they also think the pace of deterioration is slowing after huge increases in recent years.


    The deficit with Japan rose by 2.8 percent in April to $7.8 billion. The deficit with Canada rose by 16.3 percent to $6.1 billion in April while the imbalance with Mexico fell by 9.3 percent to $4.9 billion.


    America’s deficit with the 25-nation European Union declined by 7.2 percent in April to $9.4 billion.


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    Greenspan: Dependence on oil threat to economy


    By Kevin G. Hall

    Knight Ridder

    Rising energy prices are pushing up inflation and increasingly threatening the U.S. economy, former Federal Reserve Chairman Alan Greenspan testified Wednesday.


    He called for speedily developing alternative energy sources such as ethanol and liquefied natural gas.


    In his first appearance on Capitol Hill since he ended his nearly 19-year Fed tenure Jan. 31, Greenspan told the Senate Foreign Relations Committee that the United States had better reduce its dependence on foreign oil or suffer damaging economic consequences.


    A recent terrorist attack on Saudi Arabia’s main oil refinery, though thwarted, should serve as a warning that a successful hit on an oil installation could spark a global price shock that would create “a significant contraction in the economy,” Greenspan said.


    While the U.S. and global economies have shown surprising resiliency to rising oil and natural-gas prices since 2002, Greenspan said “recent data indicate we may finally be experiencing some impact.”


    The former Fed chief also detailed how investors, rather than users of oil, have come to set the price of oil through purchasing futures contracts. These speculators are betting that oil will cost above $60 a barrel six or seven years out, he said, suggesting that there won’t be a significant retreat for oil prices in coming years.


    But he said “current oil prices over time should lower to some extent our worrisome dependence on petroleum,” with the development of alternative fuels and broader use of electric-hybrid cars. This “would help to wean us off our petroleum dependence,” Greenspan said.


    Greenspan noted that three-quarters of the world’s oil reserves are state-owned. The run-up in prices is resulting in huge amounts of cash “to countries that are not friends of ours,” he said. This “is a very serious issue.”


    The bulk of his nearly three-hour testimony focused on reducing oil dependence and boosting energy security.


    Greenspan said repeatedly that cellulosic ethanol, a next-generation alternative fuel that could be made from nearly any plant fiber, appeared to be the most promising solution to the country’s oil addiction.


    “I’d move as quickly as I could to find out whether cellulosic is a practical alternative,” he said.


    He said conventional corn-based ethanol holds little promise to reduce U.S. oil dependence significantly. If every bushel of corn grown in the United States went to producing ethanol, it would displace only about 10 percent of projected U.S. gasoline consumption, he said.


    To make cellulosic ethanol, scientists deploy mass-produced, biologically engineered enzymes that can break down virtually any plant stock for fermentation and conversion into ethanol. Among its benefits is that, unlike gasoline or conventional ethanol, its production doesn’t produce gases that contribute to global warming.


    Pressed repeatedly, Greenspan frowned on the idea of a federal “man-to-the-moon”-type project to create alternative fuels. As a political conservative and market-oriented economist, Greenspan typically prefers private-sector to governmental solutions.


    Greenspan also touted liquefied natural gas as an important tool in reducing dependence on oil and gasoline.


    For years, he’d lamented the lack of liquefied natural-gas terminals in the United States. He complained Wednesday that Japan and other countries had locked up supplies in long-term contracts.


    “This could be another source of replacement for petroleum,” he said.







     


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