Category Archive

Innovation/Global Crisis Blog

Three Cheers for David Beers… David Who?

By Shlomo Maital

 David Beers:  Last Honest Man?

Very few people have heard of David Beers.  He is the head of Standard & Poor’s sovereign bond rating department.   He makes the decision whether to, for instance, downgrade America’s Treasury bond rating from AAA to AA plus.   Which is just what he did last Friday, after the stock market closed in New York.  Both before and after his decision he was subject to pressures one can only imagine – including a claim by the U.S. Treasury Dept. that he and his team made a mistake amounting to $2 trillion, in estimating America’s debt burden.   (It turns out that $2 trillion, which is 14 per cent of US GDP, is insignificant; $15 trillion have to be cut from America’s budget in the next decade!).

   Former U.S. Assistant Treasury Secretary Larry Summers vilified Beers, recalling that S&P failed to downgrade mortgage-backed securities and hence directly helped cause the global financial crisis in 2007-9.   Thanks, Larry, we had forgotten that.  But, Larry, as you well know, Beers had nothing to do with that – that was another department in S&P.  Do you think the Republican and Democrat leaders, including the President, bear any responsibility, for an anemic  deficit-reduction plan that only cuts spending by $20 b. this year? 

    Here is the key fact that justifies Beers’ courageous decision, which fires a shot across the bow of America’s dysfunctional politicians. (From Bloomberg Business Week):

  “A June analysis by the Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion over the next decade—or more than three times what Obama and Boehner were considering.   You start to see why, absent signs of a serious commitment to deficit reduction, the rating services are warning they may downgrade the federal government’s triple-A rating even if Congress does meet the Aug. 2 deadline. Fortunately, our debt hole is escapable. But digging out requires that leaders of both parties come to terms with just how deep it is.  

   In other words, just to keep America from sinking deeper in debt,  American consumers, for instance, will have to lower their average standard of living by 12 per cent (lowering personal consumption from 70 per cent of GDP to 62.5 per cent – still far higher than in China, for instance).  This is not impossible, or even draconian.  It means giving up all eating out and entertainment, for example.  Has any American leader pointed out to Americans, that in order to dig the U.S. out of its hole, every American will have to stop eating out in restaurants and going to movies, forever (not just for a month or two)?  

    David Beers deserves praise.  All those attacking him deserve sharp criticism.  By attacking Beers, they are discrediting perhaps the last honest person in a position of authority in America, one willing to tell the truth.

Global Crisis/Innovation Blog

Equal Societies are Stronger

By Shlomo Maital

The Spirit Level: Equal Societies are Stronger!

After protest movements swept across the Arab nations in the Mideast, they have now spread to Israel.  Some 100,000 young protesters gathered last Saturday night, in Israel’s major cities.   As in the Arab Spring, it is unclear what the young Israelis seek.  But reading between the lines and listening carefully, it becomes clear. They want a more equal, more fair, more just society. 

    Harvard Univ. economist John Kenneth Galbraith once write, “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy: that is, the search for a superior moral justification for selfishness”.   Once an egalitarian society, Israel embraced raw capitalism, justified selfishness on grounds of efficiency and wealth – and its modern “conservatives” led by our Prime Minister helped Israel join America as a country with one of the most unequal income distributions in the world.  (U.S. ranks third, Israel a close fourth; top of the list are Hong Kong and Singapore).   

    A 2009 book by two British epidemiologists, Richard Wilkinson and Kate Pickett, titled The Spirit Level, reaches the following conclusion:  above a certain level of GDP per capita, say, $20,000,  income is uncorrelated with all the major social indicators, such as health,mental illness, violence, education, etc.   What does correlate well with social wellbeing is (lack of) inequality.  The more unequal the society, the worse its health and society, in every indicator.  Their careful study includes a large cross-section of wealthy nations, along with the 50 American states. 

     Capitalists, you have run out of excuses.  Inequality is not only morally wrong, it is socially and politically stupid, because it makes your people worse off.    Read the book (you can download it from Amazon); the evidence is very strong.  

   As the late Harvard U. professor Albert Hirschman noted, there are two things you can do when faced with something you dislike:  “Exit” (leave, quit, don’t buy it, drop out), or “Voice” (protest, organize, complain, act).  For years, we have practiced “Exit”,  in all parts of the world.  Now, the young people are using their “Voice”.   We wish them all well.        

Global Crisis/Innovation Blog

Why Did the Stock Market Crash? Why Now?  

By Shlomo Maital

   The 1929 Crash…  and the 2011 Crash 

NEW YORK August  4/2011 — The Dow Jones Industrial Average plunged 4.3 percent Thursday, its worst one-day drop since the financial crisis, as global markets melted down over fears of a new economic downturn.  The Dow closed down 512.76 points to 11,383.68. The broader S&P 500 lost 4.8 percent to 1,200.07, while the tech-heavy Nasdaq Composite plunged 5.1 percent to 2,556.39.   The last time that the Dow fell as many points in a single day was in October 2008, during the nadir of the global financial crisis.    

  Why now? 

  The world is finally realizing that another perfect storm has occurred. 

• Governments are slashing spending, as they find it harder and harder to borrow, and more and more expensive to borrow.  This, at a time when government demand and government jobs are the only things holding up the economy, in Europe and the U.S.
• People are cutting their spending, in the face of daily headlines featuring dysfunctional political leaders who cannot even understand the problems their nation faces, let along deal with them, in Europe and the U.S.
• Businesses are piling up cash, but are not even thinking of spending it on investment. American businesses like Apple have huge piles of cash, but it is held abroad where taxes are low, thus not benefiting America.  
• World trade is weak; when GDP is stagnant, so are imports and hence exports. The only good news in this is that the price of oil is dropping like a stone.

     Failure to address the fundamental cause of the 2007-9 global crisis (massive expansion of dollars in the world, at a time when the world needs a stable reliable currency) has now led to a ‘double dip’, which is simply a continuation of the original crisis, in different forms.  It is not a double-dip recession, but rather the same one that is getting worse.   US Treasury Secretary Tim Geithner’s New York Times Op-Ed last August, “Welcome to the recovery” should cost him his job.  He just didn’t get it.  What recovery???

    President Obama says his Administration will now focus on creating jobs.  Well, how, Mr. Obama?  How about these data, from The Economist: 

    Some 6.3m workers have been off the job for more than six months, and the average duration of unemployment has grown to nearly 40 weeks.  With over 16% of the labour force jobless or underemployed, some firms are advertising that the long-term unemployed need not apply.   Workers recently laid off have a 30% chance of finding work in a given month. For workers off the job for more than six months, that chance is no better than 10%.    Growing ranks of the unemployed are exhausting the available 99 weeks of unemployment insurance. When the current emergency benefits program expires, the maximum duration of benefits may drop to just six months—a quarter of the current time span—although the Obama administration says it will fight for a new extension.  (Chances the House will approve it?  Zero).  Further attempts at fiscal stringency may hack away at other support programs, including food stamps and Medicaid, a health-care entitlement for the poor.  A staggering 45 million Americans now use Food Stamps.

  Happy 50^th Birthday, President Obama. Perhaps, given the above, you should come home from Chicago, call Congress back into session and start to address the deep crisis America and the world finds itself in.  This is no time for summer vacations.

Global Crisis/Innovation Blog

 Could the Tea Party Possibly Be… Right?

By Shlomo Maital

 John Tenniel’s ‘take’ on Alice’s Tea Party     

 Perish the thought, but – could those extreme 87 United States Congresspersons, who call themselves the Tea Party, be right?   They’re regarded by most people, even by Republicans, as extreme fanatics who want to slim government at all cost, even if means cutting Medicare, Social Security and other key social benefits.  They’re the ones who brought the U.S. to the brink of defaulting on its bonds and rattled capital markets all over the world. 

      I always urge my students to think different(ly).  Think contrarian.  So, could the Tea Party actually – be right?

     In a recent piece in the Singapore Business Times,  R. Sinvanthy recalls an episode in history worth remembering.  In 1981 Margaret Thatcher, British PM, brought in a draconian budget that slashed government spending, raised taxes, narrowed the budget deficit, closed coal mines and in general radically reduced the role of government in Britain.  In response, 364 economists wrote a letter to Thatcher, saying that her budget was disastrous and would deepen Britain’s economic crisis (the 1980-81 recession).  Among the signatories were top academics, incuding a Nobel Prize winner and two would go on to win the Nobel Prize in economics, along with Mervyn King, current Governor of the Bank of England. 

    And boy, were those guys wrong!  Within two years, Britain’s inflation rate fell from 18 per cent to 5 per cent.  (See Phillip Booth, Were 364 Economists All Wrong?   Institute of Economic Affairs, 2006).  Britain’s economy began to grow.  Thatcher was right. The geniuses were wrong.

    The Tea Party is extreme, but often to make a point you need to express it in an overly extreme fashion, just so people will take notice. As I understand it, the basic point they make is a correct one.  America is a business, like any country.  The business of America is being run badly by its political leaders.  Get your act together. Shape up.  Run America like America’s managers and entrepreneurs run their businesses.  President Obama, it’s not enough to appoint Jeff Imelt (GE CEO) to head a committee.  You have to BECOME him!  Run America like Jeff runs GE.  Deleverage. Reduce the debt. Slash waste. Do all the hard things America needs to become strong and stable again.  And do it quickly, using the principle:  All the bad news at once, good news a little at a time.  If this is what the Tea Party crazies are saying – well, I think I support them.    

Global Crisis/Innovation Blog

The Speech Obama Never Made – and Never Will *

By Shlomo Maital

 My fellow Americans,

    “No, America is not the greatest country in the world, like we politicians like to repeat endlessly. We’re probably not even the 95^th greatest country in the world.  And here is why.  America has just been throwing a huge party, it has lasted for over 30 years, under Republican and Democrat Presidents alike, we’ve overspent, underinvested, undersaved and we’ve done this for three decades.  What enabled us to do it is the fact that the dollar is the world’s currency, so we can just print dollars and persuade countries like China to accept them, in return for massive amounts of goods.  We never ever looked at ourselves in the mirror and said, hey, there is something radically, morally wrong here, when a wealthy country like America borrows enormous sums from poorer countries like China, not to build the future for young Americans, but to let spoiled baby-boomer Americans enjoy life now at their kids’ expense  and now, to retire all-expenses-paid.    And friends, guess what.  It is time to pay the piper.  The bill collector is knocking at the door.  Here is why.   The Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085  would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years…. That translates to $15 trillion over the next decade—or more than three times what I  and Speaker of the House Republican John Boehner were considering.   We can’t get the House and Senate to agree on $5 trillion of cuts..and we need $15 trillion, just to stay in the same place, like the Red Queen in Alice in Wonderland.   We need to cut consumption from 70 per cent of GDP down to about 60 per cent.  Now, THAT’S PAIN!   Boston University economist Larry Kotlikoff has calculated that if you project the gap between federal spending and federal income, under current budget conditions,  here is what you get:  a fiscal gap—i.e., the net present value of all future expenses minus all future revenue—amounting to $211 trillion.   Now that, my fellow Americans, amounts to 15 times our annual GDP.  And 15 times our current national debt.  So, I guess the conclusion is clear.  The party is over.  We will now have to LIVE WITH substantially lower standards of living, the way we live, for at least an entire generation, OR POSSIBLY THREE GENERATIONS, just to stay afloat.  I know you don’t like to hear that.  Americans want the party to continue.  But one way or another, the party’s over.  And I’m afraid that if we don’t take drastic action, the unthinkable will happen.  while America has accused a whole shopping list of other nations of irresponsibility – Mexico, Russia, Brazil, Thailand, Indonesia – all the while, it was America that was acting in the most reckless way of all. Because America is not just another country, it is the country whose money funds the world.  And my fellow Americans, I’m sorry to tell you, America is bankrupt. Oh, I know, we’ll muddle through somehow, we’ll find a way to somehow raise the debt ceiling, even if the rating agencies do downgrade us to double A instead of triple A.  But the time for muddling through is long past.  We need to make drastic cuts in what we spend, so we can set aside resources to pay for what we borrowed, and recklessly squandered, in the past – using up resources instead of using them to build assets that generated income to help us pay back the debt.  So now, we have the debt, but not the productive assets that debt should have created.  So, yes, my fellow Americans, America is probably about the 95^th greatest nation in the world, and is still heading down.  I expect that when I tell you this, and when I tell you how terrible our situation is, and how awful the medicine we have to take is, you will defeat me in the 2012 election.  You may elect someone who tells you beautiful things, like I did,  “Yes We Can!”.  Well, Americans, no, we can’t.  We can’t seem to do the right thing, take painful medicine, and get our country on a solid footing again.  Because we’re soft and flabby, and we’re about to become a second-class power, despite our vast super-expensive military (which is a main cause of our decline, not the solution), just like Britain before us in 1900, and Spain before that….and Rome before that, and before that, Greece.   So, G-d bless America, G-d bless you and your families,  and only G-d knows how in the world we’re going to dig ourselves out of this god-awful mess that we ourselves created.  Current trends are unsustainable. The sooner the adjustments begin, the more gradual they can be. It’s easier to slow down from 70 mph by stepping on the brakes than by slamming into a wall.  But, Americans, let’s face it.  We are going to hit that wall.  Because our democratic political system just does not know how to put on the brakes.”

• Based on Bloomberg Business Week,  “Why the Debt Crisis Is Even Worse Than You Think”, by Peter Coy.  Aug. 1. 

Global Crisis/Innovation Management

What in the World Is Going On?

By Shlomo Maital

  THE WORLD IS IN A BLOODY MESS….

      Are you as baffled as I am by the unfolding chain of events in the world, each one improbable and trouble? 

     What in the world is going on?

    Here is my take, based in part on the keen-eyed observations of a friend, a senior Asian diplomat. 

• The Arab Spring.  Whoever called it “spring”? It feels more like fall, or a fall.  It is not, as the media romantically portray it, a democratic uprising, but rather, soft coups, take-overs by the armed forces, especially in Egypt.  The only forces organized enough in Egypt to gain control are the Army and the Muslim Brotherhood and in the end they will share power.  For this crucial nation, the future is not bright, nor is it bright for their neighbors.  Chaos never helps anyone. 
• American debt ceiling:  The damage has already been done, whatever the intransigent Republicans and the indecisive Democrats do.  America should be stood in the corner, like a naughty child. Here is the simple reason why.  America built the current global system, built around the US dollar as the key global currency, and in doing so, back in 1944 (at Bretton Woods), promised to run its money responsibly, with the interests of the world in mind.  But, as former Texas Governor John Connolly once said, “it’s our money and your (the world’s) problem”.  So America has flooded the world with cheap bucks, and the result is to endanger world stability.  The U.S. debt ceiling crisis has been managed, as if America alone existed.  And the ‘collateral damage’ Obama referred to is not the American people, but innocent bystanders, 7 billion of them, around the world.  This is immoral and irresponsible behavior, unforgiveably bad behavior by America, and the damage is permanent. America will not regain the trust and credibility it once had, in the eyes of the world. 
• Europe:  No, it’s not about Greece. It’s about wealthy northern economies doing well, and poor southern Europe economies doing badly, and the rich in the North doing nothing to help them, except hassle them to pay their bills.  Europe is now a mixture of competitive economies doing well and uncompetitive economies doing badly. For the latter to do well, they will have to undertake painful structural changes, which none of them are equipped to do.  The only result can be a split, because the current situation is unstable and will bounce from crisis to crisis.  No-one is addressing the question: How will the southern economies build a winning global competitive strategy?  How will they rebuild some sort of strategic competitive advantage?  No it is not about debt – it is about how people will make a living. 

Mideast, America, Europe.  About half the world’s economy is in deep trouble, and the source is all the same – political mis-governance, and in some cases, too much democracy rather than too little.  (If the system is democratic, what group of people will ever vote to impose serious pain on themselves, in the short run, even if long run gain is assured?).    

   This may all seem very pessimistic, but it is not.  There are huge opportunities in this mess for creative clever people who want to do good, who know how to run organizations and build ideas, and act to create value and meet needs.  Don’t wait for the politicians.  It’s up to you and to me. 

Innovation Blog

 Norway’s Tragedy: A Sense of Proportion

By Shlomo Maital

         The enormous tragedy caused by Norway’s lone deranged extremist terrorist is difficult for anyone to fathom, especially the serene Norwegians. 

         I have tried to put the loss of life in proportion.  My arithmetic may seem insensitive to some, but perhaps of some value to others.

         America’s population is 311.8 million.  Norway’s population is 4.923 m.  So America’s population is 63 times that of Norway.

        In 9/11, America lost 2,752 lives.  In the recent attack, Norway lost 93 lives.    Loss of life in 9/11 was 30 times that of Norway’s incident.

        In other words, Norway’s tragedy, relative to its small population, was twice as massive as 9/11.  Take into account as well that many of those murdered in Norway were youths.

         Israel has grappled with Islamic terrorism for decades.  It has to this day forced Israel to place armed guards with magnetometers at the entrance to every shopping center, supermarket and coffee shop.  While we take this for granted, it is a heavy burden. Norway is now realizing that the serenity, naivety and openness of its society may have been lost forever – the fact that it took police well over an hour to get to the scene of the crime on Utoya Island must never ever recur, even taking into account the fact the Norwegian police were preoccupied with the earlier bomb blast in central Oslo.   Norway, a key player in the effort to attain Mideast peace in the Oslo Agreements, is ironically now learning how a handful of deranged murderous idiots can forever alter society – as Israel learned long ago.

Global Crisis/Innovation Blog

Brazil Helps the Poor – And Helps Itself

By Shlomo Maital

   Check out Brazil!   While eyes are focused on nations drowning in debt (US, Europe), according to the World Bank:

  Brazil weathered the global financial downturn with relatively minor impacts. The country was one of the last to fall into recession in 2008 and among the first to resume growth in 2009. Brazil’s GDP grew 7.5 percent in 2010 and is expected to grow approximately 4 percent in 2011. Brazilians are benefiting from stable economic growth, low inflation rates and improvements in social well-being. 

   Credit former President Lula da Silva with policies that maintained stable economic growth in a stable political climate, while making sure to spread the benefits to the underclass, the uneducated, the unskilled. 

●  Poverty ( US$2 per day) has fallen markedly, from 20 percent of the population in 2004 to 7 percent in 2009.

● Extreme poverty (  US$1.25 per day) also dropped dramatically, from 10 percent in 2004 to 4 percent in 2009.

●  Between 2001 and 2009, the income growth rate of the poorest ten percent of the population was 7 percent per year, while that of the richest ten percent was 1.7 percent.  This helped decrease income inequality (measured by the Gini index) from 0.596 to 0.54 in the period.

●  Key drivers of this have been low inflation, consistent economic growth, well-focused social programs, and a policy of real increases for the minimum wage.

  Brazil’s new  President,    Dilma Rousseff,  promises to continue Lula’s policies.  

  Perhaps, in addition to studying how Brazil makes ethanol out of sugar cane, the world needs to benchmark how it advances the working classes.

   It is of course true that Brazil still has one of the world’s most unequal distributions of income and wealth. But at least, it is working to mitigate it. 

    Many countries simply accept growing inequality as a fact of life.  It isn’t. Brazil is proof. 

Innovation Blog

 Greeks and Arabs are Greeks and Arabs Only in America:

The REAL Greek Debt and Arab Spring Crisis

By Shlomo Maital

      Here is an ongoing mystery:  

 ● In the United States, there are 1.5 million persons of Greek descent (Wikipedia).  There are also 1 m. Greeks in Britain.  They are known for their entrepreneurial energy, especially in the food business but extending far beyond.    

● In America, there are 4 million persons of Arab descent. According to a study by Samia el Khoudry,  “Arab-Americans are  younger, more educated, more affluent and more likely to own a business [than native-born Americans].  In general, Arab-Americans are better educated than the average American.   More of them attend college, and they earn masters or higher degrees at twice the average rate.  Median household income is strikingly higher for Arab-Americans in the Pacific, Northeast, New England, and South Atlantic regions, exceeding $50,000 annually.  Arab-Americans are significantly more likely to become entrepreneurs than native Americans.”

   The mystery is,  why are Greek Americans, and Arab Americans, more dynamic, entrepreneurial and business-oriented in America, than are Greeks and Arabs in their own countries?

   It’s no mystery.  The simple answer:  Because they can. Because the social and economic context of America permits their native culture to flourish, while the social and economic context in their native countries stifles entrepreneurship.  Greek bureaucracy is horrendous, starting a business there is a nightmare.  In many Arab countries, like Syria, the regime doles out business fiefdoms like pieces of candy to its supporters; small entrepreneurs don’t have a chance. 

   Writing in his NYT column, Tom Friedman quotes an Athens Univ. business professor Dimitris Bourantas, who says that “Greeks, when they move to the US, unleash their skills and entrepreneurship in ways that enable them to thrive in commerce.  But here in Greece, the system encourages just the opposite.  Greece is the only country in the world where Greeks don’t behave like Greeks.” 

   The short-run solution to the Greek debt crisis, and to the Arab Spring’s economic crisis, is to provide funds.  The long-run solution?  Help Greeks and Arabs be Greeks and Arabs in their own countries, to unleash the nuclear energy of enterprise.   It works – America is proof.

    “Become who you are,” Nietzsche once said.  Let’s hope Greece and Arab Spring nations will help their citizens to become who they truly are.  That is the true, and simple, solution to their economic woes.