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http://lkmp.blogspot.com/2005/01/dollar-rotation.html

How low-cost airlines have transformed Europe—and what it means for America

http://www.reason.com/0501/fe.mw.fly.shtml

The Wall Street Journal

You've Come a Long Way, Baby

By ANDY KESSLER
February 2, 2005

The chorus of praise hasn't stopped since the announcement that SBC will merge with AT&T. The storyline is attractive: Baby Bell grows up, buys parent; $15 billion in synergy; local and long distance back together; a new day for telephony. Alexander Graham Bell would be so proud, mostly because he'd recognize a lot of the equipment from 1875, especially the copper wires going into homes. Get real. This deal is about freezing the "phone" business, after winding back the clock to 1983 (or is it 1883?)

Bells are milking us for $20 a month for a service that's worth pennies, but already there are a few leaks in this huge price umbrella. With broadband, people are canceling second lines that were used for dialup. Primary lines are shut off in favor of cell phones. No wonder SBC's sales have been dropping. Buying AT&T will merely slow SBC's swirling descent. With the stroke of a pen, prices might still collapse on plain old telephone service. Watch out below.

In this day and age, there shouldn't even be a "phone" business. Communications is 20 years into a digitalization process, and the Bells don't like it one bit. Real competition actually works. Judge Greene divided Ma Bell geographically back in 1984, and competitive long-distance rates dropped 95% in 20 years. So why haven't local rates?

The incumbents have used every trick to avoid the competition a digital world brings: legal delays, bullying, lobbyists, fat dividends to keep stock up, and promises not to raise rates before elections. Whatever it takes. But they're almost out of options. Dig deep enough and you'll see that SBC's fate hangs on the thread of a carefully worded section of the Orwellian-named Telecommunications Reform Act of 1996.

Congress was duped by Reed Hundt into thinking they were getting real competition. The '96 Act insisted that regional Bells should share their lines with others, and voila, competition! Not so. Tucked in the legalese were pages of gobbledygook on how to set prices to share these copper wires -- a formula known as TELRIC, or total element long-range incremental cost. Rather than use historic costs that, with depreciation, would likely be close to zero, TELRIC is a fuzzy future cost. It's pie in the sky -- the hypothetical cost of stringing new phone lines today.

But that's like figuring the price of getting to Europe using the hypothetical cost of digging a tunnel under the Atlantic, instead of computing airfare. It gives Bells a license to steal. Only a fool would string copper phone lines today -- you'd run fiber capable of gigabit speeds -- yet copper is how we determine prices. A phone call is just 16K of data bandwidth. The math is easy. Based on current gigabit fiber line monthly fees, the value of phone service is 1.6 cents per month. That's it. Amazingly, SBC charges $18-$22 per month and complains that's below their costs! (By the way, that's what AT&T does for businesses today -- runs data lines of fiber to bypass SBC and lower corporate phone costs.)

Current line-sharing costs are not just slightly off, they're on a different planet. So how does SBC, Verizon, Bellsouth or Quest transition from phone-company to data-company? They don't. They pray TELRIC is written in stone.

The telcos whine to legislators that prices should be high to incent them to string new lines. That's bogus. Intel invests billions in R&D for new microprocessors specifically because prices of today's parts are dropping. Cisco just spent $500 million on their new terabit router because prices of their old routers have dropped. If they didn't invest, they'd be dead. It's just the opposite for SBC. It's the prospect of lower prices that stimulates investment, not higher prices, yet our telecom policy is exactly backwards. We need a Telecom Act of 2006.

Competition is here just itching to grow. Voice over Internet Protocol works over broadband and allows unlimited local/long-distance dialing for $30 a month. But almost half of those fees go to Bells like SBC to interconnect to their antiquated phone network, so it's not real competition. For the same reason, cellphone plans (which SBC and Verizon control) cost us twice what they should. Even cable modem service would be half-price without TELRIC. Because of nonsensical accounting, it's one of those "prices are high because prices are high" things.

Cool stuff is coming. Fiber is being strung away from the telcos. A mesh network of wireless transmitters on old telephone poles will offer cheap data plans with -- gasp! -- free phone calls. Burned badly, the stock market will pay for all this only if it sees a truly competitive market. SBC stock and the entire telecom market has been dead money for years. Buying AT&T only props up the corpse a little longer.

The Windy City winds down

Feb 3rd 2005 | CHICAGO
From The Economist print edition


Is the nation's transport hub grinding to a halt?

FROM his office, Earl Wacker can see the trails of aircraft flying towards O'Hare International, one of the world's busiest airports. But Mr Wacker's sights are focused on the gritty railway yard below his office window. As director of the Chicago Transportation Co-ordination Office (CTCO), he wants to improve an overburdened system that handles one-third of America's rail traffic. At present, a freight train trying to get across Chicago has to deal with up to four railroads: it can take days to get it across town.

If you are still waiting for your Christmas present, it may be somewhere close to the Windy City. Six of America's seven long-distance railroads meet there: add in local and regional services, and about 1,200 trains a day pass through the city. In addition to O'Hare, it also has a mid-sized airport at Midway. Seven interstate highways come through the region, and trucks move $572 billion in goods to, from and through it each year.

But is this hub working? The evidence in terms of congested roads and late trains and aircraft is not good. Road congestion alone supposedly costs businesses and commuters $4 billion a year. And the city's problems are expected to get much worse.

Air-freight tonnage in Chicago is projected to double in the next 25 years; the number of lorries coming through the area is expected to rise by 80%; rail volume should almost double in two decades. And there will be a compounding effect from the fast growth of inter-modal transport (switching freight from one “mode” to another, such as train to truck or aircraft) which tends to send even more traffic to hubs like Chicago. Even if the various growth forecasts prove to be only half true, they will tax the city's old infrastructure.

The ripple effects from the blockages around Lake Michigan are already felt across America. The rail traffic passing through Chicago eventually affects 5m jobs across the country, $780 billion in goods and $217 billion in wages. California, Ohio and New Jersey are the three other states most affected by rail bottlenecks in Illinois. Last month Union Pacific, the nation's largest railroad, said more carriers might be tempted to bypass Chicago. Canadian National and Burlington Northern Santa Fe have diverted some traffic through Memphis and New Orleans.

Last November, in a deal brokered by the Bush administration, domestic airlines at O'Hare, including United and American (which both use it as a hub), voluntarily limited their flights into the airport. A plan to expand O'Hare's runways is also moving forward in fits and starts. Some are still pushing for a third Chicago-area airport in Peotone, in the south suburbs. And the real dreamers talk about linking the airport into a European-style high-speed rail network that would reach other airports and cities across the mid-west.

Today the railways are in worse shape than the airports. Unlike the airlines, railroads don't have an oversight agency to co-ordinate their traffic: each of them uses its own dispatchers, who sometimes send faxes to their counterparts to let them know trains are coming. Mr Wacker's CTCO is a step forward in terms of co-ordination. But a much more ambitious $1.5 billion public-private plan—the Chicago Region Environmental and Transportation Efficiency (CREATE) programme—is awaiting federal funding.

CREATE involves plenty of sensible though expensive things, such as separating passenger- and freight-train crossings with rail-on-rail “flyovers”, adding rail connections to speed train traffic, and reducing the points at which trains and road traffic meet. The railroads have committed $212m towards it; the city and state have chipped in additional funds. But the bulk has to come from Congress, which has still failed to pass a transport bill.

As Robert Gallamore, a transport expert at Northwestern University's Kellogg School of Management, points out, the odds are in favour of CREATE getting its money. It has the support of Dennis Hastert, the House Republican speaker, whose district includes Chicago's western suburbs. Barack Obama, the new Democratic senator from Illinois, is on the Senate's public works committee.

A different solution

But even CREATE is unlikely to solve Chicago's problems. New roads will still be needed and, in a metropolitan area with 272 municipalities, it is hard to get locals to pay up. In the end, most of the long-term solutions involve forcing Americans to pay for the full cost of using their roads, airports and railways.

Last year Illinois's governor, Rod Blagojevich, inched that way when he unveiled a plan that charges lorries more for using highways in peak times. The decision by Chicago's mayor, Richard Daley, to lease the Chicago Skyway, a toll road into the city, to a Spanish-Australian consortium is “a sign of things to come”, says Frank Beal, the executive director of Metropolis 2020, a local policy group. The consortium has just coughed up $1.8 billion, beginning its 99-year lease. Private investment may be the only way to unblock America's hub.

Instapundit

HERE'S MORE ON WHO BENEFITS FROM FARM SUBSIDIES:


David Rockefeller, the former chairman of Chase Manhattan and grandson of oil tycoon John D. Rockefeller, who received 99 times more subsidies than the median farmer;

Scottie Pippen, professional basketball star, who received 39 times more subsidies than the median farmer;

Ted Turner, the 25th wealthiest man in America, who received 38 times more subsidies than the median farmer; and

Kenneth Lay, the ousted Enron CEO and multi-millionaire, who received 3 times more subsidies than the median farmer.


Not exactly the Joads, here.

These subsidies are welfare for the rich. It comes out of everyone's pocket, no matter the income level.

Exactly.

And those who are worst hit are the ones who have little to begin with.

Western agricultural protectionism protects rich farmers from competition from poor third-world farmers, at the expense of Western consumers.

It's bad economic policy, bad development policy and bad social policy - all at once.

The Wall Street Journal

A Political Case for Social Security Reform

By GARY BECKER
February 15, 2005

Republicans and Democrats are arguing passionately about the future of Social Security, and the argument, at its core, is about privatization. It is true, as some critics observe, that there is no magical gain in privatizing Social Security, since all systems have to provide incomes for retired persons. By that token, however, there's no gain in privatizing a government steel plant either, since steel still has to be produced, too. Yet there are very good reasons -- with roots in political economy -- to privatize steel. And as with steel (and the like), there are excellent reasons for a privatized individual-account Social Security system.

Minimum Standard

Pay-as-you-go social security started first in Europe as a relatively easy way to provide a minimum standard of living for the elderly. It was introduced in the U.S. during the 1930s partly, also, to discourage the elderly from competing for jobs when unemployment of younger workers was staggeringly high. It was a cheap system then because there were more than 10 workers per retired person, so the Social Security tax could be small relative to the benefits received by retirees. Indeed, the first several generations of retirees earned very high returns in retirement income on their accumulated Social Security tax payments.

But birth rates have fallen drastically and life expectancy at age 60 has expanded enormously. Fewer workers are now being forced to support more and more retirees. The result is a huge rise in social security taxes in every nation with a pay-as-you-go system. The combined tax on employees and employers in the U.S., excluding contributions to Medicare, is now 12.4% and rising, and that percentage is much higher in Japan and most Western European nations. The expectation of continuing growth in this tax rate explains why countries as different as Sweden and Britain have partially moved toward a privatized individual-account system. It also helps understand why Hong Kong, Poland and other countries with low birth rates that recently introduced social security have important components of individual accounts in their systems.

Contrary to the Bush position, however, I do not believe that the main advantage of a private-account system is that individuals can get a higher return on their old-age savings by investing in stocks. There are no freebies from such investments since the higher return on stocks is related to their greater risk and other trade-offs between stocks and different assets. However, neither is there any special "transition" problem in moving to a fully funded privatized system since future generations, under all systems, have to pay the implicit debt due to commitments toward present and future retirees -- unless, of course, they default on these commitments. But it is better to transit smoothly to fund this debt by starting now, rather than require sharp increases in taxes on later generations.

Retirees for whom Social Security income is not a major part of their retired assets will invest much of their own savings in stocks. Studies indicate that this is precisely what they generally do with their IRAs in order to have a balanced portfolio between stocks and the implicit Social Security assets guaranteed them. Since lower-income persons accumulate few assets other than their Social Security assets, a fully funded system through personal savings would enable them to have more balanced portfolios between stocks and bonds.

So, some might pose this question: If there is no obvious gain from allowing most individuals to invest in stocks to help cover their retirement, and if there is no fundamental transition problem, what, if any, are the advantages of a funded privatized system? I believe the advantages are mainly political, not "economic," and that privatization helps to separate saving for retirement from interest-group politics, from taxation, and from government spending.

Pay-as-you-go systems are in trouble in good part because of changes in the number of workers per retiree, but also because of politically determined decisions that altered the system from a saving system for old age to an inefficient and complicated welfare system for some of the elderly. Despite the growing mental and physical health of older persons, political pressures in all nations with such systems forced a restructuring of social security payouts to encourage retirements at earlier ages than even the originally established 65. In the U.S., many retirements occur at 62 or earlier, while Italians retire frequently while in their mid-50s. Very early retirement is common in Germany, Belgium and other European countries.

In addition, the link between contributions and benefits has been separated, so that each additional dollar contributed in taxes pays no more than about 40 cents in additional benefits. Hence, the social security system has evolved into two largely independent systems: a sizeable tax on wages, starting with the first dollar earned; and retirement benefits that are "guaranteed" by the government. There is only a modest link from an individual's accumulated tax payments on his earnings to these "guarantees."

Just as important are the political implications of federal fiscal behavior. Revenue from Social Security taxes at present exceeds payments to retirees. This excess is counted as part of the growing Social Security Trust Fund, but in fact also enters into the consolidated federal budget account, and helps reduce the reported spending deficit. Reported deficits during the past decade would have been much larger if Social Security were not running a surplus during this whole time period.

Social Security tax revenues are expected to fall below spending on retirees in less than 20 years. If we simply raised Social Security taxes now -- say by two percentage points -- consolidated federal deficits would appear much smaller, and the federal government would be under less constraint to reduce spending. Both theory and evidence indicate that a good fraction of the additional revenue would indeed be spent. "Putting aside" assets for the future is very difficult for all governments, subject as they are to immense demands for spending now from various interest groups.

A good individual-funded savings system would require individuals to save 4% to 6% of their incomes (President Bush suggests 4%), and to invest these savings in private individual accounts that would meet certain government-established criteria. At the same time, Social Security taxes should be cut by a couple of percentage points from the present level to ease the burden on workers. These taxes could be cut since under this saving system younger workers would be contributing to their own retirement. Moreover, a tax cut would reduce the Social Security surplus, so the government would be less tempted to spend more by rapidly growing Social Security "reserves."

These private accounts would accumulate tax-free until individuals decide to retire. The age of retirement, within broad limits, would be left to individuals; but like IRAs now, these funds would continue to grow with savings for persons who retire at later ages because they like their work, and are in good health. At retirement, individuals would get access to their assets either in a lump sum or as annualized income, and would pay taxes on their withdrawals.

As in Chile and other countries with private retirement accounts, the government would guarantee retirees a minimum income -- similar to, but larger than, the present minimum social security guaranteed. Unfortunately, such guarantees create a "moral hazard" -- that is, savers may want to make risky investments that give high payoffs if they succeed, since the government partly bails them out. Or they may not save at all. But the minimum required savings rate overcomes the latter incentive to "game" the system, and regulation of which types of investment accounts are approved takes care of the incentive to be overly risk-taking.

As in the president's proposal, we should limit Social Security accounts to index funds -- that is, funds that do not try to beat the market and invest in a balanced market portfolio of stocks and bonds. Individuals who are contributing more than the 4% minimum could take greater risks if they want to, as they do not pose any moral hazard. Index funds both reduce the overall risk of an account and have very low management fees, since it is quite cheap to run these funds, as shown, among others, by Vanguard and Barclays. High management fees is a common complaint about the Chilean system, although this system has yielded high returns to investors even net of these fees. Besides, the fees have come down a lot in recent years.

Privatized System

There is no guarantee that government interference would not increase further in such a privatized system since the retired would continue to press for additional benefits. But experience shows that governments interfere less when an industry is privatized, especially in access to capital and financing of budget deficits.

So the really strong arguments for privatization are that they reduce the role of government in determining retirement ages and incomes, and improve government accounting of revenues and spending obligations. All the other issues are really diversions, because neither advocates nor opponents of privatizing Social Security generally answer the most meaningful question: Is there as strong a political economy case for eliminating government management of the retirement industry as there is for eliminating its management of most other industries?

My answer is "yes."


Mr. Becker, a Nobel laureate in economics, is a professor at the University of Chicago and a senior fellow at Stanford's Hoover Institution.

The DOW Jones average is almost as high as it's been in 3 1/2 years. Time to sell? I pulled back into less risky funds for my 401K/IRA, but I didn't sell all.

My take is by spring we'll be hurting.

Leonid wrote:The Wall Street Journal

A Political Case for Social Security Reform

By GARY BECKER
February 15, 2005

Republicans and Democrats are arguing passionately about the future of Social Security, and the argument, at its core, is about privatization. It is true, as some critics observe, that there is no magical gain in privatizing Social Security, since all systems have to provide incomes for retired persons. By that token, however, there's no gain in privatizing a government steel plant either, since steel still has to be produced, too. Yet there are very good reasons -- with roots in political economy -- to privatize steel. And as with steel (and the like), there are excellent reasons for a privatized individual-account Social Security system.

Minimum Standard

Pay-as-you-go social security started first in Europe as a relatively easy way to provide a minimum standard of living for the elderly. It was introduced in the U.S. during the 1930s partly, also, to discourage the elderly from competing for jobs when unemployment of younger workers was staggeringly high. It was a cheap system then because there were more than 10 workers per retired person, so the Social Security tax could be small relative to the benefits received by retirees. Indeed, the first several generations of retirees earned very high returns in retirement income on their accumulated Social Security tax payments.

But birth rates have fallen drastically and life expectancy at age 60 has expanded enormously. Fewer workers are now being forced to support more and more retirees. The result is a huge rise in social security taxes in every nation with a pay-as-you-go system. The combined tax on employees and employers in the U.S., excluding contributions to Medicare, is now 12.4% and rising, and that percentage is much higher in Japan and most Western European nations. The expectation of continuing growth in this tax rate explains why countries as different as Sweden and Britain have partially moved toward a privatized individual-account system. It also helps understand why Hong Kong, Poland and other countries with low birth rates that recently introduced social security have important components of individual accounts in their systems.

Contrary to the Bush position, however, I do not believe that the main advantage of a private-account system is that individuals can get a higher return on their old-age savings by investing in stocks. There are no freebies from such investments since the higher return on stocks is related to their greater risk and other trade-offs between stocks and different assets. However, neither is there any special "transition" problem in moving to a fully funded privatized system since future generations, under all systems, have to pay the implicit debt due to commitments toward present and future retirees -- unless, of course, they default on these commitments. But it is better to transit smoothly to fund this debt by starting now, rather than require sharp increases in taxes on later generations.

Retirees for whom Social Security income is not a major part of their retired assets will invest much of their own savings in stocks. Studies indicate that this is precisely what they generally do with their IRAs in order to have a balanced portfolio between stocks and the implicit Social Security assets guaranteed them. Since lower-income persons accumulate few assets other than their Social Security assets, a fully funded system through personal savings would enable them to have more balanced portfolios between stocks and bonds.

So, some might pose this question: If there is no obvious gain from allowing most individuals to invest in stocks to help cover their retirement, and if there is no fundamental transition problem, what, if any, are the advantages of a funded privatized system? I believe the advantages are mainly political, not "economic," and that privatization helps to separate saving for retirement from interest-group politics, from taxation, and from government spending.

Pay-as-you-go systems are in trouble in good part because of changes in the number of workers per retiree, but also because of politically determined decisions that altered the system from a saving system for old age to an inefficient and complicated welfare system for some of the elderly. Despite the growing mental and physical health of older persons, political pressures in all nations with such systems forced a restructuring of social security payouts to encourage retirements at earlier ages than even the originally established 65. In the U.S., many retirements occur at 62 or earlier, while Italians retire frequently while in their mid-50s. Very early retirement is common in Germany, Belgium and other European countries.

In addition, the link between contributions and benefits has been separated, so that each additional dollar contributed in taxes pays no more than about 40 cents in additional benefits. Hence, the social security system has evolved into two largely independent systems: a sizeable tax on wages, starting with the first dollar earned; and retirement benefits that are "guaranteed" by the government. There is only a modest link from an individual's accumulated tax payments on his earnings to these "guarantees."

Just as important are the political implications of federal fiscal behavior. Revenue from Social Security taxes at present exceeds payments to retirees. This excess is counted as part of the growing Social Security Trust Fund, but in fact also enters into the consolidated federal budget account, and helps reduce the reported spending deficit. Reported deficits during the past decade would have been much larger if Social Security were not running a surplus during this whole time period.

Social Security tax revenues are expected to fall below spending on retirees in less than 20 years. If we simply raised Social Security taxes now -- say by two percentage points -- consolidated federal deficits would appear much smaller, and the federal government would be under less constraint to reduce spending. Both theory and evidence indicate that a good fraction of the additional revenue would indeed be spent. "Putting aside" assets for the future is very difficult for all governments, subject as they are to immense demands for spending now from various interest groups.

A good individual-funded savings system would require individuals to save 4% to 6% of their incomes (President Bush suggests 4%), and to invest these savings in private individual accounts that would meet certain government-established criteria. At the same time, Social Security taxes should be cut by a couple of percentage points from the present level to ease the burden on workers. These taxes could be cut since under this saving system younger workers would be contributing to their own retirement. Moreover, a tax cut would reduce the Social Security surplus, so the government would be less tempted to spend more by rapidly growing Social Security "reserves."

These private accounts would accumulate tax-free until individuals decide to retire. The age of retirement, within broad limits, would be left to individuals; but like IRAs now, these funds would continue to grow with savings for persons who retire at later ages because they like their work, and are in good health. At retirement, individuals would get access to their assets either in a lump sum or as annualized income, and would pay taxes on their withdrawals.

As in Chile and other countries with private retirement accounts, the government would guarantee retirees a minimum income -- similar to, but larger than, the present minimum social security guaranteed. Unfortunately, such guarantees create a "moral hazard" -- that is, savers may want to make risky investments that give high payoffs if they succeed, since the government partly bails them out. Or they may not save at all. But the minimum required savings rate overcomes the latter incentive to "game" the system, and regulation of which types of investment accounts are approved takes care of the incentive to be overly risk-taking.

As in the president's proposal, we should limit Social Security accounts to index funds -- that is, funds that do not try to beat the market and invest in a balanced market portfolio of stocks and bonds. Individuals who are contributing more than the 4% minimum could take greater risks if they want to, as they do not pose any moral hazard. Index funds both reduce the overall risk of an account and have very low management fees, since it is quite cheap to run these funds, as shown, among others, by Vanguard and Barclays. High management fees is a common complaint about the Chilean system, although this system has yielded high returns to investors even net of these fees. Besides, the fees have come down a lot in recent years.

Privatized System

There is no guarantee that government interference would not increase further in such a privatized system since the retired would continue to press for additional benefits. But experience shows that governments interfere less when an industry is privatized, especially in access to capital and financing of budget deficits.

So the really strong arguments for privatization are that they reduce the role of government in determining retirement ages and incomes, and improve government accounting of revenues and spending obligations. All the other issues are really diversions, because neither advocates nor opponents of privatizing Social Security generally answer the most meaningful question: Is there as strong a political economy case for eliminating government management of the retirement industry as there is for eliminating its management of most other industries?

My answer is "yes."


Mr. Becker, a Nobel laureate in economics, is a professor at the University of Chicago and a senior fellow at Stanford's Hoover Institution.

So, there is no economical advantage to privatising any part of SSI?

I do not believe in "political reasons". Sounds more like I want it, because I want it.

The Wall Street Journal

The Tax That France Built
March 4, 2005

House Ways and Means Chairman Bill Thomas is one of the most politically creative Members of Congress -- for better, or sometimes worse. He helped pass the 2003 tax cut, but he also gave us $7 trillion in new Medicare drug liabilities. Now he's floating the idea of mating President Bush's Social Security proposals with a tax reform featuring a European-style value-added tax -- and this looks too close to Medicare redux for comfort.

The VAT, for the uninitiated, is essentially a hidden sales tax that originated in France and has become a favorite of legislators around the world because of its ability to stealthily raise large sums of revenue with a minimum of public outcry. And compared with other kinds of taxes the VAT does have certain virtues. For one thing, it's a lot better way to get revenue than raising marginal income tax rates, since it creates relatively little disincentive to work.


But like any tax a VAT removes resources from the dynamic private sector of the economy and places them in government hands. And in Europe it has become a major enabler of the ever-expanding, slow-growth welfare state. The chart nearby shows tax revenue as a percentage of gross domestic product in the U.S. and the 15 (non ex-communist) countries of the European Union. Notice that the numbers were roughly the same in 1965. But starting in 1967-68 European countries began adopting the VAT en masse, and the growth of government exploded.

Having a VAT with a rate between 15% and 25% is now compulsory for membership in the EU. European governments get away with those rates because they generally don't show up on the customer's final receipt. By contrast, none of the U.S. state and local governments that charge an explicit sales tax get away with a combined rate of more than 9% or so.

VAT proponents may reply that European revenues from general consumption taxes -- which nearly doubled to 7.5% of GDP in 2002 from 4.1% in 1965 -- don't account for the entire rise in government share of GDP. But while true, this is also a reason to doubt the claim by Chairman Thomas that the more efficient VAT could somehow fully replace more economically destructive forms of taxation like the corporate income tax. In most of the world where VATs exist, and certainly in Europe, VATs are levied in addition to, not in place of, other taxes.

VATs may have the perverse effect of actually creating political pressure for other tax increases. Why? Because they place a higher relative burden on lower-income earners who spend a higher percentage of their income on consumption. So VATs have often resulted in calls for income tax rate increases to preserve the overall progressivity of the tax code.

The efficiency of the VAT is exaggerated in any case. It may be less economically distorting than some other kinds of taxes. But since it applies to virtually every transaction in the economy, it requires an army of inspectors to administer. Evasion is easy, especially in service industries. So governments keep jacking up the rate, driving still more economic activity underground in another vicious circle.

In Belgium, for example, diners are theoretically subject to legal penalties if they leave a restaurant without their duplicate copy of the 21% VAT slip, which is the tax authorities' only means of knowing for sure whether a meal ever happened. But in practice one common method of leaving a tip is simply leaving the VAT slip on the table, and thus inviting the restaurant not to submit its own VAT form.

And don't believe anyone who promises a lower, 5%-ish VAT here. A paper published by the International Monetary Fund has suggested that U.S. VAT rates would have to be in the world-wide normal range of 10%-20% to make it worthwhile to administer.

Part of the problem with Mr. Thomas's VAT talk is the bait-and-switch nature of what he's selling. On the one hand he's touting it as merely a pro-growth replacement for the corporate income tax. But in the next breath it's the solution to the projected funding shortfalls in Social Security and Medicare, as well as the way to finance "personal accounts." In the latter case it obviously wouldn't be just a corporate tax replacement, but a means of permanently and massively increasing the government's share of the economy. We had thought the goal of Mr. Bush's Medicare and Social Security reform ideas, by contrast, was to meet the challenge of caring for the elderly without an ever-increasing tax burden.

There's one more question Mr. Thomas and VAT allies need to address. If the VAT is the solution to America's long-run fiscal challenges, how come the balance sheets of countries that already have this tax look no better (and in most cases much worse) than ours? Our answer is because new tax revenues never result in a happy long-run political equilibrium; they merely enable legislators to spend more here and now, before coming back for more tax revenue later.

One lesson of the Medicare fiasco is that bad Congressional ideas need to be stopped before they gather too much political momentum. We hope Mr. Thomas's fellow Republicans are telling the Chairman that they didn't come to Washington to deliver to America the tax that helped create the European welfare state.

Rise in Payrolls, Spending Boosts Stocks and Raises Forecasts on First-Half GDP
By TIMOTHY AEPPEL and KEMBA DUNHAM
Staff Reporters of THE WALL STREET JOURNAL
March 7, 2005

American companies are shaking off a prolonged hesitancy to hire and invest, prompting many economists to raise their first-half growth forecasts. The new business vigor is underpinning the stock market and could signal a major, post-Sept. 11 shift in the tenor of the economy.

Until now, the economic recovery from the recession of 2000 had been fueled by tax cuts and low interest rates, which kept consumers spending despite the terrorist attacks and two wars. But recent data suggest business is becoming a leading force in the economic expansion, as companies tap their huge cash hoards to hire workers and buy machinery. The weaker dollar, too, is helping, by making U.S. goods cheaper on the world market and spurring

The switch is visible in government indicators, including evidence that business-construction spending is finally on the upswing. Employers added 262,000 jobs in February, double January's pace and substantially higher than the average monthly job creation during the past six months of 182,000, the Labor Department said Friday. Orders for nondefense capital goods -- such as office furniture, trucks and computers but excluding aircraft -- grew 2.9% in January, the Commerce Department said. The gains in this gauge of business investment defy economists who had been expecting a slump in orders after the December expiration of a temporary tax break for business investment.


United Parcel Service Inc. is among those stepping up spending. The Atlanta-based company plans to spend $2.3 billion this year -- up from $2.1 billion last year -- on airplanes, trucks and computer systems. The company plans to hire 300 pilots world-wide before the end of this year and is adding workers in various locations. UPS's air service is expanding particularly fast on Asia-U.S. and Asia-Europe routes.

"For several years now, consumers have held up the economy, while businesses were right-sizing themselves after the 1990s," says Mat Johnson, an economist at ThinkEquity Partners, a San Francisco investment bank. But now, he says, we're starting to see "businesses invest in things like improved infrastructure and the production of new goods." And increased production often means additional hiring.

To be sure, the U.S. economy faces some headwinds, including surging oil prices, which rose last week over $55 a barrel, and the prospect that signs of stronger business activity could prompt the Federal Reserve to become more aggressive in its efforts to quell inflationary pressures by raising interest rates. The U.S. still also faces the challenge of huge trade and budget deficits and risks that a declining dollar could make foreign investors less enthusiastic about holding U.S. government debt and securities.

And while payroll expansion in February was impressive, other job-market data were less encouraging, especially the unemployment rate, which rose in February to 5.4% from 5.2% in January. (Unemployment and job growth are derived from different surveys.) Moreover some of the expansion that U.S. companies are anticipating will occur overseas, especially in Asia, meaning U.S. workers won't see the full benefit of any added spending.

Still, for the most part, the recent economic data portray an economy that is in solid shape and poised for added growth. Friday's indicators buoyed stock prices and prompted a number of economists on Wall Street to raise their estimates of real gross domestic product, the value of the nation's output. The Dow Jones Industrial Average surged 107.52 points after the employment and factory-orders data were released Friday, closing at 10940.55, its highest point since June 2001.


David Greenlaw, an economist at Morgan Stanley, recently increased his estimate for first-quarter real gross domestic product to 4.4%, significantly higher than the 3.3% he was predicting last month. Economists at Citigroup told clients in its closely watched "Comments on Credit" report that "tracking inputs to first quarter GDP suggests that our above-consensus estimate of 4% growth is too low, perhaps by as much as a half point."

The employment report showed payroll gains occurred across a wide array of industries. Neil Lebovits, president and chief operating officer of Ajilon Professional Staffing in Saddle Brook, N.J., said hiring by his clients seemed directly related to expansion plans.

Joy Global Inc., a mining-equipment company in Milwaukee, plans to spend $30 million this year, roughly a 50% increase from last year, and is hiring welders and machinists at its six U.S. plants. Joy Global also is adding workers in places such as Australia, Chile and even Botswana. The company is benefiting from soaring global demand for commodities such as copper and coal.

Although economists say such anecdotal evidence is encouraging, they caution that it is too early to conclude that February's job gains will continue at such a strong pace. In fact, the strong gains in business investment could mean that companies are seeking new ways to lift productivity in an attempt to limit their staffing needs. Spending on equipment and software rose 13.5% last year, including an 18% surge in the fourth quarter, according to the Commerce Department, marking the strongest annual performance since the technology boom.

Sheryl King, senior economist at Merrill Lynch, expected spending to rise just 3% in the first quarter. She now has revised that to 14%. Ms. King believes that spending will slump later this year, and she hasn't altered that view. "Our general view is that rising interest rates are going to impact the U.S. economy in a negative way," she says, "it's just that the timing of it has been shifted out."

J.P. Morgan economist Bruce Kasman revised his first-quarter GDP forecast to 4%, from 3.5% last Thursday. The catalyst was the upward revision of government figures for durable-goods orders, he said, which suggest that there won't be a material falloff in capital spending with the end to tax incentives. Like Ms. King, he also drastically raised his forecast for growth in spending on equipment and software, to 15% from 5%. "The strong durable-goods report is only the latest of a string of stronger-than-expected demand indicators at the start of the year," wrote Mr. Kasman in a report.

Other factors fueling capital spending include the recent surge in merger-and-acquisition activity. "When firms undergo a merger or acquisition, capital spending is often necessary to make the firms fully compatible or to have cohesive business plans," wrote Avinash Kaza, an economist at Goldman Sachs, in a report last week. Mr. Kaza found a close correlation between capital spending and the volume of large-scale mergers.

Many companies also are flush with cash, allowing them to spend more without loading up on debt. And thanks to a recent tax break, even more money could be available. Dell Inc., for instance, has said it plans to repatriate $4.1 billion under the American Jobs Creation Act, a law passed last year by Congress that allows companies to repatriate foreign earnings at sharply lower tax rates.


Dell, based in Round Rock, Texas, says it plans to use about $100 million of that to build a manufacturing plant in North Carolina (the company hasn't specified plans for the rest of the repatriated money). The plant, already under construction, could create as many as 1,500 jobs and is set to start production in September.

Economist Michael Moran at Daiwa Securities America Inc. says that business-related construction, after falling sharply during the recession in 2001 and stagnating for several years, started to rise again late last year and was up 1.2% in January. He considers the rise a sign that excess capacity has been absorbed and new building is needed. Although some of the recent increase reflects higher prices, Mr. Moran says data for January showed a gain after adjusting for inflation. "The recent advances have not been rapid, but any sign after the long period of declining or stagnant activity is encouraging," he says.

Not all new spending and hiring is taking place in the U.S. Many U.S. companies are expanding where they see the strongest market growth -- in emerging markets such as China, India and Eastern Europe. Appliance maker Whirlpool Corp. of Benton Harbor, Mich., has returned to investment levels not seen since the late 1990s, for instance. But in addition to expanding production in its Clyde, Ohio, clothes-washer plant, the world's largest, the company is expanding in Mexico and Poland.

Cummins Inc., a major producer of industrial engines and electric-power-generation systems in Columbus, Ind., plans to spend more than $220 million this year, up from $151 million last year, with a large chunk going to expand a plant in Brazil and build a research-and-development center in China.

Privately held Bachman Machine Co., after struggling during the downturn, is now benefiting because many of its weaker competitors perished in the slump and its large industrial customers are eager to develop dependable suppliers.

President William Bachman has bought nine $250,000 machines in the past 12 months -- all to serve the same large customer -- and is planning a new $7 million plant about 45 miles away. He's currently advertising for four more skilled workers to add to his staff of 145. "We've decided that there are a couple of customers we're betting on," he says, "so we have to grow to be able to serve them."

Still, many companies say they will never again invest as aggressively as they did in past upturns. In many cases, companies have discovered they can permanently get by and even grow while investing less capital. Peter Hellman, president of Nordson Corp., Westlake, Ohio, says his company is in a "normal growth mode," but spending only about $12 million a year on capital expenditures, about half what the company spent in past upturns. "We're not starving, we're just able to operate at lower capital intensity," he says.

In the past, he notes, the company would splurge on increasingly complicated and bigger pieces of equipment. But by reorganizing the way the company makes its products -- machines used world-wide to apply industrial adhesives, coatings and sealants -- the company can rely on a larger number of much smaller, and cheaper, devices.

EconoPundit
Bruce Bartlett

Message from a small employer...

This response(http://www.epinet.org/newsroom/releases ... m_Wage.pdf) betrays the sort of elitist ignorance that's all-too common among politicians of a certain persuasion. They simply don't know anything beyond the isolated and self-absorbed world of Big Business/Big Labor.

In the real world of small employers -- where I live -- there are many instances of workers going out and finding second jobs because their primary employer simply can't afford to extend their hours beyond 40 per week. The price of the product -- as dictated by customers -- won't support higher labor costs at overtime rates.

Frankly, I would love to be able to offer some of my employees the extra hours they now spend delivering newspapers at minimum wage. At non-overtime rates I'd be able to pay them $7/hour more than they currently get in their second jobs.

But of course I can't do that legally under current legislation. Apparently the Santorum bill would change all that, but the ongoing ideological war against business and markets may be enough to defeat Santorum.


Here's Ray Fair's "moonlighter" index. Did changes in minimum wage legislation during the early Clinton years cause the rapid departure from historical norms shown after 1990?

And the point everyone misses...

How come people with full-time jobs have to find these moonlighting incomes?

The answer is simple: use some math.

1. The author states that non-overtime pay he would be paying $7/hour extra to these people.

2. Factor in the federal minimum wage (larger in some states, obviously), which, as I believe, is under $6/hour. You get $13/hour.

I'd like to see anyone who can live on $13/hour and manage to feed one's family.

There is a reason why the full-time job is 40 hours a week. Hundreds of sociologists, psychologists, economists have argued that 40 hours a wekk is the optimal size of the work week, which will not put an undue stress and exhaustion upon the employees.

It has also been thoroughly research that the effect of overworking on the average people could be costly, sometimes fatal or deadly to others. That is why we pay overtime. One, to duly compensate those who have to put in extra-hours, secondly - to discourage the employers from making the employees work overtime, which could possibly endanger you and me.

I just don't know, I am not very trustworthy of my hospital chart in the hands of an overworked nurse or a scalpel in the tired hands of the surgeon.

No one says you must trust local hospital. You can always establish your own where nurses would be paid and treated royally.

"That is why we pay overtime". Perhaps you get paid overtime, but you don't pay overtime.

However, as I've just suggested, you may try:)

If you underpay your employers, you must fear, NAY, expect they go elsewhere looking for employment (including the employers who will pay them overtime if overtime is earned). That is just as capitalist as Wall Street.

Pay them well and they will come. Pay them not - see them leave to someone who will.

The Wall Street Journal

Social Security vs. Common Sense

By MICHAEL J. BOSKIN
March 30, 2005

"It [Social Security] cannot remain static. Changes in our population, in our working habits, and in our standard of living require constant revision."

John F. Kennedy, June 30, 1961

* * *
Given the coming economic and demographic changes, President Bush, like President Clinton before him, proposes to resolve Social Security's long-term solvency problem before it becomes a crisis. And, like the late Sen. Daniel Patrick Moynihan, for decades the intellectual leader of the Democratic Party on social insurance issues, he proposes to modernize Social Security with an individual account component. It is thus disheartening that these proposals have caused the president's political opponents to claim that they will break promises, undermine Social Security, and destroy the social fabric.

By far the most important issue is to put in place, sooner rather than later, reforms that gradually and cumulatively bring projected future benefit growth in line with projected future revenues without a tax increase. Waiting several decades to deal with the issue raises the prospect of a 50% increase in payroll taxes. Alternatively, benefits then could be cut abruptly, which would be wrenching for future retirees' finances.


Perhaps the best place to start a rational discussion of these issues is to straighten out the language used to describe Social Security and the proposed reforms. When is a contribution really a tax? A guarantee, almost certain not to be realized? And a cut, actually an increase? All of these misappropriations of language obfuscate the facts about Social Security. The critics claim the Bush plan will necessitate massive cuts in "guaranteed" benefits of 40% or more. This is absurd. In contrast to the conventional spin, nobody's benefits need to be cut and nobody's taxes need to be raised. Current tax rates, given projected economic growth, are sufficient to deal with the demographic deluge.

The current benefit formula, as carried forward in the long-term Social Security projections, implies real Social Security benefits per recipient will double in the next few decades. This occurs because: 1. The initial benefit level for Social Security is indexed to wages rather than prices; since wage growth generally exceeds price growth, future benefits rise by roughly the rate of productivity gains. 2. People will be living longer, which increases the present value of total lifetime Social Security benefits. 3. The change in the consumer price index (CPI), which indexes Social Security benefits post-retirement, overstates inflation by 80-90 basis points per year, despite some valuable improvements made by the Bureau of Labor Statistics (BLS).

The claims that "guaranteed" benefits will be cut and promises broken are relative to projecting the current benefit formula forward indefinitely. This is misleading on several counts. The Social Security Administration sends future beneficiaries an annual statement which clearly states that the current system cannot pay such benefits; in a few decades, under current law, there will only be 74 cents in taxes coming into the Trust Fund, from which benefits must be paid, for every dollar of projected benefits.

Further, Congress has often changed benefits in the past, most recently by taxing them, and is certain to do so in the future. The Supreme Court has ruled no one is entitled to the benefits; they are not legally owned assets. In fact, most younger workers are not expecting to receive them. There is thus nothing "guaranteed" about the benefits; they involve immense economic, demographic and political risk.

The president says there will be no changes for retirees or near retirees. No cuts or broken promises there. The most widely discussed proposal, indexing by prices rather than wages, would still leave ample room for substantial benefit growth for those in mid-career, via life expectancy rising more rapidly than retirement ages and by the price index, even after some improvement, overstating inflation. Many younger workers say they expect the system to be bankrupt and gone by the time they retire. Only in Washington would higher real benefits in the distant future for people who do not expect to receive them, or for those not yet born, be considered a "benefit cut." Or a mechanical and unsustainable projection of a benefit formula put in place more than a century before, a promise of benefits to the not yet born for the year 2080.

There is an obvious set of commonsensical reforms which would strengthen and modernize Social Security, improve incentives, and eliminate the future funding uncertainty for families and the economy. First, we should switch from wage indexing to price indexing, but raise benefits more rapidly for those with low earnings. This would eliminate most of the long-term insolvency, but do so in a manner that leads to rapidly rising real benefits for people with low incomes, and more slowly for people with higher incomes.

Next, we should prospectively increase the retirement age in several decades slightly beyond that in current law, while maintaining a strong early retirement option. Combined with a partial improvement in the CPI (the BLS implementing its vastly superior chained-CPI, which would eliminate 30-40 basis points of the bias), these reforms will easily deal with the long-run solvency issues. And they will finally fully deliver what is Social Security's most important mission, as stated at its inception by President Franklin D. Roosevelt: providing "protection against poverty-ridden old age."

Finally, as the president has argued, we should add an individual accounts component to Social Security whereby younger workers can choose to put a modest portion of their payroll taxes up to a limit into a broadly diversified, low-cost index fund. Like the other reforms, it should be phased in gradually over time. There is an especially strong case for individual accounts for the half of the population that owns virtually no assets, a point often made by Sen. Moynihan.

Many critics of individual accounts denounce the idea of borrowing to finance them. While I share concerns about large deficits in prosperous peacetime, there is a fundamental difference between borrowing to finance individual accounts and borrowing to fund government current consumption. The individual accounts acquire real assets. So, while there is borrowing by the government on the one hand, it finances investment in real assets on the other, like borrowing to buy a home, not to throw a party. Is there really such an aversion to private capital that only government spending counts?

Individual accounts will increase saving and offer potentially higher returns to young participants. But some people will adjust their other saving, so the amount of saving in the individual accounts will be more than the total amount of incremental saving. However, it will be much harder for the government to get its hands on the funds and spend them, as it has done with Social Security surpluses for decades under administrations and Congresses of both political parties. Thus, despite the borrowing, individual accounts may be more, rather than less, likely to increase national saving. The required diversification in low-cost index funds and the long-term nature of the investment considerably mitigate the risk attendant to investment in higher return equities.

The biggest concern with individual accounts is one its opponents seldom raise: The growing future political power of the elderly may eventually result in at least a partial cancellation of the offset against individual account income, thereby turning the ex ante "carve out" into an ex post "add-on."

Thus, think of the reform as consisting of two parts: A. Deal with long-run solvency by partial price indexing, slightly increasing the retirement age in the distant future, and a modest, overdue improvement in the consumer price index. B. Modernize Social Security by adding an individual account component. Nobody gets their benefits "cut" from Part A. It is very unlikely that anybody's benefits would be less from Part B than they would have been if the system described in Part A -- call it the sustainable traditional Social Security system -- had been in place. Most younger workers likely will receive more from the sum of their individual account income and traditional Social Security than in the end they would have received from the unsustainable current system.

Put the other way around, suppose we have the Social Security reform described above (partial price indexing, retirement age, more accurate CPI) in place. Does anyone really believe it would make sense to dramatically increase benefits for future retirees and finance the expansion with a 50% increase in the payroll tax, especially given the impending larger problem in Medicare? That is what the opponents of Social Security reform are really peddling. Keeping the current system in place and raising taxes later just taxes future workers to pay ever larger inflation-adjusted benefits to well-off future retirees; prevents the bottom half of the wealth distribution from owning assets; and eventually wreaks havoc on the economy.

The critics say there is no rush, no problem let alone crisis. But the first baby boomers will begin to retire in three years. The fraction of voters receiving benefits relative to those paying taxes will increase 50% in 20 years and double in 50, making reform ever more difficult. And, once delayed, reform is ever more likely to lead to vastly higher taxes without slower benefit growth. Why now? Because reform is long overdue and should be implemented gradually and cumulatively. That way, the solvency problem is solved and families and the economy have time to adjust gradually without severe disruption.

If we wait and make large tax increases or benefit cuts abruptly, wrenching adjustments will be required for beneficiaries, taxpayers, and the economy. Thus, reform really is urgent. Enacting these sensible reforms now will strengthen the economy, spare future retirees and taxpayers severe disruption in their personal finances and ensure Social Security plays an important and appropriate role in future retirement income security.

Mr. Boskin, senior fellow at the Hoover Institution and professor of economics at Stanford, served as chairman of the President's Council of Economic Advisers from 1989-93.

We react indignantly towards gambling, yet we see nothing wrong gambling with people's SSI?

Market is gambling. I am not saying market is bad. I am saying gambling is good. Let's not be hypocritical about that.

Search for Crude Comes With New Dangers

By JOHN J. FIALKA
Staff Reporter of THE WALL STREET JOURNAL
April 11, 2005

Few U.S. motorists need give a thought to bomb-wielding terrorists in the Caucasus or the rifle-toting Urhobo tribe in the oil-rich delta of Nigeria.

But to national-security planners, diplomats, oil companies and energy planners, they are becoming critical components in the increasingly difficult and risky game of bringing new oil supplies to market.

In the coming years, the flow of oil is expected to be challenged by terrorism, increasing demand, a limited U.S. refining capacity and little spare production world-wide, especially as the thirst for oil grows in China and India.

Twenty years ago, new oil was coming to the U.S. from Alaska or offshore platforms near Norway and the United Kingdom -- all places with reliable security forces and stable governments. The oil supplies expected over the next two decades are coming from or moving through some of the least stable and most corrupt areas in the world.

As a result, long-neglected regions such as West Africa are rising in importance to U.S. policy makers. Emerging countries around the Caspian Sea are attracting new attention, too, as is the tense U.S. relationship with Venezuela's leftist government.

Further complicating matters is the struggle emerging between the U.S. and a dollar-rich, oil-hungry China seeking influence and presence in such regions. China's efforts to secure supplies of oil in Africa and Asia could reduce amounts available to the global market, according to Robert Hormats, a former senior State Department aide who is now vice chairman of Goldman Sachs International. He spoke before a House committee on the subject last week.

U.S. officials are particularly worried that China's oil companies are pumping up the economies of countries like Iran and Sudan, despite trade sanctions for alleged state-sponsored terrorism that make them off-limits for some Western companies. "Our ability to chase out radicals with sanctions is eroding," warned Chas Freeman, a former assistant secretary of the Defense Department, at a recent symposium on the issue.

The military is paying more attention to emerging oil regions as the country plans for possible disruptions in supply. Over the next decade, the U.S. plans to spend $100 million on the Caspian Guard, a network of police forces and special-operations units in the Caspian Sea region that can respond to various emergencies, including attacks on oil facilities.

The Defense Department's European Command, based in Stuttgart, Germany, is coordinating the multiagency effort and helping to train forces to protect a new pipeline that will bring oil from rigs in the Caspian Sea through the Caucasus to Ceyhan, a Turkish port on the Mediterranean, starting later this year.

The Caspian Guard, launched in the fall of 2003, will include a radar-equipped command center in Baku, Azerbaijan. That center will give the Azeri government the capability, for the first time, of monitoring shipping activity near the many oil rigs in the Caspian. The Caspian Guard also will be useful in coping with drug and arms smugglers, says Col. Mike Anderson, chief policy planner for the European Command.

Most of the oil from this area will be absorbed by markets in Europe, not the U.S. But any blockage in flows likely would generate a surge in oil prices that would register on gas pumps in the U.S., the world's largest oil consumer. "There is not a lot of excess capacity in the entire international market," says Col. Anderson, "so if there is a threat to the Ceyhan pipeline, it will ultimately affect us."

The U.S.'s European Command also is looking at West Africa. In October it hosted a meeting that included naval leaders from Nigeria, Angola, Cameroon, Guinea and Ghana to discuss possible joint efforts to protect oil facilities in or near West Africa's Gulf of Guinea. The area supplies 14% of U.S. oil imports, up from 8% two decades ago. Some experts say offshore oil discoveries could raise that to 20% within a decade.

The African group had much to discuss, including terrorism, local wars and massive oil thefts by well-armed criminal gangs in Nigeria. But so far there is no plan for a regional "Guinea Guard."

"It's a tougher nut to crack there," says Col. Anderson. He says the U.S. hopes for more anticorruption efforts from governments in the region before such a force can be organized.

Oil from the West Coast of Africa is in high demand by international oil companies. It is light and low in sulfur, much like the Texas crude that refineries along the East Coast of the U.S. were designed to process. And unlike the oil-producing nations of the Middle East, where cash-rich governments are discouraging more Western investment, West African nations are hungry for oil and natural-gas deals.


Two players raising the stakes in this game are China and India, whose increasing thirst for oil has helped propel oil prices. Their rapid economic growth -- and desires to fill Strategic Petroleum Reserves modeled on the U.S. emergency stockpile in the Gulf of Mexico -- are expected to spur more buying soon to protect them against oil shocks.

Government-owned oil companies from China and India have formed partnerships to produce oil in Iran and Sudan. They also are scouring Africa and the world for more reserves. "We have had a skewed dependence on the Middle East and one is always trying to diversify their sources of oil and gas," says Debnath Shaw, an Indian oil expert.

Both countries also are working on joint oil-production agreements with Venezuela, a major exporter to the U.S. That has emboldened Venezuelan President Hugo Chávez to amplify his political attacks on the U.S. In February he claimed the Bush administration may be planning to assassinate him. If he should be killed, Mr. Chávez warned in a radio broadcast, President Bush "can forget about Venezuelan oil."

All three of China's state-owned oil companies have made repeated visits to Canada, which has been the chief source of imported oil for the U.S. for the past six years. One deal under discussion, according to Murray Smith, the former energy minister of Alberta, is an 800-mile pipeline that would carry crude oil from Alberta's booming tar-sands region to a port in British Columbia, where it could be exported to China. Canada customarily exports about 95% of its oil to the U.S.

What this means to the U.S. oil-security picture and its economy has computers in the Department of Energy whirring. Planners are revising eight-year-old computer models used to predict supply disruptions to account for the new world.

"A lot has happened since 1997," says Lowell Feld, a world-oil-market analyst for the agency's Energy Information Administration. Older models assumed a more tranquil world in which every U.S. refinery got just the type of oil it needed. Says Mr. Feld, "It was too simple."

I think maybe we should emphasize alternative fuel sources. I'm not sure but it could be a good idea....

I wonder what the energy tsar Dick Cheney thinks. I bet he has a plan. I bet he even has a secret energy taskforce ready to lead the way.

OR NOT.

Emphasizing is easy, developing is a bit trickier.

Twenty years ago, new oil was coming to the U.S. from Alaska

Hehe

Economical wisdom - Nobel Prize winner Milton Friedman talks economics
By NED B. HUNTER

Apr 10 2005

In 1963, economist Milton Friedman published a treatise that challenged traditional economic thought.

Titled ''A Monetary History of the United States,'' Friedman's work focused on the role of the U.S. federal government's regulation of the money supply and its effect on inflation, recession and business cycles.

His continued works on economic theory and the effects of government policies on business would eventually lead him to win the 1976 Nobel Prize in Economic Sciences.

Born on July 31, 1912, in Brooklyn, N.Y., Friedman was a professor of economics from 1946 through 1976 at the University of Chicago. The author of more than 10 books, Friedman also wrote for ''Newsweek'' magazine from 1966 to 1983, and was a member of President Ronald Reagan's Economic Policy Advisory Board.

Today, Friedman still influences U.S. economic thought from his office at the Hoover Institute on the campus of Stanford University in Stanford, Calif., where he has worked as a Senior Research Fellow since 1976.

He is 92.

The Jackson Sun recently spoke to Friedman by phone from his office at the Hoover Institute about the future of Social Security, the effect of gas prices on the U.S. economy and the dangers of the U.S. deficit.

Economists from Union and Lambuth universities and the University of Tennessee Martin contributed some of the questions below.

Q & A

Question: Over the next 10 years what would you say is the greatest threat to the U.S. economy?

Answer: Excessive government spending.

Q: In any particular area?

A: Government spending can be in any area, but the particular area that we are most concerned with are in the areas of entitlements.

Q: Do you believe that Social Security should be privatized, or no?

A: Yes, I believe that Social Security should be privatized. However there are also other things they can do with it.

Q: How do you believe the system should be fixed, and not just Social Security, but perhaps also Medicare, which seems to be a greater and more prevalent problem?

A: Well first of all, I don't believe there should be a Social Security system of our present kind. Our current Social Security system is a Ponzi game*, in which the young pay in to pay the current expenses of the old. It's also being misrepresented, as if it were a form of insurance, that when you pay Social Security taxes, you are paying money which is being put away for your own benefit. That is not the case. The money that you pay goes out i