Progressives Take Note: Long-Term Unemployment

There seem to be many unique situations developing in our current economic era. You have probably noticed that, every few months, congress has had to extend unemployment coverage for workers who have exceeded the standard 27 months. That seems like a prudent thing to do in a recession. This virtually guarantees that every dollar goes immediately into the economy. I have to admit that I have not been paying sufficient attention to this issue. The number of long-term unemployed (unemployed longer than 27 months) has grown enormously, both as an absolute number, and as a fraction of the total number of the unemployed. This is a situation quite different than has been seen in earlier recessions. The Bureau of Labor Statistics provides copious tables of interesting data. Consider the percentage of the unemployed that are long-term unemployed during the current period.

12/08 22.9%

04/09 27.5%

12/09 39.8%

04/10 45.9%

These long-term unemployed represented 4.5% of the total work force in 04/10, a number that has not yet peaked. Compare this number with the peak fractions of the work force observed during previous recessions.

2004 1.4%

1992 2.1%

1983 3.1%

1977 2.1%

I believe these numbers indicate that we are entering into a new and unique economic situation. Clearly, keeping benefits flowing to these people is an important and expensive necessity. It is not totally clear from just these numbers what is going on. It would seem that the unemployed reach some sort of tipping point where the longer you are unemployed, the less interested people are in hiring you. If that is the case, I don’t see how the problem becomes self-correcting unless the total unemployment rate heads to low single digits. That is an unlikely occurrence.

So, progressives, what would you do in this situation? I don’t know either, but I promise I will begin to worry about it more than I have been.

America's Women: 400 Years of Dolls, Drudges, Helpmates, and Heroines by Gail Collins

Yes, this is the Gail Collins who is a columnist for the New York Times. If you enjoy her columns and appreciate her gentle but sneakily biting wit, you will enjoy reading this book, America's Women. The wit is more diffuse here than in her columns but she is not able to suppress it entirely. The history she covers extends from pilgrim days through the 1960s. The epilogue quickly brings the reader up to the millennium, but the details she has saved for a follow-up book that has been published (When Everything Changed: The Amazing Journey of American Women from 1960 to the Present, 2009). I have not read it yet but I intend to.

If one sets out to write a history of women in America one is faced with a variety of choices. A mile high picture would provide the details of women’s ever so slow and gradual evolution towards equal rights. On a minute scale one could track the trials, tribulations and occasional joys of being a woman, wife, and mother over this span of 400 years. These would be two quite different books. Collins has chosen to cover both in one volume and she pretty much pulls it off. The advantage of her approach is to make sure all the big picture events are placed in an appropriate context. It allows one to see clearly how truly exceptional the exceptional women of a given time period had to be. The other positive from this approach is that the author can pepper the reader with an endless stream of little tidbits about everyday life that will alternately frighten you, make you laugh or scratch your head in bewilderment. The disadvantage is that the book tends to be a bit on the long side. The chosen organization is to march linearly forward in time and at each epoch to scan laterally to look the details related to different classes of women or different social thrusts. For example, for the pre-Civil War period she has to deal with Northern women, Southern women, slave women and immigrant women. Their stories have to be blended with descriptions of the abolitionist movement, and numerous social issues.

My limited experience indicates that the author’s insistence on completeness will lose a couple of male readers, but the women won’t mind at all. Guys—if you expect to learn something good about your gender, you have come to the wrong place. The image of men that emerges from this work suggests they only had a few things on their minds: war, liquor, prostitutes, and tormenting women. My first thought was that this was a bit unfair. But, then again, I wasn’t there. I can only imagine us as the enlightened, progressive chaps we have become. Perhaps we have come a long way too.

I personally found the book fascinating but easy to put down. I ended up reading it in a large number of short sessions. And that was just fine.

Collins suggests in the Introduction a very useful approach to incorporating the history to follow into a single theme.

"The history of American women is all about leaving home—crossing oceans and continents, or getting jobs and living on their own. Some of our national heroines were defined by the fact that they never nested—they were peripatetic crusaders like Susan B. Anthony, Clara Barton, Sojourner Truth, Dorothea Dix. The center of our story is the tension between the yearning to create a home and the urge to get out of it."
　Overlayed on this internal conflict were the external influences of a male-dominated culture, the overwhelming effort required to run a household over most of our history, and cultural biases that manifested themselves to women’s economic disadvantage. For most of our history economic considerations held women back. In the end, however, it was economics that set them free (approximately).

All the Semitic religions are male dominated. The early settlers in America were intensely religious and their religion told them that women should be seen but not heard— at least not outside of the home. One can encapsulate much of women’s history as a struggle to overcome this bias.

Some fraction of women was never quite satisfied with the role of wife and mother. Those slowly began to try to exert influence in other directions. While women were officially expected to remain silent on church issues, they discovered that the men were either busy on other matters or were just not very interested. Consequently, women began to play an ever larger role in religious matters. One of the first attempts to break out of their assigned roles was to gain entry into schools of divinity. This religious focus led naturally to activism on social issues such as care for indigents, abolition, and temperance. This process of breaking out was not a smooth one. There were many advances followed by partial retreats along the way.
As Collins so aptly put it:

"Whenever there was a sudden demand for literate workers at low pay, women were usually the answer." One of the first, long-lasting breakthroughs was in the field of teaching.

"But as always happened in American history, the dogma of appropriate gender roles gave way to necessity. There simply weren’t enough men available to staff the public schools while the pool of available educated women was huge. And the price was right. In 1838, Connecticut paid $14.50 a month to male teachers and $5.75 to women.....By 1870, of the 200,000 primary and secondary school teachers in America, more than half were women....Although the percentile of women working as teachers at any given time was tiny, a much larger number had the experience at some point in their lives. A quarter of the native-born women in pre-Civil War Massachusetts were current or former school teachers. Thanks to teaching, a large minority of American women knew what it was like to have earned their own bread....The teachers were all single—well into the twentieth century, school systems required women to resign when the got married."The women who found an outlet working as teachers were the lucky ones. There were other opportunities to utilize women as reliable workers at low pay.

"American employers were worried about creating a permanent class of rough, hard-to-handle industrial workers, like the ones who were causing so much trouble in England. Girls did not usually stay long enough to become troublemakers—after a few years, most left to get married. In the meantime they were cheaper than male workers, and easier to control. By the 1820s, New England was full of textile factories where virtually all the workers were women, each making $2 or $3 per week. (The supervisors, who were men, got $12.)"The movement to abolish slavery provided an opportunity for women to exert their influence in the politic arena in a manner and on a scale never seen before. It was an issue that resonated strongly with women, and there were plenty of well-educated and strong-willed women who seemed to be itching for a cause to which they could dedicate themselves. This was one of those periods where historic change was occurring and women’s perceived roles as well as their own view of their place in society would never be the same. As the author points out:

"The antislavery movement did a lot to liberate its female members as well as the slaves."The Civil War, and the political conflict leading up to it, would be a turning point for women. Wars unleash change—change in society, change in politics and change in technology. Of necessity, the war opened up the field of nursing to women.

"Until midcentury, nursing had been a job for men and lower-class women. Florence Nightingale made it respectable for ladies. She was a well-born Englishwoman who became an international heroine in 1855 when she reorganized the nursing care in the Crimean War, reducing the death rate in British field hospitals from 45 to 2 percent. When the Civil War began, one observer noted, ‘there was a perfect mania to act Florence Nightingale’......volunteers who took care of the wounded during the early parts of the Civil War were basically on their own. They determined where the fighting was, wheedled their way through to the front, and did what they could to help....In the first terrible years of the war, wounded men died on the battlefield after lying there for days, untended, in the hot sun. There was no organized system of getting them to a field hospital. It took an enormous leap for well-bred women to enter the gory army hospitals to tend the wounded men, and it’s hard to imagine the kind of daring they must have needed to get to the battlefield unescorted. Yet a number of them managed to do it on their own....After the war, [Clara] Barton became famous as the organizer of the American Red Cross, but her finest hours came in those hectic, disorganized trauma centers of the Civil War’s early years. Her face turned blue from the gunpowder, and her skirts were so heavy with blood that she had to wring them out before she could walk under their weight."Women again demonstrated that they were much more effective than men in caring for the wounded and another career path for women was carved out.

The period between the end of the Civil War and the start of World War I was a period of great economic change which provided new opportunities for women to work outside the home and support themselves if they so chose. The arrival of the department store changed women’s lives forever. Besides the obvious pleasures and advantages of browsing and shopping, many new jobs were created—jobs perfect for women. As usual, they were paid much less than men, but it was still much better than working in a factory. The growth in government bureaucracy and economic expansion created a large number of clerical jobs. This converged with the invention of the typewriter to lock in this kind of work for women. The coming of the telephone provided numerous openings for switchboard operators. These positions soon entered women’s portfolio when it was discovered that men had a hard time remaining polite with customers. The general expansion of educational availability increased the demand for literate people to work as librarians, another position ideally suited for the mass of educated but unemployed women.

We see here a pattern that persisted essentially to the mid 1970s. Women were a well-educated resource that had demonstrated a capability to do much more than they were given the opportunity to do. As society or technology or historic events created opportunities, women moved out of the home to take advantage of them only to be forced to retreat if it was determined that they were competing with men for jobs. But the retreats were only partial and the size of the female work force grew over time and continued to expand into new directions as forceful women broke down barriers in the professions. During this period society’s expectations of women varied considerably from period to period. These expectations seem to be determined by men. This male dominance would not begin to be broken down until economic forces intervened to make change inevitable.

The author stops her narrative at the end of the 1960s, but she covers the remainder of the century in a brief epilogue. The 1970s began a period of great societal upheaval. The idea of equal rights for women began to be taken seriously. High divorce rates and longer life spans left women wondering what they would do when their husband or children left home. However, the biggest change occurred due to economic developments.

"Much of this would never have happened—or would not have happened nearly as fast—if the economy had not required it. Just as society suddenly embraced women as the ideal teachers and typists when there was nobody else to do the job, the idea of women working through their lives caught on when the information era succeeded the industrial age. The vast number of educated women was too valuable a resource to let go once they began to have children. Meanwhile the consumer economy developed more and more things that families felt they needed, which they could no longer acquire on the salary of a single breadwinner."The trials, tribulations and triumphs of women entering this new era presumably are the subjects of the author’s subsequent volume.

I have chosen to focus on economic drivers in the evolution of women’s lives. One could have just as easily focused on the struggle for equal rights, or focused on the evolution of conditions for homemakers over the years. Collins presents all that so the readers may enjoy what most interests them.

I have to admit that what I found most pleasing were the little revelations and factoids that the author provided throughout the narrative—and her gentle wit. Here are some examples I found particularly interesting.

Have you ever wondered how colonial women handled the issues related to infants in diapers? Collins wonders too. It seems they tried to toilet train their infants by the age of one month. If you have trouble comprehending how that could be possible, for your enlightenment, the author suggests that a dog and a feather were useful in this task. You will have to read the book if you wish to learn more.

Do you have any friends who are or were librarians? The author extracts this from a journal dated 1891.

"...women who worked as library assistants should expect to make....about half what men made—and be able to write steadily for six or seven hours a day. They should know half a dozen languages.....understand the relation of all arts and sciences to each other and must have....a minute acquaintance with geography, history, art and literature. Women who aspired to be head librarians should expect to work 10 hours a day...but those who are paid the highest salaries give up all their evenings as well."I am sure that by now the average librarian must be up to a full dozen languages.

Women’s suffrage was one of the most significant social changes in our nation in the past century. Many women spent a lifetime pursuing this goal. The author contends that most of the women in the movement were more interested in temperance than in suffrage itself. They viewed acquiring the vote mainly as a means of voting in prohibition. Their hope was that passage would finally prevent men from spending so much of their income on liquor. What the women discovered was that their daughters didn’t want to prevent men from drinking; they just wanted to make sure they got to drink also. Their reward was to see their daughters spend their evenings in speakeasies.

Collins devotes a healthy portion of her history to coverage of slave women and their offspring. As property, slaves could be bought and sold at will. It was often the case that families would be broken up with the father shipped off to a new owner and never seen again. There is also the issue of what kind of role model could a slave father be to a slave son. What could he teach him? Subservience? I know this is a history of women, but I am left wishing to pursue the sociological effects of two hundred years of slavery and another hundred years of discrimination on African-American men.

The abuse women had to endure became more exotic and more extreme once male doctors became prevalent and began prowling for clients. In the early nineteenth century they pushed midwives out of business.

"For the mothers-to-be the change was not necessarily an improvement. The vast majority of births were not problematic, and a skilled midwife believed in letting nature take its course. That was better by far for both mother and child, since the medical profession had yet to embrace the concept of sterility. Anytime a hand or instrument was inserted into a woman’s body, she was in danger of becoming infected, with fatal results. Childbed, or puerperal, fever became epidemic at times in the nineteenth century, particularly in hospitals, where a single doctor could carry infection from one patient to the next....in 1840 at Bellevue in New York, almost half the women giving birth during the first six months of the year contracted the fever. Eighty percent of them died."Collins points out that the sensibilities of the time often precluded allowing the doctor delivering the baby to look between the women’s legs. She points out that one of the most highly regarded obstetricians was actually blind. Medical students were not allowed to observe live births. They had to learn from textbooks or dummies. This apparently did not stop them from taking aggressive measures.

"They sometimes used forceps to speed deliveries, risking both tearing the mother and hurting the baby. A physician might also make use of one of the ‘heroic’ remedies of the day, like bloodletting. William Dewees, who taught at the University of Pennsylvania, wrote proudly that in one protracted labor he took ‘upwards of two quarts’ of blood from a woman while she was standing up. The woman, unsurprisingly, fainted, and after that, the doctor said, ‘everything appeared better.’ Bleeding women until they swooned stopped them from crying out, which must have been a relief for the doctor and family members waiting nearby."It was not long before "practicing" doctors were addressing other conditions with the same skill. The closest things they had to anesthetics were alcohol and opium. They soon discovered that their patients were more pleased with their service if they shot them up with opium before they left. Some of the "treatments seem utterly bizarre today.

"To cure nervous complaints, doctors injected water, milk and linseed into the uterus. For infections, they cauterized it with silver nitrate, or even a hot iron. They put leeches on the vagina, and even on the rectum. (A famous English gynecologist, whose work was studied by American doctors, advocated placing leeches right on the neck of the uterus, but he cautioned his readers not to let the leeches wander off into the organ itself. ‘I think I have scarcely ever seen more acute pain than that experienced by several of my patients under these circumstances,’ he wrote.) Leeches were actually a moderate approach compared with doctors who tried to bring down a patient’s temperature by opening a vein and drawing blood. Salmon B. Chase, Lincoln’s secretary of the treasury, watched doctors take 50 ounces of blood from his fever-stricken wife before she died."And then there were the surgeons. I have to recount this one tale that the author included because when I read it I had a hard time believing it.

"Other invalids suffered from an awful malady called vesico-vaginal fistula. During childbirth, the wall between their vagina and the bladder or rectum ripped, leaving them unable to control the leakage of urine or feces through the vagina. The condition had been recognized for centuries, but some historians believe that it increased when doctors began delivering babies and inserting their instruments into the womb."

"J. Marion Sims, an Alabama physician, devised an operation that successfully closed the fistulas and let these tormented women resume their lives. But the discovery came at a horrifying cost...He experimented with surgical techniques while the [slave] women balanced on their knees and elbows, in order to give them a better view of what he was doing....Four years later he finally succeeded in repairing the fistula of a slave named Anarcha....It was Anarcha’s thirtieth operation, all of them performed without anesthetics.....Sims claimed that the women had begged him to keep trying his experiments and it’s possible that was true....But they were still slaves with no real option to say no, and Sims chose to work on them in part because he believed white women could not endure the kind of pain he was inflicting."The next time you think you’ve received some rough treatment from your doctor, just remember how it used to be.

Let us finish on a lighter note.

Collins takes great delight in skewering Thomas Jefferson. This take on Jefferson’s advice to his daughter is a good example of the author’s wit.

"Remember...not to go out without your bonnet because it will make you very ugly and then we should not love you so much" wrote Thomas Jefferson, demonstrating once again that he could always find just the wrong thing to say to a devoted daughter....(Admirers of Jefferson might best be advised to skip everything he ever wrote about women and restrict their attention to the Declaration of Independence.)"If you think modern problems are new problems, consider this description from the pre-Civil War era and think again.

"Worst of all was the corset, which was worn everywhere from the breakfast table to the ballroom in the perpetual and generally hopeless pursuit of the ideal 20-inch waist. Preadolescent girls wore corsets and old women wore corsets, and mothers-to-be wore corsets even in the advanced stages of pregnancy....One commentator claimed that it was not unusual to see ‘a mother lay her daughter down upon the carpet, and placing her foot on her back, break half a dozen laces in tightening her stays.’ Comparisons to Chinese foot binding were rife and stories were passed around about deformed babies born with corset lines imprinted in their flesh....While virtually everything women read told them that corsets were bad, everything they saw stressed how essential they were. Magazines pictured women with tiny waists and dresses that sported long, tight sleeves......"Or, how about this concern from the beginning of the twentieth century:

"The white middle class was worried about ‘race suicide.’ The best-educated native-born women were failing to reproduce while immigrant families had tons of healthy babies. President Theodore Roosevelt was a particular fretter: ‘If Americans of the old stock lead lives of celibate selfishness.....or if the married are afflicted by that base fear of living which....forbids them to have more than one or two children, disaster awaits the nation."Recall that the immigrants of that era were Irish, Italian, Jewish, German and Scandinavian. How many of their descendents remember that they were once considered undesirable rabble? How many of their descendents are today worrying that too many Hispanics having too many babies are ruining their nation?

I have presented a few of the insights and revelations contained in this volume. There are many more. Read it and decide which have the most meaning for you.

The Economics of Female Empowerment

I am still working on a discussion of Gail Collins' book America’s Women. My focus seems to be narrowing down to how economic issues dominated women’s history in this country. The focus on economics reminded me of several recent references to women’s role in the world that touch on inequalities between the genders.

Consider Niall Ferguson’s comments in his recent best seller The Ascent of Money.

"The great revelation of the microfinance movement in countries like Bolivia is that women are actually a better credit risk than men.....Indeed it goes against the grain of centuries of prejudice which, until as recently as the 1970s, systematically rated women as less credit worthy than men. In the United States, for example, married women used to be denied credit, even when they were themselves employed, if their husbands were not in work. Deserted and divorced women fared even worse. When I was growing up credit was still emphatically male. Microfinance, however, suggests that credit worthiness may in fact be a female trait."Dambiso Moyo also addressed this theme in her book Dead Aid. A general discussion of this book was posted earlier. Moyo explains how this concept of microfinance was implemented and grew to be so successful. She illustrates the approach of the Grameen Bank in Bangladesh. In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for his work in this area.

"Professor Yunus’s innovation was to find a way to lend to the poorest of the poor who have no collateral.....Looking across Bangladesh, Yunus realized that although many villages had no obvious visible asset, they all shared one thing—a community of interdependence and trust. The genius behind Yunus’s Grameen Bank (literally translated from Bengali as ‘Bank of the Village’) was in converting that trust into collateral."The way this works is to collect a number, say five, of applicants from a village into a team. An agreement is made with the team that the Bank will make a loan to one member of the team for that particular member’s project. If at the end of the loan period the loan has been paid off, then another member will have his/her project funded. If not, then no further loans will be made. This is the genius of the approach. There is tremendous peer pressure on the person receiving the loan to deliver, but there is also tremendous incentive for the other members of the team to help in any way possible. Moyo claims that 97% of Grameen’s loans are awarded to women, and loan defaults are minimal. She quotes a precise number of 5% for microfinance loans in Zambia.

There is an article in the May/June, 2010 edition of Foreign Affairs magazine by Isobel Coleman entitled The Global Glass Ceiling: Why Empowering Women is Good for Business. Coleman is Senior Fellow for U.S. Foreign Policy and Director of the Women and Foreign Policy Program at the Council on Foreign Relations. The theme of this article is that large commercial organizations are beginning to realize and act upon the knowledge that economically active women are good for business.

"When women are educated and can earn and control income, a number of good results follow: infant mortality declines, child health and nutrition improve, agricultural productivity rises, population growth slows, economies expand, and cycles of poverty are broken."In fact, there is at least circumstantial evidence to suggest that gender inequality is a cause of poverty.

"Entrenched gender discrimination remains a defining characteristic of life for the majority of the world’s bottom two billion people, helping to sustain the gulf between the most destitute and everyone else who shares this planet." The interesting news that Coleman brings is that large multi-national enterprises, acting in their own self interest, are contributing significantly to efforts in education, training, encouragement of entrepreneurship. One of the main reasons for hope in this area is that these organizations can deliver funds at an enormously higher level and often more effectively than traditional aid or charitable efforts.

"As multinational corporations search for growth in the developing world, they are beginning to realize that women’s disempowerment causes staggering and deeply pernicious losses in productivity, economic activity, and human capital....Not only does the global private sector have vastly more money than governments and nongovernmental organizations, but it can wield significant leverage with its powerful brands and by extending promises of investment and employment."Some of the organizations who are given props might be a bit surprising: Goldman Sachs, Walmart, Nike, and the United States military. Our military is trying to set aside funds for contracts with Afghan businesswomen to provide supplies.

"In Afghanistan, the United States has made strengthening the role of women in Afghan society a central element in its counterinsurgency strategy.....the U.S. military has held several training courses to educate Afghan businesswomen on how to meet quality standards and navigate the complicated ‘request for proposal’ process."Consider the potential power that Walmart can wield with its immense size and resources. Given that roughly 75% of its employees are women, it has a clear incentive to help its women become more productive. Besides training and education assistance, Walmart realizes that it would have a better business plan if it had more reliable local producers of products like clothing and foodstuffs.

"The potential for female employees and suppliers in the developing world is enormous: if Walmart sourced just one percent of its sales from women-owned businesses, it would channel billions of dollars toward women’s economic empowerment—far more than what international development agencies could ever muster for such efforts."It is nice to hear a positive take on capitalism and markets and enlightened self-interest. It has been a while in coming. The material presented here is complemented by the discussion of Moyo’s book, Bad Aid.

Thoughts on Regulation

James K. Galbraith made an interesting point regarding government regulations of business in his book The Predator State. While government regulations are usually posed as impediments to progress and a general nuisance, he points out that regulation can be the friend of both business and consumer.

"Regulation emerged, reached its high point in the Nixon administration, and survived thereafter because a large part of the business community was prepared to support it. And this was so because while regulation is a burden for some businesses, it is a competitive blessing for others. A functioning structure of regulation is the competitive instrument of the more progressive part of the business community, which wishes—for its own advantage—to force everyone to play by a common set of rules."

Playing by a common set of rules is the critical issue. Say you are a manufacturer of a product that is safe and robustly designed to be reliable and long-lived. These attributes do not come for free; they add to the cost. If there are no rules defining safety standards, then it is relatively easy for another company to come in with an inferior product that is less safe and less reliable, but at a much lower price. The lower cost item will take away some of the business and put pressure on the first business to cut costs to compete, and in the process also put out an inferior product. This competition could easily lead to a situation where the only product available is cheap junk and neither the business nor the consumer is happy. With regulation in place, the companies would have to compete on a basis that does not diminish the quality of the product. It would be more likely that the consumer would get a good product at a good price and that the most efficient company would be able to make a decent profit.

This idea of regulation providing a common set of rules that can benefit everyone comes up in the current debate about financial reform as well as the health care debate. Consider a financial outfit that is trying to be conservative in limiting its exposure to risky by maintaining a reasonable amount of capital to fall back on and cover any losses. It has to compete with an outfit that does not share those concerns, one whose debt-to-capital ratio can be enormous. When times are good that has been shown to be a way to make a lot of money. The conservative firm now has to explain to its shareholders why it is making less money. So it will come under pressure to leverage its transactions more heavily also. The lack of regulation then has pushed all the players into a risky situation. As we have seen when times turn bad they can turn very bad when this is the case.

Similar situations arise in health care. Many states have minimum coverage regulations which define what can and what need not be contained in a medical insurance plan. These are intended to protect the consumer from spending money on a plan that is essentially worthless. A lot has been said about allowing people to purchase out-of-state plans. The reason for doing this is to allow people to shop in states that have the least protection for the consumer. Once again you will have a rush to the bottom in terms of coverage if that is allowed to occur. Federal, nationwide coverage rules would eliminate this downward competition.

Regulation, thoughtfully applied, can be to everyone’s benefit.

Niall Ferguson's War of the World and our times

Niall Ferguson wrote a truly exceptional history of the twentieth century called War of the World: Twentieth-Century Conflict and the Descent of the West. What made his book so interesting was his focus on the causes of the extreme violence that occurred, not only during the World Wars, but throughout the century. He attributed this level of violence to three factors: ethnic conflict, economic volatility, and empires in decline. The reference to decline of empires refers to political volatility. Over and over again multiethnic configurations were destabilized leading to conflict and violence when there was a breakdown of political control. In fact, Ferguson points out that most of the violence of the century can be framed as a form of ethnic conflict. Interestingly, Ferguson’s focus is on economic volatility rather than bad economic conditions. Everyone suffers in bad times. In volatile times the winners and losers can change roles and uncertainty and change seem to be fearsome triggers for violent behavior. This role of ethnic conflict in recent history deserves a much more detailed discussion. The purpose of this note is to ponder the relevance of Ferguson’s conclusions to our current political situation.

If one looks at the behavior of the most visible and vocal of the politically restless groups, the Tea Partiers, it would not be much of a stretch to describe their behavior as a form of ethnic conflict. They appear to be predominately white in an ever more multiracial country. Their attacks on our non-white president are heavily laden with racial references. Their cries of "Give me my country back!" seem to be born out of fear that economic and political changes are occurring that will do them some personal harm. While there has not been overt violence, the shrillness of the discourse is certainly troubling, and there have been numerous incidents of politically motivated vandalism and threats of violence. There has been plenty of fuel for this unrest. Our economy has certainly been in a volatile state for the past few years. Clearly people who once considered themselves winners have now become—or fear becoming—losers. The state of our political discourse has taken a turn for the worse over the same time period, providing a situation in which many question whether the federal government can function effectively in its current state.

I believe it is reasonable to apply Ferguson’s analysis to our current state. Therefore, it is not too surprising to see popular unrest emerge. One can hope that a broad-based economic recovery and a little more cooperation between partisan politicians will diminish the volatility that may be driving the unrest and the sense of conflict will dissipate. One can hope.

James K. Galbraith On The Minimum Wage

Galbraith demolishes many pillars of the conventional wisdom in his book The Predator State. One of his more interesting discussions centers on the effect of raising the minimum wage. The conventional wisdom would predict that the effect would be to eliminate jobs and raise the level of unemployment. Galbraith argues that the data indicate just the opposite. When the minimum wage is raised unemployment actually goes down. His explanation for why this happens is not totally convincing at first consideration. He argues that making employees more expensive to employers requires them to use their employees in a more efficient manner. In principle, this can be a win-win situation: the employee ends up with a more satisfying and more responsible job, and the employer reaps the benefit of greater productivity. This claim becomes more credible when Galbraith describes what is referred to as "The Scandinavian Model."

"The Scandinavian countries are the most egalitarian capitalist economies on earth. They have nearly universal unions, high minimum wages, and a strong welfare state. But as trade campaigners often neglect to acknowledge, they also are highly open. They practice free trade. Business there is free to import, export and outsource. Business there is free to hire and fire, change lines of business, and otherwise conduct itself as it sees fit.....There is, however, one thing you are not free to do: you are not free to cut your wages. You are not free to compete by going after cut rate workers, either native or immigrant. You are not free to undercut the union rate. You have to pay your workers at the established scale, and if you cannot do that and earn a profit, too bad for your business. The effect of this on business discipline is quite wonderful."

Given this environment the Scandinavian countries enjoy prosperous economies and usually among the lowest unemployment rates in Europe.

This approach ties into the overarching issue of whether our economy should be producing more highly skilled jobs worthy of a living wage, or reducing tasks to their minimal scale so that ever cheaper labor can be sought to perform them. More on that later.

Bad Aid: Why Aid Is Not Working and How There Is a Better Way For Africa by Dambisa Moyo

The author was born and raised in Zambia. Her education there was interrupted by political unrest, causing her to depart for the US where she received a scholarship to continue her education. She spent two years as a consultant at the World Bank in Washington DC, two years getting a Master’s degree at Harvard’s John F. Kennedy School Of Government, and four years getting a PhD in economics at Oxford. Subsequently, she worked for eight years at Goldman Sachs where her focus was on global economics and strategies. Given her background it is not too surprising that her solution to Africa’s economic and political problems is to rely on traditional, sound economic policies to foster growth. Her focus, of course, is on the nations of sub-

Saharan Africa. The aid under discussion is not the charitable aid or emergency aid provided in response to natural disasters, but the huge grants and loans that are made by countries and international organizations that can contribute large fractions of a nation’s governmental income. She makes compelling arguments that the aid that has been and is now being provided is not working. She goes further to claim that not only is aid not a solution, aid is the problem. The support for this latter claim is less obvious, but, after a series of variations on aid policies over the last 60 years that were intended to make things better and failed, the circumstantial evidence is compelling. The book is structured to show that aid is not working, illustrate why it is not working, and to provide a better path to economic and political self-sufficiency.

This is a slight book of about 150 pages, yet it does provide a number of interesting insights. It is quite readable and the economics is not too dense. There is a short but excellent forward by Niall Ferguson, the conservative economic historian, that provides a good summary of the author’s conclusions. These few pages are worth reading for those who are interested in the subject but do not wish to commit to the entire volume.

The first part of the book is devoted to describing the history of aid to Africa and the effect it has had on the African nations. It is not difficult to believe that there is something inherently wrong when one is continually bombarded with tales of corruption, civil strife, and poverty. Moyo provides some quantitative data that provides a more relevant context for judging the state of affairs.

"Africa’s real per capita income today is lower than in the 1970s, leaving many African countries at least as poor as they were 40 years ago."

"Adult literacy across most African countries has plummeted below pre-1980 levels."

"A World Bank study found that as much as 85 per cent of aid flows were used for purposes other than that for which they were initially intended, very often diverted to unproductive, if not grotesque ventures."

"....although not as extreme as Gambia or Ethiopia where 97 per cent of the government’s budget is attributed to foreign aid."

Moyo has the task of explaining why other countries have received aid, profited from it, and moved on to self-sufficiency, while many African nations have fallen into a cycle of seemingly endless aid dependency. The answer presented is that the examples where aid produced positive results were often in countries with a history of strong civil institutions, and the aid was targeted and time-limited and small compared to the overall size of the economy. The success of the Marshall Plan in Europe is the most noteworthy example. None of these preconditions existed in most African states. When aid money began flowing, most African countries were European constructs just emerging from colonialism and beset by an array of geographic, historical, cultural, tribal and institutional issues. The author does not allow these initial problems to excuse the current unsatisfactory state of affairs. She proceeds to demonstrate how the influx of large amounts of "free’ money actually inhibited the establishment of healthy governments and economies. Unfortunately, the explanation involves a confluence of factors that are not easily summarized, although this paragraph is a good attempt.

"Foreign aid props up corrupt governments—providing them with freely usable cash. These corrupt governments interfere with the rule of law, the establishment of transparent civil institutions and the protection of civil liberties, making both domestic and foreign investment in poor countries unattractive. Greater opacity and fewer investments reduce economic growth, which leads to fewer job opportunities and increasing poverty levels. In response to growing poverty, donors give more aid, which continues the downward spiral of poverty."

The author provides a number of interesting insights that provide a basis for this summary statement. For example:

"One of the features of the Cold War was the West’s ability and eagerness to support, bankroll and prop up a swathe of pathological and downright dangerous dictators. From Idi Amin in the east to Mobuto Sese Seko in the west, from Ethiopia’s Mengistu to liberia’s Samuel Doe, the competition among these leaders to be more brutal to their people, more spendthrift, more indifferent to their country’s needs than their neighbors were, was matched only by the willingness of international donors to give them the money to realize their dreams."

She provides some thoughts on how aid can help slide a country into corruption and tyranny.

"In most functioning and healthy economies, the middle class pays taxes in return for government accountability. Foreign aid short circuits this link. Because the government’s financial dependence on it citizens has been reduced it owes its people nothing."

".... in a world of aid dependency, poor country’s governments lose the need to pursue tax revenues. Less taxation might sound good, but the absence of taxation leads to a breakdown in natural checks and balances between the government and its people"

"Africa is the most conflict ridden region of the world.....There are three fundamental truths about conflicts today: they are mostly borne out of competition for control of resources; they are predominately a feature of poorer economies; and they are increasingly internal conflicts......The prospect of seizing power and gaining access to unlimited aid wealth is irresistible."

Moyo puts the emphasis placed on encouraging democratic governments in an interesting light.

"What is clear is that democracy is not the prerequisite for economic growth that aid proponents maintain. On the contrary, it is economic growth that is a prerequisite for democracy.........In What Makes Democracies Endure Przeworski et. al. offer this fascinating insight—‘a democracy can be expected to last an average of about 8.5 years in a country with a per capita income of less that $1000 per annum, 16 years in one with income between $1000 and $2000, 33 years between $2000 and $4000, and 100 years between $4000 and $6000....above $6000 democracies are impregnable...’ It is the economy, stupid!"

If aid is so ineffective why continue to provide it? Again Moyo provides an interesting perspective.

"There is simply a pressure to lend. The World Bank employs 10,000 people, the IMF over 2500; add another 5000 for the other UN agencies; add to that the employees of at least 25,000 registered NGOs, private charities and the army of government aid agencies: taken together about 500,000 people, the population of Swaziland.....they are all in the business of aid.....their livelihoods depend on aid, just as those of the officials who take it."

　

The author provides a telling example of how short-term beneficial intervention can have unintended long-term consequences. She does not say if this is an actual example or an illustration.

"There is a mosquito net maker in Africa. He manufactures about 500 nets a week. He employs ten people, who (as with many African countries) each have to support upwards of 15 relatives. However hard they work, they can’t make enough nets to combat the malaria carrying mosquito.

Enter vociferous Hollywood movie star who rallies the masses, and goads western governments to collect and send 100,000 mosquito nets to the afflicted region, at a cost of a million dollars....and a ‘good’ deed is done....With the market flooded with foreign nets our net maker is promptly put out of business. His 10 employees can no longer support their 150 dependents (who are now forced to depend on handouts), and one mustn’t forget that in a maximum of 5 years the majority of the imported nets will be torn, damaged and of no further use."

This example is the point of departure for describing the path to African economic independence. The better solution, the long-term solution, would have been to support the extension of the local net making industry so that a sufficient and continuous supply could be made available and jobs would be created. Aid could be used in this way, but the country, and even the net maker himself, could also have accessed loans that could be used for this purpose.

The crux of Moyo’s plan is for African nations to wean themselves off of aid and establish for themselves a place in the world economy. The second half of the book is devoted to convincing the reader that this a practical path to take. Botswana is used as an illustration of a country that has greatly diminished the flow of aid funds and established a stable and growing economy by utilizing her approach. She lists and discusses six financing paths that can bolster African economies. They are, in rough order of importance or effectiveness: trade, foreign direct investment (FDI), capital markets, remittances, micro-finance and savings.

Moyo would argue that the first step a country should take to shed its aid dependency would be embark on the effort to obtain a credit rating so they can borrow money from the international financial markets. The advantage of this approach is that it requires the Africans themselves to do the planning and the marketing. The markets themselves will demand discipline from the Africans in terms of cost of credit or denying credit entirely if they establish a reputation for defaulting on loans. It is this demand for discipline and responsibility that has been lacking in the aid-dominated environment. Moyo argues that some African nations have already made this move successfully, money is available at moderate interest rates, and the economic benefits have been realized by both the borrowers and the lenders.

"...the beauty with bonds is that their very existence lends further credibility to the country seeking funds, thereby encouraging a broader range of high-quality private investment. More credibility equals more money, equals more credibility."

"The notion of a sovereign ceiling means that a company can never obtain a credit rating higher than that of its country. In places where a country has no rating the ability of companies to seek outside investment capital is hampered greatly."

"...in 2006, emerging market debt gave investors a return of around 12 per cent. The performance beat the 3 per cent return on US government bonds in the same year. Moreover, emerging-market debt has almost consistently outperformed international stocks over the past 10 years."

Foreign investment in African nations is clearly an effective way of injecting capital into a nation to create jobs and incomes. Unfortunately, Africa has not benefited from investment due to a number of factors:

"... wide spread corruption, a maze of bureaucracy, a highly circumscribed regulatory and legal environment, and ensuing needless streams of red tape."

In addition:

"In 2006, the $37 billion that Africa received as official foreign aid was more than twice the continents foreign direct investment, and today Africa attracts less than 1 per cent of global capital flows, down from almost 5 per cent a decade ago."

Moyo argues that a combination of business-friendly reforms by the African nations and a more aggressive stance by investors would be very profitable for both participants. Africa possesses some of the poorest countries on earth and yet is relatively wealthy in terms of natural resources. It should be an ideal candidate for foreign investment. She presents China as an example of a country that has made a concerted, and successful, effort to invest and trade with Africa and has had a profound effect on the continent. China has a vast need for energy and raw materials. Africa has an abundance of both. She argues that, acting in its own self interest, China is doing more to benefit African nations than are the western countries with their aid-based approach.

"Bartering infrastructure for energy reserves is well understood by the Chinese and Africans alike. It’s a trade-off, and there are no illusions as to who does what, to whom and why....Africa is getting what it needs—quality capital that actually funds investment, jobs for its people and that elusive growth. These are the things that aid promised, but has consistently failed to deliver."

"...in nearly all African countries surveyed, more people view China’s influence positively than make the same assessment of US influence."

Trade is perhaps the most straightforward way of improving the economic well being of a nation. Consider China’s approach compared to that of the western nations.

"In December 2005, at the Second Conference of Chinese and African Entrepreneurs, China’s premier, Wen Jibao, pledged that China’s trade with Africa would rise to $100 billion a year within 5 years. Forget the capital markets, forget FDI, forget the US $40 billion a year aid program, and forget trade with any other country in the world—this is trade only with China.....by 2015, just 5 years later, that would be $500 billion of trade income—50 per cent of the trillion dollars of aid that has made its way to Africa in the past 60 years. The difference is, of course, one is laced with bromide, the other steroids."

"Estimates suggest that Africa loses $500 billion each year because of restrictive trade embargoes—largely in the form of subsidies by Western governments to Western farmers.....EU subsidies are approximately 35 per cent of farmers’ total income. What this means is that each European Union cow gets $2.5 a day in subsidies, more than what a billion people, many of them Africans, each have to live on each day."

"Western farmers get to sell their produce to a captive consumer at home above world market prices, and they can also afford to dump their excess production at lower prices abroad, thus undercutting the struggling African farmer."

"But perhaps the most egregious examples come from Africa itself. African countries impose an average tariff of 34 per cent on agricultural product from other African nations, and 21 per cent on their own products."

The term "remittance" refers to the money that Africans living abroad send home to their families. This can be an important source of income to help in financing a country’s balance of payments. It is equivalent to a source of income for the families so blessed.

"...the money Africans abroad sent home to their families totaled about $20 billion in 2006. According to a United Nations report.....between 2000 and 2003 Africans sent home about $17 billion each year, a figure that tops even FDI which averaged $15 billion, during this period."

Finally, it is critical for Africa to provide its citizens with secure and effective financial institutions. Without them people will not deposit savings and make funds available to lend to entrepreneurs. The author is particularly impressed with the results attained through micro-finance approaches. She quotes a default rate on such loans in Zambia as being about 5 per cent. In fact:

"With the advent of Kiva, a California-based interface, pretty much anyone sitting anywhere with a keyboard can lend money to anyone across the planet. This is how it works: a woman in Cameroon goes on line seeking a $200 dollar loan towards her tailoring business. She makes her case, as best she can, and a man in Des Moines, Iowa lends her $25 of it, someone in Sweden lends another $25, and the balance is covered by someone in Japan. The loan is made for a set period, for a pre-agreed interest rate, and she regularly updates her lenders on her progress. In the week—just one week—leading into 19 April, 2008, over $625,000 was lent by almost 3000 new lenders....the default rates have been minimal. Thus far since Kiva’s inception in 2005, some $30 million has been lent, 45,000 loans made to people in 42 countries. A wonderful innovation—get involved."

This book has been an eye opener. Whether or not one agrees with all of the author’s conclusions, it will leave one with a new perspective, and perhaps, a new interest in the evolution of Africa and its diverse nations. It will certainly allow one to judge more

intelligently the Obama administration’s approach to Africa as it unfolds.

　

All You Can Eat: How Hungry is America by Joel Berg

Mr. Berg served eight years in the Department of Agriculture during the Clinton administration. His most relevant role was as leader of the Community Food Security Initiative, an effort that George Bush terminated when he took office. Joel Berg is currently the executive director of the New York City Coalition Against Hunger.

Despite the glib title and uninspired artwork on the book cover, All You Can Eat: How Hungry Is America, was a serious and well-constructed effort to describe the extent of hunger in our country, and to detail the ramifications of “food insecurity” for both those suffering from it and for society as a whole. The author tells the reader exactly where he is heading on the very first page: “...this book argues that only government has the size, scope, resources — and yes, the legitimacy — to take the lead in actually solving the problem. And make no mistake: Government can solve the problem.” The beginning of the book focuses on defining the extent of the problem of hunger, euphemistically referred to as “food insecurity” by the government. The remainder is devoted to justifying this thesis. The final section includes the author’s plan for eliminating food insecurity. Berg also includes two appendices, one providing a list of activist organizations, the other provided advice on how to be a successful activist.

There was much to learn from this work. The author provides an interesting history of hunger in the USA, implying that many of our attitudes toward the problem are derived from our British-oriented heritage. He states that the USA and Great Britain have in common very high levels of inequality, and very high levels of child poverty, more than one observes in most advanced countries. He attributes this to a form of social Darwinism which allows one to view hunger as an unavoidable fact of life rather than addressing the issue as a solvable problem. He states: “America has been tricked into thinking that these problems can’t be solved and that the best we can hope for is for private charities to make the suffering marginally less severe.” Berg provides a detailed description of the evolution of the government’s intervention in providing food for the needy. His basic conclusion is that the safety net society provides is sufficient to keep people from starving, but is not sufficient to provide security and to allow recipients to function effectively in society. A number of interesting historical tidbits are revealed along the way. For example:

• during the depression when large numbers of people were actually starving, the nation was awash in farm output, but the notion of the government buying the food and distributing it to the needy was too advanced a concept at the time, 
• the national school lunch program was developed during World War II because recruits were emerging from the depression so malnourished that they could not immediately function as soldiers, 
• a government study accused the state of Mississippi of purposely trying to starve African Americans in order to drive them out of the state.

The real key to eliminating food insecurity is to eliminate poverty. The author expends much space to what he refers to as the “poverty trap.” This was one of the best and most informative sections of the book. He points out that you cannot get out of poverty unless you are able to accumulate savings. However if you accumulate savings then you lose your eligibility for government support. Another undesirable consequence of “means testing” is that it becomes complex and time consuming to apply for assistance. So much so that many eligible people do not gain access to the support, and many of those that do, eventually lose it through bureaucratic errors. Many of the recipients of food support are employed, but in jobs that do not pay a living wage. The provision of jobs that pay enough for a person to support minimal needs without external assistance should be, and must be, one of society’s goals. The author describes how hard it is to survive on the food stamp allotment, let alone eat healthy foods. A good discussion is provided of the tie between poverty/hunger and obesity/malnutrition. Berg points out a number of less well-known tribulations of living in impoverished areas. Supermarkets with competitive prices and abundant supplies of fresh fruit and vegetables are not likely to be found where people have little money to spend. The simplest financial transactions are either unavailable or very expensive for the poor. People in impoverished areas lack the social capital that could provide a network of friends and connections and guidance on simple things like how to approach a job interview.

The author views charitable activities in the area of food distribution as a mixed blessing. While the effort is certainly well-intentioned, it often has the effect of diverting attention from what is really needed, which is a coordinated, guaranteed government anti-poverty program. He further points out that the overhead in running a charitable effort is often much higher than it would be for an equivalent government program. In fact, most of the food distributed by charities comes from the government, either directly or indirectly through tax write-offs.

In summary, the author quotes a figure of about 35 million people who experience a significant level of food insecurity in the course of a year. Of these, about 11 million suffered from hunger or very low food security for extensive periods during the year. Studies are cited which support ties between hunger and increased health care costs, reduced productivity, and diminished educational performance. All of these factors represent a cost which the country must ultimately bear for neglecting to care for its citizens. Berg estimates that an additional $24B annual increase in food purchasing power could eliminate the issue of food insecurity if it was properly distributed. In the grand scheme of things, this does not seem like a large amount of money. The costs of inaction are undoubtedly higher.

The author did a good job in presenting a complex problem and placing it in its historic and political context. His style was rather informal and heavily anecdotal, producing text that was quite easy to read. A bit of judicious editing could have produced a volume that was significantly shorter, but just as effective.

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

Rubin argues that the world faces an unavoidable decline in petroleum production, which, coupled with increased demand from rapidly growing economies, will drive the price of oil ever higher and produce a situation where our economy, as currently structured, is unsustainable.

"Once the dust settles from the various crises rocking financial markets, we are looking at the same basic demand-supply imbalance that we were looking at before the recession began. That imbalance took us to nearly $150 per barrel before the recession set in. In the next cycle, the same imbalance will probably take us to $200 per barrel before another recession temporarily knocks back prices and demand."

The author has written a compelling and very readable account of what he believes we face. The first part of the book contains his arguments about declining production and our seeming inability to do anything about it. The second part of the book discusses the implications for our economy and for our lives of this coming stage of oil/energy scarcity. Rubin provides a good discussion of a number of energy related issues including transportation, agriculture and global warming. This second part of his book is actually a good bit more optimistic than the first. It is replete with suggestions for becoming more energy intelligent and energy efficient. One of his more interesting ideas is to impose a carbon tax on ourselves to minimize greenhouse gas production and then to impose a carbon tax on the goods we import. The latter move would in effect be a tariff that would fall most heavily on those countries that continue to produce the most greenhouse gases (read China). In promoting mass transit infrastructure investments he provides an interesting perspective on the role of the auto industry in ensuring that we ended up the greatest gas guzzling nation of all. The author’s chapter "Going Local" makes for interesting reading as he gives us a view of life in an energy/oil limited world. Increases in the cost of oil will increase the cost of transportation enough to curtail the current "globalization" of the economy. This will in turn generate a host of "good" and "bad’ effects on our lives. People will have to depend on their local economies more for food and manufacturing, travel at all levels will become less frequent. Countries that depend most on the global economy will have numerous fundamental problems to overcome.

However, before we plow under our lawns to make space for the gardens that will sustain us perhaps we should ask the question "Is he correct?" The author’s contention that this cycle is inevitable seems to rest on two foundations: the notion of peak oil having been reached and the belief that economic growth demands a certain quantity of energy/oil and therefore increased growth necessarily results in increased demand for oil. The author admits that he is on the wrong side of conventional wisdom with respect to his assumption of peak oil. His discussion of energy/oil usage is laden with suggestions for how greater efficiency is possible but he ends up assuming these efforts will fail, presumably because they failed in the past (at least in our country).

"While we routinely pat ourselves on the back for reducing the amount of oil we burn to produce a dollar of GDP, our economies nevertheless continue to ever more efficiently consume more and more oil, making them even more vulnerable to oil prices.

The fact that we can support a larger economy today for a given level of oil consumption than we could have thirty or forty years ago should be of limited solace to us. The same efficiency paradox that has prevented the average car owner from cutting his fuel bill or the average home owner from reducing her power bill plays the same role in the economy as a whole. Oil per unit of GDP in the US has fallen over 50% since the first OPEC oil shock, but total oil consumption has risen by 20% nevertheless.

The OPEC shocks didn’t wean us off oil. They just prompted technical change that has made us even more leveraged to the stuff. And when we can no longer expand supply, we risk living in a stagnant world economy that may no longer be able to grow. That world, which could be right around the corner, is going to feature a lot fewer drive-thrus, a lot more bicycles and, no doubt, less Atlantic salmon on our dinner plates. In short, it is going to be a whole lot smaller."

　

The real issue is one of timescale. If supply and demand for oil leads to a controlled and modest increase in price then there could be a few decades before any of the effects that Rubin warns of come into play. The more time you have the more likely it is that technology and changes in lifestyle can come to the rescue, perhaps in ways that cannot be envisaged today.

He argues that spikes in oil prices cause recessions. He implies that the current recession is a result of oil prices rising from $40 to $140 per barrel. His conclusion seems to be that as soon as the global economy recovers the price will go back up to that range again triggering another recession. What has happened thus far is that the price of oil fell to around $40 per barrel and then rose to about $70-85 and has stabilized there—so far. No one seems to be particularly worried about maintaining economic growth at this price, and the prospects for expanding oil production are much better.

Some of Rubin’s assumptions are admittedly counter to conventional wisdom and may be proven incorrect. He implies that the OPEC countries are incapable of manipulating price by increasing output; others assert that the Saudis are growing their output capacity to maintain that capability. Iraq is reputed to have undeveloped oil reserves that could be comparable to those of Saudi Arabia. The author makes no mention of that. Rubin asserts that the Gulf of Mexico will never meet expectations as a source, not because the oil is not there, but because of the difficult environment. DOE and others disagree. Rubin implies that production from oil sands will never be significant and that producers are backing out of the business. Apparently new technology now allows these companies to operate at a profit with oil as low as $60 a barrel and they have renewed their activities in this area. The output from Russian fields is described as falling. More recent data indicates it may in fact be rising.

The DOE has an entity called the Energy Information Administration which provides data and projections of energy supply and demand (www.eia.doe.gov). They have a draft report posted that predicts relatively slow growths in oil price and oil consumption out to the year 2035. This is the conventional wisdom that Rubin disparages. One should at least hear both sides of the story.

A useful and readable description of the "conventional wisdom" can be found in an article by Edward L. Morse in the journal "Foreign Affairs" (September/October 2009) "Low and Behold: Making the Most of Cheap Oil." The article discusses petroleum-related politics in general. Some of the discussion related to oil supply is reproduced here.

"Energy Intelligence, a leading market analyst, estimates that the world’s surplus oil-production capacity peaked at around 12 million barrels per day in 1985, was eliminated soon after Iraq invaded Kuwait in 1990 and the United Nations embargoed oil from Iraq, and climbed back up to over five million barrels a day in mid 2002. Until about 2002, the conventional wisdom held that the world was mired in a permanent oil glut and with so much oil around investments to find and develop more of it were too risky."

"Then, in 2002-3 the overhang in production capacity evaporated rapidly and unexpectedly. Some analysts invoked the so-called peak oil theory and blamed the situation on an unprecedented acceleration in the decline of oil production caused by the gradual exhaustion of underground resources. But there are more reasonable explanations for what put pressure on oil supplies. Even those countries with plenty of oil resources suffered political impediments to production that could not easily be removed. Venezuela’s state oil company went on strike in protest against President Hugo Chavez, civil disorder over living conditions in the Niger Delta crippled Nigeria’s oil sector, Iran failed to put in place an investment regime to attract foreign capital, the United States launched a war to oust Saddam Hussein and resource nationalism in Russia and other non-OPEC countries reduced production growth."

"In short order, the virtual disappearance of surplus oil-production capacity jolted the market. The loss of that cushion, which had seemed a fixture for decades, surprised both consumers and producers, not least Saudi Arabia, whose commitment to readily supply the world market is the basis of its political clout both within OPEC and globally. The tightness in supplies exposed the complacency or, rather, the failure of Saudi Arabia and other producers to adequately invest in exploration and the production of crude."

"By 2003-4 Saudi Arabia was concerned. It responded by raising production: from 7.5 million barrels per day in 2002 to 9.2 million barrels per day in 2003. After a dip in 2004, it produced close to 10 million barrels per day in 2008....Huge production expansions, including a new field that opened in June and can yield one million barrels a day, have raised capacity to 12.5 million barrels per day. Another one million barrels per day of potential capacity is on standby, meaning that it could be developed in 12-18 months. And because of Saudi Arabia’s efforts to increase its production capacity, OPEC’s total production capacity could exceed 37 million barrels per day in 2010. This would be a record level: five million barrels per day more than in 2002 (before the strike in Venezuela) and more than ten million barrels per day above today’s level."

"In fact, there are plenty of deep-water resources waiting to be tapped—in the Gulf of Mexico; off the coast of Brazil; in the eastern Mediterranean; in the gulf of Guinea; in the Caspian Sea; off the shores of India, China, Indonesia, and Australia; and along the shores of Arctic-bordering states (the United States, Canada, the United Kingdom, Denmark, Norway and Russia)—and oil companies spent increasing sums to do so.....If there was an obstacle, it was not a lack of hydrocarbon reserves—deep-water resources appear to be even more abundant than was thought a decade ago—but a lack of equipment to discover and produce them. Fewer than two dozen drilling vessels (each costing $1 billion) were available in 2000. But as contracts were put in place at the time of very high oil prices, the fleet of vessels started to expand. By 2012 there should be close to 150 such units available for finding and developing deep-water resources."

"But by mid-2009 non-OPEC output was surprisingly robust. At midyear, the International Energy Agency was projecting growth in the output of non-OPEC countries, and the Department of Energy was also projecting an increase. Russia’s output could rise by 200,000 barrels a day this year rather than falling by 600,000-700,000 barrels a day, as many had forecast at the end of last year."

"Executives at the U.S. energy company ExxonMobil and the Canadian firm Suncor Energy say that the costs of developing oil sands have dropped so much that their companies are going ahead with large projects they had postponed until now—projects that, combined, should provide 300,000 barrels per day of new output by 2012. Last year, these projects would not have been viable with the price of oil at less than $90 a barrel. Today they make sense with oil at $60 per barrel."

Morse also has some interesting comments on the demand side in future years. Not surprisingly, he is more optimistic than Rubin in anticipating reductions in demand.

"Countries with historically high demand growth, especially, have experienced unexpected and sharp drops in demand. For example, Japan’s oil appetite was growing at a sustained rate of ten percent a year before 1973, when global oil prices spiked, and South Korea’s demand growth was at double-digit levels before 1998, when the effects of the 1997-98 Asian financial crisis began to be felt. Japan has never again exceeded its pre-1973 oil needs, nor South Korea its demand of pre-1998."

Morse presumably had other motives for his article, but he ends up providing an alternate and contrary take on all of Rubin’s assertions concerning near-term oil supply and long-term demand. It will be interesting to see who is more correct. Hopefully global economies will come roaring back and one will know in a year or so.