-- If you go to Germany during Spargelzeit -- “asparagus time” -- you will experience the amazing intensity with which Germans can focus on a good thing.
In recent years, energy conservation has probably received more attention from the Germans than white asparagus. A report in the New York Times suggested last week that Americans may be about to benefit.
President-elect Barack Obama has pledged to commit billions of dollars to providing America with a greener future. A big part of that agenda will be an effort to reduce the amount of energy that is consumed heating and cooling our houses.
Public policy generally proceeds in two steps. First, identify the objective. Then, craft policies to achieve it.
In the sphere of green building, the first step is easy. German engineers have identified and produced successful models of energy Nirvana. The question for policy makers is, how can we bring Nirvana to Newark? Given Obama’s strong commitment to a greener future, I expect we will see an answer soon.
Energy Nirvana is what Germans call the Passivhaus, or passive house. It accomplishes the almost unthinkable: During cold months, it maintains an acceptable temperature without relying on a traditional furnace. During hot months, it cools itself without relying on air conditioning.
How have German engineers done this? The basic design principle is that passive houses are airtight and very well- insulated. Because of this, they effectively retain energy from sunlight, large appliances and body heat.
Year-Round Comfort
Passive houses also use a mechanical ventilation system, coupled with a heat exchanger, to regulate the air temperature and provide fresh air. The system can both heat and cool the air, making a house comfortable year-round.
It is estimated that passive houses in the U.S. would be about 10 percent more expensive than less-efficient buildings.
Proponents say passive houses use, conservatively, about 60 percent less energy than normal buildings. Let’s say every residential building in the U.S. had achieved that gain in 2008. According to my calculations, that would have meant 496.8 million fewer metric tons of carbon dioxide emitted -- a reduction of 8.4 percent, the equivalent of using 1.56 billion fewer barrels of crude oil. Such gains are not available overnight, of course, but they do provide a glimpse of the scale of the opportunity.
Conservatives often argue that the free market should be left to itself in cases like this; if passive houses are such a good idea, then people will buy them. There is no reason, the argument goes, for government to intervene.
Laissez-Faire Exception
This is one of those rare cases where the laissez-faire approach is incorrect. Policies to encourage the adoption of these technologies are justified, even within free-market orthodoxy.
Take the case of simple insulation. More than a decade ago, Gilbert Metcalf of Tufts University and I set out to study the rate of return that homeowners receive on energy conservation investments. The study was published in the Harvard University- edited Review of Economics and Statistics.
We obtained data that provided intricate details about thousands of houses that allowed us to identify which ones had made home-improvement investments, such as putting so-called Pink Panther insulation in the attic. We also tracked weather conditions and utility bills to estimate the reduction in heating costs associated with the improvements.
Our findings suggested that the positive rate of return of these investments wasn’t much different from the returns available on other assets. That is, investing in energy savings provides a solid, though not extraordinary, net profit.
Walls and Windows
The returns we found were smaller than we, and activists in the green community, expected. One reason: The energy improvements in old houses often turn out to depend on multiple, confounding factors. If you replace windows with more thermally efficient ones -- but stick them in walls that were built in the 1920s -- then the heat loss through the walls reduces the impact of the windows.
Still, our research provides strong support for home- improvement subsidies. Here’s why: Individuals might invest up to the point where they get a reasonable return, but if they stop there, they aren’t doing enough. That’s because the reduction of energy consumption also has benefits to society, through reduced pollution. A typical homeowner will not take society’s benefit into account when deciding how much to conserve.
The research also supports having government pursue dramatic targets such as the passive house. The fact is, you can save a little bit of energy by tinkering with your house, but really reducing your heating and cooling costs will, in many cases, require a massive overhaul.
We need to avoid spending too much time weather-stripping around thermally inefficient windows. Big achievements will be possible only if new construction is encouraged to veer significantly in the direction of the passive house.
To date, Obama’s environmental agenda has shown an impressive attention to rational economic details. He argues, correctly, that any cap-and-trade system should auction off 100 percent of the carbon permits rather than give some away to companies that will be hardest-hit by mandatory reductions. Tax subsidies for passive houses deserve a spot in that agenda.
Israel’s Gaza Venture Hits Chord in Wounded India
Jan. 15 (Bloomberg) -- Israel hasn’t won much praise for invading the Gaza Strip. This unpopularity abides even though Israel is bombing Gaza to stop Qassam rockets from hitting its own towns.
Still, Israel has at least some supporters in what might seem an unlikely place: India.
Not official support, mind you. Foreign Minister Pranab Mukherjee rejected any comparison between the two countries in a recent television interview. But individual Indians have been speaking out in the press and on blogs about similarities between the missile attacks from Gaza and the November attack by terrorists who killed 164 people in Mumbai, India’s financial capital.
Just as Iran backs Hamas in Gaza, many Indians suspect that Pakistan is behind the Mumbai attack. Prime Minister Manmohan Singh has said outright that Pakistani agencies were involved.
Shashi Tharoor, a former United Nations undersecretary general, summed up the attitude in a recent Project Syndicate column on “India’s Israel envy.”
Tharoor writes, “As Israel demonstrates anew its determination to end attacks on its civilians by militants based in Hamas-controlled territory, many in India, still smarting from the horrors of the Mumbai attacks in November, have been asking: Why can’t we do the same?”
In the space of the next few paragraphs, Tharoor ticks off the obvious answers to that question: Israel maintains a higher permanent state of alert and has less porous borders, while India faces, in Pakistan, an enemy that is a member of the nuclear- weapons club.
Krav Maga
Still, a growing mutual admiration between India and Israel is showing up at levels both commonplace and lofty. Krav Maga, a form of hand-to-hand combat taught by the Israeli Defense Forces, has become popular in India, the Hindustan Times reported this month.
This Israel-India link is a change. Born at the same time, the two nations at first stood out for their differences. Israel was a U.S. ally from the beginning. India irritated the U.S. by disingenuously establishing the non-aligned movement, and that irritation only deepened as Americans saw the advantage that Moscow took of Indian non-alignment.
Until the 1990s, New Delhi didn’t welcome Israeli diplomats, so Israel had to content itself with a small outpost presence in Mumbai, then known as Bombay. “In Israeli diplomatic circles, Bombay is called the loneliest place in the world,” Bernard Weinraub wrote in the New York Times in 1974.
India ignored Israel in the hope of scoring at least some points with Arab neighbors in its Pakistan conflict. Even South Vietnam was permitted diplomatic representation in New Delhi. Trade was negligible.
More in Common
Over the next decades, a shift commenced. India discerned that it had little to gain by keeping Israel at a distance, since Arab nations would surely back Pakistan over India regardless of the latter’s policy on Jerusalem.
India began to feel that it had an enemy in common with Israel: fundamentalist Islam. Also, that international terror networks had, as Tharoor puts it, “added Indians to their target list of reviled ‘Jews and crusaders.’”
Arms trade between India and Israel flourished. Israeli representatives came to New Delhi.
Some less obvious factors were also at work. India isn’t especially rich in oil and minerals; Israel is a non-oil nation in a decidedly oily region. To grow, both countries therefore have had to become more entrepreneurial, to generate non- commodity wealth -- in short, to innovate.
In Israel in the 1980s and 1990s, newly arrived Soviet Jews led the transition from the kibbutz and factory to high-tech ventures. With the end of the old bureaucratic system known as “license raj,” India, too, placed new faith in tech and services.
Two Innovators
Led by Prime Minister Singh -- at that time finance minister -- India began to invent and create. Innovating Israel and innovating India were similar in a way that agricultural Israel and agricultural India had not been.
In a phone interview this week, Tharoor recalled that India became so comfortable with its trading profile that it unilaterally granted most-favored-nation status to Pakistan. Pakistan didn’t reciprocate, creating “the only instance of a non-reciprocal free trade agreement one can think of,” Tharoor says.
The old waterfront Gateway of India at Mumbai was an important symbol not only of Queen Victoria but also of India’s tolerant, trading future. The result of this affinity of innovators has been a higher standard of living at home and expanding trade.
Trade Partners
In the past decade or so, the volume of nonmilitary trade between India and Israel grew from millions to billions, as measured in U.S. dollars. In December, the Israeli newspaper Haaretz reported the news that an Indian-made battery-powered car, the Reva, was coming to the streets of Israel.
The Indian press has suggested that the Mumbai attack was all about punishing the new trading culture. The terrorists, after all, arrived in Mumbai via a jetty at that symbol of trade, the Gateway. And an Indian paper noted that one target in the Mumbai attack -- the Chabad House Jewish center -- may have been selected to send a message that there would be a specific penalty for India’s commerce with Israel.
Still, as Tharoor notes, attacks on trading nations can backfire. Instead of halting exchange, such attacks can create new alliances of traders.
Trichet Signals ECB May Cut Rates
Jan. 15 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled he may cut interest rates again in March as the economy slides into a deeper recession than the bank had predicted.
Policy makers agreed that “the next important rendezvous was in March,” Trichet said at a press conference in Frankfurt after lowering the benchmark rate by half a percentage point to 2 percent, matching a record low. Latest data point to a more “significant slowing down” than projected in the ECB’s December forecasts, he said.
Trichet has been forced into the most aggressive series of rate reductions in the ECB’s 10-year history as the global financial crisis hurts exports, damps spending and threatens credit ratings in the 16-nation euro region. He indicated today that the ECB is reluctant to follow the U.S. Federal Reserve and cut borrowing costs to close to zero.
“If the economy continues to surprise the bank in a negative way, it might overcome its remaining scruple and continue to lower rates,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “Trichet hasn’t closed the door on further rate cuts.”
The euro fell to as low as $1.3025 after Trichet said the ECB could reduce its benchmark rate further. European government bonds rose, pushing 10-year yields to the lowest level since at least 1989.
“The recession is intensifying at a surprisingly fast speed and inflation is literally collapsing,” said Aurelio Maccario, chief euro-region economist at UniCredit in Milan. “Rates need to fall to 1 percent by mid-year.”
Economic Slump
European confidence has plunged to the lowest on record, industrial production posted its biggest annual drop in 18 years in November and unemployment rose to 7.8 percent, a two-year high.
The German economy, Europe’s largest, may have contracted as much as 2 percent in the fourth quarter, the country’s statistics office said yesterday. That would be the biggest slump in more than two decades.
The ECB last month forecast the euro-region economy would contract 0.5 percent in 2009 before rebounding to expand 1 percent in 2010. It said inflation would average 1.4 percent this year and 1.8 percent in 2010. The rate, which the ECB aims to keep just below 2 percent, declined to 1.6 percent in December.
“The euro area is experiencing a significant slowdown largely related to the effect of the intensification of financial turmoil,” said Trichet. Still, risks to the medium-term inflation outlook are “broadly balanced and in line with our definition of price stability.”
‘Reluctant to Cut’
“As long as the ECB does not see downside risks to inflation over the medium term, it will be very reluctant to cut rates to much lower levels,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London.
Trichet said the ECB wants to avoid “a liquidity trap” when “very, very low” interest rates fail to stimulate the economy. “Once you are there, it is extraordinarily difficult to get out again,” he said.
The ECB still has the highest rates among the Group of Seven industrialized nations. The Fed, the Bank of England and the Swiss central bank have cut borrowing costs more aggressively as the world’s largest economies slide simultaneously into recession for the first time since World War II.
The Bank of England on Jan. 8 reduced its main lending rate to 1.5 percent, the lowest since it was founded in 1694. The Fed last month lowered its key rate to a target range of zero to 0.25 percent. Japanese and Swiss rates are also close to zero. Canada’s rate is at 1.5 percent.
“The ECB managed today to catch up with the bleak economic reality somewhat,” said Holger Schmieding, chief European economist at Bank of America in London. “But they still have more work to do.”
Jobless Claims Climb, Producer Prices Decline
Jan. 15 (Bloomberg) -- First-time claims for unemployment insurance climbed and prices paid to U.S. producers tumbled, signaling no end to the job-market rout and collapse in raw- materials prices spurred by the deepening recession.
Initial jobless claims jumped to 524,000 in the week ended Jan. 10, the Labor Department said today in Washington. Producer prices fell 1.9 percent, capping the first annual drop since 2001. Separately, the Federal Reserve said manufacturing in the Philadelphia and New York regions shrank further in January.
Today’s reports contributed to a sell-off in stocks that sent the benchmark U.S. index to its lowest level in six weeks. The figures show the impact of a worsening global economic downturn that is hammering companies including Alcoa Inc., General Electric Co. and engine-maker Cummins Inc., which all announced additional job cuts this month.
“Economic conditions in the United States, and indeed in much of the world, are weak and deteriorating rapidly,” Christina Romer, President-elect Barack Obama’s nominee to lead the White House Council of Economic Advisers, told lawmakers today. Job losses show “no evidence of stopping” and credit flows “have not been restored,” she said.
The Standard & Poor’s 500 Stock Index fell 1.8 percent to 827.30 at 11:29 a.m. in New York. Treasuries fell, sending benchmark 10-year yields to 2.22 percent from 2.20 percent late yesterday. The dollar gained 0.9 percent to $1.3075 per euro after the deteriorating economic outlook in Europe prompted the European Central Bank to cut interest rates today.
Factory Gauges
The Fed Bank of Philadelphia’s general economic index was minus 24.3 this month compared with minus 36.1 in December. The New York Fed’s Empire State index was at minus 22.2, from a revised minus 27.9 in December that was lower than previously reported. Readings below zero indicate a contraction.
“The economy is in horrible shape and probably getting worse,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “All of the trends that have been in place are worsening. The downward momentum is building in the labor market, there’s pressure on consumers and tight credit.”
Obama, who takes office Jan. 20, is pressing for quick passage of a stimulus plan that may exceed $800 billion that would cut taxes, boost infrastructure spending, and create jobs.
“Well designed, aggressive government policies will make a crucial difference,” Romer, a professor of economics at the University of California, Berkley, said in testimony at her confirmation hearing at the Senate Banking Committee.
Fifth Decline
The drop in the producer-price index in December was the fifth straight monthly decline and followed a 2.2 percent decrease in November. Excluding fuel and food, the so-called core rate rose 0.2 percent after a 0.1 percent increase.
Falling commodity costs and asset values are raising concern among some Fed officials about the danger of deep and extended price decreases that would worsen the economic downturn.
Fed officials last month discussed setting an explicit target for inflation to discourage expectations that price increases will slow “below desired levels,” according to minutes of the Dec. 16 meeting released last week.
Some policy makers saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said.
Outlook for Prices
“The recession will continue through most of the year, and in this environment, producer prices can only move downward,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto, who forecast a 2 percent drop in PPI.
Prices paid to factories, farmers and other producers were forecast to decline 2 percent, according to the median estimate of 77 economists in a Bloomberg News survey. Core prices were projected to rise 0.1 percent for a second month, the survey median showed.
The increase in jobless claims last week exceeded the median forecast of economists surveyed by Bloomberg for a reading of 503,000. The previous week’s initial claims were revised to 470,000 from the 467,000 initially estimated.
Alcoa, the largest U.S. aluminum producer, this month reported its first quarterly net loss in six years and said it will further cut output in 2009 if demand continues to weaken. Aluminum prices are at five-year lows as automakers, builders and appliance manufacturers cut orders.
“The aluminum industry is caught up in a perfect storm of historic proportion,” Chief Executive Officer Klaus Kleinfeld said on a conference call with analysts on Jan. 12. “Inventories are building and prices are decreasing.”
Producer prices are one of three inflation gauges reported by the Labor Department. Prices of goods imported into the U.S. fell for a fifth consecutive month in December, figures showed yesterday.
A report tomorrow may show consumers’ cost of living decreased 0.9 percent in December after a 1.7 percent drop the previous month that was the biggest since records began in 1947, according to the Bloomberg survey.
U.S. Stocks Retreat on Concern Banks Need More Government Aid
Jan. 15 (Bloomberg) -- U.S. stocks fell, extending the worst start to a year for the Standard & Poor’s 500 Index, on concern banks will need more government aid and reports showing declining producer prices and a jump in initial jobless claims.
Bank of America, the biggest U.S. bank by assets, plunged 21 percent to an 18-year low. Citigroup Inc., which has already received $45 billion of U.S. assistance, slid as much as 26 percent. Apple Inc. tumbled 4.9 percent on Chief Executive Officer Steve Jobs’s plan to take a medical leave of absence.
The S&P 500 retreated 2.4 percent to 822.81 as of 1:19 p.m. in New York. The Dow Jones Industrial Average fell 154.91 points, or 1.9 percent, to 8,045.23. The Russell 2000 Index slipped 2.5 percent.
“The biggest thing continues to be the financial system and banks in particular,” said Dean Gulis, part of a group that manages about $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “A lot of the stocks are seeming to hit new lows. There are concerns about how well the initial TARP distribution has worked.”
Twenty-three of the 24 industry groups in the S&P 500 retreated after producer prices capped the first annual decrease in seven years and first-time claims for unemployment benefits jumped by 54,000 last week. U.S. stocks yesterday slid the most in six weeks after retail sales decreased at more than twice the rate forecast by economists. Retailers were the only industry to advance today.
The S&P 500 has dropped 8.9 percent in 2009 after companies from Alcoa Inc. to Intel Corp. spurred concern earnings will deteriorate amid the recession and the unemployment rate in the U.S. climbed to the highest level in almost 16 years.
Bank of America, Citigroup
Financial stocks tumbled 7.8 percent, the biggest decline among 10 S&P 500 industries. The KBW Bank Index of 24 companies sank 10 percent to its lowest level since June 1995 after sliding below its 2008 low yesterday.
Bank of America fell $2.17 to $8.03. Details of government aid are likely to be disclosed on Jan. 20, people familiar with the situation said. That’s when Bank of America may post its first quarterly loss in 17 years as it digests the purchases of Merrill Lynch and Countrywide Financial Corp. The combined company has already received $25 billion from the U.S.
Citigroup slid 83 cents to $3.70 on concern the bank may be forced to seek more government assistance on top of the $45 billion of U.S. funds that it already received.
Marshall & Ilsley Corp. lost 26 percent to $7.91, the most since at least 1980. Wisconsin’s largest bank posted a fourth- quarter loss on defaults by homebuilders and slashed its dividend.
Jobs’s Leave
Apple lost $3.72 to $81.61. Chief Operating Officer Tim Cook, who filled in during Jobs’s 2004 medical leave, has taken over Apple’s day-to-day operations, the company said. Jobs said he will remain involved in major strategic decisions.
Energy shares slumped 2.9 percent and were the second biggest drag on the S&P 500 after financial companies. Crude oil fell below $34 a barrel in New York after OPEC said demand will decline 4.2 percent this year as the slumping global economy curbs fuel use.
Chesapeake Energy Corp., the second biggest U.S. natural gas producer, slumped 9.9 percent to $13.89 to lead declines in the group.
S&P 500’s ‘Retracement’
The S&P 500 has wiped out more than half its gain since rallying from 11-year low in November, a sign the benchmark for U.S. equities may drop more. The index fell 3.4 percent to 842.62 yesterday, below the 843.57 midpoint of its 24 percent advance from Nov. 20 to Jan. 6. To technical analysts, who make predictions based on price and volume history, a so-called 50 percent retracement suggests selling momentum is increasing.
U.S. foreclosure filings jumped 81 percent last year to more than 2.3 million as falling house prices, tighter mortgage lending and the longest recession in a quarter century battered property owners, RealtyTrac Inc. said.
Autodesk Inc. dropped $2.41, or 14 percent, to $15.32. The biggest maker of engineering-design software said it will cut about 750 jobs and reduced its earnings forecast for this quarter as the recession hurts demand.
Force Protection Inc. dropped $1.20, or 19 percent, to $5.28. The third-largest maker of blast-resistant trucks for the U.S. military was cut to “hold” from “buy” by analysts at Collins Stewart LLC, who said investors have been overly optimistic about the company’s prospects of winning a U.S. Army contract to build as many as 10,000 trucks to protect troops in Afghanistan.
Amphenol Corp. had the steepest gain in the S&P 500, climbing $1.74, or 8 percent, to $23.64. The maker of fiber- optic cables reported earnings of 56 cents a share in the fourth quarter. That beat the average analyst estimate by 11 percent, according to Bloomberg data.
Ecolab Inc. rose $1.74, or 5.3 percent, to $34.75. The world’s largest maker of cleaning chemicals for hotels and restaurants said it will exit some businesses and cut about 1,000 jobs to meet earnings expectations amid a global economic slump.
China takes a lick and keeps on ticking
China takes a lick and keeps on ticking
By Ian Bremmer
Some readers will be surprised to see that Eurasia Group's list of top risks for 2009 (reprinted below) doesn't include China. Doesn't that country face a serious threat of destabilizing social unrest? It's clear that the global economic downturn has had an impact; thousands of manufacturers have shut down in the past few months as demand for China's exports falls in the United States and across Europe. That puts large numbers of unhappy people on the streets. And this is a country that already faces tens of thousands of protests each year over a broad range of public grievances.
So why didn't China make the cut? Because nationalism and pride in the very visible achievements of the Chinese system are now conspicuously more intense than at any time since I started traveling to China. I experienced this phenomenon again and again before, during, and after the Beijing Olympics last August. For millions of Chinese, those Games were their Games, their opportunity to command the spotlight on the international stage. The Communist Party delivered on promises of a great show.
It's not just the success of the Olympics, of course. It's decades of heady economic growth that continues to create opportunities for ever-larger numbers of people. There's no evidence at this point that a significant number of Chinese citizens hold their government responsible for the developing slowdown in the Chinese economy. In fact, there's an often expressed feeling in the country that American misdeeds and the western free-market system are to blame. If anything, many Chinese probably believe that it's China's over-reliance on the West that needs to change.
It's true that demonstrations have erupted across the country over the past year, reflecting deep public anger over a startling diversity of heart-wrenching issues -- from infants dying from poisoned milk to schoolchildren crushed to death inside shoddily constructed schools during the Sichuan earthquake to disputes over property rights to all kinds of other local economic problems. But the overwhelming majority of these demonstrations are targeted not at the Communist Party leadership in Beijing but at local officials, bureaucrats, and business interests.
Still, when it comes to social stability, the Chinese government takes nothing for granted. The leadership has spent considerable time and resources on efforts to stimulate growth and to create new jobs. That will help keep displaced workers off the streets. For those who do protest, the party elite has again demonstrated a determination to quell social dissent by any means necessary. Both commitments will probably help limit the turmoil produced by any large-scale and coordinated public protest in 2009.
Longer term, the risk of social instability is obvious. The party leadership is well aware that the country's vast range of environmental problems and their impact on the lives of ordinary Chinese create enormous potential for trouble. Nor is it at all clear that China can continue to generate the 10 to 12 million jobs needed to sustain longer-term economic growth-particularly jobs that require highly-skilled labor. That will prove a growing problem as tens of millions more people in search of opportunity emigrate from the countryside into China's fast-expanding cities.
The party's ability to maintain its monopoly hold on political power depends on its ability to continue to generate prosperity. But it has earned enough political capital over the years that the authoritarian system is unlikely to face regime-threatening protests at the first sign of a slowdown-even a serious one. China is an enormous, dynamic economy with more systemic flexibility than many people realize, and it's likely to emerge from the global financial crisis in better shape than most of the world's other emerging markets.
That should be enough to keep the most dangerous risks at bay...at least for 2009.
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