Torture and the CIA
Laid out in the light
Memos on CIA interrogation methods have been published. Could prosecutions for torture follow?
“WE HAVE been through a dark and painful chapter in our history,” said Barack Obama on Thursday April 16th, as he released memos issued by the Office of Legal Counsel during the previous administration. Dark indeed. The memos lay out, in bland legalese, the reasoning that led Bush administration lawyers to approve the Central Intelligence Agency’s use of “enhanced interrogation techniques”, which are commonly held to be torture.
Mr Obama had apparently been mulling for weeks whether to release the memos. In a thoughtful statement he said that America has a right to a certain amount of secrecy in its national-security operations. In this case, however, the techniques described have already been well reported and documented. As important, the practices have been ended. Thus full transparency was best.
The first memo was written by Jay Bybee, in August 2002, after the CIA had become frustrated in its efforts to interrogate Abu Zubaydah, an al-Qaeda operative. The agency believed that he was withholding information, and that it might be a matter of pressing concern, so sought permission to increase the pressure on Mr Zubaydah in a bid to “dislocate his expectations”. Mr Bybee considered ten suggested techniques, ranging from “attention grasp” (grabbing him by the shoulders) and “walling” (bouncing a suspect against a flexible wall) to waterboarding (simulated drowning) and prolonged sleep deprivation.
One method was proposed especially for Mr Zubaydah, who was thought to be afraid of bugs: they would put him in a small box with an insect in it. They would tell him, falsely, that the insect was dangerous. Would all of this be legal? Mr Bybee said yes.
The subsequent memos, from May 2005, were written by Steven Bradbury and corroborate Mr Bybee’s reasoning. It took some contortions to arrive at this position. The United States Code defines torture as an act “specifically intended to inflict severe physical or mental pain or suffering.” That language gave the lawyers room for interpretation, and they wriggled like snakes. The memos are particularly focused on whether the techniques were “specifically intended” to harm the subject, which gives the impression that torture is only torture if the investigator was trying to be malicious. Mr Bybee concluded, for example, that waterboarding is terrifying. The suspect would have the sensation of drowning, and would not be aware of any medical personnel in the room or other precautions. However, the experience is short—no more than 40 seconds at a time, in the memo’s discussion—whereas suffering, suggested the author, has the “connotation” of being a long experience.
The lawyers also noted that most of the techniques, including waterboarding, have long been used on military personnel as part of survival-training programmes without any lasting physical harm or mental distress. Of course, the context is rather different. A soldier would have no reason to fear what is known to be a training exercise.
Where does the United States go from here? Mr Obama says that he will not seek to prosecute the CIA operatives who carried out directives while “relying in good faith upon legal advice from the Department of Justice.” Mr Obama’s critics say that he has done the intelligence community a disservice simply by releasing the memos. Michael Hayden and Michael Mukasey, respectively the former director of the CIA and former attorney-general, say that the move will “invite the kind of institutional timidity and fear of recrimination that weakened intelligence gathering in the past, and that we came sorely to regret on Sept 11, 2001.”
In any case, the decision to protect the CIA officers has some support. If the administration decides to pursue prosecutions, the greater responsibility lies with the officials who authorised torture, or with agents who went beyond the instructions given. There is no word on what will happen to the lawyers. Mr Obama has not commented, though he has said that he wants to look forward, arguing that this is “a time for reflection, not retribution.” Of course, reflection would require a full accounting of what went on during this dark chapter in America’s legal history. The memos offer only a part of the story.
Veterans a Focus of FBI Extremist Probe
Veterans a Focus of FBI Extremist Probe
CAM SIMPSON GARY FIELDS
WASHINGTON -- The Federal Bureau of Investigation earlier this year launched a nationwide operation targeting white supremacists and "militia/sovereign-citizen extremist groups," including a focus on veterans from Iraq and Afghanistan, according to memos sent from bureau headquarters to field offices.
The initiative, dubbed Operation Vigilant Eagle, was outlined in February, two months before a memo giving a similar warning was issued on April 7 by the Department of Homeland Security.
Disclosure of the DHS memo this week has sparked controversy among some conservatives and veterans groups. Appearing on television talk shows Thursday, Homeland Security Secretary Janet Napolitano defended the assessment, but apologized to veterans who saw it as an accusation.
"This is an assessment of things just to be wary of, not to infringe on constitutional rights, certainly not to malign our veterans," she said on NBC's Today Show.
The documents outlining Operation Vigilant Eagle cite a surge in activity by such groups. The memos say the FBI's focus on veterans began as far back as December, during the final weeks of the Bush administration, when the bureau's domestic counterterrorism division formed a special joint working group with the Defense Department.
![[Janet Napolitano]](http://s.wsj.net/public/resources/images/OB-DM784_napoli_DV_20090417000134.jpg)
Associated PressHomeland Security Secretary Janet Napolitano, pictured this month in Mexico, defended the assessment Thursday but apologized to veterans.
A Feb. 23 draft memo from FBI domestic counterterrorism leaders, obtained by The Wall Street Journal, cited an "increase in recruitment, threatening communications and weapons procurement by white supremacy extremist and militia/sovereign-citizen extremist groups."
The FBI said in the memo that its conclusion about a surge in such activities was based on confidential sources, undercover operations, reporting from other law-enforcement agencies and publicly available information. The memo said the main goal of the multipronged operation was to get a better handle on "the scope of this emerging threat." The operation also seeks to identify gaps in intelligence efforts surrounding these groups and their leaders.
The aim of the FBI's effort with the Defense Department, which was rolled into the Vigilant Eagle program, is to "share information regarding Iraqi and Afghanistan war veterans whose involvement in white supremacy and/or militia sovereign citizen extremist groups poses a domestic terrorism threat," according to the Feb. 23 FBI memo.
Michael Ward, FBI deputy assistant director for counterterrorism, said in an interview Thursday that the portion of the operation focusing on the military related only to veterans who draw the attention of Defense Department officials for joining white-supremacist or other extremist groups.
"We're not doing an investigation into the military, we're not looking at former military members," he said. "It would have to be something they were concerned about, or someone they're concerned is involved" with extremist groups.
Mr. Ward said that the FBI's general counsel reviewed the operation before it began, "to make sure any tripwires we set do not violate any civil liberties."
Some Republican lawmakers, talk-show hosts and veterans groups complained this week after the internal DHS assessment cited the potential for the same extremists groups to target returning combat veterans for recruitment. The Democratic chairman of the House Homeland Security Committee, Rep. Bennie Thompson of Mississippi, also echoed the concerns.
The separate DHS assessment, leaked this week after being sent to law-enforcement agencies, said the "willingness of a small percentage of military personnel to join extremist groups during the 1990s because they were disgruntled, disillusioned or suffering from the psychological effects of war is being replicated today." Veterans could draw special attention, the report said, because of their advanced training.
Rep. John Boehner of Ohio, the House Republican leader, said Wednesday he was offended that veterans were characterized as potential domestic terrorists.
Amy Kudwa, a DHS spokeswoman, said Thursday the report was issued before an objection about one part of the document raised by the agency's civil-rights division was resolved. She called it a "breakdown of an internal process" that would be fixed.
The FBI documents show the bureau was working with investigators inside the nation's uniformed services "in an effort to identify those current or former soldiers who pose a domestic terrorism threat." The other agencies working with the FBI are the U.S. Army Criminal Investigative Division, the U.S. Air Force Office of Special Investigations and the Naval Criminal Investigative Service.
Documents detailing the operation are unclassified, but were meant for internal distribution only.
Geithner's Yuan Sense
Geithner's Yuan Sense
Tim Geithner gets real on Chinese currency 'manipulation.'
From today's Wall Street Journal Asia
Treasury Secretary Timothy Geithner has taken a lot of heat for his U.S. bank bailout plan. But at least he's cooled another controversy for now: a possible currency spat with China.
In a report to Congress this week, Mr. Geithner declined to label Beijing a "currency manipulator" over its allegedly over-cheap yuan. This is an about-face for Mr. Geithner, who stated in written testimony during his January confirmation hearing that the Obama Administration "believes China is manipulating its currency" and that he wanted Treasury to make "the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth."
We'd like to think Mr. Geithner changed his mind after considering certain realities. To wit: There's no such thing as a "market exchange rate" since monopolist central banks control the supply of currencies in modern economies.
With U.S. inflation fears already stoked by a trillion-dollar stimulus and a near-zero fed funds rate, now is exactly the wrong time to weaken the dollar further. In a time of economic turbulence, Beijing's stable yuan-dollar exchange rate policy since July has offered the two trading partners some welcome stability.
Whatever his underlying views, Mr. Geithner's report throws a few bones to those in Congress and U.S. industry who mistakenly think dollar devaluation vis-à-vis the yuan will keep low-value-added manufacturing from heading to China. The report justifies its conclusion by noting as signs of progress supposed indications that Beijing wants a more "flexible" exchange regime and a $586 billion Chinese stimulus proposal; it also allows that the yuan is still "undervalued."
This concedes the basic point on the "ills" of the current exchange rate and is the kind of language the Bush Administration used to placate dollar devaluationists in Congress like Sens. Chuck Schumer and Lindsey Graham. But at least it forestalls for the moment any more attempts to punish China for its yuan policy, such as the 27.5% tariff proposed by Messrs. Schumer and Graham in 2005.
Perhaps Mr. Geithner really did see the monetary light after his January misstep. Or maybe he just didn't want to open this Pandora's box with so much else on his plate. Either way, his new yuan sense is one change that fans of monetary stability can (sort of) believe in.
Minnesota's Missing Votes
Minnesota's Missing Votes
Some Senate absentee ballots are more equal than others.
Meanwhile, back in the Minnesota Senate recount, the three-judge panel reviewing the race has declared Democrat Al Franken the winner. Republican Norm Coleman intends to appeal to the state's Supreme Court, while Democrats and the press corps pressure him to surrender. We hope Mr. Coleman keeps fighting, because the outcome so far hangs on the fact that some votes have been counted differently from others.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/OB-DM892_oj_fra_E_20090417185442.jpg)
APEven after the recount and panel-findings, the 312-vote margin separating the two men equals about .01% of the 2.9 million votes cast. Even without any irregularities, this is as close to a "tie" as it gets. And there have been plenty of irregularities. By the end of the recount, the state was awash with evidence of duplicate ballot counting, newly discovered ballots, missing ballots, illegal voting, and wildly diverse standards as to which votes were counted. Any one of these issues was enough to throw the outcome into doubt. Combined, they created a taint more worthy of New Jersey than Minnesota.
The Coleman camp pushed for resolution of these problems during the recount, but it was stymied by a state canvassing board that cared more about preserving its "Minnesota nice" reputation than about making tough calls. The state Supreme Court also punted difficult questions. The mess then landed with the three-judge panel overseeing Mr. Coleman's contest trial, a panel that seemed out of its depth.
Case in point: the panel's dismal handling of absentee ballots. Early in the recount, the Franken team howled that some absentee votes had been erroneously rejected by local officials. We warned at the time that this was dangerous territory, designed to pressure election officials into accepting rejected ballots after the fact.
Yet instead of shutting this Franken request down, or early on issuing a clear set of rules as to which absentees were valid, the state Supreme Court and the canvassing board oversaw a haphazard process by which some counties submitted new batches to be included in the tally, while other counties did not. The resulting additional 933 ballots were largely responsible for Mr. Franken's narrow lead.
During the contest trial, the Coleman team presented evidence of a further 6,500 absentees that it felt deserved to be included under the process that had produced the prior 933. The three judges then finally defined what constituted a "legal" absentee ballot. Countable ballots, for instance, had to contain the signature of the voter, complete registration information, and proper witness credentials.
But the panel only applied these standards going forward, severely reducing the universe of additional absentees that the Coleman team could hope to have included. In the end, the three judges allowed only about 350 additional absentees to be counted. The panel also did nothing about the hundreds, possibly thousands, of absentees that have already been legally included, yet are now "illegal" according to the panel's own ex-post definition.
If all this sounds familiar, think Florida 2000. In that Presidential recount, officials couldn't decide what counted as a legal vote, and so different counties used different standards. The Florida Supreme Court made things worse by changing the rules after the fact. In Bush v. Gore, the U.S. Supreme Court ruled that this violated Constitutional principles of equal protection and due process, which require that every vote be accorded equal weight.
This will be a basis for Mr. Coleman's appeal to the Minnesota Supreme Court. Should that body be reluctant to publicly rebuke their judicial colleagues who sat on the contest panel, Mr. Coleman could also take his appeal to federal court. This could take months.
Another solution is to hold a special Senate election. Minnesota law does not specifically provide for such a runoff. However, the U.S. Constitution's 17th amendment does provide states with a roadmap for filling "vacancies," which might be a legal starting point for a do-over. Even before the shifting standards of the contest trial, the St. Paul Pioneer Press looked at the ballot-counting evidence and called for a revote. It could be that this is where the court case is leading in any event.
Democrats want to portray Mr. Coleman as a sore loser and make the Republican worry that he will ruin his chances for other political office. But Mr. Coleman has a legitimate grievance that not all votes have been treated equally. If the Franken standard of disparate absentee-voter treatment is allowed to stand, every close election will be settled by a legal scramble to change the vote-counting rules after Election Day. Minnesota should take the time to get this one right.
Goodbye Bland Affluence
Goodbye Bland Affluence
Get ready for authenticity chic.
A small sign of the times: USA Today this week ran an article about a Michigan family that, under financial pressure, decided to give up credit cards, satellite television, high-tech toys and restaurant dining, to live on a 40-acre farm and become more self-sufficient. The Wojtowicz family—36-year-old Patrick, his wife Melissa, 37, and their 15-year-old daughter Gabrielle—have become, in the words of reporter Judy Keen, "21st century homesteaders," raising pigs and chickens, planning a garden and installing a wood furnace.
![[Declarations]](http://s.wsj.net/public/resources/images/ED-AJ362_Noonan_DV_20090417142830.jpg)
APMr. Wojtowicz was a truck driver frustrated by long hauls that kept him away from his family, and worried about a shrinking salary. His wife was self-employed and worked at home. They worked hard and had things but, Mr. Wojtowicz said, there was a "void." "We started analyzing what it was that we were really missing. We were missing being around each other." So he gave up his job and now works the land his father left him near Alma, Mich. His economic plan was pretty simple: "As long as we can keep decreasing our bills we can keep making less money."
The paper weirdly headlined them "economic survivalists," which perhaps reflected an assumption that anyone who leaves a conventional, material-driven life for something more physically rigorous but emotionally coherent is by definition making a political statement. But it didn't look political from the story they told. They didn't look like people trying to figure out how to survive as much as people trying to figure out how to live. The picture that accompanied the article showed a happy family playing Scrabble with a friend.
Their story hit a nerve. There was a lively comment thread on the paper's Web site, with more than 300 people writing in. "They look pretty happy to me," said a commenter. "My husband and I are making some of the same decisions." Another: "I don't know if this is so much survivalism as a return to common sense." Another: "The more stuff you own the harder you have to work to maintain it."
To some degree the Wojtowicz story sounded like the future, or the future as a lot of people are hoping it will be: pared down, more natural, more stable, less full of enervating overstimulation, of what Walker Percy called the "trivial magic" of modern times.
The article offered data suggesting the Wojtowiczes are part of a recent trend. People are gardening more if you go by the sales of vegetable seeds and transplants, up 30% over last year at the country's largest seed company. Sales of canning and preserving products are also up. Companies that make sewing products say more people are learning to sew. I have a friend in Manhattan who took to surfing the Web over the past six months looking for small- and farm towns in which to live. The general manager of a national real-estate company told USA Today that more customers want to "live simply in a less-expensive place."
Some of this—the desire to live less expensively, and perhaps with greater simplicity—seems to key off what I am seeing in Manhattan, a place still generally with more grievances than grief, and with a greater imagination about how badly things are going to go than how bad it is right now. Many think that no matter how much money is sloshing through the system from Washington, creating waves that lead to upticks, the recession is really a depression. We won't "come out of it," as the phrase goes, for five or seven years, because the downturn is systemic, global, and because the old esprit is gone. The baby boomers who for 40 years, from 1968 through 2008, did the grunt work of the great abundance—work was always a long-haul trip for them, they were the first in the office in 1975 and are the last to leave the office to this day—know the era they built is over, that something new is beginning, something more subdued and altogether more mysterious. The old markers of success—money, status, power—will not quite apply as they have. They watch and work as the future emerges.
In New York some signs of that future are obvious: fewer cars, less traffic, less of the old busy hum of the economic beehive. New York will, literally, get dimmer. Its magical bright-light nighttime skyline will glitter less as fewer companies inhabit the skyscrapers and put on the lights that make the city glow.
A prediction: By 2010 the mayor, in a variation on broken-window theory, will quietly enact a bright-light theory, demanding that developers leave the lights on whether there are tenants in the buildings or not, lest the world stand on a rise in New Jersey and get the impression no one's here and nobody cares.
The New York of the years 1750 to 2008—a city that existed for money and for all the arts and delights and beauties money brings—is for the first time going to struggle with questions about its reason for being. This will cause profound dislocations. For a good while the young will continue to flock in, for cheaper rents. Artists will still want to gather with artists—you cannot pick up the Metropolitan Museum and put it in Alma, Mich. But there will be a certain diminution in the assumption of superiority on which New York has long run, and been allowed, by America, to run.
More predictions. The cities and suburbs of America are about to get rougher-looking. This will not be all bad. There will be a certain authenticity chic. Storefronts, pristine buildings—all will spend less on upkeep, and gleam less.
So will humans. People will be allowed to grow old again. There will be a certain liberation in this. There will be fewer facelifts and browlifts, less Botox, less dyed hair among both men and women. They will look more like people used to look, before perfection came in. Middle-aged bodies will be thicker and softer, with more maternal and paternal give. There will be fewer gyms and fewer trainers, but more walking. Gym machines produced the pumped and cut look. They won't be so affordable now.
Hollywood will take the cue. During the depression, stars such as Clark Gable were supposed to look like normal men. Physical perfection would have distanced them from their audience. Now leading men are made of megamuscles, exaggerated versions of their audience. That will change.
The new home fashion will be spare. This will be the return of an old WASP style: the good, frayed carpet; dogs that look like dogs and not a hairdo in a teacup, as miniature dogs back from the canine boutique do now.
A friend, noting what has and will continue to happen with car sales, said America will look like Havana—old cars and faded grandeur. It won't. It will look like 1970, only without the bell-bottoms and excessive hirsuteness. More families will have to live together. More people will drink more regularly. Secret smoking will make a comeback as part of a return to simple pleasures. People will slow down. Mainstream religion will come back. Walker Percy again: Bland affluence breeds fundamentalism. Bland affluence is over.
Good Grub and the Spirit of Capitalism
Good Grub and the Spirit of Capitalism
Why New York food is so good.
JOSEPH EPSTEIN
I recently spent a week in New York City, during which I ate no bad meals. Nor did I dine at outrageous expense. My wife was with me, and we had no checks much above $100 for the two of us, and many several dollars beneath that. Even in the plushest of times, I consider all restaurant meals $250 and above immoral, and will agree to be taken to them only by people I actively dislike.
We had two meals -- a lunch and a dinner -- at our favorite Italian restaurant, Cellini, on East 54th Street, which has grown-up male waiters who aren't waiting for a call to audition for a play, and where even the water tastes good. I had lunch with an editor at Molyvos, a Greek restaurant on Seventh Avenue that was a substantial cut above the innumerable Greek restaurants in Chicago, where I live. I had an unforgettable hamburger -- and you would think it fairly easy to forget a hamburger -- at O'Neal's near Lincoln Center. A former student took my wife and me to a recently opened fantastic Belgian restaurant on Amsterdam Avenue. And one night, not very hungry, we stopped for soup at Europa, kitty-corner from Carnegie Hall. Here, too, simple bowls of soup were high quality. Everything, everywhere we went, tasted great.
Manhattan must have 300, perhaps 400, splendid restaurants. I estimate that Chicago has, at the outside, 30, and San Francisco, Los Angeles and Washington, D.C., respectively probably not more than that. Why is this? How to account for this plentitude of good restaurant food in Manhattan?
Demand has a lot to do with it. By this I don't mean demand as in the old economists' formula of supply and demand. What I mean is that New Yorkers are, and always have been, more demanding than any other Americans when it comes to what they eat. Years ago, when I worked in New York, I used occasionally to grab a quick lunch at a luncheonette, as they were then called, on the corner of Fifth Avenue and 15th Street. The place had no tables, only a long counter, so that one could hear other people's orders. I recall vividly the extraordinary specificity of customers' requests.
"I want a sardine sandwich, on rye, lightly toasted, with a very thin slice of onion -- last time the slice was a little too thick -- with a gentle rinse of lemon between the onion and the sardines. Pickle on a separate plate."
New Yorkers tend to order food as if they are spoiled children dining in their mothers' kitchens. They demand excellent service, which includes accommodation for their idiosyncrasies (that pickle on the separate plate). If they do not get what they want, they howl, return food, do not return to the restaurant, and verbally torch the place. If you open a restaurant in New York, you had better be good, or you will soon be gone.
In Chicago, I have known wretched restaurants that have stayed in business for 30 or more years. Stoic, tired, meek people in the city of the big shoulders tend to shrug, swallow and bear it. In my own neighborhood, a Chinese restaurant of appalling quality has been in business for more than 40 years. Its specialty -- if it may be said to have one -- is contemptuous older waiters, whose own English is indecipherable and who pretend, impatiently, not to understand yours. After steering clear of it for more than 20 years, I thought perhaps there might have been a change of ownership, and the other day walked in at lunchtime to order kung pao chicken to go. The kung had no pao, and the chicken was a disgrace to the honorable name of poultry. Of the bitterness of the sauce and the gloppiness of the rice, let us not speak. In Manhattan, the joint wouldn't have lasted three weeks.
If you are going to start a restaurant in Manhattan, you had better have something extraordinary in mind: Food of a kind not available elsewhere, or done better than anyone else is currently doing it. I don't know if Thurman Arnold or Joseph Schumpeter or any of the other theorists of the inner mechanics of capitalism have hitherto spoken of it, but there is, in capitalism, operating at a sufficiently intense level, a spirit of competition that can bring out the best in everyone, at least in those realms where you cannot fake it. Something similar operates in professional sports -- the Major Leagues, the NBA and the NFL. Room exists only for the best. What is operating here is the reverse of Gresham's Law, with the good driving out the bad, and in the gastronomic realm the result is splendid food.
Next time I feel a craving for Chinese food, I'm ordering take-out from Shun Lee on West 65th Street in New York. I'm sure they deliver; the only question is can they get it to my apartment, some 800 miles away, in under an hour and still warm. Impossible though it sounds, my guess is that they can find a way to do it.
Mr. Epstein is the author, most recently, of "Fred Astaire" (Yale University Press, 2008).
Friday, April 17, 2009
Is America the new Russia?
Is America the new Russia?
By Martin Wolf
Is the US Russia? The question seems provocative, if not outrageous. Yet the person asking it is Simon Johnson, former chief economist at the International Monetary Fund and a professor at the Sloan School of Management at the Massachusetts Institute of Technology. In an article in the May issue of the Atlantic Monthly, Prof Johnson compares the hold of the “financial oligarchy” over US policy with that of business elites in emerging countries. Do such comparisons make sense? The answer is Yes, but only up to a point.
“In its depth and suddenness,” argues Prof Johnson, “the US economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets.” The similarity is evident: large inflows of foreign capital; torrid credit growth; excessive leverage; bubbles in asset prices, particularly property; and, finally, asset-price collapses and financial catastrophe.
“But,” adds Prof Johnson, “there’s a deeper and more disturbing similarity: elite business interests – financiers, in the case of the US – played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.” Moreover, “the great wealth that the financial sector created and concentrated gave bankers enormous political weight.”
Now, argues Prof Johnson, the weight of the financial sector is preventing resolution of the crisis. Banks “do not want to recognise the full extent of their losses, because that would likely expose them as insolvent ... This behaviour is corrosive: unhealthy banks either do not lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and, as it does, bank assets themselves continue to deteriorate – creating a highly destructive cycle.”
Does such an analysis make sense? This is a question I thought about during my recent three-month stay in New York and visits to Washington, DC, now capital of global finance. It is why Prof Johnson’s analysis is so important.
Unquestionably, we have witnessed a massive rise in the significance of the financial sector. In 2002, the sector generated an astonishing 41 per cent of US domestic corporate profits (see chart). In 2008, US private indebtedness reached 295 per cent of gross domestic product, a record, up from 112 per cent in 1976, while financial sector debt reached 121 per cent of GDP in 2008. Average pay in the sector rose from close to the average for all industries between 1948 and 1982 to 181 per cent of it in 2007.
In recent research, Thomas Philippon of New York University’s Stern School of Business and Ariell Reshef of the University of Virginia conclude that the financial sector was a high-skill, high-wage industry between 1909 and 1933. It then went into relative decline until 1980, whereupon it again started to be a high-skill, high-wage sector.* They conclude that the prime cause was deregulation, which “unleashes creativity and innovation and increases demand for skilled workers”.
Deregulation also generates growth of credit, the raw stuff the financial sector creates and on which it feeds. Transmutation of credit into income is why the profitability of the financial system can be illusory. Equally, the expansion of the financial sector will reverse, at least within the US: credit growth and leverage masked low or even non-existent profitability of much activity, which will disappear, and part of the debt must also be liquidated. The golden age of Wall Street is over: the return of regulation is cause and consequence of this shift.
Yet Prof Johnson makes a stronger point than this. He argues that the refusal of powerful institutions to admit losses – aided and abetted by a government in thrall to the “money-changers” – may make it impossible to escape from the crisis. Moreover, since the US enjoys the privilege of being able to borrow in its own currency it is far easier for it than for mere emerging economies to paper over cracks, turning crisis into long-term economic malaise. So we have witnessed a series of improvisations or “deals” whose underlying aim is to rescue as much of the financial system as possible in as generous a way as policymakers think they can get away with.
I agree with the critique of the policies adopted so far. In the debate on the Financial Times’s economists’ forum on Treasury secretary Tim Geithner’s “public/private investment partnership”, the critics are right: if it works, it is because it is a non-transparent way of transferring taxpayer wealth to banks. But it is unlikely to fill the capital hole that the markets are, at present, ignoring, as Michael Pomerleano argues. Nor am I persuaded that the “stress tests” of bank capital under way will lead to action that fills the capital hole.
Yet do these weaknesses make the US into Russia? No. In many emerging economies corruption is egregious and overt. In the US, influence comes as much from a system of beliefs as from lobbying (although the latter was not absent). What was good for Wall Street was deemed good for the world. The result was a bipartisan programme of ill-designed deregulation for the US and, given its influence, the world.
Moreover, the belief that Wall Street needs to be preserved largely as it is now is mainly a consequence of fear. The view that large and complex financial institutions are too big to fail may be wrong. But it is easy to understand why intelligent policymakers shrink from testing it. At the same time, politicians fear a public backlash against large infusions of public capital. So, like Japan, the US is caught between the elite’s fear of bankruptcy and the public’s loathing of bail-outs. This is a more complex phenomenon than the “quiet coup” Prof Johnson describes.
Yet decisive restructuring is indeed necessary. This is not because returning the economy to the debt-fuelled growth of recent years is either feasible or desirable. But two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail. That is not capitalism, but socialism. That is one of the points on which the right and the left agree. They are right. Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution. Without that change, the resolution of this crisis can only be the harbinger of the next.
*Wages and Human Capital in the US Financial Industry 1909-2006, January 2009, www.nber.org
FREAKONOMICS
Why Are Magazines So Bad at Updating Addresses?
By Stephen J. DubnerA reader named Mason DeCamillis writes in with a question/complaint:
Why does it take several weeks for magazines to update my mailing address when I move? I just changed my address with two magazines (on their respective websites), and both say it will take up to two publication cycles for the change to take effect. That seems crazy. When I buy something at an online store, I enter my address and they’re able to make a shipment to it the following business day, without waiting weeks for their database to be updated.
On the same note, when I originally subscribed to one of these magazines, I didn’t receive my first issue for almost three months, but in that time I received three letters from them asking me to renew my subscription. If they’re able to send a letter to me that quickly, shouldn’t it at least be accompanied by a current issue of the magazine?
Ouch. That’s a lot of bad practice for just a couple of paragraphs, but it’s hard to disagree. So why does this happen? Why is magazine fulfillment so last-century? And is it possible that these various flaws are responsible, even in small measure, for the massive plunge in ad revenues that magazines have just experienced? In an instant-gratification Internet world, are slow-footed magazines — nice glossy pages and all — helping to extinguish themselves?se
Catastrophic Top Tens |
Here are 20 tips for a safe weekend: Amanda Ripley busts 10 myths that could save your life in a disaster while Nassim Nicholas Taleb outlines 10 points to save the world from financial cataclysm. (1)
The Cost of Campaigning in Rapid City, S.D.
By Stephen J. DubnerLevitt and I had the pleasure of visiting Rapid City, S.D., recently to give a lecture. Yes, we had time to visit Mount Rushmore, a good time made all the better by our charismatic tour guide, National Park Service Superintendent Gerard Baker (Yellow Wolf), the very tall gentleman between us here:
We also had occasion to meet a phalanx of Rapid City notables, including Mayor Alan Hanks. The downside of his office, he said, is that he has to run for election every two years; among the upsides is that campaigning isn’t very expensive. He said it cost only $70,000 the last time around.
Considering that the mayor’s salary is about $95,000, that’s a pretty sweet ratio. Mayor Mike Bloomberg of New York spent $85 million last time around and receives only $1 in salary (although he’s entitled to $225,000); it cost Barack Obama $730 million to get elected, for a salary of just $400,000. In terms of R.O.I., Rapid City politics look like a pretty good deal.
When Your Portfolio Is Packing Heat |
Some people invest in stocks, others invest in lobbyists. Still others, The Wall Street Journal reports, are investing in assault rifles. Just as Slate laments spring as the start of gun season, Freakonomics readers might find more to worry about with the start of swimming pool season. (4)
How About “Downlifting” to Replace “Digital Piracy”?
By Stephen J. DubnerWe recently asked you to consider renaming “digital piracy” in light of recent actual piracy. The question appears to have some resonance, as it was picked up by The Guardian, The Washington Post, and others.
For my money, the best suggestion by far comes from a reader named Derek:
Downlifting. Download + shoplifting. Pretty accurate description that doesn’t imply violence. Plus there’s a little mental double-take with “down” and “lift.”
Thus nominated. Anyone care to second?
Practicing Your Way to a Higher I.Q. |
We’ve written earlier about Anders Ericsson’s research on talent, and we’ve blogged on the subject repeatedly. Ericsson’s thesis is that raw talent is overrated, and that experts in a given field (be it hockey or music) accomplish excellence primarily through “deliberate practice.” Nicholas Kristof wrote yesterday about a new book about I.Q., also reviewed here, by Richard Nisbett. He argues that I.Q. is only 50 percent heritable and that the controversial racial I.Q. gap is environmental rather than genetic. Nisbett offers some suggestions to parents to raise their kids’ I.Q.: “praise effort more than achievement, teach delayed gratification, limit reprimands, and use praise to stimulate curiosity.” He is also strongly in favor of the intensive early-childhood programs favored by our new education secretary. (10)
Quotes Uncovered: Who Worried About Events?
By Fred ShapiroQuotes Uncovered
Here are more quote authors and origins Shapiro’s tracked down recently.
Thirteen weeks ago, I invited readers to submit quotations for which they wanted me to try to trace the origins, using The Yale Book of Quotations and more recent research by me. Hundreds of people have responded via comments or e-mails. I am responding as best I can, a few per week.
Stan asked:
This may be too vague, but this quote essentially conveys: events that occur, not “issues” or a platform, define the term of a prime minister (or other leader). I think it’s Benjamin Disraeli, but if it rings a bell, I would love to know the real quote.
The Yale Book of Quotations has the following quote, which may be the one you have in mind:
[When asked what worried him most:] “Events, dear boy, events.” Harold Macmillan, quoted in Sunday Times (London), Nov. 15, 1992.
Nate asked:
Luck is the residue of desire. Branch Rickey is often quoted as saying “Luck is the residue of design,” but the version above is the one I have always remembered. Which one is correct, or was Rickey paraphrasing someone else?
FREAK Shots: Thrift, Sex, and Cheap Lattes
By FreakonomicsAccording to NPR, recession-themed marketing is a way to “rais[e] money from lower expectations” and “turn bad times into glad times” by selling thrift, good value — and, as Gawker claims, more sex and alcohol.
This photo, taken in a New York City subway station, then, is the perfect recession-ad sampler:
Photo: Ryan Hagen
Serious Fun: A Q&A With the Author of Play
By Annika Mengisen
Stuart BrownWhether he’s playing tennis with “a convivial group of codgers” or hanging out with his grandkids, Stuart Brown, the author of Play: How It Shapes the Brain, Opens the Imagination, and Invigorates the Soul, plays as often as he can.
With a background in neuroscience and behavioral medicine, Brown has studied play globally, both in civilization and in the wild. He founded the National Institute for Play and has produced a three-part PBS series on play. He also regularly teaches employees at Fortune 500 companies why they should do it more.
A former clinical director at Mercy Hospital and Medical Center in San Diego, Brown says he first discovered the importance of play when he observed the way it helped sick kids recover from illness, and later, when he researched murderers and found that lack of play may contribute to homicidal behavior.
Brown has agreed to answer our questions about his book, but first he has a question for Freakonomics readers:
What’s your favorite way to play?
Post your answers and comments below. For those of you reading this from your work computer, Brown recommends emailing a joke or a funny YouTube clip to a friend to increase your productivity.
In the midst of a recession, playing is probably one of the last things on people’s minds. Say you’re one of the many unlucky unemployed. Can playing help you? Read more…
The Decline Continues in Home Prices
| The Decline Continues in Home Prices | | | |
| Written by Polina Vlasenko |
| |
| Recently released data for the S&P/Case-Shiller Home Price Indices show that the decline in house prices continued throughout 2008 and there are no indications of a turnaround.
The chart shows the annual percentage change in the Case-Shiller U.S. National Home Price index, in a 10-city composite index, and in a 20-city composite index since their inception. The S&P/Case-Shiller indices track changes in the value of the residential real estate in 20 metropolitan areas. The U.S. National Home Price Index is a broader composite of single-family home prices. All are constructed from the sale prices of existing homes, taking into account possible quality changes. Because each is constructed from the actual sale prices, there is very little room for subjective judgment in the valuation. This makes these measures very accurate in reflecting the change in the market prices of existing homes. (The indices do not include initial sale prices for the newly built residences.) Over the past year, the National Home Price Index decreased 18.23 percent, the largest annual decline on record. The 10-city and 20-city composite indexes, which combine data from major metropolitan areas, decreased by 19.4 and 18.97 percent, respectively. According to all three of these indices, house prices have been continuously falling since January 2007. All three are now at the level they held around September-October 2003. Among the major metropolitan areas, the hardest hit are Phoenix, San Francisco, and Las Vegas, each of which experienced more than a 30 percent drop in house prices over the last year. Phoenix leads this unfortunate list with a 34.96 percent decline over the last year. The areas experiencing the largest drops in house prices are usually the same areas that saw dramatic increases, over 40 or even 50 percent a year, during the boom. At the opposite end of the spectrum, Denver, Boston, New York City, Cleveland, Dallas, and Charlotte, NC, experienced a drop in house prices of less than 10 percent. Dallas experienced the smallest decline in house prices last year, only 4.87 percent. None of these areas experienced an increase in house prices in excess of 20 percent per year since the inception of the Case-Shiller index in 1987. The data do not give any indication when a turnaround in house prices might occur, but it seems unlikely to be soon. An article in the most recent Research Reports explores the relationship between the house prices and rental prices. According to that analysis, a further decline in house prices is likely. |
Will China Buy our Treasuries?
I don't quite have the answer to that question, but I would argue that the question itself reflects some common confusion.
If all exchange rates are free to adjust to market forces, they would tend to produce a balance between each country's trade with the rest of the world. Strictly speaking, that assumes no unruly capital flows to complicate matters. But while market forces tend to promote trade balance with all other countries combined, there is no reason to expect the market to balance trade on a bilateral, country-by-country, basis.
However, since China has a large trade surplus and the U.S. has a large trade deficit, chances are we will have a large trade deficit with China. China has allowed the yuan to appreciate in recent years, but not to the extent that market forces alone would have likely produced. To hold the yuan down relative to the dollar China buys dollars, which, conversely, holds the dollar up relative to the yuan.
What do I mean by "buying dollars"? In the first instance, the dollars purchased are probably claims on U.S. banks (deposits). Those are then used to purchase U.S. Treasury securities to have claims totally safe from credit risk and in a very liquid market. China could, and is, diversifying by purchasing claims denominated in other currencies, but as long as it is running trade surpluses it has to hold some countries' assets, and as long as the U.S. is running trade deficits someone must accumulate its assets. The quantity of assets to be held is determined, not separately, but as part of the process of incurring the deficit. It is not a separate and independent decision.
Looking at it from another perspective, China is a huge saver with a current account surplus, and, as long as we have low savings and a large current account deficit, China will continue accumulating dollars.
To repeat, my point is that the decision to buy or hold U.S. Treasuries really isn't a separate, independent decision. China's accumulation of dollar assets is part of the same arithmetic as the size of its surplus. They are mutually determined rather than independently determined.
One way to think of it is that we are buying more from the rest of the world (mainly China) in the form of imports of goods and services than we are selling to the rest of the world in the form of exports. If we aren't fully paying for our imports with exports of goods and services, we must make up the difference by selling assets (in the form of debt or equities or direct investment) or incurring new foreign debt. To the extent that China doesn't import goods and services to the extent that they are exporting goods and services, they have to take the difference in increased foreign assets or reduced foreign debt.
This may be harder to follow, but, in effect, the capital account counterpart to our deficit with China- the capital inflow- fills the gap in U.S. saving. Our business sector saves some, but our personal saving rate has been near zero and our government saving (budget surplus) has been negative. Since our investment is positive and much greater than our aggregate domestic saving, the difference is made up by the capital inflow that finances our external deficit. From China's viewpoint, they are investing their excess saving in U.S. assets.
A technical point: In the previous post, where the focus was on the impact of trade on our GDP, I used trade in goods and services. When we export goods and services, income is generated at home. When we import goods and services, income is generated abroad. In this piece, however, the focus is on trade's impact on exchange rates and total saving. For that purpose, we need to include some international transactions in addition to trade in goods and services. We need the "current account" concept, which includes trade, but also unilateral transfers, income on investments in the other countries, etc. The distinction isn't important for must purposes, but I don't want to imagine my international trade professors rolling over.
In case I've totally lost you, the short answer to the question posed by the title is that it's not a separate, independent decision. It's mutually determined by the size of China's trade surplus and our deficit.
The immigration superhighway
Pakistan and Britain
The immigration superhighway
Another alleged terrorist link to Pakistan draws attention to a busy path on the world’s migration map
IT IS midnight outside Mecca, and a crowd has gathered to pay homage. Their devotion is intense, but not religious: the “Mecca” in question is a bingo hall in Bradford, and the god being worshipped by a group of young, white Bradfordians appears to be alcohol. Nearby, in one of the city’s Pakistani neighbourhoods, pubs have shut for lack of custom. Only a few streets away, it seems a continent apart.
One reason why shop signs on the streets of Bradford are still written in Urdu, half a century after the first Pakistanis came to Britain, is that population flows between the two countries remain large (see chart). Each year 250,000 Pakistanis come to Britain to visit, work or marry, and some 350,000 British citizens journey in the opposite direction, mainly to visit family. Links are reinforced by ingrained marriage customs: six of ten ethnic Pakistanis in Britain pick a spouse from Pakistan.
Those busy borders have been a boon in various ways. British universities rake in around £10,000 ($15,000) per person from their share of the 10,000 or so Pakistanis admitted each year on student visas, and businesses sponsor a couple of thousand Pakistani workers a year to plug gaps in the labour market. But the easy comings and goings between Britain and “the most dangerous place in the world”, as President Barack Obama recently dubbed Pakistan’s western regions, is causing concern. On April 8th British police arrested 12 men on suspicion of involvement in what officers say was a “very, very big” terrorist plot. Ten were Pakistani citizens on student visas.
No one yet knows if the alleged plot was the real thing. Previous raids, hyped by the police before turning out to be false alarms, have instilled caution in a plot-weary public. But even if the photographs of shopping centres said to have been found at the men’s addresses were holiday snaps rather than battle plans, the porous border between Britain and Pakistan is frequently abused. In December Gordon Brown said that three-quarters of domestic terrorist plots being monitored by MI5 had links to Pakistan. After the recent arrests the prime minister repeated that “Pakistan has got to do more to root out the terrorist elements in its country.”
This drew a scornful response from Pakistan’s high commission in London, not least because the raids were compromised by a senior British policeman who clumsily flashed plans of the arrests to a bank of photographers, forcing the operation to be brought forward by a day. And not everyone in the government agrees that Islamic radicalism is the fault of Pakistan alone. Sadiq Khan, the minister for community cohesion, said that on a recent trip to Pakistan he had encountered anger at attacks by unmanned American drones. “The view they [students] had was that the UK was somehow responsible for this…They lumped us together with the US,” he said.
Wherever blame lies, in Britain more responsibility for the behaviour of visa-holders is being shifted on to the shoulders of those who sponsor them. Under rules that came in last month, employers and colleges must join an official register to sponsor work or student visas. The Home Office has reported that 460 of the 2,100 schools and colleges which sought to do so were rejected. Most universities support the change, since weeding out bogus colleges should benefit the rest.
Would-be terrorists will now have to scrape together the grades to get into a real college. That may not be too hard. But from the autumn the government wants universities to check up on suspicious behaviour, reporting foreign students who seem to have dropped out to the UK Borders Agency. Some lecturers, including those who work at a university raided on April 8th, are threatening a boycott.
The heaviest flows of human traffic between Britain and Pakistan, however, are within families. Ann Cryer, the MP for Keighley, a town near Bradford with a large Pakistani population, reckons that as many as 80% of Muslim marriages in the area are transcontinental. This may reflect a cultural preference but it is also “a way of getting around immigration controls”, Ms Cryer says. For a goatherd in Mirpur, “marrying a cousin in Keighley is a leg-up”. Elderly parents can be shipped over later.
Only a minority of these marriages are forced, most people agree. British-born men are willing to marry Pakistani girls to stay in their parents’ good books; in any case, some carry on relationships with a local woman. British girls are less keen, but local Muslim men are in short supply owing to their own Pakistani marriages. Many people hotly dispute that there is a problem; Ms Cryer is angling for white votes, they say. On the contrary, she retorts, many of the loudest critics of such marriages are women whose foreign grooms filed for divorce once in Britain, often then bringing their real partners over from Pakistan.
Recent changes have tightened the conditions for marriage visas. Since November both partners have had to be 21 years old, up from 18 (and, a few years ago, 16). This will at least give British brides the chance to get the prerequisites for financial independence under their belts. The Home Office has said that it wants to require foreign spouses to speak English too.
These measures may help to stop what appears to be an increasing trend. Alan Manning and Andreas Georgiadis of the London School of Economics crunched data to show that British-born Pakistanis, or those who immigrated as children, are more likely to have foreign spouses than those who came to Britain as adults.
This startling fact may help to explain why Pakistanis (and Bangladeshis, who have similar marital habits) are failing to close the gap with other ethnic groups on female employment. Only a quarter of ethnic Pakistani women work, compared with 64% of Indians, for example. Mr Manning thinks something has to give: British women have greater earning power than their Pakistani husbands, which makes traditional roles in the home less plausible. In some cases, extremism may stem in part from male frustration that the old order is being subverted, he speculates.
For Ms Cryer, radicalisation is less important than the conditions in which many of her constituents live. “Parents who arrange marriages like these are holding the whole community back. They’re not just importing cousins; they’re importing poverty.” And that, in the long run, may prove a bigger Pakistani threat to Britain than extremism.
Campus Leftists Don't Believe in Free Speech
Campus Leftists Don't Believe in Free Speech
Conservative speakers now have bodyguards when they visit universities.
DAVID HOROWITZ
I arrived in Austin, Texas, one evening recently to give a speech about academic freedom at the university there. Entering the hall where I was to give my speech, I was greeted -- if that's the word -- by a raucous protest organized by a professor and self-styled Bolshevik, Dana Cloud. Forty protesters hoisted placards high in the air and robotically chanted "Down With Horowitz," "Racist Go Home," and "No More Witch-hunts."
Fortunately, a spokesperson for the administration was present to threaten the disrupters with arrest if they continued on this course. (The threat was administered very carefully, with three formal warnings before any action could be taken.) This quieted the crowd enough that I could begin my talk, which proceeded without further serious incident.
Even so, there were occasional heckles and demonstrative cheers from the group when I mentioned the name of Sami Al-Arian ( whose organization, Palestine Islamic Jihad, is responsible for the deaths of more than 100 innocent victims in the Middle East), Black Panther Huey Newton (convicted of killing an Oakland police officer in 1967, although he was eventually released on a technicality), or when I uttered the word "communist" -- even though I did so to remind the audience that communists killed 120 million people in the last century trying to implement Marx's ideas.
Among the organizations participating in these outbursts were the International Socialist Organization, whose goal is the establishment of a "dictatorship of the proletariat" in the United States; Iranians for Peace and Justice, supporters of Hezbollah and Hamas; and Campus Progress, the unofficial college arm of the Democratic Party.
One of the local members of Campus Progress had written a column in the campus newspaper attacking me in advance of my talk, and defending Sami Al-Arian as a victim of political persecution. The conservative students who invited me to the University of Texas told me that organizations such as the Muslim Students Association routinely join with College Democrats in protests against the state of Israel.
At the end of the evening, Prof. Cloud stepped up to the microphone to ask a question, which was actually a little speech. Even though the protocol for such occasions restricts audience participants from making their own speeches, I did her the courtesy she tried to deny me by letting her talk.
She presented herself as a devoted teacher and mother who was obviously harmless. Then she accused me of being a McCarthyite menace. Disregarding the facts I had laid out in my talk -- that I have publicly defended the right of University of Colorado's radical professor Ward Churchill to hold reprehensible views and not be fired for them, and that I supported the leftist dean of the law school at UC Irvine when his appointment was withdrawn for political reasons -- she accused me of whipping up a "witch-hunting hysteria" that made her and her faculty comrades feel threatened.
When Ms. Cloud finished, I pointed out that organizing mobs to scream epithets at invited speakers fit the category of "McCarthyite" a lot more snugly than my support for a pluralism of views in university classrooms. I gestured toward the armed officers in the room -- the university had assigned six or seven to keep the peace -- and introduced my own bodyguard, who regularly accompanies other conservative speakers when they visit universities. In the past, I felt uncomfortable about taking protection to a college campus until a series of physical attacks at universities persuaded me that such precautions were necessary. (When I spoke at the University of Texas two years ago, Ms. Cloud and her disciples had to be removed by the police in order for the talk to proceed.)
I don't know of a single leftist speaker among the thousands who visit campuses every term who has been obstructed or attacked by conservative students, who are too decent and too tolerant to do that. The entire evening in Texas reminded me of the late Orianna Fallaci's observation that what we are facing in the post-9/11 world is not a "clash of civilizations," but a clash of civilization versus barbarism.
Mr. Horowitz is the author, most recently, of "One-Party Classroom: How Radical Professors at America's Top Colleges Are Indoctrinating Students and Undermining Our Democracy" (Crown Forum, 2009).
The Twitter Revolution
The Twitter Revolution
The brains behind the Web's hottest networking tool.
MICHAEL S. MALONE
San Francisco
"Twitter is the side project that took," says company co-founder Biz Stone, 35. "Now it's our chance to do something transformative."
![[The Weekend Interview]](http://s.wsj.net/public/resources/images/OB-DM891_oj_win_E_20090417184733.jpg)
Ismael RoldanBiz Stone (left) and Evan Williams.
When I arrive at Twitter's headquarters on a recent morning, Jerry Brown is waiting in the lobby -- just another day at the world's hottest high-tech company. "It's pretty bizarre," says co-founder Evan Williams, 37. "At least once per day we look at each and say, 'What the hell?' It's like we're living out the script of the ultimate start-up company story."
But other than the familiar face of California's attorney general standing near the steel front door, you would hardly know that this little company of about 30 employees is the epicenter of the Web, used by an estimated 20 million Americans on a daily -- even minute-by-minute -- basis. Just how fast Twitter is growing is a company secret, but its traffic appears to be more than doubling every month.
The company itself seems calm and casual. The employees drift in, grab some free food and eventually make their way to their desks. It's located in an anonymous warehouse just a couple blocks from South Park, the once-frenzied environs of the dot-com companies of the first Internet boom. In his sports shirt and slacks, sipping a bottle of apple juice, Mr. Williams exhibits indifference to the trappings of success. So does Mr. Stone, who last year won an Oxford Union debate wearing a borrowed bow tie and a pair of black sneakers.
The company is hiring like crazy -- it expects to double its size in the next month or two -- and is also adding a senior management, notably new vice-president of global operations Santosh Jayaram, hired away from Google. "We've never had a company that grew past 15 to 20 people," says Mr. Stone, "We're kind of excited about that."
Even faster than Google, Amazon and eBay in their days, the three-year-old Twitter has become deeply embedded in the culture. President Barack Obama twittered the words, "We just made history," on the night of his election. It was a twittered image that first captured the forced landing of US Airways Flight 1549 in the Hudson River. Scores of people trapped in the Mumbai terrorist attack twittered desperately for help. And in a much discussed event, a San Francisco technology writer twittered his surprise to discover his home was being broken into.
Strictly speaking, Twitter is a social networking application that enables users to post short text messages -- called "tweets" -- of no more than 140 characters on their personal feed. These real-time diary entries can then be read by other users, called "followers," who have subscribed to that page.
But Twitter is much more than a novel way to share updates of one's daily life with friends. It's now evolved into a powerful new marketing and communications tool. Regional emergency preparedness organizations are looking at Twitter as a way to reach millions of people during a disaster. NASA is using it to regularly update interested parties about the status of space shuttle flights. And one journalist solicited help from fellow Twitterers to get himself out of an Egyptian jail. (It worked.)
The real Twitter revolution may prove to be much more everyday. When I stop for a latte at Peet's Coffee on the way to the interview, the manager tells me that he plans to start sending out tweets to let regular customers know when a table is open. He isn't alone. A Manhattan bakery twitters when warm cookies come out of the oven. "It's those small stories that really inspire us," says Mr. Stone. "Those are the things that transform people's lives."
Mr. Stone vividly remembers the first time he appreciated the power of Twitter. He and his now-wife had just bought a house in Berkeley and, having spent the day scraping up carpet and painting walls, he was tired and sweaty. "That's when I got a twitter from Ev saying, 'Up in Sonoma drinking pinot noir after a massage.' I just started laughing. That's when I realized that this technology could be entertaining too," as opposed to a basic communications tool, he says.
"It took us a while to figure out that it really was a big deal," says Mr. Williams. It was at the annual South by Southwest tech conference/music festival in Austin, Texas, in March 2008, that the social power of Twitter came home to the co-founders. "I found myself watching groups of people twittering each other to coordinate their actions -- which bar to go to, which speech to attend -- and it was like seeing a flock of birds in motion," says Mr. Stone.
As with many Web entrepreneurs, Messrs. Williams and Stone took unconventional paths to success.
Mr. Williams was born on a soybean, corn and cattle farm near Clarks, Neb., (pop. 361), where he attended the single public school there. In a class of just 14, he took part in everything from sports to band ("In a school that small, everyone does it all," he says.) But he was an indifferent student and felt like a black sheep at home, too. His father and brother loved to farm and hunt, while Evan, a vegetarian, preferred to read and ponder schemes for building enterprises.
Eventually he made it to the University of Nebraska, but he never declared a major, took as few classes as possible, and eventually dropped out. In the years that followed, Mr. Williams drifted around the country -- Key West, Dallas, Austin -- working various technology jobs and trying to pursue start-ups. But every time he got started on one idea, some new idea would pop into his head, luring him away and preventing him from ever following through on a project. "It was turning into a constant pattern," Mr. Williams recalls.
By 1996, Mr. Williams found himself back on the family farm, with little money and few prospects. "I was in the dumps," he recalls. He had long worshipped California's Silicon Valley from afar, and now, with nothing to lose, he decided to move there. "Unfortunately, my aim was a little off," he says, since he landed in the farming town of Sebastopol in Marin County, working for the old-guard media/conference firm O'Reilly Inc.
In the end, that proved fortuitous. What began as a marketing job ended up as an independent contractor job writing computer code, and in short order, Mr. Williams parlayed that into freelance work with legendary Valley companies like Intel and Hewlett-Packard. "For the first time, I learned what it was like to work in an office and have a normal career. To be in real meetings. I also learned that I didn't want to do that."
Did Mr. Williams ever feel that there was something wrong with his inability to hold a traditional job? "No," he says. "I always figured there was something wrong with everybody else."
In 1999, Mr. Williams teamed up with another contractor, Meg Hourihan, and founded Pyra Labs to make management software. A much admired product which allowed managers to handle complex projects online, Pyra earned him a reputation as a brilliant entrepreneur who didn't know how to make money. "The truth is," Mr. Williams protests, "we had revenues from the first day . . . there just wasn't enough of them." It should have ended in yet another business failure -- but in computer parlance, Mr. Williams decided to 'turn a bug into a feature.' This meant taking one of his distracting brainstorms and turning it into a company.
The new company, called Blogger.com -- Mr. Williams invented the term -- which was developed from a note-taking application on Pyra, was the original blog prototype. It proved to be one of the few successes of the era. Better yet, Mr. Williams even managed to nail down some real venture investment just as the bubble burst.
Mr. Williams finally had a real company and real money. Now he needed a team.
Enter Christopher Isaac "Biz" Stone. Raised in Wellesley, Mass., Mr. Stone had an early love for graphic arts and theater. But at the University of Massachusetts, he too had proven to be a distracted student, and when a job at publisher Little, Brown evolved from moving boxes to designing book covers, Mr. Stone dropped out of college. In the years that followed, he, like Mr. Williams, discovered a natural gift for Web design and programming. In fact, the two young men had admired each other's work from opposite coasts.
So when Evan invited Biz to join Blogger, Biz moved West. He arrived just in time to get the news that Google decided to acquire Blogger. Messrs. Williams and Mr. Stone, neither of whom technically qualified for the CV-obsessed company, were suddenly Google employees.
The gig lasted 20 months and both men say they thoroughly enjoyed it. Mr. Williams even met his future wife at the firm. But the entrepreneurship gene couldn't be denied forever. And in 2005, both men decided to strike out on their own. "It was about the toughest decision I ever made," recalls Mr. Stone, "and if I'd known how high Google stock would go, I'm not sure I would have made it."
Once out of Google, Mr. Williams teamed with another entrepreneur, Noah Glass, to found Odeo, a podcasting company. It was a brilliant plan -- until Apple decided to offer its own podcasting application in iTunes. Says Biz, who had also joined the firm, "I remember asking Evan, 'Do you really want to be the King of Podcasting?' And he said, 'No.' And that was it." Looking back, Mr. Williams says, "I didn't follow my gut. I intellectualized myself into Odeo."
Mr. Williams had taken venture capital money to build Odeo and to change its business model, and he had to buy out those investors with a big chunk of his Blogger cash. Once again abandoning the main idea for a sidelight, he transformed Odeo into Twitter by stripping down and selling off the podcasting component and keeping the social-networking tool -- the last a concept proposed by Jack Dorsey, now Twitter chairman.
Under the guise of a fun communications tool, Twitter is building one of the world's most valuable real-time information caches. And as Twitter's profile continues to explode -- Oprah just sent her first tweet on yesterday's show -- many wonder whether the company will ever find a revenue model. Others speculate about who will buy the young company (Google seems to be the leading candidate). "We know there are a lot of people looking at Twitter right now," says Mr. Stone.
For now, Messrs. Williams and Stone are keeping their plans secret. With patient investors who just put in $35 million in third-round funding, the company is in no hurry. Mr. Stone will only say that "we are enamored with the idea of going all the way." Adds Mr. Williams: "We want to have as large an impact as possible."
Mr. Williams says that the amount of money it would take to buy Twitter right now is more than any company could justify to its shareholders, but suggests three other possible scenarios. First, that Twitter could go public -- probably without him, as he has little interest in running a public company. Second, Twitter could remain private and somehow buy out its investors. Or third, they discover some other option no one has thought of yet.
Of course, there's still one more possibility: Yet another one of Mr. Williams's "obsessive distractions," as he calls them. Lately, he's been pondering a way to revolutionize email.
Mr. Malone's new book on protean corporations, "The Future Arrived Yesterday" will be published next month by Crown Business.
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