Wednesday, June 27, 2007

Another Employee's Butchered Benefits

Steve Lopez, Los Angeles Times

June 27, 2007

Tony Mays, who cuts meat at the Vons in Echo Park, lets me into his apartment. When I don't see the son he told me about on the phone, I figure he must be in the bedroom. But then I realize there is no bedroom.

It's a studio apartment, says Mays, 31. His son, 3-year-old Tony Jr., is behind me, nodded out on a bed in a little cubbyhole. The room, in a former hotel near Washington and Main near downtown Los Angeles, is stuffy, and the small fan isn't doing the child much good on a warm evening.

Mays, a single parent, pays $775 a month for this place. It's definitely an improvement over the Long Beach shelter he and his son lived in until he got the job with Vons nearly two years ago, but it's not where he expected to be after moving up the ladder in the supermarket company.

He went from $7.55 an hour to $11 as an apprentice, and then $17.38 earlier this year when he began running a meat department. But as Mays puts it, he's a "second-tier" employee, meaning that his pay and benefits are not as good as employees who started before the 141-day strike and lockout 3½ years ago.

Today, with the possibility of another strike looming, negotiations on a new contract are expected to resume, with 65,000 Southern California employees of Vons, Ralphs and Albertsons hoping for a better deal.

"I thought $17.38 was pretty decent, and I could get into at least a one-bedroom apartment so my baby could have a room," says Mays, whose son stays with a baby-sitter or at preschool while Mays is at work. "But it turns out I can't afford a one-bedroom."

The cheapest, halfway decent place he could find was $1,100 a month, but the landlord told him he had to clear three times that amount after taxes in order to qualify.

What really bothers Mays, though, about the current contract is that he didn't even qualify for partial healthcare benefits until 18 months after he was hired. Even now that he would qualify to purchase company insurance, he can't afford his share of the cost. Tony Jr. won't be eligible until his dad has been on the job 30 months.

Right now both are on Medi-Cal, which means that despite healthy profits at Vons and the other supermarket chains, taxpayers are picking up the tab for employee healthcare. It's similar to the Wal-Mart story, in which low prices and huge profits are made possible in part by low pay and lousy healthcare benefits for employees, many of whom end up on the health insurance dole.

Ken Jacobs, of the UC Berkeley Center for Labor Research and Education, says that since the new grocery contract went into effect, 20,000 fewer children of employees are covered by store-sponsored healthcare plans.

"What's the role of government in taking this on, setting some standards and being bold?" asked Madeline Janis of the Los Angeles Alliance for a New Economy. The group has teamed with local clergy to lobby for political pressure on the chains to improve pay and benefits.

"This is the fastest-growing industry and the undergirding of the whole new economy," Janis said. "If we don't get this right, whatever middle class we have is going to be gone…. I think it's a fight for the soul of our city."

During the last contract talks, the chains argued that they were facing a huge threat from Wal-Mart and other superstores. And they say they're still in a hyper-competitive market and don't have much wiggle-room.

The Rev. Anna Olson of Clergy and Laity United for Economic Justice isn't buying it. It would be a different story, she said, if the supermarkets were struggling or if the spread of superstores had materialized and whittled away at profits. "But the reason for making the cuts" in benefits has not come to pass, Olson argued, and now nearly half the 65,000 employees are in the second tier, along with Tony Mays.

While visiting with Mays, who is African American, I asked about the mother of his son and whether she could help with the finances. They split long ago, he said, and she has virtually no role in their son's life. Mays worked in construction in San Diego before moving north to get a fresh start for himself and his son.

"He wasn't a mistake," Mays said as his son slept nearby. "We were in love, and we had talked about having a baby. I love him dearly."

On Sunday, Mays cast a vote supporting a strike if no agreement is reached. If he's barely getting by now, I asked, what will he do if they walk?

"I can't handle a strike, but what can I do?" he said.

Maybe work for a different store that's under a different contract, he said. Or maybe work for a restaurant.

"I learned a trade so I could take it with me wherever I have to go. My cuts are real clean. I do a nice job cutting the meat and laying it out so it eats good."

He likes his job and the people he works with, Mays said, but it rankles to know his corporate bosses are out to "maximize profits" on the backs of employees.

Last year, Mays said, top sirloin was $2.67 on sale and now it's $2.97. And he used to have more help in the meat department than he does now. So if the company gets more for his cuts, and he's expected to do more work with less help, why can't he at least get health insurance for Tony Jr.?,0,930174.column?coll=la-home-center

Thursday, June 21, 2007

Limits of Affluence

LRB | Vol. 29 No. 5 dated 8 March 2007

Stop the treadmill!

Barry Schwartz

The Challenge of Affluence: Self-Control and Well-Being in the United States and Britain since 1950 by Avner Offer · Oxford, 454 pp, £30.00

Suppose you believe that a central aim of public policy in a democratic society should be improving the welfare of its citizens. Even when resources are plentiful, this is a challenging task because of the difficulty of determining what ‘welfare’ consists in. Beyond basic necessities, there is great variation in what people want out of life. This is true with respect to material goods, and also true with respect to what people want from their work, their medical care, their educational opportunities, their relationships with others, their public institutions, the arts and just about everything else. So any specific commitment of public resources is likely to please some people and displease others.

The way to solve this problem, we are often told, is to provide a wide range of opportunities and let people choose for themselves whatever promotes their personal welfare. Since each individual is in the best position to judge his or her welfare, putting decisions into the hands of individuals is a solution to the social welfare problem that can’t be improved on. To improve welfare, you must increase freedom of choice, not because increased choice is necessarily good in itself, but because it increases the chances that each individual will be able to find something that serves his or her interests.

This is the central dogma of neoclassical economics. Economists assume that we know what we want, and that we are rational, so that if we have the opportunity – freedom to choose – we will choose whatever gives us the greatest satisfaction. These assumptions go a long way towards explaining the Reagan/Thatcher revolution, and they contribute to the current enthusiasm of many in the US for the privatisation of pensions and health insurance, for choice in schooling and, more generally, for the libertarian view that the best government is the least government. Whatever else initiatives like these may achieve, each has the virtue of allowing individuals to pursue welfare as they see fit: risky retirement investments or safe ones, open classrooms or highly structured ones etc. On this view, the real virtue of the competitive free market is not so much what it gains in economic efficiency (narrowly defined as output per unit of input) over other economic systems, as what it gains for individuals in opportunities to choose.

The importance of choice also casts light on the emphasis that developed societies place on increasing the material wealth of their citizens. The value of material wealth has more to do with its relation to freedom of choice than with its relation to luxurious standards of living. It is roughly true that the wealthier a person is, the freer they are to live the kind of life they want and to make the choices they want. Wealth liberates: per capita GDP is a decent proxy for the amount of freedom enjoyed by individuals in a society. It is an admittedly imperfect measure: civil rights don’t require wealth, and wealth doesn’t buy freedom of speech or assembly. But even with civil rights, if you have to struggle to exhaustion every day just to meet your basic needs, freedom of speech or assembly becomes the kind of luxury you rarely get to enjoy.

The view that choice is essential to collective welfare seems compelling, on account of the reasonable assumption that if some choice is good then more choice is better. Adding further options can’t make anyone worse off and will surely make some better off. It’s what economists call ‘Pareto efficient’. And increasing wealth is what makes more of these options real for more and more citizens.

The Challenge of Affluence is a frontal assault on this view. Avner Offer is an economic historian who has long been concerned with figuring out what matters most to quality of life. And what the book tells us, in some 450 amply annotated pages (he seems to have read every relevant source in the social sciences), is that it’s not what economists think it is. Offer makes the powerful argument, with data derived mostly from research in the UK and the US, that not only has our unprecedented affluence failed to make us better off, it may actually have made us worse off; not only does affluence fail to solve the most basic human problems, it creates new ones. We measure the wrong things, we adopt policies designed to promote the wrong things, and we spend money on the wrong things. We have wasted too much time listening to economists. There is an extensive literature on the determinants of wellbeing that for more than forty years has studied people across the globe. The results indicate that wealth is extremely important as people struggle from poverty to subsistence. After that, the welfare gains diminish, and other aspects of life become more important. This amounts to an argument that people living in poor countries should be taking their cues from economists, but people living in rich countries should not. Yet nations like the US and Britain continue to promote policies designed to push per capita GDP still higher, while at the same time neglecting the promotion of policies that might actually make citizens better off. A close reading of Offer’s book will make plain the poverty of imagination and wilful neglect of evidence that this blinkered approach to public policy represents.

Offer’s key insight, from which most of his analysis derives, is that ‘economic resources are not final goods.’ What this means is that wealth is a means to an end, not an end in itself. The true ‘end’ is ‘welfare’, or ‘life satisfaction’, or ‘utility’. We all know this: we all know that wealth is at best a proxy for welfare, which is what we really care about. But ‘welfare’, ‘life satisfaction’ and ‘utility’ are not especially easy to define or to measure; each has a significant inherently subjective component. It is thus tempting to use wealth as a stand-in, especially because money is fungible, so that each of us can use it to get the things that provide us with satisfaction. It seems perfectly reasonable to assume that the more money we have, the better able we will be to use it to provide us with what we value – material goods, leisure time, education. More precisely, it seems reasonable to assume that the relation between money and welfare is monotonic – that the more money we have, the more welfare we have – even if it is not linear (as implied by the ‘law’ of diminishing marginal utility).

Offer criticises this line of thinking. ‘The paradox of affluence and its challenge,’ he writes, ‘is that the flow of new rewards can undermine the capacity to enjoy them.’ There are two main reasons for this. First, freedom of choice is not an unalloyed good, in part because people can be paralysed by too wide a choice, in part because they often choose badly, and in part because even when people overcome paralysis, and choose well, the thought of all those attractive options they left on the table can undermine their satisfaction with the option they chose. Economists believe that choice shouldn’t work this way, but it does. And affluence requires more choice: it poses problems that take time and energy to solve. In the US, if you can’t afford a private school, you don’t have to decide which school is right for your child. If you can afford a private school, your life has just grown a good deal more complicated.

Second, affluence exposes one of our principal weaknesses: our inability to exert self-control. Offer quotes Hume: ‘There is no quality in human nature, which causes more fatal errors in our conduct, than that which leads us to prefer whatever is present to the distant and remote.’ We have a powerful tendency to indulge short-term passions at the expense of long-term interests, and increased wealth feeds this myopia, by giving us the wherewithal to indulge such preferences. The market offers us one novel consumption opportunity after another, and ‘novelty tends to produce a bias towards short-term rewards, towards individualism, hedonism, narcissism and disorientation.’ As an example, Offer has an entire chapter on the obesity epidemic that now plagues the developed world: this is myopia in action. More generally, he says, ‘the thrust of empirical work since the 1960s . . . is that the rational consumer is a fiction, and that choice is often fallible. The choices people make do not always accord with what . . . they would judge as being good for themselves.’ And further, ‘a great deal is at stake here: at a technical level, the assumption of consistency in choice, which is a pillar of economic analysis. At the level of ideology, the justification of market outcomes as being both efficient and equitable. At the political level, the bias in favour of deregulation, privatisation and low taxes.’

Problems of self-control are not new, even if wealth exacerbates them. What have people done in the past to help solve them? The answer is that they – we – relied on a network of restraints provided by the state and by various social and religious institutions; but, as Offer points out, these restraints have weakened. Whether this is a result of affluence, of capitalism, of liberalism or of modernity more generally is hard to say, but whatever the cause, each of us is now pretty much on our own. Nanny states, meddling pastors, strict parents and nosy neighbours have a much smaller hold on us than they used to. Advertisers dangle attractive treats in front of our eyes and noses, and there is precious little to stand between us and the products they want us to buy and consume. The market shoves shiny toys in our faces, and we can afford to buy them.

Offer observes that consumption has shifted increasingly from time-saving devices, like washing machines, to time-using devices, like iPods and DVRs. We want to have a good time, but a pervasive aspect of our psychology does us in; we adapt. New acquisitions give us pleasure, but for much less time than we expect. We become bored, we feel cheated or short-changed, and we’re off to find the next new thing. This process of adaptation has been referred to as the ‘hedonic treadmill’, and Offer provides a nice discussion of the evidence for it. But, as on exercise treadmills, we don’t actually get anywhere. We don’t even get any exercise.

Moreover, choosing these pleasure machines and then using them takes time, and time spent getting and consuming is time not spent on other things. The time we spend on the hedonic treadmill is time we don’t spend nurturing and sustaining relations with friends, family and community. This is doubly unfortunate. First, the literature on the determinants of wellbeing makes it clear that once a society has enough material wealth to live above subsistence, close relations to others are crucial to wellbeing. And second, it is friends, family and community that can collectively help us solve our self-control problems. As our social ties weaken, these become more acute.

Nor is the hedonic treadmill the only one we’re running on. Offer points out how much we care about what he calls ‘regard’, how we look to others. Status or regard can be derived from many things: virtues of character, occupation, acts of kindness or charity, and of course wealth. In a society in which efforts are concentrated on increasing GDP, and life is oriented towards consumption, wealth becomes an increasingly important yardstick of status, and other things recede into the background. Thus the treadmill: how much wealth is enough? The answer is: more wealth than your neighbours. A rising tide that lifts all boats doesn’t change your own relative position; you may get a better car, but you won’t get more status. The result is a kind of arms race of wealth acquisition that thrives on inequality, but leaves no one better off. Twenty years ago Robert Frank wrote a brilliant book about the quest for status, Choosing the Right Pond, and Offer’s contribution brings Frank’s analysis up to date. We run faster and faster, for longer and longer, just to keep up. And it isn’t only about status. As Fred Hirsch pointed out long ago in Social Limits to Growth, there are certain goods that are inherently scarce and can’t be increased by improved economic efficiency (e.g., a house in the best neighbourhood, or admission to the best university), so that the only way to assure access to them is by out-doing your neighbour.

Concern for status and competition for time also weakens our commitment to our partners (Offer shows that marital satisfaction has been going down as GDP has been going up) and increases the costs associated with having children (he has an excellent chapter on this, called ‘Women and Children Last: The Retreat from Commitment’). The single-minded pursuit of increased GDP leads to increased inequality, which has significant negative effects on both psychological and physical health. It leads to increased insecurity, which, as Jacob Hacker has recently pointed out in The Great Risk Shift, afflicts the white-collar classes as much as it does the blue-collar. It leads to decreased trust as we are constantly bombarded by advertisements from an industry that depends on trust while at the same time undermining it. And it leads to decreased virtue, because money seems to crowd out ethics.

In the early 1990s, Switzerland was preparing for a referendum about where it would site nuclear waste dumps. Citizens had strong views on the issue, and were well informed. Two social scientists, Bruno Frey and Felix Oberholzer-Gee, went to a number of Swiss cantons to sample public opinion. When asked whether they would be willing to have a waste dump in their community, about 50 per cent of respondents said yes – even though people generally thought such a dump was potentially dangerous and would lower the value of their property. The dumps had to go somewhere, and like it or not, people had obligations as citizens. Apparently, there is not much of a nimby problem among the Swiss. Frey and Oberholzer-Gee then asked the same group a slightly different question: whether, if they were given an annual payment equivalent to six weeks of an average Swiss salary, they would be willing to have the dumps in their communities. These people had two reasons to say yes: obligations as citizens and a financial incentive. Yet only about 25 per cent of respondents agreed. Adding the financial incentive cut acceptance in half.

It seems self-evident that if people have one good reason to do something, and you give them a second, they’ll be more likely to do it: you’re more likely to order a dish that tastes good and is good for you than one that just tastes good. Yet the Swiss who were given two reasons to accept a waste site were less likely to say yes than those given only one. Frey and Oberholzer-Gee explained this result by arguing that reasons don’t always multiply; sometimes, they compete. The Swiss who were not offered incentives had to decide whether their responsibilities as citizens outweighed their distaste for having nuclear waste dumped in their backyards. Some thought yes, and others no. But that was the only question they had to answer.

The situation was more complex for those who were offered cash incentives. They had to answer another question before they even got to the issue of accepting the waste: ‘Should I approach this dilemma as a Swiss citizen or as a self-interested individual? Citizens have responsibilities, but they’re offering me money. Maybe the cash is an implicit instruction to me to answer the question based on the calculation of self-interest.’ Now, taking the lead of the questioners, with their self-interested hats squarely on their heads, citizens concluded that six weeks’ pay wasn’t enough. Indeed, they concluded that no amount of money was enough. Put another way, the offer of money undermined the moral force of the situation. Morality is for suckers, the offer of money seemed to be saying, even if only implicitly. To take a more mundane example, Fred Hirsch observed, in discussing the commercialisation of romance, that ‘orgasm as a consumer’s right rather rules it out as an ethereal experience.’

Ask yourself if it is possible to run a society in which children are neglected, marriages are unstable, jobs are precarious, trust is absent and virtue has disappeared. Offer’s answer is clear. And so was Adam Smith’s. The father of the free market, who in The Wealth of Nations saw competition as a somewhat miraculous virtuous circle, wrote another important book, The Theory of Moral Sentiments, in which he argued that people’s ‘natural sympathy’ for one another would impose restraints on what each person was willing to do to others in pursuit of self-interest. Smith was right about the ‘sympathy’ part, but not about it being ‘natural’. ‘Sympathy’ reined us in and kept the world from becoming Hobbesian, but it wasn’t ‘natural’; it was sociocultural. It was so pervasive in Smith’s milieu that he seemed to take it for granted. But 250 years of the pursuit of wealth in market societies has made it all but disappear. Not only does life become ‘nasty and brutish’ in a world without virtue, but the magic of the market stops working as well. Markets depend on virtue for their efficiency, even as they undermine it.

The story Offer tells has been told before by various social scientists in various ways. What he adds is a genuine economic analysis. The book is full of the kind of data that economists take seriously – on advertising, buying a car, income, occupational status. This is a book that uses the tools of economics to illuminate the myopic lens through which economics views the world. Because of this, one can hope that economists will afford this book a measure of serious attention and respect that they have not given to its predecessors. And this matters, because economists rule the roost in the social sciences, and I don’t see them ceding their position to psychologists or sociologists any time soon. If there is a problem with Offer’s book, it is that although the words and sentences should be comprehensible to any educated person, the graphs and tables that present data are almost indecipherable for anyone who has not had some training in economics. Offer would have done a real service by translating the data into English.

You might read Offer’s book, be persuaded by his arguments, but still feel compelled to pursue policies that aim to raise GDP. The reason is that not everyone in your society has attained the level of economic status in which subsistence is no longer an issue and Offer’s problems start to kick in. If massive inequality is inevitable, and the only way to raise the economic status of the poor is by pursuing policies that enable those who aren’t poor to acquire more wealth (and more problems), then you’re stuck. And this is pretty much the line we’ve been fed. It’s the neoliberal ‘official story’. I don’t buy it. It seems to me that if Offer is right, and I think he is, then one can tackle poverty by a significant redistribution of wealth. In the old days, one would have to justify such redistribution morally by arguing that a shilling in a poor person’s pocket produced more utility than the same shilling in a rich person’s pocket. Although redistribution made some better off at the expense of others, the gains outweighed the losses. The beauty of Offer’s analysis is that if you take it to its logical conclusion, it implies that everyone benefits from redistribution. That the poor benefit is obvious; but the rich benefit also because, with less wealth, they are less plagued by choice and less tempted to succumb to loss of self-control. This is a true Pareto efficient policy.

And if you combine redistribution of wealth with policies designed to enhance ‘in-kind’ goods and services rather than GDP, you can make real social progress. Instead of giving people more money, tempting them to run for even longer on the hedonic treadmill, you could provide better schools, better health care, greener parks and more comfortable community centres from which everyone can benefit. Reduce the working week so that people will have more time to spend as citizens, partners and parents. An important step in this direction would be a new system of national accounts – one that measures what really matters to wellbeing, instead of what’s easy to measure. I’m not sure that Offer would endorse any of these proposals, but it seems to me that if he takes his own analysis seriously, he should. And so should the rest of us.

Barry Schwartz is a professor of psychology at Swarthmore College in Pennsylvania and the author of The Paradox of Choice and The Costs of Living.

copyright © LRB Ltd, 1997-2007

Tuesday, June 12, 2007

Income Inequality, Writ Larger

June 10, 2007

INCOME inequality is a hot topic in politics and economics. The rising economic tide is lifting a bunch of yachts, but leaving those in simple boats just bobbing along.

Two professors — Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley — have found that the share of gross personal income of the top 1 percent of American earners rose to 17.4 percent in 2005 from 8.2 percent in 1980.

Many economists, especially those who find themselves in the Bush administration, argue that the winner-take-all trend is fueled by other, unstoppable trends. After all, globalization, information technology and free trade place a premium on skills and education. “The good news is that most of the inequality reflects an increase in returns to ‘investing in skills’ — workers completing more school, getting more training and acquiring new capabilities,” as Edward P. Lazear, the chairman of the Council of Economic Advisers, put it last year.

It takes an optimist to find good news in the fact that the top 1 percent have steadily increased their haul while the other 99 percent haven’t; after all, many more than one in every 100 Americans are investing in skills and education.

But the orthodoxy surrounding income inequality is being undermined by research that looks at institutional issues: changes in the way the corporate world measures the performance of workers, the decline of unions, and government wage and tax policy. In this view, skills, education and trade aren’t the whole story. They’re simply “factors operating within a broader institutional story,” as Frank Levy, the Rose professor of urban economics at the Massachusetts Institute of Technology, describes it.

One big change in recent decades has been a rise in performance-based pay. Through the 1970s, thanks in part to unions that negotiated wages collectively, “people with different abilities and capabilities were frequently paid the same amount for doing similar jobs,” said W. Bentley MacLeod, an economics professor at Columbia.

But as companies and compensation consultants began using information technology to determine more accurately the contributions of individual employees, employers began to discriminate among employees based on performance. In a working paper, Professor MacLeod, along with Thomas Lemieux of the University of British Columbia and Daniel Parent of McGill University, mined census data and found that the proportion of jobs with a performance-pay component rose to 40 percent in the 1990s from 30 percent in the late 1970s.

“Since companies are better able to measure precisely what an employee contributes, we’ve seen a greater range of incomes among people doing roughly the same jobs,” Professor MacLeod said.

The fact that more Americans are paid less on the basis of a job title and more on their individual output inexorably leads to greater inequality. The authors’ conclusion is that the rise of performance-based pay has accounted for 25 percent of the growth in wage inequality among male workers from 1976 to 1993.

“All the bits of evidence we have tend to say that this trend is continuing,” Professor Lemieux said. In 2003, the authors note, 44.5 percent of workers at Fortune 1000 companies received some form of performance-based pay, up from 34.7 percent in 1996. And think of the growing legions of self-employed — people selling items on eBay, mortgage brokers and real estate brokers, freelance journalists and consultants of all types — for whom all pay is performance-based. Among these growing cadres, the dispersion of incomes is rather large.

“When you look at the self-employed and contractors,” Professor Lemieux said, “inequality is much higher.”

Aside from corporate compensation policies, public policies have played a significant role in contributing to the growth of income inequality. That’s the argument made in a recent, brilliant National Bureau of Economic Research working paper by Professor Levy and Peter Temin, the Elisha Gray II professor of economics at M.I.T. The paper, which is more narrative than quantitative — Professor Temin is a distinguished economic historian — argues that the rise of income isn’t simply a byproduct of the free market working its wonders.

Professor Levy and Professor Temin divide the second half of the 20th century into two periods. In the first, 1955 to 1980, a grand bargain between labor and corporate America involving New Deal-era protections for workers and high marginal tax rates (the top rate was 90 percent in the 1950s) led to what economists have called the Great Moderation. The middle class grew dramatically, income inequality decreased, and corporations generally enjoyed labor peace.

Since 1980, they argue, it’s been a different story, thanks in part to a shifting political environment. Unions have weakened, the minimum wage hasn’t come close to keeping up with inflation, and marginal income tax rates have been cut — the top marginal rate is now 36 percent, down from 70 percent in 1980. A result has been declining bargaining power for workers and the rise of a winner-take-all environment.

“The last six years of federal tax history have involved an inhospitable politics in which winners have used their political power to expand their winnings,” the authors say. In other words, if capital has lately been prevailing in the centuries-long battle with labor, it is doing so with a substantial assist from the government.

Professor Saez agrees with the broad argument, but says that the impact of tax policy in recent years has been minor. When the top income tax rate was 5o percent in the 1970s, he says, “the force to pay according to talent was much weaker” because most of the excess pay would be eaten up by taxes. “Once the very high tax rates for big fortunes were removed in the 1980s,” Professor Saez says “then the market could drive up the compensation at the top.”

WHAT are the political — and policy — implications of this rethinking of the roots of income inequality? Too often, economists have argued that the government can’t — and shouldn’t — do much to reverse the growth of income inequality, beyond exhorting workers to get more skills and education. But given the institutional factors at work, that may be a cop-out.

“The historical evidence suggests that institutions do have some power to modify some of these outcomes,” Professor Levy said.

It is commonplace to hear that the current set of arrangements and policies is the only possible way the economy can work, given trends like the rise of China and global economic integration. As Professor Levy said, “That’s a very convenient argument for people to make if they’re doing very well.”

Daniel Gross writes the “Moneybox” column for

Copyright 2007 The New York Times Company

The Next Culture War

June 12. 2007

The conventional view is that an angry band of conservative activists driven by nativism and economic insecurity is killing immigration reform. But this view is wrong in almost every respect.

In the first place, immigration is not now, nor has it ever been a primarily partisan issue. A Pew Research Center poll released last week found that 36 percent of Republicans support the bill, along with 33 percent of Democrats and 31 percent of independents. That’s hardly a party-line chasm.

In the second place, immigration attitudes have never dovetailed neatly with racist or nativist ones. Hostility to immigration often increases in periods when racist attitudes are on the decline. Moreover, established immigrants are nearly as suspicious of new and illegal immigrants as native-born Americans.

And in the third place, decades of research have failed to show any clean link between economic insecurity and anti-immigrant views. Pollsters ask voters if they feel their own wages are affected by immigrant labor. There is no strong connection between feelings of personal risk and anti-immigration opinions. Some studies find no link at all between income levels and those views.

What’s shaping the immigration debate is something altogether deeper and more interesting. And if you want to understand what it is, start with education. Between 1960 and 1980, the share of Americans enrolled in higher education exploded. The U.S. became the first nation in history with a mass educated class. The members of this class differed from each other in a thousand ways, but they tended to share a cosmopolitan approach to the world. They celebrated cultural diversity and saw ethnocentrism as a sign of backwardness.

Their worldview, which they don’t even understand as a distinct worldview, was well summarized by Richard Rorty, who died this week. The goal of any society, he wrote, was to create “a greater diversity of individuals — larger, fuller, more imaginative and daring individuals.” Social life should widen. New cultures should be explored. And, as Rorty concluded, “Individual life will become unthinkably diverse and social life unthinkably free.”

Liberal members of the educated class celebrated the cultural individualism of the 1960s. Conservative members celebrated the economic individualism of the 1980s. But they all celebrated individualism. They all valued diversity and embraced a sense of national identity that rested on openness and global integration.

This cultural offensive created a silent backlash among people who were not so enamored of rampant individualism, and who were worried that all this diversity would destroy the ancient ties of community and social solidarity. Members of this class came to feel that America’s identity and culture were under threat from people who didn’t understand what made America united and distinct.

The two groups clashed whenever a political issue arose that touched on America’s identity or role in the world: immigration, free trade, making English the official language or intervening for humanitarian reasons in Kosovo or Darfur.

These conflicts were and are primarily cultural clashes, not economic or ideological ones. And if you want to predict which side a person is likely to be on, look at his or her educational level. That’ll be your best clue.

As the sociologist Manuel Castells generalized, “Elites are cosmopolitan, people are local.” People with university values favor intermingling. People with neighborhood values favor assimilation.

What’s made the clashes so poisonous is that many members of the educated class don’t even recognize that they are facing a rival philosophy. Many of them assume that anybody who disagrees with them on immigration and such must be driven by racism, insecurity or some primitive atavism. This smug attitude sends members of the communal, nationalistic side into fits of alienation and prickly defensiveness. It’s what makes many of them, in turn, so unpleasant.

The bottom line is that the immigration debate is part of a newer culture war that has succeeded the familiar and fading culture war. This longer culture war is not within the educated class. It’s not the ’60s versus the ’80s. It’s — to mimic Mark Lilla — between the people who have absorbed both the ’60s and the ’80s, and everyone else.

It’s between open, individualistic cosmopolitans and rooted nationalists. It’s between those who ride the tides of the cultural mainstream and those so driven by marginalization that they’re destroying the best compromise they will get.

Copyright 2007 The New York Times Company

Sunday, June 10, 2007

Private Loans Deepen a Crisis in Student Debt

June 10, 2007


WASHINGTON — As the first in her immigrant family to attend college, Lucia DiPoi said she had few clues about financing her college education. So when financial aid and low-interest government loans did not stretch far enough, Ms. DiPoi applied for $49,000 in private loans, too. “How bad could it be?” she recalls thinking.

When Ms. DiPoi graduated from Tufts University in Boston, she found out. With interest, her private loans had reached $65,000 and she owed an additional $19,000 in federal loans. Her monthly tab is $900, with interest rates topping 13 percent on the private loans.

Ms. DiPoi, now 24, quickly gave up her dream to work in an overseas refugee camp. The pay, she said, “would have been enough for me but not for Sallie Mae,” her lender.

The regulations that the federal Education Department proposed this month to crack down on payments by lenders to universities and their officials were designed to end conflicts of interest that could point students to particular lenders.

But they do nothing to address a problem that many education officials say may have greater consequences — more students relying on private loans, which are so unregulated that Attorney General Andrew M. Cuomo of New York recently called them the Wild West of lending.

As college tuition has soared past the stagnant limits on federal aid, private loans have become the fastest-growing sector of the student finance market, more than tripling over five years to $17.3 billion in the 2005-06 school year, according to the College Board.

Unlike federal loans, whose interest rates are capped by law — now at 6.8 percent — these loans carry variable rates that can reach 20 percent, like credit cards. Mr. Cuomo and Congress are now investigating how lenders set those rates.

And while federal loans come with safeguards against students’ overextending themselves, private loans have no such limits. Students are piling up debts as high as $100,000.

Banks and lenders face negligible risk from allowing students to take out large sums. In the federal overhaul of the bankruptcy law in 2005, lenders won a provision that makes it virtually impossible to discharge private student loans in bankruptcy. Previously such provisions had only applied to federal loans, as a way to protect the taxpayer against defaulting by students.

While federal loans also allow borrowers myriad chances to reduce or defer payments for hardship, private loans typically do not. And many private loan agreements make it impossible for students to reduce the principal by paying extra each month unless they are paying off the entire loan. Officials say they are troubled by the amount of debt that loan companies and colleges are encouraging students to take on.

“It’s a huge problem,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “When a student signs the paper for these loans, they are basically signing an indenture,” Mr. Nassirian said. “We’re indebting these kids for life.”

Dozens of students interviewed said that when they signed for their loans they were unclear on what interest rate they were getting and that financial aid counselors discussing repayment failed to include interest that students were compounding while in college. The lenders say they are providing a valuable service, helping students who might otherwise not be able to afford college. Tom Joyce, a spokesman for Sallie Mae, the nation’s largest student lender, said the company’s average interest rate on private student loans was just over 10 percent and that the typical borrower was a young person with little or no credit history and no collateral.

“What would the credit card interest rate be for that borrower — 24, 25 percent?” Mr. Joyce asked. “Our goal is to make it possible for students to graduate.”

But various members of Congress are now looking at ways to tighten oversight of private student loans.

The large growth in private loans — once confined primarily to graduate students — largely comes from steep increases in tuition, which have outpaced inflation and federal aid, and an increasing reluctance among parents to take on more debt.

For the last 15 years, the limits on the most common federal loans have stagnated at $17,125 for four years. They will increase slightly starting next month. In addition, loan companies have also come to realize that such loans can be hugely profitable.

Although the federal Education Department has no jurisdiction over private student loans, Education Secretary Margaret Spellings recently pledged to convene the agencies that do, including the Securities and Exchange Commission, the Federal Trade Commission and the Federal Deposit Insurance Corporation.

Research by the U.S. Public Interest Research Group and others show that some students are taking private loans before exhausting their eligibility for low-interest, fixed-rate federal loans.

Janea Morgan, 25, a 2006 graduate of California College San Diego, said that college officials had her fill out the federal financial aid form but never tapped federal loans. Instead, she said, they steered her to a private loan with KeyBank, at an interest rate that could rise four times a year, with no cap.

Now, she is carrying $46,000 in private loans at 9.22 percent interest, which she fears may rise beyond her ability to pay. Ms. Morgan said that when she asked college officials why they bypassed federal loans, “They said it would take too long.”

Barbara Thomas, vice president and chief operating officer at California College San Diego, said that she could not discuss Ms. Morgan’s situation because of privacy laws, but that generally students sometimes took too long to fill out the federal financial aid application properly. “It’s a time thing that kids have to work with,” Ms. Thomas said.

Sometimes marketing is at work. Last September, the United States Student Association complained to the Federal Trade Commission that a major private lending program, Loan to Learn, made “false and deceptive claims” in a brochure called “Demystifying Financial Aid.”

According to the complaint, the brochure stated inaccurately that “most government loans are need-based,” suggested that federal loans could not be used for education-related costs like computers and books, and that there were “strict deadlines” on applying for federal loans. In fact, students can get federal loans to pay for educational expenses, even retroactively.

George C. Pappas, a spokesman for Loan to Learn, dismissed the complaint as “absolutely ridiculous.” Nevertheless, EduCap, the parent company, has removed the passages from the guide. The F.T.C. declined to comment on Loan to Learn.

Students with private loans can be caught by surprise at how adjustable interest rates allow debt to swell.

Sean Craig Hicks, 35, attended the Westwood College of Aviation Technology, now known as Redstone College, in Broomfield, Colo., from 1997-2000 in the hope of becoming an airplane mechanic. He said a financial aid officer gave him an application for a $6,000 private loan through Wells Fargo to help pay outstanding expenses just before graduation. On the school’s hall walls, he said, were fliers for Wells Fargo loans. “You trust those people when they tell you this is the one to go with,” Mr. Hicks said.

Mr. Hicks said his loan documents had promised that if he paid the minimum due each month, he would pay off the loan by 2010. Instead, after six years of payments, most of them on time, he owes $100 more than when he took out the loan.

A spokeswoman for Wells Fargo, Mary Berg, confirmed that Mr. Hicks held a student loan, but called the dealings with him a private matter. Officials at Redstone College did not respond to requests for comment.

Many students out of dozens interviewed said it was not particularly clear what interest rate they had signed up for.

Take Attila Valyi, a Motorola employee in Plantation, Fla. Eager to jump-start his education, he turned to American InterContinental University, a for-profit institution offering a bachelor’s degree in 13 months. But discovering how much the diploma would cost was an endeavor worthy of a dissertation.

While the $28,000 tuition was no secret, Mr. Valyi said that at the urging of university officials, he had signed an application for a loan that doubled as a pledge to pay the money back. It did not indicate an interest rate. He took out two more loans before getting his bachelor’s degree, realizing only when it was too late, he said, that he carried loans at three different interest rates that could rise from month to month, the largest for $10,745 at 18 percent.

When Mr. Valyi, 30, contacted the lender, Sallie Mae, to refinance, he said he was told he could not do so until he graduated. “You’re locked in at 18 percent,” he said he was told.

Martha Holler, a spokeswoman for Sallie Mae, said Mr. Valyi and other borrowers of those years would have been told, during the application process and in an approval letter, the interest rate as a percentage above the prime rate. And they were free to cancel, up to 30 days after the money went to the school.

Lynne Baker, a spokeswoman for the Career Education Corporation, which owns American InterContinental and scores of other for-profit colleges, said that the corporation did not track individual student interest rates and that whether to pay such rates was the students’ decision.

Copyright 2007 The New York Times Company

Battle of the Bands? Gates vs. Jobs

'Two of the Luckiest Guys on the Planet': Steve Jobs and Bill Gates Trade Memories, Not Barbs, In Rare Joint Appearance

Wall Street Journal June 1, 2007; Page B1

CARLSBAD, Calif. -- Among the many barbs that Steve Jobs and Bill Gates have traded over the years, perhaps none was as cutting as when the Apple Inc. CEO said that Microsoft Corp. had "no taste" in a 1990s documentary. Embedded in that short remark were the vast differences between the two men and between their companies. Though they worked closely together in the early days of the personal computer industry, they soon diverged. Mr. Jobs built his fame as the father of elegant and tasteful consumer products such as the Macintosh computer and iPod music player. Mr. Gates earned a fortune building software for the general-purpose utility PC for businesses and homes, functional but arguably unexciting by comparison.

So it was especially significant that in a rare joint appearance at The Wall Street Journal's D: All Things Digital conference here this week, Mr. Gates said he'd "give a lot to have Steve's taste.... The way he does things is just different, and I think it's magical." In an exchange marked more by respect than rivalry, Mr. Jobs acknowledged Mr. Gates's role as a software pioneer and pointed to the deep history the two men have as the catalysts of an industry revolution that brought cheap, easy-to-use computers to the masses.

Still, the two companies and their leaders are a study in contrasts. Microsoft has outdone Apple on scale, using its Windows operating system to forge a dominance in PC software that towers over the single-digit market share held by Apple's Mac line of computers. But in recent years, Apple has punched back in an emerging area of digital consumer electronics, creating a runaway hit with its iPod player. There, Apple is the giant and Microsoft a mere challenger.

Questioned on stage by Walt Mossberg and Kara Swisher, Messrs. Gates, 51 years old, and Jobs, 52, reflected on the future of digital technology as well as the past. Excerpts:

Ms. Swisher: There's been a lot of mano-a-mano/catfight kind of thing in the blogs and the press, but what do you think each other has contributed to the computer and technology industry?

Mr. Jobs: Bill built the first software company in the industry before anybody really knew what a software company was, and that was huge. And the business model they ended up pursuing turned out to be the one that worked really well for the industry. A lot of other things you could say, but that's the high-order bit.

Mr. Gates: First, I want to clarify: I'm not Fake Steve Jobs [an anonymous blogger who writes a spoof diary].

Bill Gates and Steve Jobs appear together on stage at WSJ's D Conference to discuss their contribution to the computing industry. Here are highlights of their conversation with Walt Mossberg.
What Steve's done is quite phenomenal. If you look back to 1977, that Apple II computer, the idea that it would be a mass-market machine, that this could be an incredible empowering phenomenon: Apple pursued that dream.

Steve gave a speech once where he talked about [how] we build the products that we want to use ourselves. He's really pursued that with incredible taste and elegance, and his ability to always come around and figure out where that next bet should be has been phenomenal.

Mr. Mossberg: I don't think most people know that there was actually some Microsoft software in that Apple II computer. How did that occur?

Mr. Jobs: My partner, this guy named Steve Wozniak. Brilliant, brilliant guy. He writes this BASIC [computer programming language] that is, like, the best BASIC on the planet. It does stuff that no other BASIC's ever done. It's perfect in every way, except for one thing, which is it's just fixed point. It's not floating point [which is better for complex math]. And, we're begging Woz to make this floating point and he just never does it.... So, you know, Microsoft had this very popular, really good floating point BASIC [so] we ended up going to them and saying, "Help."

Mr. Mossberg: And how much [did Apple pay]?

Mr. Gates: Oh, it was $31,000.... I flew out to Apple, I spent two days there getting the cassette. The cassette tapes were the main ways that people stored things at the time. And, you know, that was fun.

I think the most fun is later when we worked together [on the Mac].... We had really bet our future on the Macintosh being successful.

Mr. Jobs: What's hard to remember now is that Microsoft wasn't in the applications business then. They took a big bet on the Mac because this is how they got into the apps business. Lotus dominated the apps business on the PC back then.

Ms. Swisher: Moving forward, after [Microsoft] grew more and more strong, what did you think was going to happen to Apple after the disasters that occurred after Steve left?

Mr. Gates: Well, Apple hung in the balance. We continued to do Macintosh software. Excel, which Steve and I introduced together in New York City, went on and did very well. But Apple just wasn't differentiating itself well enough from the higher volume platform.... The product line just didn't evolve as fast -- Steve wasn't there -- as it needed to. And we were actually negotiating a deal to invest and make some commitments and things with Gil Amelio [Apple's CEO in the 1990s].... I was calling him up on the weekend and next thing I knew, Steve called me up and said, "Don't worry about that negotiation with Gil Amelio. You can just talk to me now." And I said, "Wow!"

Mr. Jobs: Gil was a nice guy, but he had a saying. He said, "Apple is like a ship with a hole in the bottom leaking water, and my job is to get the ship pointed in the right direction."

Mr. Mossberg: In 1997, Windows was going great guns. Windows 95 really was an enormous leap.... Steve, you said you had decided that it was destructive to have this competition with Microsoft. Now, obviously, Apple was in a lot of trouble, and I presume that there was some tactical or strategic reason for that, as well as just wanting to be a nice guy, right?

Mr. Jobs: Apple was in very serious trouble. And what was really clear was that if the game was a zero-sum game where for Apple to win, Microsoft had to lose, then Apple was going to lose. A lot of people's heads were in that place at Apple and in the customer base because Apple had invented a lot of this stuff and Microsoft was being successful and Apple wasn't and there was jealousy and this and that.

But it was clear that you didn't have to play that game because Apple didn't have to beat Microsoft. Apple had to remember who Apple was because they'd forgotten who Apple was.... So I called Bill up and we tried to patch things up.

Mr. Gates: And since that time, we've had a team that's fairly dedicated to doing the Mac applications, and that's worked out very well.

Ms. Swisher: Do you look at yourselves as rivals now, as the landscape has evolved? We watch the commercials.... Although I have to confess I like PC guy.

Mr. Jobs: The art of those commercials is not to be mean, but it's actually for the guys to like each other. Thanks. PC guy is great. Got a big heart.

Mr. Gates: His mother loves him.

Mr. Mossberg: How often is Apple on your radar screen at Microsoft in a business sense?

Mr. Gates: Well, they're on the radar screen as an opportunity. In a few cases like the Zune, if you go over to that group, they think of Apple as a competitor. They love the fact that Apple's created a gigantic market, and they're going to try and come in and contribute something to that.

Mr. Jobs: And we love them because they're all customers.... The big secret about Apple, of course, is that Apple views itself as a software company.... We don't have a belief that the Mac is going to take over 80% of the PC market. You know, we're really happy when our market share goes up a point, and we love that and we work real hard at it. But Apple's fundamentally a software company, and there's not a lot of us left and Microsoft's one of them.

Mr. Mossberg: There is a certain school of thought that this is all migrating to the [Internet], and you'll need a fairly light piece of hardware that won't have to have all that investment -- all the kinds of stuff you guys have done throughout your careers. So as much as people might think of you as rivals, one way to think of you is the two guys....

Mr. Jobs: We're both dinosaurs?

Mr. Mossberg: No, seriously.... In five years, is the personal computer still going to be the linchpin of all this stuff?

Mr. Gates: The mainstream is always under attack. The thing that people don't realize is that you're going to have rich local functionality. It's a question of using that local richness together with the richness that's elsewhere.

Mr. Mossberg: What would you each imagine that you would carry as your principal [device] in five years?

Mr. Gates: I don't think you'll have one device. I think you'll have a full-screen device that you can carry around, and you'll do dramatically more reading off of that.... I believe in the tablet form factor. I think you'll have voice. I think you'll have ink. You'll have some way of having a hardware keyboard and some settings for that. .... You'll have your living room, which is your 10-foot experience, and that's connected up to the Internet, and there you'll have gaming and entertainment, and there's a lot of experimentation in terms of what content looks like in that world. And then in your den, you'll have something a lot like you have at your desk at work. You know, the view is that every horizontal and vertical surface will have a projector so you can put information [on it]. Your desk can be a surface [where] you can sit and manipulate things.

Mr. Jobs: The PC has proved to be very resilient because, as Bill said earlier, I mean the death of the personal computer has been predicted every few years.... This general purpose device is going to continue to be with us and morph with us, whether it's a tablet or a notebook or a big curved desktop you have at your house. So I think that'll be something that most people have, at least in this society. In others, maybe not, but certainly in this one.

But then there's an explosion that's starting to happen in what you call post-PC devices. You can call the iPod one of them.... And I think that category of devices is going to continue to be very innovative, and we're going to see lots of them.

Mr. Mossberg: So what are the core functions of the device formerly known as the cellphone? The pocket device.

Mr. Gates: How quickly all these things that have been somewhat specialized -- the navigation device, the digital wallet, the phone, the camera, the video camera -- come together it's hard to chart out. But eventually, you'll be able to pick something that has the capability to do every one of those things.

Mr. Mossberg: Five years from now, what's going to be on that pocket device?

Mr. Jobs: I don't know. And the reason I don't know is because I wouldn't have thought that there would have been maps on it five years ago, but something comes along, gets really popular, people love it, get used to it, you want it on there.

People are inventing things constantly and I think the art of it is balancing what's on there and what's not on there. Clearly, most things you carry with you are communications devices. You want to do some entertainment with them as well, but they're primarily communications devices and that's what they're going to be.

Question from the audience: Bill, even your harshest critic would have to admit that your philanthropy work is planet-shaking, incredible and could be, if you make it, a second act so amazing that it would dwarf what you've actually done at Microsoft. If you had to choose a legacy, what would it be? And Steve, do you look at Bill and think, gee, that guy is so lucky he had a company so rich with talent that he didn't have to personally come in every day and save it, and I wish I had the opportunity?

Mr. Gates: The most important work I got a chance to be involved in, no matter what I do, is the personal computer. That's what I grew up with, in my teens, my 20s, my 30s. I even knew not to get married until later because I was so obsessed with it. That's my life's work. And it's lucky for me that some of the skills and resources that I was able to develop through those experiences can be applied to the benefit of the people who haven't had technology, including medicine, working for them. So it's an incredible blessing to have two things like that. But if you look inside my brain, it's filled with software and the magic of software and the belief in software, and that's not going to change.

Mr. Jobs: I think the world's a better place because Bill realized that his goal isn't to be the richest guy in the cemetery. That's a good thing, and so he's doing a lot of good with the money that he made.

I'm sure Bill was like me in this way. I mean, I grew up fairly middle class, lower middle class, and I never really cared much about money. And Apple was so successful early on in life that I was very lucky that I didn't have to care about money then. And so I've been able to focus on work and then, later on, my family. And I sort of look at us as two of the luckiest guys on the planet because we found what we loved to do and we were at the right place at the right time and we've gotten to go to work every day with super bright people for 30 years and do what we love doing.

I don't think about legacy much. I just think about being able to get up every day and go in and hang around these great people and hopefully create something that other people will love as much as we do. And if we can do that, that's great.

Question from the audience: You approached the same opportunity so very differently. What did you learn about running your own business that you wished you had thought of sooner or thought of first by watching the other guy?

Mr. Gates: I'd give a lot to have Steve's taste -- in terms of intuitive taste, both for people and products. We sat in Mac product reviews where there were questions about software choices, how things would be done, that I viewed as an engineering question -- that's just how my mind works. And I'd see Steve make the decision based on a sense of people and product that is even hard for me to explain. The way he does things is just different, and I think it's magical.

Mr. Jobs: Because Woz and I started the company based on doing the whole banana, we weren't so good at partnering with people. And, you know, actually, the funny thing is, Microsoft's one of the few companies we were able to partner with that actually worked for both companies. And we weren't so good at that, where Bill and Microsoft were really good at it because they didn't make the whole thing in the early days, and they learned how to partner with people really well.

And I think if Apple could have had a little more of that in its DNA, it would have served it extremely well. And I don't think Apple learned that until a few decades later.

Ms. Swisher: What's the greatest misunderstanding in your relationship and about each other?

Mr. Jobs: We've kept our marriage secret for over a decade now.

[Laughter and applause.]

Mr. Gates: It's been fun to work together. I actually kind of miss some of the people who aren't around anymore. You know, people come and go in this industry. It's nice when somebody sticks around and they have some context of all the things that have worked and not worked.

Mr. Jobs: When Bill and I first met each other and worked together in the early days, generally, we were both the youngest guys in the room, right? I'm about six months older than he is, but roughly the same age. And now when we're working at our respective companies, I'm the oldest guy in the room most of the time. . . . I think of most things in life as either a Bob Dylan or a Beatles song, but there's that one line in that one Beatles song, "you and I have memories longer than the road that stretches out ahead." And that's clearly true here.

Friday, June 8, 2007

Reviving the Hamiltonian Agenda

June 8, 2007


These days there seem to be four schools of political economic thought. First, there are the limited government conservatives, who think taxes should be low and the state should be as small as possible. Second, there are the Hamiltonians, who believe in free market capitalism but think government should help people get the tools they need to compete in it.

Third, there are the mainstream liberals, who think government should intervene in small ways throughout the economy to soften the effects of creative destruction. Fourth, there are the populists, who believe the benefits of the global economy are going to the rich and we need to fundamentally rewrite the rules.

If you are reading this column, you’re keeping company with somebody in group No. 2. We Hamiltonians disagree with the limited government conservatives because, on its own, the market is failing to supply enough human capital. Despite all the incentives, 30 percent of kids drop out of high school and the college graduation rate has been flat for a generation.

Just when it needs a more skilled work force, the U.S. is getting a less skilled one. This is already taking a bite out of productivity growth, and the problem will get worse.

We Hamiltonians disagree with the third group, the mainstream liberals, because their programs haven’t worked out. Retraining programs for displaced workers have flopped. Tax code changes to reduce outsourcing are symbolic. Federal jobs programs aren’t effective. Moreover, the high taxes you need to pay for these programs sap the economy. There’s now a pile of evidence showing that higher taxes mean reduced working hours. In the face of Chinese and Indian competition, we don’t need Americans working less.

We Hamiltonians disagree with the populists because we don’t find their storyline persuasive. The populists argue that global trade is creating a race to the bottom that is leading to stagnant wages and vast inequality. But when you look at the details, you find that most inequality is caused by a rising education premium, by changes in household and family structure, by the fact that the rich now work longer hours than the less rich and by new salary structures that are more tied to individual performance. None of this can be addressed by changing global trade rules.

The global economy radically decreased poverty and increased living standards. It’s crazy to upend this complex system to return to some nostalgic vision of a 1950s industrial wonderland.

When it comes to what Hamiltonians are actually for, two big themes stand out. First, the overall economy has to remain dynamic. The biggest threat is the looming wall of entitlement debt. We Hamiltonians would break the current campaign silence on the issue by raising the retirement age and tackling medical inflation to make Medicare affordable.

The second big theme is a human capital agenda. No one policy can increase the quality of human capital, but a lifelong portfolio of policies can make a difference.

Children do better when raised in stable two-parent families. Bigger child tax credits and increasing the earned income tax credit can reduce the economic strain on young families (and shift the tax burden to older, affluent ones). Extending government income support to young men in exchange for work would make them more marriageable.

Nurse practitioners who make home visits can stabilize disorganized, single-parent families. Quality preschool can help young children from those disorganized homes develop the self-motivation skills they’ll need to succeed.

The most important thing in a school is quality teachers. That means there should be merit pay for the best, and a change in the certification rules (we should allow more people into the profession and weed out the mediocre ones, regardless of their certification).

Senior citizen groups could mentor students to keep them emotionally engaged during college years. National service should be a rite of passage, forcing city kids to work with rural kids, and vice versa.

Middle-aged workers need portable pensions and health insurance so they can move and take risks. The immigration system should reward skills, like the college admissions system. The government should increase funding for basic research, especially in math, engineering and physics.

The list could go on. My goal here is merely to describe the different economic policy schools that are out there, and to emphasize my favorite, the one least represented by the current presidential candidates.

Government is really bad at rigging or softening competition. It can do some good when it helps people compete.

Copyright 2007 The New York Times Company

Media Dumbness Causes Ours

June 8, 2007

Lies, Sighs and Politics


In Tuesday’s Republican presidential debate, Mitt Romney completely misrepresented how we ended up in Iraq. Later, Mike Huckabee mistakenly claimed that it was Ronald Reagan’s birthday.

Guess which remark The Washington Post identified as the “gaffe of the night”?

Folks, this is serious. If early campaign reporting is any guide, the bad media habits that helped install the worst president ever in the White House haven’t changed a bit.

You may not remember the presidential debate of Oct. 3, 2000, or how it was covered, but you should. It was one of the worst moments in an election marked by news media failure as serious, in its way, as the later failure to question Bush administration claims about Iraq.

Throughout that debate, George W. Bush made blatantly misleading statements, including some outright lies — for example, when he declared of his tax cut that “the vast majority of the help goes to the people at the bottom end of the economic ladder.” That should have told us, right then and there, that he was not a man to be trusted.

But few news reports pointed out the lie. Instead, many news analysts chose to critique the candidates’ acting skills. Al Gore was declared the loser because he sighed and rolled his eyes — failing to conceal his justified disgust at Mr. Bush’s dishonesty. And that’s how Mr. Bush got within chad-and-butterfly range of the presidency.

Now fast forward to last Tuesday. Asked whether we should have invaded Iraq, Mr. Romney said that war could only have been avoided if Saddam “had opened up his country to I.A.E.A. inspectors, and they’d come in and they’d found that there were no weapons of mass destruction.” He dismissed this as an “unreasonable hypothetical.”

Except that Saddam did, in fact, allow inspectors in. Remember Hans Blix? When those inspectors failed to find nonexistent W.M.D., Mr. Bush ordered them out so that he could invade. Mr. Romney’s remark should have been the central story in news reports about Tuesday’s debate. But it wasn’t.

There wasn’t anything comparable to Mr. Romney’s rewritten history in the Democratic debate two days earlier, which was altogether on a higher plane. Still, someone should have called Hillary Clinton on her declaration that on health care, “we’re all talking pretty much about the same things.” While the other two leading candidates have come out with plans for universal (John Edwards) or near-universal (Barack Obama) health coverage, Mrs. Clinton has so far evaded the issue. But again, this went unmentioned in most reports.

By the way, one reason I want health care specifics from Mrs. Clinton is that she’s received large contributions from the pharmaceutical and insurance industries. Will that deter her from taking those industries on?

Back to the debate coverage: as far as I can tell, no major news organization did any fact-checking of either debate. And post-debate analyses tended to be horse-race stuff mingled with theater criticism: assessments not of what the candidates said, but of how they “came across.”

Thus most analysts declared Mrs. Clinton the winner in her debate, because she did the best job of delivering sound bites — including her Bush-talking-point declaration that we’re safer now than we were on 9/11, a claim her advisers later tried to explain away as not meaning what it seemed to mean.

Similarly, many analysts gave the G.O.P. debate to Rudy Giuliani not because he made sense — he didn’t — but because he sounded tough saying things like, “It’s unthinkable that you would leave Saddam Hussein in charge of Iraq and be able to fight the war on terror.” (Why?)

Look, debates involving 10 people are, inevitably, short on extended discussion. But news organizations should fight the shallowness of the format by providing the facts — not embrace it by reporting on a presidential race as if it were a high-school popularity contest.

For if there’s one thing I hope we’ve learned from the calamity of the last six and a half years, it’s that it matters who becomes president — and that listening to what candidates say about substantive issues offers a much better way to judge potential presidents than superficial character judgments. Mr. Bush’s tax lies, not his surface amiability, were the true guide to how he would govern.

And I don’t know if this country can survive another four years of Bush-quality leadership.

Copyright 2007 The New York Times Company

Thursday, June 7, 2007

Genentech Blockbusters: CEO Interview

How Genentech Wins At Blockbuster Drugs: CEO to Critics of Prices: 'Give Me a Break'


June 5, 2007; Page B1

The founding of Genentech Inc. in 1976 launched the biotechnology industry, which engineers drugs from living cells instead of test tubes. Headquartered in South San Francisco, Calif., Genentech just finished its best year ever, with a 72% surge in profit to $2.39 billion, driven by Avastin for colon and lung cancer, Rituxan for non-Hodgkin's lymphoma, Herceptin for breast cancer and Lucentis for blindness.

More than 300 studies presented at the American Society of Clinical Oncology this week will involve the use of the company's drugs against more than 15 tumor types, a spokeswoman said. (Another promising use for Avastin; see related article1.)

Genentech's philosophy is to create medicines to fill unmet needs and to recoup its big research-and-development investment -- $1.8 billion in 2006 -- by charging premium prices. A year's supply of Avastin, for example, costs $55,000. But the company is feeling mounting pressure from Congress and Medicare to curb prices and from competitors seeking to produce rival generic products.

Chief Executive Officer Arthur D. Levinson, who has a doctorate in biochemistry, joined Genentech as a senior scientist in 1980 and did pioneering work on the cancer gene HER2/neu that led to the blockbuster Herceptin. He recently spoke with Wall Street Journal editors about the challenges facing his company and the health-care industry. Excerpts:

WSJ: You have multiple blockbuster biotech drugs on the market and more on the way. In such an uncertain business, how do you manage scientists to achieve that kind of success?

Dr. Levinson: We are first and foremost committed to doing great science. If a drug can't be the first in class or the best in class, we're just not interested. We're not looking to achieve incremental advances or extend patents or do X, Y, Z unless it is going to really matter for patients. That allows us to bring in phenomenal scientists and encourage them to do the basic and translational research.

We decided 15 years ago that we would be committing to oncology, which at the time for us was new. We are now the leading producer of anticancer drugs in the United States. We took a lot of risks. In many cases, those risks paid off. We are now also in immunology. Again, the role of management here is to set the broad direction and then hire absolutely the best scientists and bring them in and say, 'Do your stuff.'

There are always trade-offs -- in the short term, between the cancer patient, or the immunology patient. You can't do everything for everybody. Last year, we spent $1.8 billion in research and development. It's a serious job to prioritize everything that's in the pipeline and decide where we are going to spend those precious resources.

The third thing is we place a huge emphasis on making Genentech a great place to work. Eight or nine years ago, we didn't appear on many lists of the best places. We started doing employee surveys, asking, people 'What do you like; and more importantly, what do you not like about the company? What bothers you?' We've been pleased by the validation. We made it to Fortune's Top 20 List four years in a row. Last year we were No. 1. [This year, Genentech slipped slightly, to the No. 2 spot, behind Google Inc.]

WSJ: How do you balance the high cost of innovation with the pressure to cut cancer-drug prices?

Dr. Levinson: Since 1976, when our company was founded, the biotech industry has lost $90 billion in aggregate. I think it's the biggest money-losing industry of all time. It is hemorrhaging. There are some exceptions: We are doing well, and Amgen is doing well. But for most of the 1,300 to 1,400 companies -- 300 or 400 of them public -- this is a money-losing enterprise.

You don't just crank these drugs out. My lab cloned a portion of the breast-cancer gene in 1982. And we started making antibodies to it in the mid-'80s. Then we got cell-culture results in the late '80s and by the early '90s we were getting animal results. And then approval was in December '98. So this goes back a long, long time. Unless these companies can get a return, we are not going to get the new medicines that are making such a difference to patients' lives right now.

There's another way to look at it -- look at how much society is investing in cancer. In the absence of better care, 42% of everybody out there is going to get cancer. And half of those 42% are going to die of cancer. It's the leading cause of death among Americans under age 85. So how much are we spending on drugs for cancer? We have a $12 trillion GDP [gross domestic product]. And we're spending $15 billion. If I do that math, 1/800th of GDP for the leading cause of death. And people say cancer drugs are bankrupting America! Give me a break.

WSJ: So what led you to cap the price of Avastin at $55,000 a year?

Dr. Levinson: That came out of a lot of feedback from payers and patients. We have patients on Avastin for a very long time. We have healthy margins on the drug. We have to have healthy margins because so few of the drugs make it....But at that point, we can afford to give the drug free. That was part of it.

Once or twice a year we will bring in payers...patients, people who are complaining strongly and understandably about the high price of drugs. We bring them in for a two-day symposium, and you can audit our books. Our margins are respectable, but not off the chart. They are not Microsoft margins; they are not Oracle's margins, even. At the end of the day, it's not that everybody applauds and says we're happy paying the price of your drug. But they understand what goes into the equation. And the vast majority of them say this was a revelation, now we understand it.

WSJ: What's your reaction to the Democrats in Congress who are trying to pave the way for generic versions of biotech drugs?

Dr. Levinson: There's a lot of impetus to allow the FDA [Food and Drug Administration] to approve generics. Our position is we don't mind that. Nobody is looking for free handouts here. But what's missing from the Waxman-Schumer-Clinton Bill is an appreciation for the complexity of the science involved in producing a generic biologic in a pill.

Makers of pharmaceutical pills can show chemical equivalence easily. But if you are producing a biological, it is not made by chemical synthesis. It is made by a Chinese hamster's ovary cell or an E. coli bacterium -- a very complex route. We do not yet have analytical techniques to tell you that a copy is clinically identical to the innovator's drug. Our recommendation to the FDA would be to simply require a clinical trial to make sure that the drug is behaving in the clinic as expected.

WSJ: You recently said that the factor limiting R&D isn't money but the ability to find the best people. Aren't we producing enough people?

Dr. Levinson: I think Bill Gates made a comment about immigration and the fact that we make it most difficult for the smartest people to come into this country. We're tightly constrained in terms of bringing great scientists from Great Britain, France or Germany. We struggle to bring in these incredible people who are going to help the economy, help patients and help our business grow. At the end of the day, it will only be good. But we are making it tough on ourselves.

WSJ: You have an unusual situation in which some doctors are treating macular degeneration with your cancer drug Avastin, even though it hasn't been approved for that use, rather than your pricey eye drug Lucentis, which has been. And now the government wants to set up a bake-off comparing them, but you made the decision not to supply drugs for the trials. Why?

Dr. Levinson: To give everybody perspective, I have to go back in time: Fifteen years ago, one of our scientists, Napoleone Ferrara, had purified a protein, VEGF [vascular endothelial growth factor], that induces blood vessels to form. It's been a theory for probably 100 years that [cancers] have some weird way of bringing in blood vessels that nurse the tumor and allow the cancer to grow. Ferrara showed that, lo and behold, 90% of cancers overexpress this protein. It was a semirational leap of faith that if you interfered with this protein, you could block the nourishment of the tumors from blood vessels. That led to the development of Avastin, a monoclonal antibody that blocks VEGF and is now used in colorectal and lung cancer.

About 10 or 12 years ago, Ferrara showed that in patients with macular degeneration, there's also a very high level of VEGF. There's too much [vessel formation] at the back of the eye, near the retina. So he thought, maybe an antibody to VEGF might also help AMD, the leading cause of blindness over age 55.

So we spent two years doing protein engineering. We made it bind more tightly, smaller to reach the back of the eye and noninflammatory. We made three important changes and ended up with Lucentis.

We did a Phase I study and showed that this drug doesn't cause any problems. We did a Phase II study, and we started seeing some incredible, near-miraculous results. We did the Phase III trial, and it confirmed absolutely the Phase II results. And we published the data, and people saw that an antibody to VEGF can potentially save vision. But the drug [Lucentis] wasn't approved. [That was in mid-2005; Lucentis won approval for eye use on June 30, 2006.]

This is a disease that over the course of days you can go from 20/20 vision to losing your eyesight. It's very, very quick, and once you lose your vision, it's gone and you will probably never get it back. The FDA takes a very, very long time to approve the drug. But there was Avastin out there and it was already approved. So you could if you wanted to make a leap of faith that the Avastin molecule would also work in macular degeneration. But Avastin is not approved for that.

WSJ: There's a big difference in cost -- $2,000 a shot for the approved eye drug Lucentis, versus $50 a shot if a doctor splits off a small fractional dose of the cancer drug Avastin -- which was priced to be given in a large IV infusion -- into tiny opthalmic syringes so it is cheaper as an eye shot.

Dr. Levinson: There's a big difference in cost, right. We did Phase III clinical trials of Lucentis that cost $40,000 to $45,000 per patient [the most expensive clinical-development program Genentech ever undertook]. We spent two years to do all kinds of protein engineering to make Lucentis.

It is a very expensive enterprise. What would you suggest we do? We have $1.86 billion to spend on R&D. There are people dying of all kinds of cancers and immunological diseases and everything. We have what we believe are other potential absolutely breakthrough therapies. Would you take your money and do a two-year extraordinarily expensive equivalence trial? [Researchers say such a trial of Lucentis vs. Avastin would cost $50 million.]

Furthermore, access is not a problem with Lucentis. It's very, very difficult to come across a patient who at the end of the day won't have access to Lucentis, either by insurance or by co-pay assistance programs or by our free drug programs.

I have a philosophy -- I invite criticism. But don't ever come to me with a complaint without saying, here is what we might do to make it better. I am happy to hear Part A if I hear Part B.

Write to Marilyn Chase at

Wednesday, June 6, 2007

Conflicts Over Patent Reform

June 6, 2007

Industries Brace For Tough Battle Over Patent Law:
Drug Makers Oppose Overhaul Plan Backed By Tech, Finance Firms

June 6, 2007; Wall Street Journal Page A1

WASHINGTON -- U.S. patent law, already shaken up by a Supreme Court ruling this spring, is facing its biggest overhaul in 50 years, amid a legislative battle that pits drug companies against some major players in the financial and high-tech sectors.

The battle's next round is in the Senate, where a committee is set today to consider legislation backed by Democratic and Republican leaders that would make patents harder to get and easier to challenge. It would also reduce penalties for violating them.

WSJ's Greg Hitt discusses how the proposed legislation may affect patent lawsuits, including how it may significantly raise the bar for patent-infringement awards.
The proposed legislation reflects years of criticism from judges and businesses that the nation's current system of protecting intellectual property is ill-suited to the modern economy, where new inventions crop up quickly and often involve the marriage of hundreds of potentially patentable technologies and ideas. Many large companies also complain that patent litigation is becoming increasingly common and judgments against patent infringers increasingly costly.

Mark Chandler, the general counsel for Silicon Valley giant Cisco Systems Inc., who is in Washington this week to rally support for the proposed legislation, says the current patent system has encouraged "lottery ticket" litigation and deterred innovation. Critics complain the system as it stands now abets inventors and companies who patent incremental advances in technology largely to gain the right to sue for damages if their patents are infringed, rather than to develop products based on those advances.

In March 2006, little-known patent-holding company NTP Inc. won a windfall settlement from Research in Motion Ltd., maker of the popular BlackBerry wireless email device. Faced with the possibility a court-ordered shutdown of its services in the U.S. without a license from NTP, RIM, of Waterloo, Ontario, agreed to pay $612 million to NTP, whose patents had never been applied to an actual product. The case produced widespread calls for patent reform.

Cisco has been joined in its support of the overhaul legislation by high-tech leaders including Microsoft Corp. Goldman Sachs Group Inc. and other financial-services companies are also backing the changes. The widening use of patents on "business methods," such as ways to service mortgages or clear checks, has prompted the industry to focus on the patent issue, as has the industry's rapid embrace of the Internet and other high technology.

The financial-services industry is particularly vulnerable to "infringement suits and nuisance claims," says John Squires, Goldman's chief intellectual-property counsel. Mr. Squires, who is scheduled to testify today in the Senate, says the legislation is needed to "restore some balance and fairness to the litigation landscape."

But pharmaceutical companies like Eli Lilly & Co. and Pfizer Inc., along with manufacturers like Caterpillar Inc. and Dow Chemical Co., have been telling lawmakers the proposed measure goes too far. They say the legislation wouldn't only weaken the value of patents, but would make challenges to them too easy to launch -- and win.

"It's almost everything an infringer could ever want," says Phil Johnson, the chief patent attorney for health-care products maker Johnson & Johnson. He says the legislation being pushed by the leadership of the influential Senate and the House judiciary committees would make "very sweeping changes," and would be a "very substantial policy shift away from fostering innovation."

Drug makers have jealously guarded their technology against challenges by Congress and the courts, arguing that their patents make up the bulk of their real assets, and that any weakening of patent protections would discourage expensive research into next-generation cures.

Critics, however, have pushed long and hard for an overhaul of the system, which still follows the basic framework of the Patent Act of 1952, enacted well before the computer age sparked a whole new level -- and style -- of innovation. But the issues involved in the debate are complex, and Congress until recently had left it largely to the courts to sort them out.

In recent years, the Supreme Court has underscored the patent system's disrepair in a series of rulings rejecting the way lower courts have been interpreting existing law. The justices have declared, in effect, that the patent system, as it has developed through the courts, has deviated from the balance Congress set a half-century ago between promoting innovation and spreading the fruits of progress.

This spring, the high court, in two important rulings, took action that made it harder to get new patents and defend existing ones. In one of those decisions, the justices sided with critics who contend innovation has been stifled by lower-court rulings that gave patent holders more power than Congress intended. The legislation now on Capitol Hill marks an effort to transform what have been piecemeal court rulings into a comprehensive set of changes.

Democratic leaders came to power last fall vowing to make patent reform a priority, as part of a broader agenda to stimulate innovation in the economy. But the current initiatives have a strong bipartisan flavor, increasing their chances for passage. In the House, Rep. Howard Berman (D., Calif.) is working with Rep. Lamar Smith (R., Texas), while Sens. Patrick Leahy (D., Vt.) and Orrin Hatch (R., Utah) are teaming up on the Senate side of the Capitol.

The bill has already cleared an important hurdle, winning approval in May from the House Judiciary Subcommittee on Intellectual Property. The measure is expected to go to the full House Judiciary Committee later this month, and could be ready for floor action in July. Today's hearing before the Senate Judiciary Committee is designed to set the stage for formal action in the chamber later this summer.

Lawmakers have introduced identical bills in the House and Senate, as part of a strategy to push legislation through before the 2008 presidential campaign draws much nearer. "We're on a fast track," says Mr. Berman, who is chairman of the House Judiciary Subcommittee on Intellectual Property.

Under the legislation, patents would still be granted by the government for as long as 20 years. But the legislation would make some fundamental changes in how they are issued and defended. Among other things, the legislation would create a "first to file" system for granting patents, bringing U.S. rules in line with those used by the rest of developed world.

Under the current U.S. system, patents typically go to the first inventor. Under a "first to file" system, a patent would go to the first individual or entity that filed a claim with the government. That could put smaller companies and individual inventors at a disadvantage, but the shift could streamline the patent-approval process by eliminating debates about who first came up with an idea.

Another proposal would make it easier to challenge a patent already approved by the U.S. Patent and Trademark Office. Today, patents can be challenged in two ways: through a special administrative proceeding within the agency or through litigation. The legislation would create a third avenue -- a three-judge tribunal that would consider the validity of patents.

Supporters say the proposal would cut down on questionable patents and reduce the number of lawsuits. They say such a tribunal would be better suited to sorting out the complicated disputes that arise in the high-tech and financial sectors.

But the Coalition for 21st Century Patent Reform -- a broad group that includes drug makers as well as manufacturers like 3M Co. and United Technologies Corp. -- contends the tribunal approach would subject a patent to open-ended challenges. That would be a big problem for pharmaceutical companies, which sometimes spend hundreds of millions of dollars to develop products based on a single patent.

"It cuts right to the business model of our industry," says Ken Johnson, a spokesman for the Pharmaceutical Research and Manufacturers of America, the trade group representing major brand-name drug makers.

Another hotly contested proposal is designed to rein in damage awards in patent-infringement cases. The legislation would limit the circumstances under which damages could be trebled. It would generally prescribe damage awards based on the narrow value of an infringed patent, which might only cover one component in a broader product.

For supporters of the legislation, a federal jury's decision last winter to order Microsoft to pay $1.52 billion to Alcatel-Lucent SA underscored the need for controls on damages in patent litigation. The jury found that Microsoft had infringed patents related to the MP3 technology used for playing and recording digital audio, but critics said the final damage award far exceeded the value of the technology at issue in the case.

The debate is multilayered, and many of the industries involved aren't unified. Some technology companies, for example, oppose the legislation. Bruce G. Bernstein, the chief intellectual-property officer at InterDigital Communications Corp. in King of Prussia, Pa., complains the changes are being pushed by larger, more established technology companies, which are already working the issue aggressively on Capitol Hill. "They've got a big head start," adds Mr. Bernstein, who is scheduled to testify at today's hearing.

The Bush administration has taken a mixed position on the overhaul legislation. It has commended the "bicameral and bipartisan" legislative effort, while also expressing concerns about details of the bipartisan bill. Among other things, the administration has raised questions about the new procedures proposed for reviewing existing patents and the patent office's ability to handle the additional workload. But the administration's statement stressed that it "looks forward" to working with Congress as the measure moves forward.

Write to Greg Hitt at greg.hitt@wsj.com1

How Construction Workers Get Screwed

Original Title: Freelance Labor Costs Illinois $300 million
By Bob Tita
June 04, 2007

A year ago, Mike Volpentesta threw in the towel on his 15-year-old masonry contracting business. Despite a booming construction market in Chicago, Mr. Volpentesta, a career mason, was getting consistently underbid — by wide margins — on bricklaying jobs. He had no idea why.

"I started thinking, 'Am I that out of touch with what other guys are charging?' " says Mr. Volpentesta, 44. "I had one general contractor tell me, 'Mike, you should just stop bidding, because you just can't compete.' "

By the time he took the contractor's advice, Mr. Volpentesta learned how he'd been getting undercut: The winning bidders had shrunk their costs 30% or more by paying their workers as independent subcontractors, which allowed them to avoid payroll taxes, workers compensation and unemployment insurance. Their workers, mostly immigrant tradesmen, earned $10 to $15 per hour less than the $35 hourly union wage.

As Mr. Volpentesta found out, the practice of using off-payroll immigrant workers was taking Chicago's construction industry by storm, cutting many union, and some non-union, contractors out of building projects — and depriving the state of much-needed tax revenue. A recent study estimates the practice cost Illinois more than $350 million in taxes in 2005. The study, conducted at the University of Missouri, also estimated that 8.5% of all Illinois workers were misclassified as independent contractors that year, up 55% since 2001.

"It's caught on like wildfire," says Tom Villanova, president of the Chicago and Cook County Building Trades Council.

The practice also highlights another complication in the raging immigration debate: Many of the skilled tradesmen being treated as off-payroll contractors enter the country legally. Some come on tourist visas that let them stay through the warm-weather construction season. Others simply stay long after their visas expire, knowing they can make substantially more money in the United States and that tax and immigration authorities are unlikely to hunt them down.


And while rising health benefit costs have pushed businesses in many industries to shift workers from employee to contractor status, the trend has been most prevalent in the booming construction market, where demand for workers has outstripped supply, and the immigrant population has provided a steady flow of skilled labor.

"It's how many immigrants start out," says Robert Fital, who legally entered the United States from Poland in 1992 and worked for two years as an independent subcontractor. He says none of his employers paid taxes or insurance on him. "They didn't tell me anything. They just said I had to pay my own taxes."

Mr. Fital says he knew nothing of U.S. employment or tax law. His rudimentary English made it difficult to challenge his bosses or demand a conventional employment relationship. Eventually, he joined the International Union of Bricklayers and Allied Craftworkers, cutting back from the 60-plus-hour weeks he'd been working and commanding a better wage.

But many non-native workers are less interested in entering the legitimate workforce.

"If you're going to work for three months and make the equivalent of what you'd make in three years (in another country), you're going to keep your mouth shut," says Cliff Horn, president of A. Horn Inc., a union contractor in Barrington who's been shifting his focus to publicly funded projects and high-end construction jobs to avoid competitors who use independent workers.

Some estimates say as much as 50% of income earned by independent contractors nationwide is not reported to the IRS. The Missouri study, which looked at random tax-audit records, estimated that misclassified contract workers in Illinois deprived the state of $248 million in state income taxes and $54 million in unemployment premiums in 2005 and failed to pay as much as $96 million in work comp premiums.

The state may recover some of that money if Gov. Rod Blagojevich signs a bill passed by the General Assembly that would tighten the rules that distinguish employees from contractors. Generally, workers who are told what time to show up, given specific instructions at work and who use the employer's equipment would be considered employees, subject to tax and insurance requirements. Fines for business owners who break the law would be as high as $2,500 per worker per day.

Unions and union contractors are also using the courts to pursue contractors they suspect of paying full-time workers as contractors.

Late last month, the Bricklayers and Allied Craftworkers union and a pair of union masonry contractors filed a federal lawsuit against Chicago-based Jerry Ryce Builders Inc., accusing the company of fraud and racketeering in obtaining jobs last year in Evanston and Chicago. The complaint, filed by A. L. L. Masonry Construction Co. of Chicago and U.S. Masonry Inc. of Glen Ellyn, says Ryce's use of low-cost, illegal labor constituted an unfair advantage over other bidders.

The suit claims $471,200 in lost profits and damages. Calls to Ryce were not returned.

Mr. Volpentesta, who these days monitors job sites for a masonry labor and management council, says years of competing unsuccessfully against Ryce helped convince him to abandon his own contracting business.

"That son of a gun crushed me on a lot of projects," he says.

©2007 by Crain Communications Inc.