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The Economist Articles for May. 2nd week : May. 12th(Interpretation)
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Leaders | A region in mortal danger
Emmanuel Macron’s urgent message for Europe
The French president issues a dark and prophetic warning
In 1940, after France had been defeated by the Nazi blitzkrieg, the historian Marc Bloch condemned his country’s inter-war elites for having failed to face up to the threat that lay ahead. Today Emmanuel Macron cites Bloch as a warning that Europe’s elites are gripped by the same fatal complacency.
France’s president set out his apocalyptic vision in an interview with The Economist in the Elysée Palace. It came days after his delivery of a big speech about the future of Europe—an unruly, two-hour, Castro-scale marathon, ranging from nuclear annihilation to an alliance of European libraries. Mr Macron’s critics called it a mix of electioneering, the usual French self-interest and the intellectual vanity of a Jupiterian president thinking about his legacy.
We wish they were right. In fact, Mr Macron’s message is as compelling as it is alarming. In our interview, he warned that Europe faces imminent danger, declaring that “things can fall apart very quickly”. He also spoke of the mountain of work ahead to make Europe safe. But he is bedevilled by unpopularity at home and poor relations with Germany. Like other gloomy visionaries, he faces the risk that his message is ignored.
The driving force behind Mr Macron’s warning is the invasion of Ukraine. War has changed Russia. Flouting international law, issuing nuclear threats, investing heavily in arms and hybrid tactics, it has embraced “aggression in all known domains of conflict”. Now Russia knows no limits, he argues. Moldova, Lithuania, Poland, Romania or any neighbouring country could all be its targets. If it wins in Ukraine, European security will lie in ruins.
Europe must wake up to this new danger. Mr Macron refuses to back down from his declaration in February that Europe should not rule out putting troops in Ukraine. This elicited horror and fury from some of his allies, but he insists their wariness will only encourage Russia to press on: “We have undoubtedly been too hesitant by defining the limits of our action to someone who no longer has any and who is the aggressor.”
Mr Macron is adamant that, whoever is in the White House in 2025, Europe must shake off its decades-long military dependence on America and with it the head-in-the-sand reluctance to take hard power seriously. “My responsibility,” he says, “is never to put [America] in a strategic dilemma that would mean choosing between Europeans and [its] own interests in the face of China.” He calls for an “existential” debate to take place within months. Bringing in non-eu countries like Britain and Norway, this would create a new framework for European defence that puts less of a burden on America. He is willing to discuss extending the protection afforded by France’s nuclear weapons, which would dramatically break from Gaullist orthodoxy and transform France’s relations with the rest of Europe.
Mr Macron’s second theme is that an alarming industrial gap has opened up as Europe has fallen behind America and China. For Mr Macron, this is part of a broader dependence in energy and technology, especially in renewables and artificial intelligence. Europe must respond now, or it may never catch up. He says the Americans “have stopped trying to get the Chinese to conform to the rules of international trade”. Calling the Inflation Reduction Act “a conceptual revolution”, he accuses America of being like China by subsidising its critical industries. “You can’t carry on as if this isn’t happening,” he says.
Mr Macron’s solution is more radical than simply asking for Europe to match American and Chinese subsidies and protection. He also wants a profound change to the way Europe works. He would double research spending, deregulate industry, free up capital markets and sharpen Europeans’ appetite for risk. He is scathing about the dishing-out of subsidies and contracts so that each country gets back more or less what it puts in. Europe needs specialisation and scale, even if some countries lose out, he says.
Voters sense that European security and competitiveness are vulnerable. And that leads to Mr Macron’s third theme, which is the frailty of Europe’s politics. France’s president reserves special contempt for populist nationalists. Though he did not name her, one of those is Marine Le Pen, who has ambitions to replace him in 2027. In a cut-throat world their empty promises to strengthen their own countries will instead result in division, decline, insecurity and, ultimately, conflict.
Mr Macron’s ideas have real power, and he has proved prescient in the past. But his solutions pose problems. One danger is that they might in fact undermine Europe’s security. His plans could distance America, but fail to fill the gap with a credible European alternative. That would leave Europe more vulnerable to Russia’s predations. It would also suit China, which has long sought to deal with Europe and America separately, not as an alliance.
His plans could also fall victim to the unwieldy structure of the eu itself. They require 27 power-hungry governments to cede sovereign control of taxation and foreign policy and to give more influence to the European Commission, which seems unlikely. If Mr Macron’s industrial policy ends up bringing more subsidy and protection, but not deregulation, liberalisation and competition, it would weigh on the very dynamism he is trying to enhance.
And the last problem is that Mr Macron may well fail in his politics—partly because he is unpopular at home. He preaches the need to think Europe-wide and leave behind petty nationalism, but France has for years blocked the construction of power connections with Spain. He warns of the looming threat of Ms Le Pen, but has so far failed to nurture a successor who can see her off. He cannot tackle an agenda that would have taxed the two great post-war leaders, Charles de Gaulle and Konrad Adenauer, without the help of Germany’s chancellor, Olaf Scholz. Yet their relationship is dreadful.
Mr Macron is clearer about the perils Europe is facing than the leader of any other large country. When leadership is in short supply, he has the courage to look history in the eye. The tragedy for Europe is that the words of France’s Cassandra may well fall on deaf ears.
Leaders | All talk
Should American universities call the cops on protesting students?
The principles involved in resolving campus protests are not that hard
photograph: getty images
May 1st 2024
Flashbangs to clear occupied buildings, helmet-wearing police officers and handcuffed students: the scenes at Columbia and other American universities seem like a throwback to a rougher age. More than 1,500 students have been arrested around the country so far, and the number will probably rise in the coming weeks. For college presidents this is nightmarish. Members of Congress are trying to get them fired for indulging antisemitism; donors threaten to withdraw funding; they are supposed to be guardians of free speech and are also expected to create an environment that fosters learning and inquiry. Some outside agitators are showing up, hoping for a fight. The students, both pro-Palestinian protesters and those offended by the protests, are paying customers. And members of the faculty all think they could do a better job than the hapless administrators.
As a practical question, dealing with these protests is hard. As an intellectual question, the sort debated on college campuses, it really is not. And yet clever people are tying themselves in knots over the rights and wrongs of what is going on. To the right are politicians who have spent years denouncing elite universities for being full of snowflakes who cannot bear exposure to different opinions, and are now trying to stretch the definition of antisemitism to silence views they disagree with, preferably with the help of the National Guard. To the left are students, faculty and administrators who have embraced the idea that objectionable speech is the same as violence, and are now arguing that it is fine for people to wave banners that call for actual violence (for example, “Globalise the intifada!”).
Given that, it is helpful to stand back and think about the principles at stake. The first is the need to protect free speech. The First Amendment is a good starting-point. Though the legal obligations of public and private universities differ, all colleges should adopt a broad definition of speech and police it neutrally. They should protect the rights of students to raise their hands in class and call Israel an apartheid state, or even to express support for Hamas, because airing bad ideas is an important part of free inquiry.
But the First Amendment is not an instruction manual for creating a culture of learning. Letting protesters yell about globalising the intifada, intimidating Jewish students trying to get to class, is not consistent with that aim. Nor is there a free-speech right to occupy parts of a university. Freedom of assembly is also part of the First Amendment, but that does not mean protesters have a right to assemble anywhere, if doing so prevents other people from using public spaces. And damaging property is as much of a crime on campus as it is off it.
Protests should, wherever possible, be resolved through negotiation. Yet that requires a set of clear demands on the part of students. Some of their demands about divestment are impractical; others, such as the creation of a Palestinian state, may be consistent with government policy but are hardly within the gift of a college president; some are nonsensical. If negotiation doesn’t work, and laws and rules are broken, calling in the police is a last resort and may backfire. But universities are within their rights to do so. What those who decry the deployment of cops at Columbia and elsewhere miss is that the point of civil disobedience is sometimes to get arrested, in the hope that an unreasonable use of force draws attention to the cause and wins sympathy.
Thankfully, students have so far not attacked the police, and the officers have been relatively restrained. This is not 1968, when police shot 28 students and killed three at Orangeburg, South Carolina. The protests will fizzle in a few weeks, after graduation. But it will not be the end: protesters and the police may meet for a second round at the Democratic convention in Chicago in August. That could get a lot nastier. ■
Leaders | The haven falls
Japan is wrong to try to prop up the yen
Supporting the currency is expensive and futile
illustration: the economist
Apr 30th 2024
It is easy for investors to lose a fortune in the financial markets—and even easier for governments. In 2022 Japan spent more than $60bn of its foreign-exchange reserves defending the yen, its first intervention to strengthen the currency since 1998, after the exchange rate fell to nearly ¥146 to the dollar. And for what? Today the yen is weaker still. Yet instead of learning that fighting the market is futile, policymakers are repeating the mistake. After falling to ¥160 to the dollar on April 29th, its lowest in 34 years, the currency twice moved sharply upwards in the subsequent days. It seems the government is buying again, to the tune of tens of billions of dollars.
The yen has been falling primarily because of simple economic logic. The gap in interest rates between Japan and America is yawning. Although the Bank of Japan raised rates in March, it did so by only a smidgen: they increased from between minus 0.1% and zero to between zero and 0.1%. Rates in booming America, by contrast, are more than five percentage points higher. Investors expect the gap to shrink a little over time, but not by much. As a result a ten-year Japanese government bond yields just 0.9%, compared with 4.6% for an American Treasury of the same maturity.
chart: the economist
The gulf exists because of differences in the outlook for inflation. It is still unclear just how emphatically Japan has broken out of the low-inflation—and at times deflationary—trap in which it has been stuck since asset prices collapsed in the 1990s. Although headline annual inflation has been above the central bank’s 2% target for nearly two years, there are signs that price rises have been slowing. Rightly, rate-setters at the Bank of Japan seem more concerned with hitting their inflation target than with using monetary policy to support the yen. All told, therefore, the country’s interest-rate outlook is diverging from America’s, where there are growing worries that inflation is not falling as it should and that the Federal Reserve will, as a result, not cut interest rates any time soon.
Given that Japan has an open capital account, an inevitable side-effect of its low relative interest rates is a weak currency. Higher rates abroad make profitable a “carry trade”, whereby investors borrow in yen and invest in dollars; that weakens the yen and strengthens the greenback. In theory, the yen must depreciate until its cheapness—and hence the higher likelihood of a rebound in future—means this trade is no longer expected to yield profits. Currencies can overshoot the fundamentals, but it is difficult to tell when they have, and harder still to calibrate an appropriate response. The thresholds at which the Japanese government has chosen to intervene are arbitrary. It says that volatility in the currency has been excessive, but its opaque criteria for selling reserves may well have made that problem worse.
After the last intervention, economic logic was temporarily obscured by good luck. Towards the end of 2022 America’s bond yields fell, allowing the yen to strengthen in the months that followed the intervention, before its slide resumed the next year. There is no guarantee that this pattern will be repeated. Instead, resisting the adjustment is likely to create opportunities for speculators, who will gladly treat the government as dumb money. After the apparent interventions, the exchange rate quickly began drifting back towards its previous level.
The Japanese government’s urge to intervene is driven by a combination of political calculation and national pride. A cheaper yen makes imports, most notably of energy, more expensive, which is painful for voters. There is no doubting Japan’s firepower: at last count it had almost $1.3trn of foreign-exchange reserves to run down. But it is a waste to spend them doing battle with currency traders who—thanks to the choices of Japan’s own policymakers not to follow the Fed—have good reasons to be selling yen and buying dollars.
United States | Lexington
Joe Biden is practising some Clintonian politics
But he needs to do more than crack down on “junk fees” to woo swing voters
illustration: kal
May 2nd 2024
President joe biden says he is in a battle for the soul of America. He is out to save democracy at home from Donald Trump and abroad from Vladimir Putin of Russia and Xi Jinping of China. Mr Biden also wants to restore America’s manufacturing, rebuild its infrastructure, bring peace to the Middle East and confront climate change. And yet none of that seems to mean quite as much to most Americans as when he starts railing about finding fewer potato chips in a bag than he used to.
Mr Biden and his aides are putting new emphasis on his efforts to fight what he calls junk fees and shrinkflation—the underhanded means, in his view, by which businesses surprise consumers with higher prices or less stuff, such as potato chips, than they expect. Unlike almost anything else Mr Biden says or does, combating such costs draws overwhelming bipartisan support.
And so, among other measures not obviously destined to save the soul, Mr Biden has proposed regulations to force universities to refund unused meal-plan payments; to force airlines to disclose fees for checking baggage; to cap fees for late credit-card payments; to ban fees for stopping cable-television service early; and to eliminate charges for such bogus services as oil changes on electric cars. In total, the White House says, such measures would save Americans $20bn each year.
Mr Biden has seized on some of his most high-profile appearances to complain about the size of candy bars or sports-drink bottles. “What makes me the most angry”, he declared in a video the White House released on the day of the Super Bowl, “is that ice-cream cartons have actually shrunk in size but not in price.” Some members of Congress laughed in March when Mr Biden brought up the potato-chip gap in his state-of-the union address, right between a pledge to protect Social Security and a summons to tighten border security. But in a recent survey commissioned by Blueprint, an initiative to back Democrats, that tested 40 issues that could affect the 2024 election, banning businesses from charging misleading fees ranked first, with net support of 76%. Mr Biden has endorsed legislation to empower the Federal Trade Commission and state attorneys-general to take action against companies that shrink product sizes without cutting prices.
Mr Biden’s micro interventions hearken back to another era for the Democratic Party, when it was less sweeping in its ambitions for systemic change and also more attentive to the daily travails of most Americans. Bill Clinton got some big things done as president, but he also practised a kind of assiduous concierge politics that flipped John F. Kennedy’s message in order to inquire, obsequiously: what can your country do for you? The help he offered included more-efficient emergency telephone numbers, a computer chip to let parents censor their children’s television-watching and a campaign to reduce truancy.
The man who did the inquiring for Mr Clinton was Mark Penn, a pollster who joined Mr Clinton’s re-election campaign as it was flailing in 1995. Mr Penn imported to politics lessons he learned pushing products and building brand loyalty for the likes of at&t. Critics who denigrated his work as corporatist and small-bore overlooked the respectfulness embedded in his approach: Mr Penn believed voters were smart and sophisticated about their own interests, that they cared about issues and the nuances of policy more than about personality or vision. In fact, issues could define personality by communicating to voters that a leader cared about them and was on their side. By welding issues to values, such as by protecting children from scary or sexual television programmes, the right policies would create powerful political levers.
Mr Penn’s approach worked. In 1996 President Clinton counted on the polarising Republican speaker of the House, Newt Gingrich, to motivate the Democratic base, and he relied on the sorts of policy ideas generated by Mr Penn to reach swing voters. A similar combination sustained Mr Clinton through the sex scandal of his second term, enabling him not merely to weather impeachment but to leave office with an approval rating of 66%, higher than any president since Harry Truman, when Gallup began tracking this number, and higher than any president since.
Clintonian pragmatism, with its swing-voter sensitivities, is out of favour in today’s more ideological Democratic Party. But Mr Biden has found a loophole: pointillist policies attacking junk fees also appeal to leftist voters because, in Mr Biden’s telling, the villains are big businesses. Complaining about such charges lets Mr Biden shift responsibility for inflation and sound more populist without annoying any core Democratic constituency.
Bill Clinton v Donald Trump
But Mr Biden is not offering the range of services that Mr Clinton did. It is hard to imagine Mr Clinton paying as little attention to such parental anxieties as learning-loss from covid and absenteeism. Mr Biden has instead focused on issues of particular concern to his college-educated base, such as forgiving student debt. This has resulted in questionable policy and politics: the Harvard Youth Poll recently showed that even Americans between 18 and 29 care far less about student debt than they do about inflation, immigration and crime. Now Mr Biden is under pressure from left-wing staff and supporters not to take executive action on illegal immigration and to declare a climate emergency.
When it comes to assuring swing voters that he is on their side, Mr Biden is not the agile communicator Mr Clinton was. And while, as Mr Clinton did, Mr Biden can count on a Republican opponent to motivate his own base voters, Mr Trump also presents a novel challenge to Mr Penn’s theory of politics: he is a blustering, protean, attention-sucking affront to the conviction that issues really do matter more, in the end, than personality. ■
The Americas | Cuckoo for cocoa’s price
Latin America’s farmers are cashing in on hot hot cocoa prices
They aim to spend the windfall improving their technology to expand production
photograph: getty images
May 2nd 2024
The latest El Niño weather cycle has ended. Latin America’s farmers are assessing the damage. It is mostly bad news. Many places flooded, while others suffered extreme heat and drought. Harvests of most staples have been meagre. Falling prices have added insult to injury, eroding farmers’ profits.
But cocoa, the core ingredient in chocolate, is bucking the trend. Output has risen in Ecuador and Brazil, the region’s two largest growers, as well as in countries like Peru, Colombia and the Dominican Republic, which produce less. That is mostly down to luck. The areas where cocoa is grown, such as the coastal provinces in Ecuador and north-eastern Brazil, escaped the worst of the weather.
And the price of cocoa has surged over the past six months too, thanks largely to the collapse of production in west Africa, where most of it is grown. The value of exports from Latin America has shot up. Ecuador earned 32% more selling cocoa to overseas buyers in 2023 than it did in 2022. Exports then tripled in value from the beginning of the year, compared with the same period in 2023. Cocoa has become one of the region’s most valuable exports.
chart: the economist
In west Africa growers are paid a fixed price set by their governments. Latin American producers sell at the global market price. Their counterparts in Ivory Coast and Ghana get $2,460 for every tonne of cocoa, even as the global price oscillates around $10,000 (see chart).
Tempting though it may be to bank the windfall cash, many farmers spy an opportunity to invest in order to produce more. Many are buying high-yielding seedlings, expanding their growing areas and planting cocoa instead of less profitable crops.
National agricultural associations are backing the investment. To increase efficiency they are boosting availability of fertiliser, providing advice about effective pruning, managing pests and spotting disease. Latin America’s cocoa farmers collect well under a tonne of crop per hectare. Most cocoa-growing countries in the region are trying to double that.
The hope is to return Latin America’s cocoa industry to its former glory. Brazil was the world’s largest grower until its crop was clobbered by fungal disease in the late 1980s and early 1990s. In 2023 its agriculture ministry unveiled a plan to produce 400,000 tonnes by 2030, up from 290,000 in 2023. Ecuador’s government is even more ambitious, aiming for 800,000 tonnes in 2030, up from 420,000 last year.
The industry will need to harness technology in order to lift output if it is to meet these targets. That is beginning to happen. Some tasks that have traditionally been done by hand are now being mechanised. But most Latin cocoa farmers are smallholders with a handful of hectares apiece. Smart irrigation systems and harvest-automating machinery don’t pay off when used on such small patches.
World cocoa prices may of course fall. Farmers who invest in increasing output risk being saddled with unsold stock, or having to offload it cheaply. But even if better weather in west Africa prompts cocoa production to bounce back next year, the long-term outlook there is gloomy. Most of its farmers are old and poor. Their national cocoa authorities are inefficiently run and in some cases are almost bankrupt. Tough European Union regulations on deforestation are due to come into force next year. These will hurt African producers more than Latin American ones, as they export more to the eu.
Sluggish African production will probably mean global cocoa prices stay high because so few other countries can grow the crop. The plant is finicky. Where banana yields some 25 tonnes per hectare, cocoa yields about 500kg on average. It needs high levels of humidity and warm overnight temperatures to thrive, with regular rainfall and sunshine (though not too much). So it likes low elevations, close to the equator. Not many places offer this. In the long run climate change is likely to limit production, with the best growing areas being disrupted. This will prop up prices. Demand is strong and growing, partly because Asians are eating more chocolate. That should reassure Latin America’s cocoa farmers. Their challenge will be finding ways to pay for new technologies in order to produce more. ■
Asia | Pensions and penury
Japan and South Korea are struggling with old-age poverty
Their problems may be instructive for other countries
photograph: getty images
May 2nd 2024|seoul and tokyo
At a soup kitchen in Dongdaemun, a district of Seoul synonymous with the capital’s fashionistas, Kim Mi-kyung is busy preparing for the lunch rush. Ms Kim explains that the kitchen serves around 500 people a day, most of them elderly. “They can’t work, they can’t ask for money from their children and they can’t eat,” she says. “So they come here.”
South Korea has the second-highest rate of income poverty among the elderly in the oecd, a club of mostly rich countries (the highest is tiny Estonia). Nearly 40% of South Koreans over 65 live below the oecd’s poverty line, set at half the national median income. In Japan that rate is 20%. The oecd average is 14%. South Korea’s and Japan’s abundance of old people and lack of young ones, combined with changing labour markets and inflexible pension systems, mean the problem is likely to worsen. Other rich countries will soon face similar issues. East Asia provides an example of what works—and what doesn’t.
A South Korean on the oecd’s poverty line earns almost $22,000. That is still more than an average salary in Mexico. And this does not take into account asset wealth such as property. Still, in South Korea 63% of income-poor seniors have few assets. And Japan’s and South Korea’s pension systems are flawed.
Japan’s system dates from 1961 and has long offered wide coverage. South Korea’s was introduced in 1988, and only reached nearly universal coverage in 1999. Japan has a two-tiered pension system. The first is a basic tier, available to all, with flat-rate payments and a final payout proportional to years of contribution. The second is for those in full-time employment. Workers’ contributions, based on their earnings, are matched by their employer. The South Korean system is similar, with all but the top-earning 30% entitled to the basic old-age pension. In 2022 it amounted to 307,500 won ($220) per month. Workers in good jobs often have private pensions, too.
Those who enjoyed a long career of regular work retire with a relatively decent pay packet. But basic pensions on their own are rather stingy. In Japan a full 40 years’ worth of contributions garners a pension of around 65,000 yen per month ($410). And freelancers are less likely to make consistent contributions to their pension, or even to be enrolled. One estimate suggests that the top 10% of South Korean earners born in 1970 will retire with almost 34 years’ worth of contributions, while the bottom 10% will have only 19.
chart: the economist
A second problem is that both counties do terribly on gender equality. Women earn less and are more likely to be in precarious employment. This means that older women are especially likely to be poor (see chart). Japan’s pension system was designed for a traditional family model headed by a salaryman and a stay-at-home mother. So-called dependent spouses are exempted from making contributions if they earn less than 1.3m yen. Even so, they receive the basic pension, so married couples receive a larger pension than an individual worker. Divorcees are hit hard.
Rising life-expectancies have led to longer working lives. Some 49% of South Koreans aged 65 to 69 are still working, second only in the oecd to Japan’s 50%. Working life for older people in Japan is not perfect, but much thought has gone into making their jobs useful and rewarding. Nearly 40% of Japanese companies keep employees on beyond 70, and each municipality runs a “Silver Work” centre where older people can find jobs. Miyata Toyotsugu, a 77-year-old widower, has worked at a bicycle park in the east of Tokyo for 12 years. “Without my job,” he says, “I will lose all my ties.”
Silver surfers
South Korea’s approach is more haphazard, and old people often find themselves in low-paid, unappealing work. This is worsened by a culture of putting pressure on people to retire from their main career early, so that companies can save on pension contributions and benefits by paying a one-off lump sum. Only 25% of South Korean workers aged between 55 and 59 in 2020 had the same employer as they had five years earlier, compared with 52% on average in the oecd. The pyejijupnun halmeoni, or cardboard-collecting grandmas, are a ubiquitous symbol of this precarity, dragging carts overloaded with used boxes to sell for a pittance. Lee Young-ja, now 78 years old, has been at it for ten years. Rent and hospital bills eat through her meagre earnings and what she gets from the state.
chart: the economist
Old-age poverty will only get worse. Japan is the world’s oldest society; 30% of the population is over the age of 65. South Korea has half that share. But it is rapidly catching up (see chart). In 1960 South Korea’s fertility rate was six births per woman. Now it has fallen to 0.78, the world’s lowest. Japan is more fecund, at 1.3, but still far below the replacement rate, at which the population is stable.
This worsening ratio of workers to pensioners is putting strain on systems. South Korea’s pension fund grew to be the world’s third largest, worth over 1,000trn won ($730bn), because few qualified for a full pension until now. As the baby-boomers retire with a full working life’s worth of contributions, and too few workers pay in, that nest-egg will quickly vanish. The government estimates that the fund will stop growing by 2040. By 2055, it will be empty.
Some simple tweaks would help. South Korea is raising its retirement age from 62 to 65, and Japanese companies are now encouraged to keep workers employed until 70. South Koreans pay only 4.5% of their income into their pensions, which is matched by their employers. The oecd average is more than double that. And both countries could eliminate regressive features of their systems. Japan’s pension scheme increasingly relies on consumption taxes rather than income tax, which would raise more from higher earners. Tackling low fertility rates would also help. But mass immigration, a simple solution to the shortage of young people, remains taboo in both countries.
Politicians must figure out how to convince people that working life is not a race to retirement but an invigorating climb followed by a gentle descent. Japan and South Korea, both famed for their love of hiking, have already begun that transition, with mixed success. ■
China | Raising revenue
China mulls a bold test of taxation without representation
With revenue declining, its leaders must figure out how to collect more money
illustration: pete ryan
May 2nd 2024|hong kong
Chairman mao zedong was a fan of meetings. “Whenever problems arise, call a meeting,” he wrote in 1949. “Place problems on the table.” Otherwise, he warned, they can drag on for years. A tableful of problems now beset China’s economy, including deflation, debt distress and demographic decline. A property slump has eroded confidence and hurt the land sales that help finance local governments. China also faces growing opposition from trading partners, who are limiting what they sell and buy from a country they now count as a geopolitical rival.
In response, China’s rulers have finally called a big meeting. On April 30th they announced that the party’s central committee will hold its third plenary session in July, gathering together over 370 committee members and their understudies. The third plenum, one of seven full meetings held over a typical five-year term, is traditionally devoted to reform and the economy. The session in 1978 enshrined China’s turn towards the market, making it one of the most consequential meetings in history. The most recent gathering in 2018 was also significant, for better or worse, paving the way for Xi Jinping, China’s ruler, to serve indefinitely as president.
The meeting in July will be more than six months later than usual. The long delay stirred some speculation that China’s rulers were divided about the country’s direction. But the procrastination might also have indicated the opposite: that China’s economic strategy is largely settled, leaving no urgent need for a plenum to resolve debates. Gabriel Wildau of Teneo, a consultancy, guesses the third plenum will be a “nothingburger”, reiterating Mr Xi’s ambition to refocus the economy on high-tech manufacturing.
But although the government’s economic aims appear largely settled, what remains unclear is how it will pay for them. Even as the state has become more intrusive in recent years, government revenues have retreated (see chart 1). In yuan terms, revenue declined by 2.3% in the first quarter, compared with a year earlier, the third quarterly fall in a row. That is the longest spell of falling revenues in data going back to 1990. At another big economic meeting in December, the party said it should plan a new round of fiscal and tax reforms. A third plenum could give those reforms more momentum.
chart: the economist
New sources of revenue are sorely needed. During China’s property boom, its local governments relied on land sales to supplement their budgets. But sales fell in value by over 13% last year and may never revive. The problem is not confined to property. The money flowing into China’s “general” budget (which excludes land sales and social-security contributions) exceeded 22% of gdp in 2015 but fell below 17% in the last four quarters. The erosion of China’s revenue base was one reason why the outlook for its credit rating was cut by Fitch, a ratings agency, last month.
What explains this erosion? One answer is slowing growth and the government’s efforts to revive it. China’s previous prime minister, Li Keqiang, who served from 2013 to 2023, was something of a “small-government Keynesian” in his response to weak demand. Most Keynesians believe that economic downturns can be offset by bigger budget deficits. The rarer breed of small-government Keynesian prefers to increase the deficit by cutting taxes rather than raising spending. “China has led the way in slashing taxes and fees,” Mr Li boasted in his annual speech to parliament in 2018. He made similar boasts in his next five speeches, too.
For now China can fill the gap between its spending ambitions and its diminished revenues by borrowing. Yields on its existing bonds are low. And in March it said it would issue new “ultra” long-term bonds in each of the next several years. By 2028, when another third plenum will fall due, China’s broad government debt could exceed 140% of gdp, according to imf projections (see chart 2). That would exceed the figure for America, a country China often chides for fiscal irresponsibility.
Over the long term, China’s government will need other ways to mobilise resources. The third plenum in 2013 highlighted plans for a new property tax (a recurring levy on the value of people’s homes). Political momentum for such a tax seemed to be building in 2021. But it dropped off the legislative agenda last year amid fears that it would worsen the property downturn. “The idea is now pretty clearly dead,” argues Andrew Batson of Gavekal Dragonomics, a research firm.
The other obvious source of revenue is the income tax. In the g7 group of rich countries these taxes are a mainstay, contributing over 37% of tax revenues on average. In China they contribute only 8.5%. Most people pay nothing at all. According to Sebastian Beer and Daniel Garcia-Macia of the imf, the bottom 70% of China’s population escape any obligation thanks to a generous basic deduction. For higher earners, the rate rises steeply. But only a tiny fraction pay the top rate of 45%.
Instead of progressive income taxes, China relies on a regressive alternative. It requires employees and their employers to make hefty contributions to various social-insurance funds, including pensions. In many parts of the country, the combined contribution rate is even higher than the g7 average. But because contributions are capped, they fall less heavily on the highest paid. As a consequence, China’s tax schedule looks less like a staircase, rising step by step with higher incomes, and more like the undulating Great Wall (see chart 3).
chart: the economist
China’s peculiar pattern of revenue-raising is not an accident. It reveals something about the character and limits of China’s authoritarian regime. Modern states are defined by their power to tax. Their fiscal apparatus noses into every corner of the economy. But as states penetrate society, society tends to penetrate states, as Changdong Zhang of Peking University has put it. Taxpayers demand accountability and a say in how their money is used.
To avoid these social entanglements, China has remained a “half-tax state”, according to some scholars. It relies not on taking money directly from people’s pay cheques, but on land sales, contributions from companies and indirect taxation, such as value-added taxes. In this way it can disguise the fiscal burden it imposes. A smart king makes sure his “gifts are visible and his extractions are invisible”, according to the “Guanzi”, a Chinese philosophical text. The modern party has followed that ancient advice.
To extract more revenue, the imf economists suggest that China gradually introduce a property tax and widen the reach of its carbon-emissions trading scheme. China could also increase the cap on social-security contributions, even as it lowers the contribution rate. More radically, the country could lower the basic deduction for income taxes from 60,000 yuan ($8,300) to 15,000. At that threshold, 80% of the population would pay something.
If China adopted these recommendations, it would move closer to becoming a full-tax state and making its extractions more visible. Such a transition would be fiscally prudent but politically risky. From the perspective of China’s ageing, authoritarian regime, the challenge is to figure out how to take more money from people without giving them more voice in return. ■
Business | Bartleby
How not to work on a plane
Hours without interruption and work to do. What could go wrong?
illustration: paul blow
May 2nd 2024
You are not important enough to turn left on a plane. But you are important enough for the company to want you to have completed a project-risk update by the time you land. You have six solid hours in the air, and the work should take no more than three hours. You are not in a middle seat, and no one can email you. What could possibly go wrong?
You find your seat, which is on the aisle. You take out your laptop and a book, and try to put them into the seat pocket in front of you. It is made for someone who has absolutely no interests but you manage, with some effort, to shove both of them in. As the plane fills up, your hopes of space around you go down. You scan the people heading down the aisle. So does everyone else already in a seat. In this moment each passenger is being silently judged on only two criteria: girth and proximity to a baby. Eventually you get up to make way for a couple to sit beside you. Could have been worse.
You waste the first hour of the flight just faffing about. There is a surprising amount to do. You go through every film in the on-board menu three times, surprised anew by how so much choice can yield so little enthusiasm. You stir pepper into a tomato juice while wondering what is supposed to be happening as a result; the grains remain on the surface, unmoved by your efforts. You eat a tiny bag of pretzels as slowly as you can. You fall dramatically and briefly asleep.
Eventually, it’s time. You attempt to remove the laptop and find it is completely wedged into the seat pocket. You tug at it, without success. You pull harder: nothing. And more violently still, until your grip suddenly loosens and your elbow flies back into the hand of the passenger next to you. The hand holding a glass. Also of tomato juice. You apologise wildly. They are both nice about it, but a palpable air of disgrace now hangs over seat 42H. You carefully pull back the seat pocket with your left hand as far as you can, and manage to lever the laptop out. To your right, a lot of murmuring and the dabbing of napkins.
You place the laptop on the tray table, turn the computer on and remember just how little room there is on a plane, especially now that you are determined to cause no more inconvenience to your neighbours. You tuck your elbows in, and your hands dangle in front of you. You look like a T. rex about to take dictation. Your neighbour immediately asks if she can get past. You retrace your movements, closing the laptop, folding the table, putting things away. In the galley you can see the crew readying the trolleys for lunch. Give it another hour, you think.
The meal passes without incident. You drink wine from a can and for some reason think this is a treat. You start to watch a film about a gorilla and a monster. You have no interest in this kind of thing normally, but it turns out to be truly excellent. The gorilla wins, or the monster does, or perhaps they both do. You have three hours to go.
The laptop comes out again, but by now the person in front of you has put their seat back. With your own seat reclining and the tray table pulled right out, you can have the screen open at an acute angle of around 60 degrees. You know that it’s important that strangers cannot read company documents over your shoulder. But reading it for yourself would be nice. All you can really do is insert your hands into the small space above the keyboard and hope for the best. You type a sentence, pick up the laptop and angle the screen away from you, to read: “rag stusys: three redm seven amsber, two groin.”
You spend the next two hours typing blindly. Occasionally you pick the laptop up again to check on what you are writing. You know what everything means but others would struggle to understand: it reads as though you are heroically drunk. You will have to go through everything again at the hotel. Suddenly a noise. You peer at the screen and see that your laptop has announced that its battery levels are critical. Before you can think to yourself, “Did I save it?”, it starts shutting itself down. The screen goes dark. You stare at it in disbelief. You press the on/off button. Nothing.
One hour to go, and the crew is coming round again, with something they call “a light snack”. As you chew on a sub-zero-temperature scone, you start to brighten up. You have got no work done. Your neighbours hate you. But you did drink canned wine while watching a film about a monkey and a monster. Not a bad flight, all in all.
Business | Schumpeter
Does Perplexity’s “answer engine” threaten Google?
Taking aim at one of the best business models of all times
illustration: brett ryder
May 2nd 2024
When aravind srinivas was accepted at the University of California, Berkeley, to do a phd, his mother was disappointed. Like many Indian parents, she wanted him to go to the Massachusetts Institute of Technology. But things worked out after all; on the west coast he interned at Openai and Google’s DeepMind, both of which became leaders in generative artificial intelligence (ai). With that experience, he co-founded Perplexity, a generative-ai startup recently valued at $1bn that provides fast, Wikipedia-like responses to search queries. He is an unassuming interviewee, but an ambitious one. His “answer engine” is aimed at competing with Google search, one of the best business models of all time. Think Martin Luther taking on the Catholic church.
Mr Srinivas is a student of disruption. When a podcaster asked him recently to compare the cultures of Openai and DeepMind, he explained how the engineer-led, free-wheeling approach of the former disrupted what he called the research-obsessed “very British” hierarchy of the latter (which was founded in London). He resorts to disruption theory when discussing Alphabet, Google’s parent company. Rather than explaining how Perplexity’s business model will enable it to attack the search giant, he uses a celebrated concept outlined in “The Innovator’s Dilemma”, a management bestseller from 1997 by Clayton Christensen, to identify what he sees as Alphabet’s Achilles heel. He is not alone. The innovator’s dilemma has been invoked to explain why Google is threatened by Openai’s Chatgpt and by other generative-ai sites such as You.com. The argument is seductive. But it is off the mark.
The dilemma, as presented by Christensen, explains why new technologies cause great companies to fail. If they compete with upstarts, they jeopardise their own standards and brand. If they don’t, they risk falling victim to the next wave of innovation. In a nutshell, the theory states that an incumbent is so good at pleasing its best customers that it would never dream of going downmarket. That gives insurgents an opportunity. They target a niche of the market with initially subpar products. Through relentless improvement, eventually they hit the big time. You can use it to understand how digital photography killed Kodak, and why Apple’s iPhone disrupted not mobile phones, but laptops.
Mr Srinivas brings up the theory to explain why Google’s search business could turn from a blessing to a curse. It costs Google almost nothing when users click on its links. But advertisers bid on the cost per click, providing Alphabet with whopping profit margins. Generative ai shifts the model. First, the results cost more, because ai-related q&a uses more computing power than search queries. Second, they provide answers, not links, hence less granularity for advertisers. In short, if Alphabet were to abandon search for a Perplexity-like product, Mr Srinivas argues, costs would rise, revenues would plummet, margins would suffer and investors would head for the hills. That is where Perplexity, with no profits to jeopardise, sees something to aim at.
This is plausible in theory, but it is not an application of the innovator’s dilemma. In Christensen’s formulation, the incumbents overlook the insurgents because these start by nibbling at the fringes of a market, not by going head to head. Yet Mr Srinivas has openly thrown down the gauntlet to Google. Upstarts are supposed to win over underserved customers with cheap, scrappy technology. Yet Perplexity, with a subscription model that may eventually include ads, can be more expensive than Google and its answers tend to be far more polished (if not always accurate).
Rather than being a disrupter, Perplexity looks more like an example of what Christensen called “sustaining” innovation—making good products better. There is nothing wrong with that. But it is a game that Alphabet can play, too. It has the researchers and deep pockets to keep improving generative-ai search. It is experimenting with an ai tool called “search generative experience”, and says the computing costs of such queries have fallen by 80% since they were first introduced. It is confident it will be able to use ai to better monetise ads. Meanwhile its search revenues continue to boom; they rose by 14% year on year in the first quarter. Not exactly the start of the Reformation.
In short, Google does not appear to face a dilemma at present. It can compete or not, depending on where its interests lie. Mr Srinivas does a better job explaining Perplexity’s strengths. By gleaning answers from a variety of large language models, both closed and open-source, his product can take advantage of each model’s analytical strengths, as well as their varying pricing structures, to improve performance and lower costs. It is likely to become increasingly conversational. It is not hard to imagine it pairing up with a killer device—think of the earpiece in the movie “Her”, an ai love story.
The winner’s curse
What such a device could be, Mr Srinivas says, is the trillion-dollar question. But he reckons there is a huge hurdle in the shape of Apple’s iPhone. “This is the moat,” he says, picking up your columnist’s device. That is because of the interplay between the hardware and Apple’s operating system, app store and payments platform, which he thinks makes it almost invincible.
Again he may be wrong. Apple may be more exposed to the innovator’s dilemma than Alphabet. It is one of the world’s most reputable companies. It is laser-focused on its best customers (those, say, who can afford a $3,499 augmented-reality headset). It would never risk its brand by offering a cheap, shoddy product. Makers of ai gizmos, from pendants to whatever the Rabbit r1 thinks it is, one day hope to vanquish the mighty iPhone but remain far too flawed for Apple to bother responding to. Sounds like a recipe for disruption. ■
Business | Polls and profits
How to handle populists: a CEO’s survival guide
Western businesses are learning to live with volatile electoral politics around the world
illustration: vincent kilbride
Apr 28th 2024
This year Western bosses must work their way through a lengthy list of obsequious phone calls. Around 80 countries, home to some 4bn people, are holding elections in 2024. Some chief executives may already have drafted their compliments for Narendra Modi, who is near-certain to keep his job as prime minister of India, where citizens are now casting ballots in a weeks-long poll. After Mexico’s election in June corporate leaders expect to be congratulating Claudia Sheinbaum, the anointed successor of the incumbent, Andrés Manuel López Obrador.
Western firms working to reduce their reliance on China have turned to India and Mexico. But neither electoral prospect fills them with unadulterated delight. Mr Modi has made his country an easier place to do business, by simplifying its tax system and investing in infrastructure, among other things. But he has also raised tariffs on goods like cars and increased domestic firms’ tax advantage over foreign ones. Mr López Obrador has been nationalising the assets of Western firms in industries from construction materials to energy and let criminal gangs run rampant. Indonesia, another market that has caught the eye of Western bosses, elected a populist of its own, Prabowo Subianto, in February.
The ceos find little comfort closer to home. Few relish the prospect of Donald Trump, a self-described “Tariff Man”, triumphing in November, even with his talk of slashing red tape. They also feel ambivalent about President Joe Biden, who talks of raising corporate taxes and blames greedy businesses for stubborn inflation. In Britain, the ruling Conservatives scorn companies’ pleas to keep trade with the eu flowing. Yet many corporate grandees are sceptical that Labour will champion their interests if, as expected, the left-of-centre party sails into government later this year. Nationalist parties dubious of free trade are predicted to expand their foothold in the European Parliament after elections in June. One such outfit is on track to win Austria’s upcoming national poll.
chart: the economist
The long-term trend is clear. The Economist, using data from the Manifesto Project, a research group, examined the ratio of favourable to unfavourable discussions of free enterprise in the manifestos of political parties in 35 Western countries from 1975 to 2021, the most recent year available (see chart 1). We used a five-year-moving average and excluded parties that won less than 5% of the vote. In the 1990s deregulation, privatisation, unfettered trade and other policies that bring joy to the hearts of businessmen were praised almost twice as often as they were criticised. Now politicians are more likely to trash these ideas than celebrate them.
Any residual business-friendliness no longer stems from a belief that what is good for business is good for citizens—and so, by extension, for their elected representatives’ prospects. Instead, governments are asking not what they can do for business but what business can do for them. The West’s corporate titans are thus learning to adapt to a world in which their success can turn on a government’s whim. The outlines of a playbook are taking shape.
Knowledge is the starting point. Bosses are turning to specialist consultancies like Dentons Global Advisors (dga), McLarty Associates and Macro Advisory Partners (map) that promise to demystify politics at home and abroad. Consulting giants like McKinsey and investment banks like Lazard and Rothschild & Co offer similar counsel. These consiglieri, often former government insiders, help companies understand the political calculations and constraints that shape government policy.
That allows bosses to know which political curveballs to worry about most. Consider what may come of America’s coin-toss presidential election. Corporate chiefs can be confident that hostility towards China will persist regardless of who wins in November. Mr Biden, fearful of appearing soft on America’s economic rival, has turned steadily more hawkish. In April he called for tariffs on Chinese steel and aluminium to be tripled, from 7.5%, and announced an investigation into subsidised Chinese shipbuilders. On April 24th he signed a bill that, among other things, will ban TikTok in America unless its Chinese owner sells the hit video app to non-Chinese interests. Although Mr Trump may seek to decouple the American and Chinese economies more quickly than Mr Biden, the direction of travel looks similar.
chart: the economist
A victory for Mr Trump may be more consequential for transatlantic business, thinks Kate Kalutkiewicz of McLarty Associates. If he follows through on his threat to slap a 10% tariff on all goods imports, regardless of origin, retaliation from Europe is likely, thinks Sir Mark Sedwill, a former boss of Britain’s civil service now at Rothschild & Co. Last year listed American firms generated around an eighth of their revenues in Europe, three times what they made from China, according to estimates from Morgan Stanley, a bank (see chart 2). Their European counterparts, which make around a fifth of their revenues from America, would be even harder hit.
Trump-shaped uncertainty hangs over businesses that have come to rely on producing in Mexico for export to America. Mr Trump, who thinks trade deficits are for losers, may take aim at America’s with Mexico, which reached a record high last year. The trade agreement he negotiated with Mexico and Canada in 2018 is up for review in 2026. If Mr Trump shuts the border to fulfil his pledge to crack down on illegal immigration, trade would suffer, too.
Mapping out such scenarios helps businesses balance risks with rewards when making investments, argues Ed Reilly, boss of dga. Firms can hold fire on big commitments whose pay-offs hinge on close elections, notes Nader Mousavizadeh, who runs map, or otherwise hedge their bets. Some companies, however, are not content with mere political spectating. As one consulting boss puts it, meddling politicians create uncertainty, but can also bring benefits to those that win their favour.
This need not be as flagrant as turning up for dinner at Mar-a-Lago. Consider Intel, an American chipmaker that in March nabbed an $8.5bn grant from the federal government. Pat Gelsinger, its boss since 2021, has diligently courted Mr Biden’s administration, presenting Intel as the answer to America’s efforts to reduce dependence on semiconductors manufactured in potentially perilous spots like Taiwan. Besides wrapping itself rhetorically in the flag, the company has more than doubled its spending on lobbying on Mr Gelsinger’s watch, to $7m last year, according to figures from OpenSecrets, a non-profit. The charm offensive seems to have paid off. Gina Raimondo, America’s commerce secretary, now calls Intel “our champion”.
Other firms, and not just American ones, have been busy on Capitol Hill. Volkswagen, which last year became the first foreign carmaker to gain eligibility for the federal government’s tax rebates for electric vehicles (evs), has almost tripled its lobbying budget since Mr Biden came to power. One jaded corporate emissary in Washington muses how he spent much of Mr Trump’s term helping clients sneak exemptions from tariffs, and much of Mr Biden’s helping them weasel handouts. Between 2020 and 2023 the number of lobbyists fanning out of K Street increased from 11,500 to almost 13,000.
The situation is not unique to America. A business envoy in Brussels says he has been run off his feet by clients angling to benefit from the eu’s efforts to decarbonise. Western firms have also been busy trying to prove their value to Mr Modi and his inner circle, says Teddy Bunzel of Lazard. “Never before has alignment with government policy been more important for success in India,” explains Mr Mousavizadeh. After meeting Mr Modi last year, Tim Cook, ceo of Apple, tweeted that he shared his “vision of the positive impact technology can make on India’s future”.
Some Western firms, including Mr Cook’s, are courting favour by opening factories in India, which comes with the added bonus of subsidies. Others are opting to hitch themselves to India’s national champions. In February Disney, an American media giant, announced it would merge its Indian business with Viacom18, the media arm of Reliance Industries, an Indian conglomerate with a well-connected boss. TotalEnergies, a French energy giant, has buddied up with the Adani Group, an industrial titan in Mr Modi’s good books.
Pol positions
Not all politicians are equally open to overtures. Forging ties with Mr López Obrador, who is hostile even to Mexican bosses, has been tricky, says Mr Bunzel. But not impossible. Last year the president declared he would bar Tesla, an American ev-maker, from building a factory in Mexico’s arid north. He reversed course after a phone call from Elon Musk, Tesla’s boss, who promised to use recycled water. Many ceos believe that Ms Sheinbaum will be more pragmatic than her predecessor in her dealings with business.
Cosying up to governments is no guarantee of success. Intel’s share price slumped by 9% on April 26th after it projected soggy growth in sales and profits. Mr Biden’s handouts will not do much to help it regain the technological lead it has ceded to competitors of late. What is more, as politics grows more polarised, companies viewed as belonging to an incumbent political camp could find their fortunes reversed if power changes hands.
Still, with politicians everywhere bending markets to their will, many ceos will be unable to resist the allure of power. Whatever qualms British ones have about Labour, they snapped up all available tickets to the “business day” at the party’s upcoming conference in less than 24 hours when these went on sale on April 23rd. As Grégoire Poisson of dga notes, “If you’re not at the table, you’re on the menu.” ■
Finance and economics | Buttonwood
What campus protesters get wrong about divestment
Will withdrawing money hurt Israel?
illustration: satoshi kambayashi
May 2nd 2024
One-third of Ivy League graduates end up working in finance or consulting. So perhaps it is unsurprising that campus protesters are providing investment advice: they want university endowments to get rid of assets linked to Israel. At Columbia University, for instance, a coalition of more than 100 student organisations is demanding that administrators divest from companies that “publicly or privately fund or invest in the perpetuation of Israeli apartheid and war crimes”. Another longer-running campaign by green types hopes to push fossil fuels out of portfolios.
Divesting from something has obvious symbolic value. But many protesters hope to have a real-world impact, too. Divestment campaigns may exert influence by starving their targets of capital. Scare enough investors from an industry or country and, so the argument goes, companies will find it harder to raise or borrow money, which will force them to change their behaviour. If enough Israeli firms begin to suffer, perhaps Binyamin Netanyahu will rethink his campaign in Gaza. How likely is this to work?
The choice of target makes a difference. Take the campaign against coal power in America. People agree on the industry’s harms, its economic importance is waning and firms involved have historically relied on a handful of banks for financing. Accordingly, when these banks pulled back from new projects, the sector struggled. A study by Daniel Green and Boris Vallée of Harvard Business School estimates that bank exits from coal between 2015 and 2021 cut carbon-dioxide emissions by a gigatonne, an amount equal to the lifetime emissions of 20m Volkswagen Passats.
Unfortunately for protesters, things are less straightforward in other industries. Even when they succeed in encouraging some financial institutions to withdraw, there tend to be other less socially motivated sources of capital willing to step in. American university endowments hold only a sliver of global financial assets; together they are perhaps the same size as the world’s seventh-largest sovereign wealth fund. When pension funds, which are much larger, sold oil stocks at the height of the environmental, social and governance craze a few years ago, hedge funds were happy to scoop them up. Things would really have to snowball for divestment from Israeli assets to influence Mr Netanyahu’s calculations.
This is made less likely by the perplexing demands of protesters. They have run into a problem: university endowments hold vanishingly few shares in Israeli firms. So the focus has shifted to companies doing business in Israel. Campaigners at the University of Michigan are demanding divestment from firms including Google, McDonald’s and Toyota, and the severance of ties with financial giants such as Andreessen Horowitz and Blackstone. Cull all these from a portfolio and there will not be much left. And what next? Would an endowment be allowed to hold Treasuries given the American government’s aid to Israel? Judging by the expanding ambition of those manning the barricades, it seems unlikely.
Meanwhile, divestment carries a cost for the institution withdrawing its money. Many of the industries targeted in campaigns are handy when building a resilient portfolio. Commodities and energy stocks, for instance, are good inflation hedges; shares in defence firms provide some insurance against geopolitical risk. At a time when universities are leaning on endowments to meet day-to-day running costs, avoiding big crashes becomes especially important. Brigitte Roth Tran, an economist at the Federal Reserve, has even suggested that they may want to over-allocate to fossil-fuel firms. If the green transition slows, they would benefit, which would provide extra funding for clean-energy research.
Fees would probably be another drag for the divesting institution, as indicated by those paid by retail investors. BlackRock’s exchange-traded fund (etf) tracking the s&p 500 index of big American firms charges just 0.03% in fees. If you add a basic screen to exclude companies in industries such as oil, tobacco and weapons, the fee jumps to 0.08%. For an etf that selects the most virtuous American companies, the fee hits 0.25%. Similarly, if divestment campaigns succeed, endowments’ needs will become more bespoke, and thus more expensive.
These are not the sorts of issues that trouble activists. But resisting magical thinking about how financial markets work would help them better direct their efforts today. And it might even help a few of them in their careers tomorrow.■
Finance and economics | Free exchange
Working from home and the US-Europe divide
Americans are no longer the rich world’s great office drones
illustration: álvaro bernis
May 1st 2024
When it comes to economic growth, America comfortably beats Europe. Many factors have fed America’s outperformance, from tech innovation to vast oil reserves. But there is one explanation that seems almost too simplistic: that “Americans just work harder”, as the head of Norway’s oil fund put it in an interview with the Financial Times on April 24th.
The numbers do in fact bear out this assertion—a rare case of national stereotypes being empirically provable. On average Americans work 1,811 hours per year, according to data from the oecd, a club of mostly rich countries. That is 15% more than in the eu, where the average is 1,571 hours. And it is not just that Europeans spend a few extra weeks on the beach. The typical working day in Britain, France and Germany is half an hour shorter than in America, according to the International Labour Organisation.
Observing these differences, it is natural to ask which is the better way of living—with more money or more free time? The reality is that it is difficult for people to choose. Those in America work according to American schedules; those in Europe conform to European norms. Analytically, the more fruitful question is why Americans put in longer hours. The answer leads to a curious new observation: that remote work is making America’s office drones a little more European, albeit with a puritanical twist.
A first guess suggests that culture might account for the variation in work hours. Maybe Europeans enjoy their leisure more. They are spoilt for choice about how to spend time off, with beautiful cities, culinary delights, rugged mountains and much else besides just a short train ride or discount flight away. America might simply have less to offer travellers, and what it does have is spread over a much bigger area, which goes some way to explain why Europe draws about 150m tourists from abroad a year, twice as many as America. As for Americans, surveys indicate that they view hard work as intrinsically worthwhile. “Rugged individualism” is, after all, what built the country.
But the difficulty with chalking up the difference to culture is that until the early 1970s many Europeans worked more. American working hours are basically the same now as back then. The big change is that Europeans now toil less. Hours are down a whopping 30% in Germany over the past half-century. Something beyond culture—a slow-moving, ill-defined variable—is at play.
Edward Prescott, an American economist, came to a provocative conclusion, arguing that the key was taxation. Until the early 1970s tax levels were similar in America and Europe, and so were hours worked. By the early 1990s Europe’s taxes had become more burdensome and, in Prescott’s view, its employees less motivated. A substantial gap persists today: American tax revenue is 28% of gdp, compared with 40% or so in Europe.
But the effect of taxation on work is far from straightforward. Some workers may respond to lower taxes by putting in longer hours, knowing that they can take more money home. Others, by contrast, may decide that the additional post-tax earnings allow them to work less and still enjoy their desired lifestyles. A recent study by Jósef Sigurdsson of Stockholm University examined how Icelandic workers responded to a one-year income-tax holiday in 1987, when the country overhauled its tax system. Although people with more flexibility—especially younger ones in part-time jobs—did indeed put in more hours, the overall increase in work was modest relative to that implied by Prescott’s model.
Regulation seems to matter more. European rules give workers power, from generous parental-leave policies to stricter laws on firing staff. Many European countries try to put caps on working time, such as France’s famous 35-hour work-week. These caps have been somewhat misguided, failing to boost employment as their proponents wished. They also have plenty of loopholes. Yet most research agrees that they have reduced work hours.
Another important relationship is that, as people get richer, they typically want to work less. A recent paper by the imf shows a remarkably strong link between gdp per person and hours worked in Europe. People in richer countries, such as the Netherlands, generally work less than those in poorer countries, such as Bulgaria. That, however, only reframes the question. Americans are wealthier than most Europeans, so why do they still work more?
Perhaps leisure is a collective-action problem. Americans may want to ask their bosses for longer holidays but are worried about being seen as slackers. A paper in 2005 by Alberto Alesina of Harvard University and colleagues argued that Europe’s stronger unions had in effect solved this collective-action problem by fighting for paid vacations, which ended up enshrined in law. America, with weaker unions, is one of the few countries with no mandatory paid vacations. Europe’s well-regulated leisure time may then beget more leisure because it is more socially acceptable, and the market responds by supplying more good ways not to work. It is a virtuous cycle of lovely cafés.
Just another day out the office
One fascinating new development is a discrepancy in the rise of remote work. In 2023 the Global Survey of Working Arrangements found that full-time employees in America work from home 1.4 days a week, while those in Europe do so for 0.8 days. Applying this home-office split to the working-hours data compiled by the oecd yields a striking result: Europeans and Americans now spend almost exactly the same amount of time in the office, with 1,320 hours a year for the former and 1,304 for the latter.
In other words, the extra 15% of work done by Americans annually is now from the comfort of their own homes—or occasionally on the beach, perhaps even one in Europe. Americans do still work harder, but rather more enjoyably than in the past. ■
Culture | Can’t get you out of my head
“Boléro” is among the most lucrative works of classical music
It is also at the forefront of a new film and copyright dispute
photograph: alamy
May 2nd 2024
Maurice ravel’s “Boléro” is a strange piece of music, consisting of two melodies repeated nine times each. Originally the score to a ballet, it is catchy and keeps running in the listener’s head long after it ends. “Boléro”, a new French biopic about Ravel’s struggle to compose the work in 1928, also employs repetition. Anne Fontaine, the director and co-writer, returns to Ravel’s tortured sexuality, fascination with mechanical noise and slow mental deterioration. He died in 1937 of a brain disease; neurologists think it may have been frontotemporal dementia, which is associated with obsessive repetition.
“Boléro” is among the most famous tunes in classical music. The royalties it has generated from live performances, recordings and film soundtracks are estimated at more than $100m. The question of who got all that money is complicated. Ravel had no descendants. On his death the copyright passed to Ravel’s brother, who married his caretaker after a car accident. She then left the rights to her first husband, who married his manicurist. Ultimately the copyright wound up belonging to that manicurist’s daughter from a previous marriage, Evelyne Pen de Castel.
Under French law the piece entered the public domain in 2016. But much like the music, the copyright battle over “Boléro” just keeps going. In 2018 the heirs of Alexandre Benois, the original ballet’s set designer, sued sacem, France’s copyright agency; Ms Pen de Castel also got behind the lawsuit. They argue that the ballet was a collaborative work, and that because Bronislava Nijinska, the choreographer, did not die until 1972, they are entitled to receive royalties until 2051. In June a French court will decide whether they are right.
Ms Fontaine’s film is not about money; it is about the man and his music. In 1928 Ida Rubinstein, a Russian dancer in Paris, commissioned Ravel to write a ballet. But he puts it off, obsessed by an unconsummated emotional affair. He flees to the seaside, attends parties and visits brothels (where instead of sex, he asks a girl to put on gloves so he can listen to the sound). In flashbacks viewers learn of his struggle to be accepted by France’s stuffy musical academy and of his rivalry with Claude Debussy, another French composer.
With Rubinstein’s deadline approaching, Ravel plinks hopelessly at the piano. A vaguely Spanish pop song his housekeeper sings feeds in to his melody. Some films might have treated this as a eureka moment, but Ms Fontaine suggests various sources of inspiration. In another scene Ravel takes Rubinstein to a factory to listen to the machines: the ballet, he says, should be an ode to mechanical modernity.
The success of “Boléro” was immediate and enduring. Leonard Bernstein, the celebrated American conductor and composer, loved it. The credits of Ms Fontaine’s film claim it is played by an orchestra somewhere in the world every 15 minutes. It is hardly surprising that Ms Pen de Castel wishes those performances were still earning her money. Benois designed the ballet’s sets and costumes but never claimed to have had a hand in the music, says David El Sayegh, the deputy chief executive of sacem, which deems the lawsuit nonsense. Though unlikely, if this lawsuit by long-distant heirs were to be successful, it could embolden others to sue over expiring copyrights.
Ravel was ambivalent about “Boléro”, according to a protégé. He considered it his masterpiece but also said that “unfortunately there is no music in it.” Yet Ravel might find it fitting that its story goes on and on. In the film, he asks a friend: “Don’t you think there is something terribly insistent about this melody?” ■
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