The Economist Articles for Sep. 4th Week : Sep. 27th(Interpretation), Sep. 28th(Discussion)

[도진]

The rise and rise of Xi Jinping

Xi who must be obeyed

The most powerful and popular leader China has had for decades must use these assets wisely

Sep 20th 2014 | From the print edition

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THE madness unleashed by the rule of a charismatic despot, Mao Zedong, left China so traumatised that the late chairman’s successors vowed never to let a single person hold such sway again. Deng Xiaoping, who rose to power in the late 1970s, extolled the notion of “collective leadership”. Responsibilities would be shared out among leaders by the Communist Party’s general secretary; big decisions would be made by consensus. This has sometimes been ignored: Deng himself acted the despot in times of crisis. But the collective approach helped restore stability to China after Mao’s turbulent dictatorship.

Xi Jinping, China’s current leader, is now dismantling it. He has become the most powerful Chinese ruler certainly since Deng, and possibly since Mao. Whether this is good or bad for China depends on how Mr Xi uses his power. Mao pushed China to the brink of social and economic collapse, and Deng steered it on the right economic path but squandered a chance to reform it politically. If Mr Xi used his power to reform the way power works in China, he could do his country great good. So far, the signs are mixed.

In this section

• Xi who must be obeyed
• How to fix Obamacare
• Chasing a rolling snowball
• Too reliant on the few
• Paris via Montreal

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• China

Taking on the party

It may well be that the decision to promote Mr Xi as a single personality at the expense of the group was itself a collective one. Some in China have been hankering for a strongman; a politician who would stamp out corruption, reverse growing inequalities and make the country stand tall abroad (a task Mr Xi has been taking up with relish—seearticle). So have many foreign businessfolk, who want a leader who would smash the monopolies of a bloated state sector and end years of dithering over economic reforms.

However the decision came about, Mr Xi has grabbed it and run with it. He has taken charge of secretive committees responsible for reforming government, overhauling the armed forces, finance and cyber-security. His campaign against corruption is the most sweeping in decades. It has snared the former second-in-command of the People’s Liberation Army and targeted the retired chief of China’s massive security apparatus—the highest-ranking official to be investigated for corruption since Mao came to power. The generals, wisely, bow to him: earlier this year state newspapers published pages of expressions of loyalty to him by military commanders.

He is the first leader to employ a big team to build his public profile. But he also has a flair for it—thanks to his stature (in a height-obsessed country he would tower over all his predecessors except Mao), his toughness and his common touch. One moment he is dumpling-eating with the masses, the next riding in a minibus instead of the presidential limousine. He is now more popular than any leader since Mao (see article).

All of this helps Mr Xi in his twofold mission. His first aim is to keep the economy growing fast enough to stave off unrest, while weaning it off an over-dependence on investment in property and infrastructure that threatens to mire it in debt. Mr Xi made a promising start last November, when he declared that market forces would play a decisive role (not even Deng had the courage to say that). There have since been encouraging moves, such as giving private companies bigger stakes in sectors that were once the exclusive preserve of state-owned enterprises, and selling shares in firms owned by local governments to private investors. Mr Xi has also started to overhaul the household-registration system, a legacy of the Mao era that makes it difficult for migrants from the countryside to settle permanently in cities. He has relaxed the one-child-per-couple policy, a Deng-era legacy that has led to widespread abuses.

More muscle needed

It is still far from clear whether Mr Xi’s economic policies will succeed in preventing a sharp slowdown in growth. The latest data suggest the economy is cooling more rapidly than the government had hoped (see article). Much will depend on how far he gets with the second, harder, part of his mission: establishing the rule of law. This will be a central theme of the annual meeting next month of the Communist Party’s Central Committee. The question is whether Mr Xi is prepared for the law to apply to everyone, without fear or favour.

His drive against corruption suggests that the answer is a qualified no. The campaign is characterised by a Maoist neglect of institutions. It has succeeded in instilling fear among officials, but has done little to deal with the causes of graft: an investigative mechanism that is controlled entirely by the party itself, a secret system of appointments to official positions in which loyalty often trumps honesty and controls on free speech that allow the crooked to silence their critics.

Mr Xi needs to set up an independent body to fight corruption, instead of leaving the job to party investigators and the feuding factions they serve. He should also require officials to declare all sources of income, property and other assets. Instead, he has been rounding up activists calling for such changes almost as vigorously as he has been confronting corruption. In the absence of legal reform, he risks becoming a leader of the old stripe, who pursues vendettas in the name of fighting wrongdoers. That will have two consequences: there will be a new wave of corruption, and resentments among the party elite will, at some point, erupt.

Mr Xi is making some of the right noises. He says he wants courts to help him “lock power in a cage”. Reforms are being tinkered with to make local courts less beholden to local governments. But he needs to go further by abolishing the party’s shadowy “political-legal committees”, which decide sensitive cases. The party should stop meddling in the appointment of judges (and, indeed, of legislators).

The effect of such reforms would be huge. They would signal a willingness by the party to begin loosening its monopoly of power and accepting checks and balances. Deng once said that economic reform would fail without political reform. Mr Xi last month urged foot-dragging officials to “dare to break through and try” reform. China’s leader should heed his own words and those of Deng. He should use his enormous power for the greatest good, and change the system.

Ebola

Chasing a rolling snowball

The world is still acting too slowly to stop Ebola

Sep 20th 2014 | From the print edition

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FOR months the world has sat largely idle as an Ebola epidemic has marched steadily from the remote jungles of Guinea to the slums of Liberia, and beyond. On September 16th that changed. Barack Obama announced the largest humanitarian deployment by America’s armed forces to fight an infectious disease. Saying that the epidemic “is not just a threat to regional security—it’s a potential threat to global security if these countries break down”, the president began the process of sending some 3,000 American troops to set up treatment centres with 1,700 beds and to train local health workers.

The dispatch of troops to west Africa may seem an odd priority when American forces are preparing to confront jihadists in Iraq and Syria and are stretched thin elsewhere. Ebola is a disease that is usually absent from human populations, has been quickly stamped out in the past and in its worst recorded outbreak has thus far caused 3,000 known deaths (see article). Moreover it is unlikely to spread widely in rich countries with good health-care systems. Set against killers such as HIV, the virus that kills some 1.6m people a year, or tuberculosis (TB), which takes another 1.3m lives, an expensive fight against Ebola may seem a misallocation of resources.

In this section

• Xi who must be obeyed
• How to fix Obamacare
• Chasing a rolling snowball
• Too reliant on the few
• Paris via Montreal

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• Liberia

Yet Ebola is now growing exponentially, with the number of new cases roughly doubling every three weeks or so. In Monrovia, the capital of Liberia, it is thought to be doubling every two weeks. Previous outbreaks were usually in rural villages where it was easier to contain. At this rate of progress, small numbers quickly become big ones, and there is a real risk of the disease spreading to cities such as Lagos, which is home to more than 10m people. The longer Ebola is allowed to replicate in humans, the greater the risk that it will become more contagious. Some virologists fret that it might even acquire the ability to be transmitted through the air by coughs and sneezes. Although this seems unlikely, nobody wants to find out just how quickly Ebola can adapt to humans.

America’s response is the first by a government on a large scale. Until now the burden has been carried by charities such as Medecins Sans Frontieres (MSF), which has 2,000 staff in the affected countries. Yet even America’s large commitment may not be enough to get ahead of this epidemic in Liberia, the country most affected. By the time the troops actually get there, the situation in Liberia could be far worse.

Gloves and masks needed

Elsewhere, the response falls far short of what is needed. Sierra Leone, the second-worst-affected country, has received far less help from governments: China is sending 174 people and mobile laboratory teams, Cuba is sending a similar number and Britain will set up a hospital with 62 beds. France is sending 20 people to the region (though it is expected to announce that it will build a hospital).

Two things are urgently needed. The first is the rapid provision of basic (and, frankly, cheap) protective gear such as gloves, gowns, surgical masks and disinfectant. Domestic health systems in affected countries have crumbled as nurses and doctors have fallen ill or died for lack of basic gear.

The second need is for trained staff to run the treatment centres and work in them. Poorly run ones with weak infection controls may hasten the spread of the disease. Both are needed soon, as the cost of halting Ebola’s spread is also rising exponentially. In August the World Health Organisation estimated that it would take nine months and cost $490m to contain Ebola. Now it reckons the cost has risen to over $1 billion. The longer the world prevaricates, the harder and costlier it will be to contain this outbreak.

Greenhouse gases

Paris via Montreal

The quickest way to cut greenhouse gases is to expand the Montreal protocol

Sep 20th 2014 | From the print edition

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IN 1974 two chemistry professors, Frank Rowland and Mario Molina, predicted that chlorofluorocarbons (CFCs), a set of chemicals used in refrigeration, would gradually decompose, release chlorine into the stratosphere and break down the ozone layer which protects Earth from ultraviolet radiation. The chairman of DuPont, a chemical company, called their idea “a load of rubbish”.

Eleven years later, scientists discovered a hole in the ozone layer over Antarctica, and two years after that governments negotiated an agreement, the Montreal protocol, to phase out CFCs. Messrs Rowland and Molina now share a Nobel prize; the ozone layer has been preserved and, as a happy consequence, the climate as a whole has benefited. CFCs are powerful greenhouse gases and the Montreal protocol has reduced them by the equivalent of 135 billion tonnes of carbon dioxide (compared with doing nothing), making it by far the world’s most effective action to tackle climate change. We have reviewed the carbon-cutting records of 20 policies which rein in greenhouse-gas emissions (see article). The protocol does almost as much as everything else on the list put together.

In this section

• Xi who must be obeyed
• How to fix Obamacare
• Chasing a rolling snowball
• Too reliant on the few
• Paris via Montreal

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• Politics
• International relations
• Political policy
• Government and politics
• Treaties

This little-known success deserves greater prominence in today’s efforts to tackle climate change. On September 23rd the world’s leaders gather for a climate summit in New York. Their meeting starts a year of talks aimed at producing a treaty on carbon emissions to be signed in Paris at the end of 2015. In designing the new treaty, politicians ought to learn from—and expand—the Montreal protocol.

The protocol won the backing of developing countries partly because they did not think its targets were being jammed down their throats, and partly because they were given plenty of money to comply with its measures. Even more important, it also won support from large chemical companies (including DuPont) which made money producing substitutes for CFCs. This widespread co-operation is a model to be copied. It will be harder with carbon, because regulating downstream emissions (which a carbon treaty must do) involves more parties than upstream production (which the protocol regulates). But the spirit—of generous financing and co-operation—is the same.

While learning from the Montreal protocol, the world’s leaders should also expand it. The existing agreement does not cover a class of chemicals called hydrofluorocarbons (HFCs) which do not harm ozone but do act as greenhouse gases; they are among the fastest-growing such gases. If the protocol were amended to cover them, it could reduce greenhouse gases by the equivalent of another 130 billion tonnes of CO{-2} by 2050, or roughly 4 billion tonnes a year. It would reduce greenhouse gases more than any other single climate-change action.

Worthwhile Canadian initiative

Expanding the Montreal protocol would not, by itself, keep the rise in global temperatures within safe bounds. That will require cutting carbon emissions by around 26 billion tonnes of CO{-2} equivalent a year by 2030 (or almost halving the current rate of emissions). A broad carbon treaty will still be necessary; so will stopping deforestation, slashing subsidies to fossil fuels and much else (see article). But expanding the Montreal protocol would get more than a tenth of the way towards what is needed. More important, it can be agreed, and implemented, quickly. The road to Paris should run through Montreal.

Lexington

Hillary in Iowa

If she runs, she may win. But if she wins, could she govern?

Sep 20th 2014 | From the print edition

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IS HILLARY CLINTON preparing a run for the White House? Before pondering that timely question, consider another which may matter just as much. Why would any Democrat want to become president in 2016?

Mrs Clinton is certainly giving people cause to ask the first question. Before too long, she will need to answer the second. On September 14th she headed to Iowa for the first time since her wounding defeat by Barack Obama in that state’s 2008 Democratic caucus. The former secretary of state, senator and First Lady made her return in a friendly, controlled setting. Accompanied by her husband, Bill, she was the guest star at the Harkin Steak Fry, a combined picnic, fundraiser and clan gathering for fans and friends of Tom Harkin, Iowa’s Democratic senator and an old-school New Deal populist.

In this section

• Experimental medicine
• The problem-solvers
• The politics of outrage
• A war by any other name
• Heels and reels
• Painting the lawn green
• Hillary in Iowa
• Correction

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• Republican Party (United States)
• Government and politics
• World politics
• American politics
• Politics

No national politician heads to Iowa on a whim. Winning Iowa’s first-in-the-nation presidential contest does not sew up the nomination. But losing Iowa badly (in 2008 Mrs Clinton came third behind Mr Obama and John Edwards, a caddish lawyer) can derail a campaign built round inevitability. Senator Harkin tried to consign that rejection to history, calling the Clintons America’s “comeback couple” and, to Iowa Democrats, “family”.

Mr Harkin is retiring after 40 years in Congress. The Clintons were at pains not to overshadow their host. They used his-and-hers speeches to heap praise on Mr Harkin, bash Republicans and urge Democrats to vote in November’s mid-term elections. The lovely setting, a sloping meadow bathed in autumn sunshine, had been decorated with similar care. There were old tractors, artfully placed hay bales, a giant flag and rows of campaign signs promoting mid-term candidates. “Ready for Hillary”, a shadow campaign group working to assemble an army of grassroots activists for Mrs Clinton if she decides to run, bused hundreds of volunteers and Iowa students to the site, just outside Indianola. Tactfully, the group had lined the site with signs declaring “Thank You Tom!” and “Ready”, and making no explicit mention of their heroine or 2016 (though the signs’ colours were laden with meaning, with sky-blue lettering giving way to exclamation marks in a grown-up shade of pink).

Before her speech Mrs Clinton chatted, gingerly, with a crowd of over 100 penned-in reporters, pretending not to hear yelled-out questions about her presidential ambitions. Once on stage she was a bit more direct, admitting that she was “thinking about” the presidency. Strikingly, she earned only a handful of real cheers: when she walked onstage, when dropping 2016 hints, and when she defended women’s rights. Before the end of her workmanlike speech, activists began heading for the exits. Judging by the badges and banners they carried, these were Democrats pleased by the general idea of a fresh Clinton candidacy. Yet at that precise moment they also looked a little bored, and mostly focused on beating the traffic.

When straw-polled, quite a few Iowa Democrats seem content with that level of commitment, for now. They sound mainly intrigued by that first basic question—is Mrs Clinton running?—and in quite a tokenistic way. This was true of several students at Drake University in Des Moines, waiting to board a free bus to the steak fry, laid on by “Ready for Hillary”. Many said America needed to show it could elect a woman president. Young people are excited by novelty, added a first-year advertising student: “We’ve had a black president, now what’s next?”

Other Democrats are willing to grapple with the second question cited at the start: why would they want the presidency in 2016? Democrats could be termed the party of people, with an edge in the nationwide popular vote, at least on the one day every four years when the White House is at stake. Beyond the Democrats’ urban strongholds, Republicans are the party of territory, dominating vast swathes of rural and suburban America. Combine that with congressional district maps not due to be redrawn before 2020, and a President Hillary would be likely to face—at a minimum—a Republican-held House of Representatives and years of divided government.

Alas, divided government is not currently working. Mrs Clinton’s husband has a talent for defining the political issue of the moment, and proved it again at the steak fry. America faces a puzzling problem, he mused in his speech. “We are less racist, sexist and homophobic than we’ve ever been.” At the same time: “We don’t want to be around anyone who disagrees with us.” Put another way, even as some big divisive arguments lose their potency, partisan divisions are growing ever sharper.

Post-hope politics

Such gridlock alarms thoughtful Iowa Democrats, it turns out, to the point of undermining the received wisdom that voters hate Washington and all its works. Those Democrats—the ones who wonder what Mrs Clinton might do as president—were united in praising her experience, not just in government and the Senate, but in the wheeling-’n’-dealing Clinton White House. In 2008 Mr Obama “took us by storm”, sighed a long-time activist. Hope and change was a “wonderful slogan”, she added—but after Mr Obama’s idealism it is time for “cold, hard facts”, and a president ready to cut deals from day one. A church minister urged the former First Lady to run as a “hard-nosed pragmatist”, offering, in effect, “a third term of Bill Clinton”. A 19-year-old student, describing Mrs Clinton’s strengths, ventured: “Her involvement in Washington politics is a lot longer than President Obama’s.” A handful openly regretted their 2008 support for Mr Obama.

Democrats are sure that Hillary Clinton would be a formidable presidential contender. They nearly all blame Republicans for Washington’s dysfunction. But a deep fear gnaws at them, and spilled into the open in Iowa: what if a Democrat can win the White House, then finds the country ungovernable?

From the print edition: Leaders

Crime and punishment in Saudi Arabia

The other beheaders

The possible reasons for a mysterious surge in executions

Sep 20th 2014 | From the print edition

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THE condemned may request a painkiller. Their end is not televised, and comes with a swift sword stroke from a skilled executioner rather than from hacking with a kitchen knife by an untutored brute. Otherwise there is not much difference between a death sentence in the jihadists’ “Islamic State” and in Saudi Arabia, a country seen as a crucial Western ally in the fight against IS. Nor, indeed, is there much difference between the two entities in other applications of a particularly merciless brand of sharia, or Islamic law, including public whippings and the right for victims of crime to claim eye-for-an-eye revenge.

Both follow Hanbali jurisprudence, the strictest of four schools of traditional Sunni Islamic law: when Egyptians chide someone for nitpicking, the expression‎ is “Don’t be Hanbali”. Dissidents in Raqqa, the Syrian town that is IS’s proto-capital, say all 12 of the judges who now run its court system, adjudicating everything from property disputes to capital crimes, are Saudis. The group has also created a Saudi-style religious police, charged with rooting out vice and shooing the faithful to prayers. And as in IS-ruled zones, where churches and non-Sunni mosques have been blown up or converted to other uses, Saudi Arabia forbids non-Muslim religious practice. For instance, on September 5th Saudi police raided a house in Khafji, near the Kuwaiti border, and charged 27 Asian Christians with holding a church ceremony.

In this section

• An improbable alliance
• The other beheaders
• Al-Sisi Ascendant
• Help in the time of Ebola
• E-bola

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• Egypt
• Islam
• Religion
• Sharia law
• Saudi Arabia

In recent months IS has carried out hundreds, possibly thousands, of executions, mostly by gunfire rather than beheading and typically without a trial of any kind. Saudi Arabia is far less trigger- or sword-happy. Still, in the space of just 18 days during the month of August, the kingdom beheaded some 22 people, according to human-rights advocates. The spate of killings was surprising not only because it was so sudden—the kingdom carried out a total of 79 executions last year—but also because many of those killed were convicted of relatively minor offences, such as smuggling hashish or, strangely, “sorcery”. In one case the defendant was determined to be mentally unsound, but lost his head anyway.

It was surprising, too, because the Saudi kingdom has in recent years gently relaxed some social strictures, and made efforts to rein in excesses by religious police. Some Saudi critics fear that the sudden upsurge represents a response by the religious establishment to the challenge from IS. Perhaps it is an attempt to prove to the most conservative Saudis that the kingdom remains a truer “Islamic” state than any other. Others see it as part of a broader policy to assert government control amid signs of growing discontent among the bored Saudi young, including a drift into unbelief.

Charlemagne

Europe’s ring of fire

The European Union’s neighbourhood is more troubled than ever

Sep 20th 2014 | From the print edition

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IT SEEMS safe to assume that Johnny Cash, born in Arkansas in 1932, gave little thought to European foreign policy. Yet one of the Man in Black’s better-known numbers sums up the European Union’s troubles with its neighbours. “Love is a burning thing,” he sang in “Ring of Fire”, a hit in 1963, “and it makes a fiery ring. Bound by wild desire, I fell into a ring of fire.”

Wild desire is a mild overstatement, but there was certainly an abundance of goodwill behind the EU’s decision to launch its European Neighbourhood Policy (ENP) in 2004. Aiming to construct a “ring of friends” to its east (former communist countries) and south (across the Mediterranean), the EU took enthusiastically to the task of transforming its 16 ENP partners. Like Cash with his guitar, the EU had powerful instruments, including trade, aid and political reform. Fresh from an enlargement that took in eight central and east European countries, the club believed itself influential enough to bring about change in its neighbours without the carrot of eventual membership.

In this section

• Win some, lose more
• Yukos 2.0?
• Lofven’s coalition problem
• There is an Alternative
• Who is the Other now?
• The long road to 2017
• Renzi redux
• Europe’s ring of fire

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• European Union politics
• Government and politics
• Europe
• Russia
• European Union

Yet ten years on, the EU is facing a ring of fire on its eastern and southern flanks. Over 3,000 people have been killed in Ukraine’s fighting this year. There, and in Georgia and Moldova, two of the other five eastern ENP countries, Russian troops are present against the will of the legitimate governments. Azerbaijan is imprisoning activists and tensions are rising with Armenia over Nagorno-Karabakh, an enclave the pair fought a war over in the early 1990s. Belarus’s long-serving president, Alexander Lukashenko, still merits his label as Europe’s last dictator. Meanwhile, to the south, Libya is in turmoil, the hopes from Egypt’s 2011 uprising have been quashed by a military counter-revolution, and Israelis and Palestinians have again shown that any number of EU action plans cannot stop them killing each other.

Why has the ENP fallen so far short of its goals? The EU cannot control the internal political dynamics of other countries, of course. In many cases, particularly in the south, its technocratic approach has simply been overwhelmed by domestic forces. But elsewhere it has been guilty of naivety. Take Ukraine. Last year the EU and Ukraine concluded an “association agreement”, an ENP instrument par excellence that included a free-trade deal and various political elements. But under pressure from Russia, which was alarmed by the prospect of Ukrainian integration into Western institutions, Viktor Yanukovych, then Ukraine’s president, declined to sign at the last minute, causing protests that led to his downfall. This was followed by Russia’s annexation of Crimea and its invasion of the south-east.

The thousands of Ukrainians who occupied the Maidan in Kiev were not demonstrating for tariff reform and patent protection. They were asserting a European identity and rejecting the backward-looking, post-Soviet vision of Mr Yanukovych and the corruption that flourished on his watch. They understood that Europe had not banished geopolitics. So did Vladimir Putin, Russia’s president, although his conclusion that Ukrainian sovereignty must be sacrificed to secure Moscow’s interests was altogether darker. The irony was that the Russians took the ENP far more seriously than the Europeans ever did.

Europe, too, has woken up to the return of geopolitics. Last week the association-agreement circle was completed when the EU and Ukraine, after lobbying by Russia as well as some EU members, decided to delay many of its provisions for a year to help underpin a ceasefire in the south-east that is barely holding. This week, in a powerful piece of symbolism, the European and Ukrainian parliaments ratified the agreement simultaneously via video link. Yet the different understandings of Ukraine’s European vocation seemed apparent when Petro Poroshenko, Ukraine’s pro-European president, declared that, after all the violence in his country, “nobody will dare close the door of the EU in front of Ukraine”. Some MEPs looked awkwardly at their feet.

Technocratic policies are not toothless. The EU accession process, during which candidates must adopt rules on everything from food safety to public procurement, is mind-numbing but also powerful. Yet it requires the lure of membership to work. Nobody believes the EU’s eastern neighbours are anywhere near joining; the southerners never will. But signals count, and today the EU seems more concerned to downplay its neighbours’ aspirations. One of the first pledges of the incoming president of the European Commission, Jean-Claude Juncker, was that there would be no expansion of the club in the next five years.

Yet the EU must find some way to quell the flames licking at its borders. Poland and the Baltic trio worry that a weak-kneed European response in Ukraine has encouraged Russia to make more mischief. To its south, the EU has not found a solution to the human tragedies of would-be migrants dying in the Mediterranean; recently, over 500 drowned after their boat was rammed by human traffickers. Relations with Turkey, which have soured as Recep Tayyip Erdogan’s government has turned eastward, are especially tricky, as its membership talks are stuck and it shelters as many as 1m Syrian refugees, many of whom want to get to the EU.

Federica’s challenge

The EU’s eastern policy was dented by a previous bout of muscle-flexing by Russia: the 2008 war with Georgia. This year, after a slow start, EU members have finally begun to act, although a senior official warns that internal differences will make it hard to move beyond the latest sanctions. The incoming EU foreign-policy chief, Italy’s Federica Mogherini, is to produce an assessment of global challenges. This is a chance to rethink Europe’s security strategy, if Ms Mogherini has the ambition and is given enough space by the big countries. It is a fine line between being tough and staying united, but the EU, as Cash once sang, must walk it.

Schumpeter

Entrepreneurs anonymous

Instead of romanticising entrepreneurs people should understand how hard their lives can be

Sep 20th 2014 | From the print edition

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SEVEN years ago Joe Jones (not his real name) left his job with a big NASDAQ-listed company to strike out on his own. He was sick of corporate life and he wanted to test his inner mettle. But being an entrepreneur proved far harder than he had imagined: a succession of potholes, speed bumps and dead-ends rather than a high road to prosperity. He found he had “lost his levers of control”: all the things his former employer had provided for him, from administrative support to a social network. He had to learn how to do all sorts of things he had not thought about before. The responsibility of meeting his payroll was “overwhelming”. The worry about every detail of his life—could he afford to keep his car, or pay the mortgage on his house?—was all-consuming. He took to drinking. Mr Jones eventually joined Alcoholics Anonymous and turned his business into a success. But many other would-be entrepreneurs have not been so lucky.

It is fashionable to romanticise entrepreneurs. Business professors celebrate the geniuses who break the rules and change the world. Politicians praise them as wealth creators. Glossy magazines drool over Richard Branson’s villa on Lake Como. But the reality can be as romantic as chewing glass: first-time founders have the job security of zero-hour contract workers, the money worries of chronic gamblers and the social life of hermits.

In this section

• Profits in a time of war
• The gasman cutteth
• Foamy war
• The great disrupter’s new targets
• Pouring cold water
• Strikers against reality
• Piketty Airways
• Entrepreneurs anonymous

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• Business
• Start-ups

Phil Libin, the boss of Evernote, a document-storage service, says that “It is amazingly difficult work—you have no life balance, no family time, and you will never work harder in your life.” Aaron Levie, a founder of Box, a cloud-storage firm, says he spent two and a half years sleeping on a mattress in his office, living off spaghetti hoops and instant noodles. Vivek Wadhwa, an entrepreneur turned academic, had a heart attack when he had just turned 45, after taking one company public and reviving another.

Over half of American startups are gone within five years. Most of the survivors barely stumble along. Shikhar Ghosh of Harvard Business School (HBS) found that three-quarters of startups backed by venture capital—the creme de la creme—failed to return the capital invested in them, let alone generate a positive return. In 2000 Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs.

Even success can turn into a different sort of failure. The best way to avoid the loneliness of the long-distance entrepreneur is to found your company with a friend. But this frequently leads to quarrels about power, titles or money, as anyone familiar with the story of Facebook will know. The best way to cope with growth is to take on more investors and introduce more professional managers. But this usually leads to a loss of control: few founders are still CEOs when their companies go public.

Such a roller-coaster would impose an emotional strain on even the most balanced people. But it seems the average entrepreneur is far from balanced. John Gartner, who teaches psychiatry at Johns Hopkins University medical school, suggests that a disproportionate number of entrepreneurs may suffer from hypomania, a psychological state characterised by energy and self-confidence but also restlessness and risk-taking. Numerous studies confirm‎, at the least, that they are prone to over-optimism. Guy Kawasaki, a venture capitalist, says that when an entrepreneur promises to make $50m in four years he adds one year to the delivery time and divides the revenue by ten. Venture capitalists often use personality tests to distinguish between the merely over-optimistic and the completely delusional.

What can be done to deal with the dark side of entrepreneurialism? Mr Wadhwa urges company founders to have regular medical checkups, make time to exercise and learn to relax. “You may not believe in anything called a work-life balance, but your body certainly does.” Mr Jones suggests that people who start their own companies need to think hard about constructing social networks: the idea that they can succeed in splendid isolation is a dangerous illusion. They need friends to lean on, and mentors to guide them. The Entrepreneurs’ Organisation (EO), which has more than 10,000 members in 46 countries, organises meetings in which they can talk about their emotional as well as their business problems. The Kauffman Foundation, an American non-profit which studies and promotes entrepreneurship, provides online courses on “surviving the entrepreneurial life”.

Learning by being thumped

Company founders need to have a more realistic assessment of what it is like to fail. Management literature is full of guff about how entrepreneurs should embrace failure as a “learning experience”. But being punched in the face is also a learning experience. Dean Shepherd of the Kelley School of Business at Indiana University argues that the entrepreneurs who fail frequently go through a process that is similar to grieving after a death or divorce. Some bury themselves in the details of putting their lives back together. Others fixate on their loss. He argues that they must learn how to repair their lives and cope with their loss if they are to restore their fortunes and learn from their mistakes. Glib talk about “failing fast” hardly encourages this.

The paradox of the current, romantic view of entrepreneurs is that it leads us to undervalue their achievements. It is easy to envy people if you focus on a handful of success stories. It is easy to say, as Barack Obama did, that “If you’ve got a business—you didn’t build that. Somebody else made that happen”, while ignoring all the edifices that have fallen down and crushed those who devoted their lives to building them. Would-be entrepreneurs need to have a more measured view of the risks involved before they start a business. But society also needs to have more respect for people who put their lives on the line to build something from nothing.

Buttonwood

Can’t pay, won’t pay

Hiring hedge funds was never going to make pension deficits disappear

Sep 20th 2014 | From the print edition

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HAVE the whizz kids of finance lost their va-va-voom? For decades, hedge funds have been portrayed as the smart money, with the power to frighten chief executives and destabilise governments; rich individuals and powerful institutions competed to give them money. But the announcement on September 15th, by CalPERS, California’s main public pension fund, that it was unwinding its $4 billion hedge-fund portfolio, is a significant blow to the sector’s appeal.

The CalPERS press release specifically says that the decision is not based on the performance of the programme. But Ted Eliopoulos, the chief investment officer, said that “when judged against their complexity, cost and the lack of ability to scale at CalPERS’ size”, the allocation to hedge funds was no longer warranted.

In this section

• Out of control
• Can’t pay, won’t pay
• Beyond cows
• A test of will
• Now, make money
• Transfer policing
• Inverse logic
• Leaving dead presidents in peace

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Related topics

• Industries
• Asset management
• Investment funds
• Investment services
• Financial markets

It is hard to believe that, if the performance of the programme had been stellar, the pension fund would have axed it. But the reference to scale is also striking. Very small pension funds tend not to have the money or the expertise to invest in hedge funds. Now CalPERS (the sixth-biggest pension fund in the world, according to TowersWatson, an actuarial consultant) is saying that it is too big to be involved. Who does that leave?

Investing in hedge funds requires one to believe in three things. The first, which is plausible, is that there are anomalies in the market which a shrewd fund manager can exploit. One example is momentum, the tendency for assets that have recently risen in price to continue doing so. The second requirement is to identify such outperforming managers in advance. This is much more difficult. It takes time to spot good managers, but the average life of a hedge fund is less than five years, indicating that many managers have to give up for lack of clients or because of poor performance. In addition, half of all current funds are less than five years old.

Even if one can successfully identify smart managers, one must then believe that the excess returns will be sufficient to outweigh their high fees. Not all managers charge the “two-and-twenty” of legend (a 2% annual fee plus 20% of the return over a given benchmark) but enough do to make this a very high hurdle to overcome. And investors who use a consultant (or a fund of funds) to help with the selection process have to pay an extra layer of fees.

The evidence for stellar hedge-fund performance is not convincing. Of the last ten calendar years, only one (2005) has seen the average hedge fund outperform a portfolio of 60% equities (the S&P 500 index) and 40% government bonds. Far from being masters of the universe, the managers have been mastered by the market.

One could argue that hedge funds offer a different type of return—less volatile and thus offering a better trade-off between risk and reward. But the example of 2008, when the average hedge fund made a loss of 23%, makes that a harder case to argue.

Anyway, it seems unlikely that pension funds have been putting money into hedge funds for such a reason. It is more likely that a hedge-fund allocation is part of a “Hail Mary” bet, with pension schemes looking for something, anything, that will pep up returns, and help to reduce yawning deficits. CalPERS highlights the issue with its claim that it has adopted “a new asset-allocation mix that reduces risk to the portfolio, while still being able to achieve its return goal of 7.5%.”

The risk-free rate (the yield on the ten-year Treasury bond) at the moment is around 2.6%. One has to take on a substantial amount of risk to hope for a return five percentage points higher than that. CalPERS points to its 8.4% annual return over the past 20 years, but that is irrelevant: when yields fall to historic lows, as they have over those two decades, investors make a capital gain that boosts returns. One cannot expect such returns to continue without a similar plunge in yields in future, which is almost impossible. And a world in which Treasury bonds yielded even less would probably be characterised by slow growth and deflation—not an environment in which CalPERS’s equity portfolio would thrive.

Even if hedge-fund managers did outperform a market index on a reliable basis, it would not solve the problem of pension funding. The 300 largest pension funds in the world have assets of $15 trillion; total hedge-fund assets are around $2.9 trillion, or a fifth of that. So if pension schemes were the only clients of hedge funds, and if they earned an excess return of two percentage points a year after fees, that would still boost overall pension returns by just 0.4 percentage points a year. No wonder CalPERS thought it wasn’t worth the bother any more.

Free exchange

Leaving dead presidents in peace

Abolishing notes and coins would bring huge economic benefits

Sep 20th 2014 | From the print edition

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SINCE cash was invented in the seventh century BC, it has generally been the most convenient way to pay for everyday purchases. But as electronic payments get easier—most recently with the launch of a “contactless payment” system by Apple—economists are beginning to ask whether notes and coins have had their day. Kenneth Rogoff, of Harvard University, reckons they have. Scrapping physical currency, he argues, would help governments to collect more tax, fight crime and develop better monetary policy.*

On the surface, Mr Rogoff’s plan seems like a minor change. Notes and coins make up only a tiny part of the money in circulation: just 3% in Britain, for instance. (In America, the proportion is 10%, partly because foreigners hold lots of dollar notes.) The rest is simply records of balances in accounts, either at a bank (in the case of businesses and individuals) or at the central bank (in the case of banks). It tends to be moved around by electronic transfer, never taking physical form.

In this section

• Out of control
• Can’t pay, won’t pay
• Beyond cows
• A test of will
• Now, make money
• Transfer policing
• Inverse logic
• Leaving dead presidents in peace

Reprints

Related topics

• Bank of England
• Federal Reserve Bank of Cleveland
• Federal Reserve Bank of San Francisco
• Kenneth Rogoff
• Economies

Cold, hard electronic transfers

Rich countries are becoming ever less dependent on cash, as debit and credit cards, “virtual wallets” and other substitutes grow in popularity. According to the World Bank, they had 83 cash dispensers for every 100,000 adults in 2008; by 2012 they had only 68. A paper from the Federal Reserve Bank of San Francisco shows that, in America, the share of transactions using cash has fallen in recent years. Until the mid-1990s the total value of all bills of $50 or less grew in line with the economy. From 1993 to 2013, however, the American economy grew in real (inflation-adjusted) terms by 65%, but notes of $50 or lower grew by just 19% (see chart).

Yet cash remains important. There is $4,000 of the stuff for every American. And it causes all sorts of problems. Forgery is one: in 2013 the Bank of England removed 680,000 counterfeit notes, with a face value of ￡11.5m ($19m), from circulation. Genuine cash helps criminals of other sorts, since notes and coins keep transactions anonymous: you cannot tell who has bought a kilo of cocaine by looking at the cash they used to pay for it. In the OECD, a club of rich countries for the most part, the “underground economy” of activity hidden from the government, whether drug-dealing or undeclared income from babysitting, makes up about one-fifth of GDP. What is more, that share has barely shrunk in a decade. Mr Rogoff estimates that in most countries, the desire to hide something from the authorities accounts for more than half of cash transactions by value.

Higher-denomination notes are particularly useful for criminals. There are €295 billion ($382 billion) of €500 notes in circulation. Yet most Europeans have never seen one: criminals hog them, as they are so useful for moving ill-gotten gains around. (€1m-worth of €500 bills weighs just 2.2kg.)

Abolishing cash would eliminate counterfeiting at a stroke, and make it much easier to trace illicit payments. The reduction in crime that would follow would be a huge boon, both socially and economically. The reduction in tax evasion alone would bring big fiscal benefits. Research from Tufts University estimates that Uncle Sam could collect an extra $100 billion a year if America went cashless.

Monetary-policy experts also see benefits in cashless economies. Many rich economies are stuck at the “zero lower bound”, with interest rates close to zero. These economies would gain from further monetary stimulus in the form of negative rates, which would prod those hoarding money to spend and invest. An article published by the Cleveland Fed in 2012 found that the “ideal” interest rate for the American economy at the depth of the crisis would have been -6%.

However, the continued existence of cash makes moving rates below zero much less effective. Central bankers assume that people would simply withdraw their money from the bank and hold it as high-denomination notes. In fact, they already seem to be doing so in countries where interest rates are very low. From 2009 to 2013 the total value of $100 bills in circulation grew by 30% in real terms. The San Francisco Fed reckons that rock-bottom interest rates were partly responsible.

Going digital does pose problems. For one thing, even in the rich world, there are still plenty of honest but “unbanked” people who rely completely on cash. Some economists think central banks might suffer too. They inject money into the economy, in both physical and virtual form, by buying government debt. They do not pay interest on the money they have created, but they earn interest on the bonds they have bought. The profits they earn in this way, known as seigniorage, are sent to government coffers. Bhaskar Chakravorti, of Tufts University, reckons that in America seigniorage typically brings in $20 billion a year. The Bank of England earns about ￡500 million a year in this way.

Mr Rogoff thinks that scrapping physical money would reduce seigniorage revenues. Tax-evaders and other criminals, fearful of being noticed, would cut back on spending; demand for money would fall. Mr Chakravorti, though, reckons that the lost revenue would be dwarfed by higher tax receipts. It might also be offset by the lower per-unit cost of producing currency.

There is also the question of whether voters would tolerate the loss of privacy that the abolition of cash entails. Some might be so outraged that they stop using local currency and convert their bank balances into alternative stores of value, such as foreign exchange or Bitcoin, a digital currency.

One compromise might be to phase out big notes, such as €500 bills. That would allow small transactions to be kept completely private, while making life much trickier for all but the pettiest of criminals.