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  1. 2005/09/16 NYTimes article on Bush's plan for reconstruction
  2. 2005/09/13 Paul Krugman's NYT editorial
  3. 2005/09/12 New York Times article on the aftermath of Katrina
  4. 2005/09/08 International Socialist Newspaper's editorial on Katrina
  5. 2005/09/08 Congressional Budget Office's Analysis on the Macroeconomic and Budgetary Effects of Katrina
  6. 2005/09/08 NY Times article on political effects of Katrina on Bush Tax Cuts
  7. 2005/07/27 Allan Greenspan's Testimony to the US Congress & FED Interest Rate Policy
  8. 2005/07/27 China's Change in Exchange Rate Policy
  9. 2005/06/30 FRB's Inflation and Monetary Policy
  10. 2005/06/30 ICT and Millenium Development Goals

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NYTimes article on Bush's plan for reconstruction

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September 15, 2005

Bush to Focus on Vision for Reconstruction in Speech Tonight

By ELISABETH BUMILLER and RICHARD W. STEVENSON

The commitments are part of a series of initiatives that the president is expected to announce as he tries to recover from the political fallout over the government's handling of the storm.

The initiatives will encompass education, health care and other social services, with specific housing and job assistance for people who return to New Orleans to live. White House officials said the president would not call for any set-asides or quotas for minorities in reconstruction contracts.

The proposals were still in the planning stages on Wednesday night, and officials said the 9 p.m. address, the president's first major speech on the hurricane, would not be a State of the Union "laundry list" of proposals. Instead, they said, it would focus more generally on Mr. Bush's vision for the reconstruction of New Orleans and the Gulf Coast, with the federal government playing a supportive role to what White House officials are calling a "home-grown" plan that must be created by city and state authorities.

"We're in the beginning of the rebuilding at this point, and there are a lot of ideas that people are expressing," Scott McClellan, the White House press secretary, told reporters on Air Force One on Wednesday. "The president wants people to think big."

Mr. McClellan indicated that Mr. Bush would not use the speech to name a "reconstruction czar" to oversee the effort. A number of White House officials have advised the president to name such a czar, with Gen. Tommy Franks, commander of forces in the 2001 war in Afghanistan, being a favorite of Republicans who are pushing the idea.

White House officials also played down the notion that Mr. Bush would offer a "Marshall Plan" for New Orleans and the Gulf Coast, as the Senate Republican leadership called for in a letter to the president on Wednesday. "We stand ready to work with you to lay out a comprehensive approach to the coordination of relief and development efforts through a 'Marshall Plan' for the Gulf Coast as soon as possible," said the letter, signed by Senator Bill Frist, the majority leader, and others.

Instead, administration officials and a Republican close to the White House said Mr. Bush would offer some general principles about "building a better New Orleans" with stricter construction standards to try to avoid a replay of the recent catastrophe. Republicans said Mr. Bush would not mention a price tag, in large part because of budget and political pressures from House Republicans and other supporters angry about administration spending.

Republicans said Karl Rove, the White House deputy chief of staff and Mr. Bush's chief political adviser, was in charge of the reconstruction effort, which reaches across many agencies of government and includes the direct involvement of Alphonso R. Jackson, secretary of housing and urban development.

As of Wednesday, few if any members of Congress had been informed by the administration of the president's plans. But Congressional leaders nonetheless offered Mr. Bush advice on his speech.

"I want him to reassure the people that the big part of this fight is ahead of us, and he's going to make sure that the federal government does a better job, does its part," Senator Trent Lott, Republican of Mississippi, said in an interview on MSNBC on Wednesday night. "We're all to blame to a degree." Mr. Lott added that Congress should never have passed legislation, as the White House wanted, that made the Federal Emergency Management Agency part of the Department of Homeland Security.

"We went along with that, and I guess we'll have to go back and try to rewrite the history, but that should be an independent agency reporting only to the president of the United States," Mr. Lott said.

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2005/09/16 01:58 2005/09/16 01:58

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Paul Krugman's NYT editorial

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The New York Times

September 12, 2005

All the President's Friends

By PAUL KRUGMAN

The lethally inept response to Hurricane Katrina revealed to everyone that the Federal Emergency Management Agency, which earned universal praise during the Clinton years, is a shell of its former self. The hapless Michael Brown - who is no longer overseeing relief efforts but still heads the agency - has become a symbol of cronyism.

But what we really should be asking is whether FEMA's decline and fall is unique, or part of a larger pattern. What other government functions have been crippled by politicization, cronyism and/or the departure of experienced professionals? How many FEMA's are there?

Unfortunately, it's easy to find other agencies suffering from some version of the FEMA syndrome.

The first example won't surprise you: the Environmental Protection Agency, which has a key role to play in Hurricane Katrina's aftermath, but which has seen a major exodus of experienced officials over the past few years. In particular, senior officials have left in protest over what they say is the Bush administration's unwillingness to enforce environmental law.

Yesterday The Independent, the British newspaper, published an interview about the environmental aftermath of Katrina with Hugh Kaufman, a senior policy analyst in the agency's Office of Solid Waste and Emergency Response, whom one suspects is planning to join the exodus. "The budget has been cut," he said, "and inept political hacks have been put in key positions." That sounds familiar, and given what we've learned over the last two weeks there's no reason to doubt that characterization - or to disregard his warning of an environmental cover-up in progress.

What about the Food and Drug Administration? Serious questions have been raised about the agency's coziness with drug companies, and the agency's top official in charge of women's health issues resigned over the delay in approving Plan B, the morning-after pill, accusing the agency's head of overruling the professional staff on political grounds.

Then there's the Corporation for Public Broadcasting, whose Republican chairman hired a consultant to identify liberal bias in its programs. The consultant apparently considered any criticism of the administration a sign of liberalism, even if it came from conservatives.

You could say that these are all cases in which the Bush administration hasn't worried about degrading the quality of a government agency because it doesn't really believe in the agency's mission. But you can't say that about my other two examples.

Even a conservative government needs an effective Treasury Department. Yet Treasury, which had high prestige and morale during the Clinton years, has fallen from grace.

The public symbol of that fall is the fact that John Snow, who was obviously picked for his loyalty rather than his qualifications, is still Treasury secretary. Less obvious to the public is the hollowing out of the department's expertise. Many experienced staff members have left since 2000, and a number of key positions are either empty or filled only on an acting basis. "There is no policy," an economist who was leaving the department after 22 years told The Washington Post, back in 2002. "If there are no pipes, why do you need a plumber?" So the best and brightest have been leaving.

And finally, what about the department of Homeland Security itself? FEMA was neglected, some people say, because it was folded into a large agency that was focused on terrorist threats, not natural disasters. But what, exactly, is the department doing to protect us from terrorists?

In 2004 Reuters reported a "steady exodus" of counterterrorism officials, who believed that the war in Iraq had taken precedence over the real terrorist threat. Why, then, should we believe that Homeland Security is being well run?

Let's not forget that the administration's first choice to head the department was Bernard Kerik, a crony of Rudy Giuliani. And Mr. Kerik's nomination would have gone through if enterprising reporters hadn't turned up problems in his background that the F.B.I. somehow missed, just as it somehow didn't turn up the little problems in Michael Brown's résumé. How many lesser Keriks made it into other positions?

The point is that Katrina should serve as a wakeup call, not just about FEMA, but about the executive branch as a whole. Everything I know suggests that it's in a sorry state - that an administration which doesn't treat governing seriously has created two, three, many FEMA's.

E-mail: krugman@nytimes.com

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2005/09/13 07:44 2005/09/13 07:44

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New York Times article on the aftermath of Katrina

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The New York Times

September 11, 2005

Breakdowns Marked Path From Hurricane to Anarchy

The governor of Louisiana was "blistering mad." It was the third night after Hurricane Katrina drowned New Orleans, and Gov. Kathleen Babineaux Blanco needed buses to rescue thousands of people from the fetid Superdome and convention center. But only a fraction of the 500 vehicles promised by federal authorities had arrived.

Ms. Blanco burst into the state's emergency center in Baton Rouge. "Does anybody in this building know anything about buses?" she recalled crying out.

They were an obvious linchpin for evacuating a city where nearly 100,000 people had no cars. Yet the federal, state and local officials who had failed to round up buses in advance were now in a frantic hunt. It would be two more days before they found enough to empty the shelters.

The official autopsies of the flawed response to the catastrophic storm have already begun in Washington, and may offer lessons for dealing with a terrorist attack or even another hurricane this season. But an initial examination of Hurricane Katrina's aftermath demonstrates the extent to which the federal government failed to fulfill the pledge it made after the Sept. 11, 2001, attacks to face domestic threats as a unified, seamless force.

Instead, the crisis in New Orleans deepened because of a virtual standoff between hesitant federal officials and besieged authorities in Louisiana, interviews with dozens of officials show.

Federal Emergency Management Agency officials expected the state and city to direct their own efforts and ask for help as needed. Leaders in Louisiana and New Orleans, though, were so overwhelmed by the scale of the storm that they were not only unable to manage the crisis, but they were not always exactly sure what they needed. While local officials assumed that Washington would provide rapid and considerable aid, federal officials, weighing legalities and logistics, proceeded at a deliberate pace.

FEMA appears to have underestimated the storm, despite an extraordinary warning from the National Hurricane Center that it could cause "human suffering incredible by modern standards." The agency dispatched only 7 of its 28 urban search and rescue teams to the area before the storm hit and sent no workers at all into New Orleans until after the hurricane passed on Monday, Aug. 29.

On Tuesday, a FEMA official who had just flown over the ravaged city by helicopter seemed to have trouble conveying to his bosses the degree of destruction, according to a New Orleans city councilwoman.

"He got on the phone to Washington, and I heard him say, 'You've got to understand how serious this is, and this is not what they're telling me, this is what I saw myself,' " the councilwoman, Cynthia Hedge-Morrell, recalled.

State and federal officials had spent two years working on a disaster plan to prepare for a massive storm, but it was incomplete and had failed to deal with two issues that proved most critical: transporting evacuees and imposing law and order.

The Louisiana National Guard, already stretched by the deployment of more than 3,000 troops to Iraq, was hampered when its New Orleans barracks flooded. It lost 20 vehicles that could have carried soldiers through the watery streets and had to abandon much of its most advanced communications equipment, guard officials said.

Partly because of the shortage of troops, violence raged inside the New Orleans convention center, which interviews show was even worse than previously described. Police SWAT team members found themselves plunging into the darkness, guided by the muzzle flashes of thugs' handguns, said Capt. Jeffrey Winn.

"In 20 years as a cop, doing mostly tactical work, I have never seen anything like it," said Captain Winn. Three of his officers quit, he said, and another simply disappeared.

Officials said yesterday that 10 people died at the Superdome, and 24 died at the convention center site, although the causes were not clear.

Oliver Thomas, the New Orleans City Council president, expressed a view shared by many in city and state government: that a national disaster requires a national response. "Everybody's trying to look at it like the City of New Orleans messed up," Mr. Thomas said in an interview. "But you mean to tell me that in the richest nation in the world, people really expected a little town with less than 500,000 people to handle a disaster like this? That's ludicrous to even think that."

Andrew Kopplin, Governor Blanco's chief of staff, took a similar position. "This was a bigger natural disaster than any state could handle by itself, let alone a small state and a relatively poor one," Mr. Kopplin said.

Federal officials seem to have belatedly come to the same conclusion. Michael Chertoff, the homeland security secretary, said future "ultra-catastrophes" like Hurricane Katrina would require a more aggressive federal role. And Michael D. Brown, director of the Federal Emergency Management Agency, whom President Bush had publicly praised a week earlier for doing "a heck of a job," was pushed aside on Friday, replaced by a take-charge admiral.

Russ Knocke, press secretary at the Department of Homeland Security, said that any detailed examination of the response to the storm's assault will uncover shortcomings by many parties. "I don't believe there is one critical error," he said. "There are going to be some missteps that were made by everyone involved."

But Richard A. Falkenrath, a former homeland security adviser in the Bush White House, said the chief federal failure was not anticipating that the city and state would be so compromised. He said the response exposed "false advertising" about how the government has been transformed four years after the Sept. 11 terrorist attacks.

"Frankly, I wasn't surprised that it went the way it did," Mr. Falkenrath said.

 

Initial Solidarity

At midafternoon on that Monday, a few hours after the hurricane made landfall, state and federal leaders appeared together at a news conference in Baton Rouge in a display of solidarity.

Governor Blanco lavished her gratitude on Mr. Brown, the FEMA chief.

"Director Brown," she said, "I hope you will tell President Bush how much we appreciated - these are the times that really count - to know that our federal government will step in and give us the kind of assistance that we need." Senator Mary L. Landrieu pitched in: "We are indeed fortunate to have an able and experienced director of FEMA who has been with us on the ground for some time."

Mr. Brown replied in the same spirit: "What I've seen here today is a team that is very tight-knit, working closely together, being very professional doing it, and in my humble opinion, making the right calls."

At that point, New Orleans seemed to have been spared the worst of the storm, although some areas were already being flooded through breaches in levees. But when widespread flooding forced the city into crisis, Monday's confidence crumbled, exposing serious weaknesses in the machinery of emergency services.

Questions had been raised about FEMA, since it was swallowed by the Department of Homeland Security, established after Sept. 11. Its critics complained that it focused too much on terrorism, hurting preparations for natural disasters, and that it had become politicized. Mr. Brown is a lawyer who came to the agency with political connections but little emergency management experience. That's also true of Patrick J. Rhode, the chief of staff at FEMA, who was deputy director of advance operations for the Bush campaign and the Bush White House.

Scott R. Morris, who was deputy chief of staff at FEMA and is now director of its recovery office on Florida, had worked for Maverick Media in Austin, Tex., as a media strategist for the Bush for President primary campaign and the Bush-Cheney 2000 campaign. And David I. Maurstad was the Republican lieutenant governor of Nebraska before he became director of FEMA's regional office in Denver and then a senior official at the agency's headquarters.

The American Federation of Government Employees, which represents FEMA employees, wrote to Congress in June 2004, complaining, "Seasoned staff members are being pushed aside to make room for inexperienced novices and contractors."

With the new emphasis on terrorism, three quarters of the $3.35 billion in federal grants for fire and police departments and other first responders were intended to address terror threats, instead of an "all-hazards" approach that could help in any catastrophe.

Even so, the prospect of a major hurricane hitting New Orleans was a FEMA priority. Numerous drills and studies had been undertaken to prepare a response. In 2002, Joe M. Allbaugh, then the FEMA director, said: "Catastrophic disasters are best defined in that they totally outstrip local and state resources, which is why the federal government needs to play a role. There are a half-dozen or so contingencies around the nation that cause me great concern, and one of them is right there in your backyard."

Federal officials vowed to work with local authorities to improve the hurricane response, but the plan for Louisiana was not finished when Hurricane Katrina hit. State officials said it did not yet address transportation or crime control, two issues that proved crucial. Col. Terry J. Ebbert, director of homeland security for New Orleans since 2003, said he never spoke with FEMA about the state disaster blueprint. So New Orleans had its own plan.

At first glance, Annex I of the "City of New Orleans Comprehensive Emergency Management Plan" is reassuring. Forty-one pages of matter-of-fact prose outline a seemingly exhaustive list of hurricane evacuation procedures, including a "mobile command center" that could replace a disabled city hall.

New Orleans had used $18 million in federal funding since 2002 to stage exercises, train for emergencies and build relay towers to improve emergency communications. After years of delay, a new $16 million command center was to be completed by 2007. There was talk of upgrading emergency power and water supplies at the Superdome, the city's emergency shelter of "last resort," as part of a new deal with the tenants, the New Orleans Saints.

But the city's plan says that about 100,000 residents "do not have means of personal transportation" to evacuate, and there are few details on how they would be sheltered.

Although the Department of Homeland Security has encouraged states and cities to file emergency preparedness strategies it has not set strict standards for evacuation plans.

"There is a very loose requirement in terms of when it gets done and what the quality is," said Michael Greenberger, a professor at the University of Maryland School of Law and director of the Center for Health and Homeland Security. "There is not a lot of urgency."

As Hurricane Katrina bore down on New Orleans, Mayor C. Ray Nagin largely followed the city plan, eventually ordering the city's first-ever mandatory evacuation. Although 80 percent of New Orleans's population left, as many as 100,000 people remained.

Colonel Ebbert decided to make the Superdome the city's lone shelter, assuming the city would only have to shelter people in the arena for 48 hours, until the storm passed or the federal government came and rescued people.

As early as Friday, Aug. 26, as Hurricane Katrina moved across the Gulf of Mexico, officials in the watch center at FEMA headquarters in Washington discussed the need for buses.

Someone said, "We should be getting buses and getting people out of there," recalled Leo V. Bosner, an emergency management specialist with 26 years at FEMA and president of an employees' union. Others nodded in agreement, he said.

"We could all see it coming, like a guided missile," Mr. Bosner said of the storm. "We, as staff members at the agency, felt helpless. We knew that major steps needed to be taken fast, but, for whatever reasons, they were not taken."

 

Drivers Afraid

When the water rose, the state began scrambling to find buses. Officials pleaded with various parishes across the state for school buses. But by Tuesday, Aug. 30, as news reports of looting and violence appeared, local officials began resisting.

Governor Blanco said the bus drivers, many of them women, "got afraid to drive. So then we looked for somebody of authority to drive the school buses."

FEMA stepped in to assemble a fleet of buses, said Natalie Rule, an agency spokeswoman, only after a request from the state that she said did not come until Wednesday, Aug. 31. Greyhound Lines began sending buses into New Orleans within two hours of getting FEMA approval on Wednesday, said Anna Folmnsbee, a Greyhound spokeswoman. But the slow pace and reports of desperation and violence at the Superdome led to the governor's frustrated appeal in the state emergency center on Wednesday night.

She eventually signed an executive order that required parishes to turn over their buses, said Lt. Col. William J. Doran III, operations director for the state Office of Homeland Security and Emergency Preparedness.

"Just the logistics of wrangling up enough buses to get the people out of the dome took us three days," Colonel Doran said. A separate transportation problem arose for nursing homes. In some cases, delays proved deadly.

State regulations require nursing homes to have detailed evacuation plans and signed evacuation contracts with private transportation companies, according to Louisiana officials.

Yet 70 percent of the New Orleans area's 53 nursing homes were not evacuated before the hurricane struck Monday morning, according to the Louisiana Nursing Home Association. This week, searchers discovered 32 bodies in one nursing home in Chalmette, a community just outside New Orleans.

Mark Cartwright, a member of the nursing home association's emergency preparedness committee, said 3,400 patients were safely evacuated from the city. An unknown number of patients died awaiting evacuation or during evacuation.

"I've heard stories," Mr. Cartwright said. "Because rescuers didn't come, people were succumbing to the heat." Mr. Cartwright said some nursing home managers ignored the mayor's mandatory evacuation order, choosing to keep their frail patients in place and wait out the storm.

 

Symbols of Despair

The confluence of these planning failures and the levee breaks helped turn two of the most visible features of the New Orleans skyline - the Superdome and the mile-long convention center - into deathtraps and symbols of the city's despair.

At the Superdome, the initial calm turned to fear as a chunk of the white roof ripped away in the wind, dropping debris on the Saints' fleur-de-lis logo on the 50-yard-line. The electricity was knocked out, leaving only dim lights inside the windowless building. The dome quickly became a giant sauna, with temperatures well over 100 degrees.

Two-thirds of the 24,000 people huddled inside were women, children or elderly, and many were infirm, said Lonnie C. Swain, an assistant police superintendent overseeing the 90 policemen who patrolled the facility with 300 troops from the Louisiana National Guard. And it didn't take long for the stench of human waste to drive many people outside.

Chief Swain said the Guard supplied water and food - two military rations a day. But despair mounted once people began lining up on Wednesday for buses expected early the next day, only to find them mysteriously delayed.

Chief Swain and Colonel Ebbert said in interviews that the first buses arranged by FEMA were diverted elsewhere, and it took several more hours to begin the evacuation. By Friday, the food and the water had run out. Violence also broke out. One Guard soldier was wounded by gunfire and the police confirmed there were attempts to sexually assault at least one woman and a young child, Chief Swain said.

And even though there were clinics at the stadium, Chief Swain said, "Quite a few of the people died during the course of their time here."

By the time the last buses arrived on Saturday, he said, some children were so dehydrated that guardsmen had to carry them out, and several adults died while walking to the buses. State officials said yesterday that a total of 10 people died in the Superdome.

"I'm very angry that we couldn't get the resources we needed to save lives," Chief Swain said. "I was watching people die."

Mayor Nagin and the New Orleans police chief, P. Edwin Compass III, said in interviews that they believe murders occurred in the Superdome and in the convention center, where the city also started sending people on Tuesday. But at the convention center, the violence was even more pervasive.

"The biggest problem was that there wasn't enough security," said Capt. Winn, the head of the police SWAT team. "The only way I can describe it is as a completely lawless situation."

While those entering the Superdome had been searched for weapons, there was no time to take similar precautions at the convention center, which took in a volatile mix of poor residents, well-to-do hotel guests and hospital workers and patients. Gunfire became so routine that large SWAT teams had to storm the place nearly every night.

Capt. Winn said armed groups of 15 to 25 men terrorized the others, stealing cash and jewelry. He said policemen patrolling the center told him that a number of women had been dragged off by groups of men and gang-raped - and that murders were occurring.

"We had a situation where the lambs were trapped with the lions," Mr. Compass said. "And we essentially had to become the lion tamers."

Capt. Winn said the armed groups even sealed the police out of two of the center's six halls, forcing the SWAT team to retake the territory.

But the police were at a disadvantage: they could not fire into the crowds in the dimly lit facility. So after they saw muzzle flashes, they would rush toward them, searching with flashlights for anyone with a gun.

Meanwhile, those nearby "would be running for their lives," Capt. Winn said. "Or they would lie down on the ground in the fetal position."

And when the SWAT team caught some of the culprits, there was not much it could do. The jails were also flooded, and no temporary holding cells had been set up yet. "We'd take them into another hall and hope they didn't make it back," Capt. Winn said.

One night, Capt. Winn said, the police department even came close to abandoning the convention halls - and giving up on the 15,000 there. He said a captain in charge of the regular police was preparing to evacuate the regular police officers by helicopter when 100 guardsmen rushed over to help restore order.

Before the last people were evacuated that Saturday, several bodies were dumped near a door, and two or three babies died of dehydration, emergency medics have said. State officials said yesterday that 24 people died either inside or just outside the convention center.

The state officials said they did not have any information about how many of those deaths may have been murders. Capt. Winn said that when his team made a final sweep of the building last Monday, it found three bodies, including one with multiple stab wounds.

Capt. Winn said four of his men quit amid the horror. Other police officials said that nearly 10 regular officers stationed at the Superdome and 15 to 20 at the convention center also quit, along with several hundred other police officers across the city.

But, Capt. Winn said, most of the city's police officers were "busting their asses" and hung in heroically. Of the terror and lawlessness, he added, "I just didn't expect for it to explode the way it did."

 

Divided Responsibilities

As the city become paralyzed both by water and by lawlessness, so did the response by government. The fractured division of responsibility - Governor Blanco controlled state agencies and the National Guard, Mayor Nagin directed city workers and Mr. Brown, the head of FEMA, served as the point man for the federal government - meant no one person was in charge. Americans watching on television saw the often-haggard governor, the voluble mayor and the usually upbeat FEMA chief appear at competing daily news briefings and interviews.

The power-sharing arrangement was by design, and as the days wore on, it would prove disastrous. Under the Bush administration, FEMA redefined its role, offering assistance but remaining subordinate to state and local governments. "Our typical role is to work with the state in support of local and state agencies," said David Passey, a FEMA spokesman.

With Hurricane Katrina, that meant the agency most experienced in dealing with disasters and with access to the greatest resources followed, rather than led.

FEMA's deference was frustrating. Rather than initiate relief efforts - buses, food, troops, diesel fuel, rescue boats - the agency waited for specific requests from state and local officials. "When you go to war you don't have time to ask for each round of ammunition that you need," complained Colonel Ebbert, the city's emergency operations director.

Telephone and cellphone service died, and throughout the crisis the state's special emergency communications system was either overloaded or knocked out. As a result, officials were unable to fully inventory the damage or clearly identify the assistance they required from the federal government. "If you do not know what your needs are, I can't request to FEMA what I need," said Colonel Doran, of the state office of homeland security.

To President Bush, Governor Blanco directed an ill-defined but urgent appeal.

"I need everything you've got," the governor said she told the president on Monday. "I am going to need all the help you can send me."

"We went from early morning to late night, day after day, after day, after day. Trying to make critical decisions," Ms. Blanco said in an interview last week. "Trying to get product in, resources, where does the food come from. Learning the supply network."

She said she didn't always know what to request. "Do we stop and think about it?" she asked. "We just stop and think about help."

FEMA attributed some of the delay to miscommunications in an overwhelming event. "There was a significant amount of discussions between the parties and likely some confusion about what was requested and what was needed," said Mr. Knocke, the spokesman for the Department of Homeland Security.

As New Orleans descended into near-anarchy, the White House considered sending active-duty troops to impose order. The Pentagon was not eager to have combat troops take on a domestic lawkeeping role. "The way it's arranged under our Constitution," Defense Secretary Donald H. Rumsfeld noted at a news briefing last week, "state and local officials are the first responders."

Pentagon, White House and Justice officials debated for two days whether the president should seize control of the relief mission from Governor Blanco. But they worried about the political fallout of stepping on the state's authority, according to the officials involved in the discussions. They ultimately rejected the idea and instead decided to try to speed the arrival of National Guard forces, including many trained as military police.

Paul McHale, the assistant secretary of defense for homeland security, explained that decision in an interview this week. "Could we have physically moved combat forces into an American city, without the governor's consent, for purposes of using those forces - untrained at that point in law enforcement - for law enforcement duties? Yes."

But, he asked, "Would you have wanted that on your conscience?"

For some of those on the ground, those discussions in Washington seemed remote. Before the city calmed down six days after the storm, both Mayor Nagin and Colonel Ebbert lashed out. Governor Blanco almost mocked the words of assurance federal relief officials had offered. "It was like, 'they are coming, they are coming, they are coming, they are coming,' " she said in an interview. "It was all in route. Everything was in motion."

 

'Stuck in Atlanta'

The heart-rending pictures broadcast from the Gulf Coast drew offers of every possible kind of help. But FEMA found itself accused repeatedly of putting bureaucratic niceties ahead of getting aid to those who desperately needed it.

Hundreds of firefighters, who responded to a nationwide call for help in the disaster, were held by the federal agency in Atlanta for days of training on community relations and sexual harassment before being sent on to the devastated area. The delay, some volunteers complained, meant lives were being lost in New Orleans.

"On the news every night you hear, 'How come everybody forgot us?' " said Joseph Manning, a firefighter from Washington, Pa., told The Dallas Morning News. "We didn't forget. We're stuck in Atlanta drinking beer."

Ms. Rule, the FEMA spokeswoman, said there was no urgency for the firefighters to arrive because they were primarily going to do community relations work, not rescue.

William D. Vines, a former mayor of Fort Smith, Ark., helped deliver food and water to areas hit by the hurricane. But he said FEMA halted two trailer trucks carrying thousands of bottles of water to Camp Beauregard, near Alexandria, La., a staging area for the distribution of supplies.

"FEMA would not let the trucks unload," Mr. Vines said in an interview. "The drivers were stuck for several days on the side of the road about 10 miles from Camp Beauregard. FEMA said we had to have a 'tasker number.' What in the world is a tasker number? I have no idea. It's just paperwork, and it's ridiculous."

Senator Blanche Lincoln, Democrat of Arkansas, who interceded on behalf of Mr. Vines, said, "All our Congressional offices have had difficulty contacting FEMA. Governors' offices have had difficulty contacting FEMA." When the state of Arkansas repeatedly offered to send buses and planes to evacuate people displaced by flooding, she said, "they were told they could not go. I don't really know why."

On Aug. 31, Sheriff Edmund M. Sexton, Sr., of Tuscaloosa County, Ala., and president of the National Sheriffs' Association, sent out an alert urging members to pitch in.

"Folks were held up two, three days while they were working on the paperwork," he said.

Some sheriffs refused to wait. In Wayne County, Mich., which includes Detroit, Sheriff Warren C. Evans got a call from Mr. Sexton on Sept. 1 The next day, he led a convoy of six tractor-trailers, three rental trucks and 33 deputies, despite public pleas from Gov. Jennifer M. Granholm to wait for formal requests.

"I could look at CNN and see people dying, and I couldn't in good conscience wait for a coordinated response," he said. He dropped off food, water and medical supplies in Mobile and Gonzales, La., where a sheriffs' task force directed him to the French Quarter. By Saturday, Sept. 3, the Michigan team was conducting search and rescue missions.

"We lost thousands of lives that could have been saved," Sheriff Evans said.

Mr. Knocke said the Department of Homeland Security could not yet respond to complaints that red tape slowed relief.

"It is testament to the generosity of the American people - a lot of people wanted to contribute," Mr. Knocke said. "But there is not really any way of knowing at this time if or whether individual offers were plugged into the response and recovery operation."

 

Response to Sept. 11

An irony of the much-criticized federal hurricane response is that it is being overseen by a new cabinet department created because of perceived shortcomings in the response to the Sept. 11, 2001, terrorist attacks. And it is governed by a new plan the Department of Homeland Security unveiled in January with considerable fanfare.

The National Response Plan set out a lofty goal in its preface: "The end result is vastly improved coordination among federal, state, local and tribal organizations to help save lives and protect America's communities by increasing the speed, effectiveness and efficiency of incident management."

The evidence of the initial response to Hurricane Katrina raised doubts about whether the plan had, in fact, improved coordination. Mr. Knocke, the homeland security spokesman, said the department realizes it must learn from its mistakes, and the department's inspector general has been given $15 million in the emergency supplemental appropriated by Congress to study the flawed rescue and recovery operation.

"There is going to be enough blame to go around at all levels," he said. "We are going to be our toughest critics."

 

Jason DeParle, Robert Pear, Eric Schmitt and Thom Shanker contributed reporting for this article.

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2005/09/12 03:15 2005/09/12 03:15

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International Socialist Newspaper's editorial on Katrina

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EDITORIAL: Hurricane Katrina: U.S. gov’t guilty of criminal neglect
 
Published Sep 1, 2005 12:27 AM
 

Almost all of the death, injury, damage and destruction arising from hurricane Katrina is the result of the crimes of the Bush administration.

 

 
 
 

President Bush was criminally negligent in diverting funds that had been requested to protect the people of New Orleans for use in the criminal war of conquest in Iraq. The Bush administration did this in full knowledge of the impending danger. The highest government agency in charge of dealing with disasters, the Federal Emergency Management Agency, warned of the potential for disaster as early as 2001.

 

With the complete evacuation of New Orleans, tens of thousands trapped without food, water, or electricity, thousands of homes destroyed and the death toll mounting by the hour, this is a disaster of unprecedented proportion. It profoundly affects Black people, who are a major part of the population in Louisiana, Alabama, and Mississippi, and are suffering disproportionately because they are subject to racist discrimination—which leaves them in poverty and most vulnerable to such disasters. Seventy percent of New Orleans’ residents are Black and live in apartheid-like conditions.

 

Some politicians are calling it “our tsunami.” The tsunami last December also took an excessive toll of life because of criminal neglect. But a tsunami comes rarely. Hurricanes come to the delta region almost every year. This disaster was not only predictable but predicted. What seems like an inevitable tragedy caused by nature was foreseen long ago by scientists, engineers, government agencies, environmentalists and experts in disaster management.

 

The science writer for the Houston Chronicle wrote on Dec. 1, 2001:

“New Orleans is sinking.

“And its main buffer from a hurricane, the protective Missis sippi River delta, is quickly eroding away, leaving the historic city perilously close to disaster. ...

“So vulnerable, in fact, that earlier this year the Federal Emergency Management Agency ranked the potential damage to New Orleans as among the three likeliest, most catastrophic disasters facing this country.” The other two were an earthquake in San Francisco and a “terrorist attack on New York City.”

 

The federal, state and local governments knew of the danger. They knew what caused it and how to deal with it. But they did little or nothing. They left the people of the delta region unaware and helpless to deal with the inevitable disaster.

 

Why did they do nothing? An Aug. 30 dispatch of Editor and Publisher revealed that “$250 million in crucial projects” planned by the Army Corps of Engineers in the delta for shori ng up levees and building pumping stations could not be carried out. “The Corps never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security—coming at the same time as federal tax cuts—was the reason for the strain.

 

“The 2004 hurricane season was the worst in decades. In spite of that, the federal government came back this spring with the steepest reduction in hurricane and flood-control funding for New Orleans in history.”

 

The Houston Chronicle’s 2001 report cited a study by a consortium of government agencies several years ago. This consortium recommended that between $2 billion and $3 billion dollars was needed for projects that could rectify the problem. That is less than the cost of one month of spending on the Iraq occupation, which costs $4 billion a month at the minimum! Certainly part of the $300-billion-plus spent on the war could have been used to take preventive measures.

 

Of course, while Bush is the immediate culprit, it must not be forgotten that the Democratic Party voted for the war and every nickel spent on it. So the Democrats are also criminally liable for both the devastation in New Orleans and the illegal war and occupation.

 

Now that the capitalist authorities have let this disaster happen, Bush is taking a business-as-usual approach to dealing with the disaster. Just as during the tsunami, it took him days to disrupt his vacation and step away from his Crawford ranch.

 

The federal government is the only authority capable of mobilizing the resources necessary for the rescue mission and the reconstruction. It is said that a million people were evacuated from New Orleans and the surrounding parishes (counties) before the hurricane. Actually, the government did not evacuate anyone. The authorities simply declared a mandatory evacuation and then left it to people to get out. Now they are saying that “at least a hundred thousand people” were left in the city itself.

 

People have no place to stay. Many have no food. Their personal belongings are all gone. Medical care is cut off. Schools are inaccessible. Countless are homeless. The immediate crisis requires a national mobilization of medical personnel, social workers, rescue experts, hydraulic engineers.

 

Food, water and medical supplies should be immediately commandeered for the emergency from agribusiness, supermarket chains, pharmaceutical companies. Wal Mart and other retail giants should be required to ship, gratis, clothing and other necessities to meet basic needs. Government food storage supplies in warehouses throughout the Midwest and other regions should be made available.

Every form of transport—planes, helicopters, buses, ambulances, small boats—should be mobilized to the region. These and other measures should be immediately implemented by the federal government based on its emergency powers and responsibilities.

 

In other words, all of this society’s material and human resources should be made available to the victims in this crisis. The corporations have control of these resources, but the workers who created them have every right to them.

 

Let the government and the bosses pay. Putting people—the suffering people of the delta—before profits should be the order of the day. The property restrictions of capitalism must be overruled in the interest of the masses.

 

Particularly, the oil companies should be forced to cough up billions of dollars for reconstruction out of the super-profits that they pump out of the delta region every day. Exxon Mobil refines 493,000 barrels of oil a day in Baton Rouge; Chevron, 325,000 a day in Pascgoula, Miss.; Conoco Phillips, 247 ,000 a day, to name a few. All this wealth has been taken out of the region, not to speak of the wealth spent trying to conquer Iraq and its oil. And they should not only give back the profits they gouged from the people by raising gasoline prices to over $3 a gallon—they should be forced to lower prices drastically.

In general, the giant multinationals should be made to ante up because of all the wealth and labor they have taken from New Orleans—through which so much of the wealth of this country flows—while the majority of people are left with just enough to survive.

 

As for the reconstruction effort, the authorities are taking a narrow approach. They are talking about months and years to recover. People with flood insurance can stand in line once they can get back to their neighborhoods. Poor people who have no flood insurance are on their own. Perhaps FEMA will give a few handouts to tide them over for a while. All the racist hysteria being whipped up about “looters” is a cover-up for the fact that the government has made no provisions to feed the people, and that so many Black people are living in dire poverty.

 

But the truth is, there is a much more rapid and comprehensive solution to turning the situation around right in front of the government’s nose. There are millions of workers who can be mobilized to go to the region to help out.

 

Right now there is a “housing boom” where hundreds of thousands of construction workers are toiling away as real-estate developers race to make super-profits on the speculation in the housing market.

What is needed is a full-scale mobilization of the building trades, construction workers, hydraulic engineers, medical personnel, social-service workers and workers from all over the country to stop capitalist business as usual and mobilize to help the people of New Orleans, Biloxi and the delta region—fully funded by the government.

 

Millions of unemployed workers could be hired at union wages to pitch in. Organized labor could be in the vanguard of organizing the reconstruction effort.

 

With all their technology, the bosses are preoccupied with how they can collect damages from the insurance industry, how they can get their profitable refineries back on line, and how they can resume making profits in the area as soon as possible. The working class, in contrast, is concerned with the fate of the masses of people, especially the Black, Latin American poor white and the exploited who suffer the most and will get the least help.

 

Once the reconstruction effort begins and communications become possible, unions, community organizations, and move ment groups should set up independent channels by which they can give aid and assistance to the people of the stricken area.

 

Mass mobilization, putting people before property, is how reconstruction projects are handled in Cuba and under the socialist organization of society. The demand should be put forward that the government treat this as a national emergency crisis of the greatest magnitude. Measures should be taken in proportion to the extent of the crisis—measures such as giving extended unemployment insurance to everyone in the area. Personal property loss should be fully restored. And the government should subordinate all its efforts to giving effective short term and long term aid to the victims. But at the same time the working class in this country should try to find a way to get beyond the capitalist authority and bring whatever aid and assistance it can to the people of the delta.

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2005/09/08 01:52 2005/09/08 01:52

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Congressional Budget Office's Analysis on the Macroeconomic and Budgetary Effects of Katrina

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CONGRESSIONAL BUDGET OFFICE Douglas Holtz-Eakin, Director

U.S. Congress

Washington, DC 20515

www.cbo.gov

 

September 6, 2005

Honorable William H. Frist, M.D.

Senate Majority Leader

United States Senate

S-230 Capitol

Washington, DC 20515

 

Dear Senator Frist,

The Congressional Budget Office (CBO) has received numerous inquiries regarding the

likely consequences of Hurricane Katrina for the national economy, federal receipts, and federal

outlays. While the primary consideration is the human cost of the disaster, it will also likely

spawn economic impacts, some of which will spread throughout the economy.

Those impacts will arise from the disruption of production (especially of oil and oil

products) and spending in the affected areas, from the loss of wealth of those most directly

affected, and from the loss of life. In addition, the disaster is also likely to have budgetary impacts

beyond the recently enacted supplemental. Some of those will flow directly from federal

involvement in the cleanup from disaster; others will come from the disruption to production and

private spending.

While it is not possible at this time to provide a clear picture of the impacts, CBO staff

have put together some initial thoughts about those economic and budgetary effects in the

attachment to this letter. To provide context, recall that the overall economy was growing steadily

at the time the disaster. (CBO’s summer forecast called for 3.7 percent real growth in 2005 and

3.4 percent in 2006.) The devastation in the Gulf Coast region is unlikely to knock the economy

far from that course. While making specific estimates is fraught with uncertainty, evidence to date

suggests that overall economic effects will be significant but not overwhelming. Because they are

concentrated in this year, there is the potential to reduce growth by between one-half and one

percentage point at an annual rate in the second half of 2005. (On a year-to-year basis, the impact

may be as small as a few tenths of a percent of GDP). Last week, it appeared that larger economic

impacts might occur, but despite continued uncertainty, progress in opening refineries and

restarting pipelines now makes those larger impacts less likely.

Page 2. Honorable William H. Frist, M.D.

While Katrina has devastated ordinary business, it will also likely lead to a boom in

clearing and reconstruction activity, first in the areas along the coast that escaped persistent

flooding, and then in New Orleans. This follows a pattern familiar from past natural disasters

(such as Hurricane Andrew in 2002), but with the caveat that such reconstruction may begin a bit

less rapidly.

At this point the ultimate impact of Hurricane Katrina on the federal budget is unclear, but

it will be dominated by legislative actions of the Congress. The President has already requested

and Congress has appropriated $10.5 billion in emergency assistance. In addition to that

legislation, substantially more funding is likely to be provided for assistance to businesses and for

long-term reconstruction efforts. There may be other changes in spending—both increases and

decreases—associated with the disaster, in part because the disruption of payments systems in the

Gulf Coast region may affect the timing of several kinds of federal payments and of tax receipts.

I hope that you find the attachment useful. CBO would be pleased to address any further

questions that you may have.

 

Sincerely,

Douglas Holtz-Eakin

Director

Attachment

Identical Letters sent to: Honorable Harry Reid, Honorable J. Dennis Hastert, and Honorable

Nancy Pelosi.

September 6, 2005

 

Macroeconomic and Budgetary Effects of Hurricane Katrina

Katrina could dampen real gross domestic product (GDP) growth in the second half of the year

by ½ to 1 percentage point and reduce employment through the end of this year by about

400,000. Most economic forecasters had expected 3 percent to 4 percent growth during the

second half, and employment growth of 150,000 to 200,000 per month. Economic growth and

employment are likely to rebound during the first half of 2006 as rebuilding accelerates.

The Congress has appropriated $10.5 billion for spending on emergency relief, and many

analysts expect more to be provided in the near future. Katrina will affect the budget in a number

of ways in addition to the emergency spending—outlays may be affected by disruptions in the

submission or processing of claims for federal payments, reductions in royalty payments from oil

and gas drilling, and the sale of oil from the Strategic Petroleum Reserve; and tax receipts will be

affected by immediate reductions in national income and gasoline consumption, along with

temporary tax relief provided by the Internal Revenue Service—but it is still too soon to estimate

what the net effects on the budget might be.

 

Macroeconomic Effects

Katrina’s macroeconomic effects will be greater than those of previous major hurricanes such as

Andrew and Hugo, which caused a great deal of devastation but which had a small effect on the

macroeconomy. Katrina’s effects will be greater because of the greater devastation, the long-term

flooding of New Orleans (which will preclude immediate rebuilding), and the destruction of

energy and port infrastructure.

 

Energy Supply

The supply of petroleum products and natural gas will be lower than it otherwise would have

been, but the reduction in supply will not necessarily hurt economic activity nationwide

significantly. If most of the refineries come back online during the next two weeks and there are

no significant periods of total unavailability of product—that is, if rationing is done through the

price mechanism alone—energy use will tend to be put to its highest-value uses, and economic

activity will not be seriously affected.

Spot prices for energy products have begun to fall from last week’s highs.

 

2 Petroleum and Distillates

The pipelines for refined product have been largely restored, but three of the major refineries that

were shut down may not reopen for more than a month, and petroleum production from some oil

rigs in the Gulf will be curtailed for many months. The supply of crude oil from the Strategic

Petroleum Reserve (which is already being sent to refineries), the reallocation of petroleum

product within the United States, and the likelihood of more petroleum product from overseas

(which may take three or four weeks to get here) will dampen the adverse effects of the reduction

in supply.

 

Natural Gas

Natural gas markets have been affected by the storm in four main areas: production, processing,

electricity generation, and local distribution. First, production from the Outer Continental Shelf

was shut down before the storm and cannot fully resume until production platforms in the Gulf

are all inspected and restaffed (and repaired, where necessary). Half the original loss of natural

gas supply—which totaled nearly 15 percent of the nation’s supply—has been restored. Second,

four natural gas processing plants that help produce pipeline-quality gas were closed. The

Congressional Budget Office (CBO) cannot confirm the status of those gas plants—any lingering

problems could impede pipeline deliveries. Third, the Louisiana electric utility, Entergy, has had

some problems delivering gas to its generating plants, although current reports indicate that gas is

being received. And fourth, local distribution of natural gas to customers throughout the region is

disrupted because of broken lines.

 

Production and Employment in the Directly Affected Areas

Production

Production of electricity, oil, refined products, port services, housing services, manufacturing,

retailing, tourism, and other consumer services will be sharply curtailed for at least a few months

in the affected areas. The gross state product of Louisiana is about 1.2 percent of U.S. GDP, and

that for Mississippi is about 0.7 percent. If half of that product were lost for three months

(September to November), the level of real GDP would be lowered by about 1 percent from what

it otherwise would be, cutting about 1.3 percentage points from the annualized growth rate for

the third quarter and about 2.7 percentage points from the fourth quarter. It is unlikely that

production would be hurt that much for that long, however. Presumably some people in New

Orleans and other parts of the coast will be able to return to work in one or two months, and

construction employment will be picking up during the fourth quarter. Therefore, it is more likely

that economic activity in the affected area would directly reduce the growth of GDP by less than

1 percent for both the third and fourth quarters.

 

3 Employment

The main areas likely to experience prolonged and substantial disruption of economic activity

and employment are the New Orleans-Metairie-Kenner metropolitan statistical area (MSA) of

Louisiana and the Gulfport-Biloxi and Pascagoula MSAs of Mississippi. Other areas were

affected by the storm but are likely to experience little if any sustained disruption of activity.

Employment for September will decline significantly—estimates of the impact range from

150,000 to half a million—as a direct consequence of the hurricane. The Bureau of Labor

Statistics (BLS) may or may not be able to estimate the size of this effect when it releases the

September data on October 7. Employment will increase in subsequent months, as workers return

home and businesses reopen and as reconstruction activity gathers steam. The large-scale

relocation will generate additional demand for workers in receiving communities; some of those

jobs will be filled by the evacuees themselves. Once New Orleans residents are able to return

home, the net effect on the level of employment will be positive, as reconstruction activity

continues.

 

Louisiana. New Orleans and most of its suburbs have been evacuated, and it will take

considerable time before basic services are restored and most residents are able to return. Total

employment (based on the BLS’s Establishment Survey) in the New Orleans-Metairie-Kenner

MSA was 616,000 in 2004, including 510,000 private-sector workers. Data from the BLS

Quarterly Census of Employment and Wages indicate that of the 596,000 workers covered by

unemployment insurance within that MSA, 248,000 were employed in Orleans Parish (City of

New Orleans), 213,000 in Jefferson Parish, and the remaining 135,000 in the other five parishes

making up the MSA. Not all of the suburban areas experienced flooding to the same degree as

New Orleans itself, so some workers and residents of those areas may be able to return sooner.

Some of those workers, especially those whose jobs involve the provision or restoration of

essential services and those involved in reconstruction, are likely to return to work soon and

remain on payrolls. Some others, including federal and state government workers and employees

of large multiestablishment corporations, may be able to work from alternate locations until they

are able to return home. But it is reasonable to expect that the majority will be off payrolls at

least through September, with only a gradual rebound. That effect will be partially offset by

large-scale hiring of construction workers.

 

Mississippi. The Gulf Coast areas sustained major damage, but more from wind and storm

surges than from flooding. Thus, residents should be able to return much sooner than in the New

Orleans case. Total employment last year stood at 113,000 in the Gulfport-Biloxi MSA. That

includes roughly 14,000 employed by casinos, which were severely damaged or destroyed.

Another 54,000 were employed in the Pascagoula MSA. Aside from the effect on casino

workers, many of whom are reportedly still being paid, the effect on employment should be

smaller and of shorter duration than in Louisiana (and will again be offset to a considerable

degree by reconstruction activity).

 

4 Effect of Katrina on the Ability to Make Payments

There are few reported problems related to the inability of people to make payments. Apparently,

the Federal Reserve’s contingency plans are intact. Although the New Orleans branch of the

Atlanta Federal Reserve Bank remains closed, other branches of the Atlanta Fed are covering

currency demands and check-processing needs.

• News anecdotes indicate that many financial companies are relaxing their payment

requirements and waiving late fees for contractual obligations (loan and insurance

payments, for example) of those affected by Katrina. Some banks are waiving ATM

(automated teller machine) fees for cash withdrawals by nondepositors.

• By last weekend, about 80 percent of the roughly 240 Federal Deposit Insurance

Corporation-regulated banks in the Katrina-affected area had been reached by regulators.

Most were open for business in some fashion.

• Social Security recipients can go to any Social Security office to pick up their monthly

check.

• Although the lack of electricity makes credit card payments difficult, people are making

do. For example, one news report indicates that one business is recording payments with

paper and pencil for future debiting.

• Some Blue Cross/Blue Shield plans in the affected areas were not making payments to

medical providers last week.

• The Texas Workforce Commission is assisting the Louisiana Department of Labor in

processing Louisiana disaster unemployment assistance claims.

 

Reconstruction

Rebuilding will take place along several dimensions—rebuilding of residences, businesses,

infrastructure, and stocks of consumer durables. Nationwide, each housing start adds over

$200,000 to GDP. So, each block of 100,000 housing units (homes and apartments) that needs to

be completely rebuilt raises GDP by over $20 billion, or about 0.2 percent. Repairs and major

replacements of structures not completely destroyed would add to that figure. To estimate the

amount of eventual rebuilding, CBO will need information on the number of housing units lost

or the dollar value of housing losses (both insured and uninsured). Replacements of destroyed

residences will be needed whether the former residents rebuild in the same place or elsewhere.

Nonresidential structures—shops, factories, streets, bridges—will also need to be rebuilt. CBO

has no information on the value of such structures destroyed by Katrina, but it is likely to be

substantial. Nationwide, the stock of private nonresidential fixed assets is about 90 percent as

large as the stock of residential fixed assets, in dollar terms, while the stock of government fixed

assets (for example, roads and schools) is about half as large as the stock of residential fixed

assets.

 

5 The timing of such rebuilding is highly uncertain. Presumably, clearance and rebuilding will start

almost immediately in the areas of the coast that have not suffered persistent flooding but will be

delayed up to several months in New Orleans. Nonresidential structures typically take longer to

build than residential structures, so one might expect this rebuilding to proceed more slowly than

the rebuilding of lost residences.

Reconstruction activity will employ a large number of construction workers and will increase the

demand for construction materials such as cement and plywood. The demand for those resources

is likely to cause a slight increase in the cost of construction elsewhere in the country.

 

Insurance

Preliminary estimates suggest that privately insured losses from Hurricane Katrina could exceed

$30 billion. (By comparison, insurers paid about $32.5 billion after 9/11.) Undoubtedly, some

businesses have business interruption coverage which will allow them to continue to meet their

payrolls, but other businesses likely did not purchase that coverage. (A significant portion of the

insured losses after 9/11 were for business interruption insurance.)

Although no estimates have been published, federal flood insurance payments are also likely to

be substantial. Those payments could exceed the program’s reserves and thus necessitate

Congressional action. Additional payouts on federal crop insurance are also possible. Finally, the

Congress may enact additional supplemental relief.

 

Production Elsewhere in the United States

Economic activity in the rest of the United States will be adversely affected through higher

energy prices, which will temporarily reduce other consumption (and reduce saving), and through

any reduction in port activity, which may keep energy supplies and raw materials from getting to

producers and consumer goods from getting to retailers.

The supply of petroleum products, as indicated above, does not appear to be a major

macroeconomic problem, but higher gasoline prices will temporarily reduce both gasoline

consumption and consumption of other goods and services. The increase in gasoline prices is

basically a temporary redistribution of income from consumers of gasoline to the stockholders of

refiners. As a ballpark estimate, assume a 40 percent average rise in gasoline prices in September

and that consumers, on average, reduce nongasoline spending by 40 cents for each dollar increase

in gasoline prices. Since gasoline accounts for 2.7 percent of consumption (without the price

increase), the rise in prices would reduce consumption (net of the rise in gasoline prices) by 0.4

percent (40 percent x 40 percent x 2.7 percent), or about $38 billion at an annual rate. If

sustained, that would reduce annualized GDP growth for the third quarter by 0.4 percent and for

the fourth quarter by 0.9 percent. That effect is temporary: as gasoline prices return to pre-

Katrina levels, consumption would bounce back, meaning higher GDP growth.

 

6 The damage to the Port of Southern Louisiana is significant, but most shipping will be able to

resume in a few weeks or be diverted from the New Orleans facilities to other facilities on the

Mississippi (such as Baton Rouge) or to Houston. Vessels drafting more than 39 feet cannot

currently use the river. Only one grain elevator appeared to be severely damaged, and the others

are coming back into operation as power is restored.

 

Budgetary Effects

At this point, it is unclear what the ultimate impact of Hurricane Katrina will be on federal

spending. Thus far, the President has requested and the Congress has appropriated $10.5 billion

in emergency assistance, with $10 billion of that total going to the Federal Emergency

Management Agency’s (FEMA’s) disaster relief account. (The remaining $500 million was

appropriated for operation and maintenance for costs incurred by the Department of Defense for

evacuation, deployment of personnel, and related efforts.) CBO expects that most of the outlays

from that supplemental appropriation will occur in fiscal year 2006. Much of the new funding

may be obligated in this month (that is, within fiscal year 2005), but most of the checks are likely

to be written in subsequent months. In addition, FEMA may spend at least a few hundred million

dollars more in September—from funds previously appropriated—than it would have expended

otherwise.

 

That initial funding is likely to be used mostly for short-term emergency assistance for

individuals adversely affected by the hurricane. It is likely that more funding will be provided for

assistance to businesses and for long-term reconstruction efforts.

 

The hurricane will affect federal spending in September and the months beyond in a number of

other ways. Some of those effects may simply be a shift in the timing of spending or in the

collection of offsetting receipts. In the near term, some programs may experience lower outlays

because federal agencies or their agents may not be able to process payments as rapidly as usual

or because recipients of payments may be delayed in submitting claims. Offsetting receipts from

royalty payments for leases on the Outer Continental Shelf are likely to be lower—by at least a

few hundred million dollars—for one month or more this fall. However, the Department of

Energy will collect receipts for the sale of oil from the Strategic Petroleum Reserve, possibly in

the neighborhood of $2 billion (for the announced sale of 30 million barrels). In addition, federal

flood and crop insurance payments could increase, and the government may experience an

increasing number of defaults in some of its loan and loan guarantee programs. Most of the

outlay effects of those near-term changes are likely to occur after September (that is, in fiscal

year 2006). It is still too soon to tell what the net effects for either fiscal year 2005 or fiscal year

2006 might be—though the effects in 2005 are likely to be small, since there is so little time left

in the fiscal year.

 

The effects of Hurricane Katrina on tax receipts are also unclear at this point. Federal receipts

will be affected not only because of the immediate reductions in national income and gasoline

consumption, but also because of temporary tax relief provided by the Internal Revenue Service.

 

7 Victims of Hurricane Katrina in Louisiana and designated areas of Mississippi, Alabama, and

Florida can delay their estimated payments of individual and corporate income taxes beyond the

normal September 15 due date. Those tax payments instead will not be due until at least October

31, therefore delaying some tax receipts into fiscal year 2006. Taxpayers who reside outside of

the affected areas but have their financial records or tax practitioners within the areas also can

qualify for the delay in payments. Other payment delays applying to withheld income and

employment and excise taxes do not currently last into fiscal year 2006. Also, through September

15 penalties will not be assessed on taxpayers who sell for highway use certain dyed diesel fuel

(which is normally available only for tax-exempt purposes). All of the payment delays may be

extended at a later date for certain taxpayers.

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2005/09/08 01:38 2005/09/08 01:38

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NY Times article on political effects of Katrina on Bush Tax Cuts

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NY Times article
September 7, 2005

Budget Office Says Storm Could Cost Economy 400,000 Jobs

WASHINGTON, Sept. 7 - Hurricane Katrina is about to blow a hole in the federal budget, and it is already jeopardizing President Bush's agenda for cutting taxes and reducing the deficit.

The Congressional Budget Office reported today that it had told congressional leaders that Hurricane Katrina could reduce employment this year by 400,000 jobs and could slow the economy's expansion by as much as a full percentage point. As a nonpartisan advisor to Congress, the office had previously predicted that the economy would grow by 3.7 percent in 2005 and by 3.4 percent in 2004. The budget office's report came in a nine-page memo delivered Tuesday to Sen. Bill Frist, Republican of Tennessee and the majority leader.

Also on Tuesday, administration officials told Republican lawmakers that relief efforts were running close to $700 million a day, and that the total federal cost could reach as high as $100 billion.

That would be many times the cost of any other natural disaster or even the $21 billion that was allocated for New York City after the terrorist attacks of Sept. 11, 2001.

Still, the budget office saidin its report that the start of the recovery of the country's refineries was promising. "Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely."

It added: "While making specific estimates is fraught with uncertainty, evidence to date suggests that overall economic effects will be significant but not overwhelming."

But the expenses of Katrina are mounting just as Mr. Bush and Republican leaders are trying to push through spending cuts for programs like Medicaid and student loans, extend about $70 billion in expiring tax cuts, and reduce the federal budget deficit.

"There is no question but that the costs of this are going to exceed the costs of New York City after 9/11 by a significant multiple," said Senator Judd Gregg, Republican of New Hampshire and chairman of the Senate Budget Committee.

White House officials are planning to ask Congress as early as Wednesday for a second round of emergency financing, perhaps as much as $40 billion, but they said even that would be a "stopgap" measure while they assessed the full costs.

Though it is still too early for accurate estimates, the costs are all but certain to wreak havoc with Mr. Bush's plans to reduce the federal deficit and possibly his plans to extend tax cuts.

On Monday, Mr. Frist postponed plans to push for a vote on repealing the estate tax, a move that would benefit the wealthiest 1 percent of households, costing more than $70 billion a year once fully put in effect.

House and Senate leaders are also grappling with their pre-hurricane plan to propose $35 billion in spending cuts over the next five years for entitlement programs like Medicaid, student loans, food stamps and welfare payments.

Those cuts could suddenly prove politically unpalatable to Mr. Bush and Republican lawmakers, who are trying to rebuff criticism that the federal government shortchanged the hurricane's poorest victims.

Congressional Democrats are already using the hurricane as a reason to block Republican tax and spending plans.

"Democrats think this is the worst possible time to be cutting taxes for those at the very top and cutting the social safety net of those at the very bottom, and adding $35 billion," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee.

Budget analysts said the magnitude and unique characteristics of the hurricane made it unlike any previous natural disaster, resulting in a variety of extraordinary costs:

¶Shelter for as many as a million people for months.

¶A potentially high share of uninsured property losses that stem from flooding, which is not covered by private insurers.

¶Education and health care for hundreds of thousands forced to live outside their home states.

"Katrina could easily become a milestone in the history of the federal budget," said Stanley Collender, a longtime budget analyst here. "Policies that never would have been considered before could now become standard."

Indeed, there were signs on Tuesday that Republicans and Democrats had already begun to compete with each other over who might be willing to spend more.

Senator Harry Reid of Nevada, the Senate Democratic leader, predicted on Tuesday that costs could total $150 billion. Top Republican lawmakers, meanwhile, have begun to call for "stimulus" measures to buck up the overall economy.

White House officials contend that costs attributable to the hurricane are separate from Mr. Bush's underlying budget goals, which include cutting the deficit in half over the next four years and permanently extending most of the tax cuts passed in 2001 and 2003.

Budget analysts also note that natural disasters are essentially one-time costs that do not affect the government's long-run fiscal health.

"We can afford $100 billion - one time," said Douglas Holtz-Eakin, director of the Congressional Budget Office. "What we cannot afford is $100 billion in additional spending year after year."

The problem is that, even without the hurricane, the federal government's underlying fiscal health is in poor shape. In July, the White House predicted that surging tax revenues would reduce the deficit this year to $333 billion from $412 billion in 2004.

But many analysts believe that the tax surge was largely a one-time event and that overall government spending is still poised to climb rapidly as a result of the war in Iraq, the Medicare prescription drug benefit and the growing number of baby boomers who will soon reach retirement age.

Before the hurricane, House and Senate Republicans were preparing to work out $35 billion in spending cuts over the next five years that would trim Medicaid payments by $10 billion and make smaller cuts in student loan programs, farm programs, food stamps, housing and cash assistance to poor families.

Under the budget resolution that Congress passed this spring, Congressional committees are supposed to spell out the proposed cuts by Sept. 16. House and Senate leaders had been planning to pass the cuts within a week or so after that.

 

Jennifer Bayot contributed reporting to this article.

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2005/09/08 01:33 2005/09/08 01:33

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Allan Greenspan's Testimony to the US Congress & FED Interest Rate Policy

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Allan Greenspan’s testimony to Congress and the U.S FED interest rate policy

Greenspan’s last words?

Jul 20th 2005 From The Economist Global Agenda


Alan Greenspan, the chairman of America’s Federal Reserve, has given what may be the last of his twice-yearly speeches to Congress on monetary policy before his expected retirement. Those pleading for lower interest rates—or at least an end to the rises—found that he has not gone soft in his old age

 

OVER the last decade, as the baby-boomers have watched retirement lurching closer, an aura of mania has hovered over the American marketplace. Telecoms were going to carry workers along the information superhighway to the land of effortless wealth, and dotcoms promised to turn the stock market into a sort of perpetual-motion money-making machine—at least until the Y2K bug brought the entire world to a crashing halt. Now those fads are regarded with (rueful) nostalgia, and Americans are ploughing their money into real estate, with expectations of recouping a modest 20% or so a year on their investment.

 

Despite the madness of the crowd, at least one man has remained remarkably steady: Alan Greenspan, the chairman of America’s Federal Reserve. Credited with godlike powers by the markets in the late 1990s, he has taken something of a shellacking in the press in recent years for the usual sins with which central bankers are charged: making monetary policy too easy, which causes inflation and encourages people to bury themselves in debt; or making monetary policy too tight, which throws people out of work and makes it hard for people to pay the debts they amassed when monetary policy was looser. Open a newspaper these days, and you can often find him accused of both within a few pages.

 

Despite entreaties from both sides, Mr Greenspan has held his ground. The Federal Reserve has been increasing interest rates at the slow, steady pace originally promised as the economy inched out of the 2000-01 recession. As he headed into his biannual testimony on monetary policy before Congress on Wednesday July 20th, all eyes were watching to see if his words would presage any wavering from this course. With Mr Greenspan expected to step down in January, two months before his 80th birthday, this may be his swan-song before the legislative body.

 

The dollar rose sharply ahead of Mr Greenspan’s testimony, in the expectation that he would hint at more interest-rate rises to come—as indeed he did. Even so, there are those who feel it is nearing time for Mr Greenspan to let them level off, as they approach the range which many analysts believe to be “neutral”—neither low enough to spur economic growth, nor high enough to hinder it. That level is believed to be somewhere between 3.5% and 4.5%. In recent months, the Federal Reserve has been raising interest rates in quarter-point increments, most recently to 3.25% (see chart above).

 

Though economic growth has remained strong (especially compared with sluggish Europe), there are ample worries to fuel the case for restraint. Oil, the fuel of the world’s economy, remains expensive. And America’s job market is still surprisingly subdued considering how far the nation is into the current economic expansion. Unemployment stands at 5%, down from a high of 6.3% in June 2003, but much of the early improvement came from workers leaving the labour force, rather than job creation. Labour-force participation remains well below its 2000 peak, and payroll headcounts have only this year returned to their 2001 levels. Consumer spending remains strong, but (it is feared) increasingly dependent on housing wealth and desperate corporate measures to shake consumers loose from their hard-earned dollars—the Big Three automakers have offered their employee discounts to the entire country to move backlogs of 2005 models off the lots.

 

Nonetheless, even before he testified it was clear that Mr Greenspan's words would not satisfy those hoping for easier money. In a July 11th letter to Representative Jim Saxton, the chairman of Congress’s joint economic committee, the Fed chief said that the economy seemed to be coping with higher oil prices, and that the narrowing spread between short-term and long-term interest rates, which can herald a recession, should not be cause for alarm. Mr Greenspan's testimony confirmed this view. Saying that “the US economy has remained on a firm footing, and inflation continues to be well contained”, Mr Greenspan made it clear that the bank is not done yet with rate increases. Another 0.25% increase is expected in August, and rates are likely to hit 4% by the end of the year—provided the economy remains co-operatively robust.

 

There are worries in some quarters, however, that this is not hawkish enough. Mr Greenspan’s letter also indicated that the bank is not acting to rein in the bubble which many fear has developed in America’s housing market. Mr Greenspan has long held that interest rates are not a good tool for bursting asset-price bubbles. This position has brought him grief from critics who blame him for allowing the stock market bubble of the late 1990s to continue to inflate long after he warned of its “irrational exuberance”. There are fears that the economy has simply lurched from depending on increasing stock prices to relying on house price appreciation to fuel growth—and that the longer this goes on, the stiffer the price Americans will pay when the bubble pops.

 

Rational exuberance

Mr Greenspan's testimony acknowledged the fears of both sets of critics, pointing to three primary areas of uncertainty that could derail his current, favourable assessment of the economy's prospects. Unit labour costs, which have remained subdued in recent years, have turned up of late, which will put upward pressure on inflation if the trend continues.

 

The possibility of further increases in energy prices threatens not only higher inflation but also slower economic growth, though Mr Greenspan noted that the forecast currently embedded in futures markets is for oil and gas prices to level off. And the unusual behaviour of long-term interest rates, which are currently hovering abnormally close to short-term rates, entails a current risk of excess borrowing, particularly in the housing market, and a future risk of higher rates and slower growth.

 

Mr Greenspan endorsed the view expressed by Ben Bernanke, the chairman of President Bush's Council of Economic Advisors, that at least part of the unusual narrowing is due to a mismatch between high levels of global savings and relatively low levels of global capital investment. With capital investment recovering in America and Japan, this problem may heal itself. But it will remain worrying until it does. As will the housing bubble: Mr Greenspan noted that, at a minimum, some local markets are distinctly frothy and a decline in prices would undoubtedly entail economic distress. However, he was careful to add that such a decline is by no means inevitable, nor sure to produce large macroeconomic effects even if it does occur.

 

Mr Greenspan's speech will probably reassure those who fervently hope he is steering America between the Scylla of speculation and the Charybdis of contraction. Interest rates high enough to pop a bubble could be high enough to throw the economy into a tailspin, causing more damage than they avert. Interest rates low enough to stimulate employment may also be low enough to unleash inflation, as the central bankers of the 1970s found to their dismay. So far, America seems to be muddling through. Economic growth is strong, payrolls are recovering (however slowly), and America’s monetary policy seems to be reviving the dollar from its recent lows, which should give another fillip to consumer wallets. Mr Greenspan’s powers may not be quite godlike, but many hope that he may yet have a couple miracles up his sleeve.

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2005/07/27 03:26 2005/07/27 03:26

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China's Change in Exchange Rate Policy

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The following is one article of The Economists dealing with China's exchange rate policy change.

 

China lets the yuan rise—but how far?

Jul 22nd 2005 From The Economist Global Agenda


China has revalued its currency, the yuan, and linked it to a basket of currencies—though it is not yet clear how far it will be allowed to rise. The move may ease trade tension with America, though China's slowing economy, which is boosting its trade surplus, may reignite the spat

 

SOONER or later, it was going to happen, and on Thursday July 21st it did. China abandoned the 11-year-old peg of its currency, the yuan, at 8.28 to the dollar. From now on, the yuan will be linked to a basket of currencies, the central parities of which will be set at the end of each day. And the currency has been revalued, although by nothing like as much as America and others have been demanding: the yuan's initial central rate against the dollar was shifted by just 2.1%, to 8.11.
 

So far, it is not clear exactly how the new system will operate. The Chinese called it a “managed floating exchange-rate regime”, which may well imply more management than floating. Neither the currencies in the basket used to set the level of the yuan, nor their weights, have been disclosed. The fact that the Chinese have acted at all is important. But the eventual economic and political effects of the revaluation will depend on how far and how fast the yuan moves from now on. In Friday's trading it barely budged—and in fact closed a fraction below 8.11 to the dollar, suggesting the authorities are keen to damp down market expectations of further rises.

 

Such a slight initial revaluation is unlikely to do much to slow China's fast-expanding economy. The day before the currency regime changed, the country's official statisticians said that GDP in the second quarter of 2005 was 9.5% higher than a year before—more than most pundits had forecast and only a shade less than the figure for the same period of 2004 (see chart below). Growth rates of industrial production, ahead by 16.8% in the year to June, and investment in fixed assets, up by 25.4% in the first half, year on year, have both eased from their levels at the end of 2003, but remain strong. Inflation, as measured by the consumer-price index, is mild. It slid to 1.6% last month, down from 5%-plus a year ago.

 

In truth, the economy is slowing more markedly than these (highly suspect) official figures suggest. Many economists say that China has an institutionalised bias to over-reporting growth at the bottom of a cycle and under-reporting it at the top, to reduce the volatility of the numbers. Judged by physical indicators, such as electricity consumption or freight volumes, GDP growth probably peaked at over 12% in 2003 and should slow to 8% by 2006. Since China's macroeconomic growth is driven more by fixed investment than by household consumption (which dominates in the West), it is especially vulnerable to any slowing of corporate investment or public spending on infrastructure.

 

“In investment cycles,” says Andy Xie, Asia economist at Morgan Stanley, “the leading indicators are profit margins, product prices and property prices, which forecast corporate cash flow or ability to borrow.” These three indicators are slowing. For the past five years, Chinese industrial firms have enjoyed record profit margins as revenue growth has outpaced the increase in wages and raw-material costs. In 2003 and 2004, industrial production and sales grew at an annual rate of nearly 30% in real terms, analysts estimate, but in 2005 the pace has slowed to around 15%. With commodity prices high, companies' margins are being squeezed: overheated industries such as cars, steel, cement and basic materials are suffering especially.

 

Property prices are also moderating after a period of extraordinary growth, particularly in big cities. Shanghai house prices, up by half since 1998 and by almost 10% in the first quarter of this year, have fallen back by 10-20% since mid-April. Transaction volumes in most urban centres have also dropped, because the government has imposed a property-sales tax and tightened mortgage requirements.

 

Overall, however, China seems to be managing the soft landing that it wants. The authorities have acted earlier and more decisively than they did in the mid-1990s, curbing growth before it gets out of hand. Policymakers have also been more sophisticated, targeting selected sectors with administrative restrictions while shifting to market-based measures, including last October's increase in interest rates, to rein in money and credit growth. A dearer yuan—but much dearer, probably, than after this week's move—would give the economy another downward nudge.

 

In addition, the economy is looking better balanced: there are signs that consumer spending is doing more to support the economy, alongside fixed investment and exports. Rising incomes are boosting households' spending power, lifting retail sales by 13% in the first half of the year, compared with the same period of 2004. And the countryside is finally playing a part: after six years of lacklustre growth, rural incomes rose by 12.5% in the first half.

 

That said, China's policymakers cannot afford to rest on their laurels. On the one hand, there is a risk that the economy will steam away again as spending for the Beijing Olympics in 2008 takes off. On the other, the vast amount of manufacturing capacity built up over the past few years means that a slightly sharper slowdown, perhaps triggered by lower growth in America, could tip the country back into deflation. Already, a staggering nine-tenths of manufactured goods in China are thought to be in oversupply.

 

In the short term, the biggest worry is that China becomes a victim of its own international success. Until recently China has been a powerful engine driving the world economy. If it slows, existing political and trade tensions could still worsen. Thus an unfortunate side effect of China's attempts to cool its domestic economy has been an exploding trade surplus, because import growth has softened while exports have remained robust. In June, China's exports rose by 30.6%, year-on-year, while imports grew by just 15.1%, widening the monthly trade surplus to $9.7 billion. The cumulative surplus for 2005 is now nearly $40 billion, more than for the whole of last year. This year's current-account surplus could reach 9% of GDP. “Just one year ago, China was the world's fastest-growing importer of heavy industrial products,” says Jonathan Anderson, chief Asia economist at UBS. “Today, the mainland is actually a growing net exporter, with shipments of not only textiles but also steel, other metals and chemicals accelerating visibly.”

 

Slowing imports (of everything but commodities) are bad news for international companies, at a time when those doing business in China are already suffering from increased competition and oversupply. And mainland firms are becoming aggressive exporters of everything from textiles and steel to electronics and even cars. Ningbo Bird, based in Zhejiang province, is flooding Asia with cheap mobile-phone handsets it cannot sell profitably at home.

 

Revaluing the yuan should make some of the tensions created by all this less acute. American politicians, in particular, have been demanding a step in this direction—President George Bush's spokesman welcomed the move. However, some congressmen have been demanding a much bigger stride. And investment is becoming as touchy an issue as trade has been. China is no longer using its huge stock of foreign-exchange reserves—over $700 billion—merely to buy American Treasury bonds, but to snap up physical assets too. The $18.5 billion contested bid by CNOOC, a big Chinese oil company, for America's Unocal is causing an uproar in Washington, DC. China's currency move may dampen calls for trade protection and revaluation for a while. But if its domestic economy slows and thus becomes less supportive of global growth, such calls are likely to return soon.

 

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2005/07/27 03:21 2005/07/27 03:21

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FRB's Inflation and Monetary Policy

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The following article is a presentation paper addressed at the International Research Forum on Monetary Policy Conference, Frankfurt am Main, Germany, May 20 2005. It is also available on the website at http://www.federalreserve.gov/. It seems to be very interesting to see how FRB staffs forecast inflation and conduct monetary policy based on Expectations-Augmented inflation framework which was proposed by M. Friedman and E. Phelps in mid 1960s.

 

Remarks by Governor Donald L. Kohn
To the International Research Forum on Monetary Policy Conference,
Frankfurt am Main, Germany, May 20, 2005

 

Modeling Inflation: A Policymaker’s Perspective

Nothing is more important to the conduct of monetary policy than understanding and predicting inflation. Price stability is our responsibility as central banks--it is how, in the long run, we contribute to society's welfare. Achieving and maintaining price stability will be more efficient and effective the better we understand the causes of inflation and the dynamics of how it evolves. 1

I think central bankers are asking more of inflation analysis these days. In the United States, our attention was focused for many years on containing and then reducing inflation. The risks and rewards were one-sided, and policymakers were mostly interested in whether inflation would rise. Now that we are in the neighborhood of price stability, we can be faced with looking at the possibility that inflation will fall too low as well as rise too high. Moreover, so long as inflation expectations are well anchored, we can tolerate limited changes in inflation, but we need to know that a rise or fall is not the beginning of a more extended trend. Consequently, we focus closely on the reasons for any changes in inflation and their implications for the outlook.

Of course, I have always known how important the analysis and forecasting of inflation was for monetary policy, but I must admit that as someone who now has to go on record with a vote on the basis of some notion of the future course of inflation, the exercise has taken on added meaning. I thought I might take advantage of this captive audience of researchers on central bank policies to ruminate a bit on the evolution of inflation modeling and suggest areas for further research. I know that European central banks have been in the forefront of recent efforts to improve our understanding of some key issues in this area, but I will focus on our practices in the United States.

 

The Stability of the Basic Framework
I find it remarkable how fundamentally stable our basic framework for analyzing inflation has remained over the past thirty-five years or so: That basic framework is essentially the expectations-augmented
Phillips curve introduced by Milton Friedman and Edmund Phelps in the late 1960s.2

One of the key assumptions underlying this basic framework is the temporary rigidity of wages and prices. It is because of these nominal rigidities that monetary shocks have real effects: In the well-known litany, wages and prices do not change immediately in response to a positive monetary surprise, so real interest rates fall, and spending is stimulated. But higher demand cannot be met without pushing firms up their marginal cost curves as they compete for scarce labor and other resources. As opportunities to raise prices present themselves, firms take them to better align prices with costs. That process may be gradual, because firms' competitors may not be raising their prices at the same time.

It is easy to see in this tale the central mechanism of the Phillips curve. What is missing from the story, though, is that seminal feature of Friedman and Phelps's framework, namely, expectations. Expectations are a key part of the framework because wages and prices will be set for some time, and so it is important for workers and firms to consider the economic conditions expected to prevail during the period that the wages and prices are fixed. If inflation is anticipated over the period ahead, wages and prices will be set commensurately higher as workers and firms strive to protect themselves against the erosion of their purchasing power.

As Friedman and Phelps emphasized, these efforts to protect against the erosion of purchasing power by inflation will mean that an ongoing and fully anticipated inflation will, to a first approximation, have no effect on the level of resource utilization; the outcome of the economy will be whatever the real forces at work dictate. Friedman called the unemployment rate determined by such real factors the natural rate of unemployment. An important implication of the expectations-augmented Phillips curve is that any attempt to use monetary policy to lower the unemployment rate below the natural rate on a sustained basis will end in failure. Initially, expansionary monetary policy would lower unemployment as well as raise inflation. As the stimulus continued, however, firms and workers would increasingly protect themselves against the higher inflation, giving an additional boost to inflation. Eventually, there would be no additional employment; only a (self-reinforcing) higher rate of inflation.

In 1970, the Federal Reserve held a conference that addressed this then-new framework; the conference encompassed both theoretical extensions, including Lucas' first exposition of rational expectations, and empirical implementation.3 In its essentials, the way we forecast inflation today is not all that different from what came out of that conference. That is, inflation is importantly a function of an output or employment gap relative to a natural rate, plus some measure of inflation expectations.

 

Advances within the Basic Framework
One of the first challenges that the new framework had to face was the supply shocks of the early 1970s. The framework was extended to allow for the effects of shifts in relative prices, such as crude oil and import prices. Such shifts can feed through fairly directly to the measures of core inflation through their effect on business costs, though their influence on inflation should be temporary unless they get built into labor costs or inflation expectations. We include these types of price terms today in our forecasting equations, and they are important to forming our views of the inflation outlook and thus to the policy process.

Another early development within the framework was the buttressing of its microeconomic foundations, in particular by paying more careful attention to the modeling of nominal rigidities. John Taylor's staggered-contracts framework remains a touchstone because of its intuitive appeal--annual wage reviews are a familiar experience for most people who work. Much subsequent work--including, recently, among economists at the European Central Bank and the euro-area national central banks--has confirmed the key assumption underlying this model, which is that wages and prices are changed infrequently.

A key objective of Taylor's staggered-contracts model was to show that, in an economy with nominal rigidities, monetary policy can have important effects even when expectations are perfectly rational. However, about a decade ago, Jeff Fuhrer and George Moore pointed out that inflation was more persistent than was predicted by the model with sticky prices and rational expectations.4 Since their work, a number of researchers have suggested that "sticky information" or rules of thumb can account for this excess persistence. Such departures of expectations from perfect rationality can be an important source of observed inflation dynamics.

At the Fed, the staff takes a number of different approaches to the modeling of expectations. The staff's large, formal model (FRB/US) assumes rational expectations--but with a twist. In particular, the model addresses the Fuhrer-Moore critique by making inflation itself, as well as the levels of wages and prices, costly to adjust. The implications of these additional frictions are very similar to those of the departures of expectations from perfect rationality used by other modelers. An advantage of a model with expectations that are, at least in part, rational is that we can address questions related to how the behavior of the economy may change when the systematic implementation of monetary policy changes.

We also look at models that assume that inflation expectations are well modeled by lagged inflation--the original proposal of Friedman and of Phelps. Such models may not be as useful in addressing policy questions. However, they have a good forecasting track record.

 

The Performance of the Board Staff's Inflation Forecast
The Board staff forecasts distributed to the Federal Open Market Committee (FOMC) are judgmental: Although the staff consults a variety of models in coming up with its forecasts, no one model can be said to summarize the staff view. Also, the staff forecasts are not necessarily its best guess on how inflation will evolve; the forecasts are conditioned on an assumed path for monetary policy and, during some periods, at the behest of policymakers, the staff did not assume what it would have viewed as the most likely policy path.

I have distributed a figure that shows the Board staff's four-quarter-ahead forecasts for inflation as measured by the core Consumer Price Index along with the actual outcomes. The period shown is 1984 to 2000; I chose those years because the current definition of the core CPI did not come into use until 1983, and the staff's forecasts remain confidential for five years.

As shown in the inset box, the root-mean-squared error of the staff projections has been smaller than that of a na?e benchmark model, in which inflation is assumed to continue at its pace over the preceding four quarters. Nonetheless, the one-year-ahead root-mean-squared error of the staff forecast is about 1/2 percentage point. That is to say, almost one-third of the time, inflation has been either more than 1/2 percentage point higher, or more than 1/2 percentage point lower, than the staff has predicted. Moreover, over the period shown, there was, on average, some bias in the staff's inflation forecasts; inflation has tended to come in lower than the staff anticipated, by about 0.2 percentage point per year.

No single explanation suggests itself for either the extent of the misses or the bias. Rather, a variety of factors has caused inflation to deviate from expectations.5 At times, demand was not as robust as anticipated, and unexpected but persistent changes in the foreign exchange value of the dollar and oil prices fed through to core CPI inflation on several occasions. But I will concentrate on one general phenomenon and two episodes that help illustrate how our understanding has evolved and some of the more general challenges for inflation forecasting over the past twenty years.

One factor that may account for some of the upward bias over this entire period was a gradual reduction in the natural rate of unemployment. With hindsight, I believe we can point to a number of developments in labor markets that are consistent with such a reduction. For example, disability insurance rolls rose steadily over this period, which allowed many people who likely would have had above-average unemployment rates to withdraw from the labor force. Also, in the early 1990s, many public opinion surveys indicated a sharp increase in worker insecurity--and workers who are anxious about losing their jobs will be less willing to risk unemployment. These examples illustrate the need to be alert to the possibility of the natural rate shifting. As Friedman emphasized, the natural rate is not a rigid data point, but rather the reflection of many developments in the economy.

In the 1988-90 period, the behavior of crude oil prices, unemployment, and the exchange rate were not especially surprising or anomalous. However, the models the staff was consulting in preparing its forecasts may have been miscalibrated. In particular, inflation expectations perhaps were becoming better anchored, so that an unemployment rate below the natural rate was putting less pressure on inflation than it would have over the preceding twenty years. Likewise, the staff may have overestimated the ongoing effects of the dollar decline on inflation, as the models in use at that time inevitably gave considerable weight to the experience of the 1970s. Empirical estimates unavoidably lag these sorts of endogenous changes in inflation dynamics.

For the period from 1996 to 1998, inflation also came in consistently lower than the staff forecast. Here, the pick up in structural productivity growth was the likely cause: The historical record suggests that a sustained acceleration in productivity affects prices before it affects wages. Thus, the pickup in productivity growth has a direct, depressing effect on costs--and thus ultimately on prices. It took Fed forecasters--and others--a while to discern the acceleration in productivity and its implications for inflation. Interestingly, by the time of the forecasts made in 1998 and 1999--the 1999 and 2000 observations on the chart--the string of forecasting errors had ended. This improved performance likely reflected the eventual recognition that productivity growth had increased on a sustained basis.

 

An Agenda for Further Research
As I noted at the beginning of my remarks, research aimed at improving our understanding of and ability to predict inflation is essential to the central banker's mission. The better the forecasts, the better the odds that policy choices will contribute to economic stability and efficient resource allocation. Needless to say, more work remains to be done--and always will. My chart stops at 2000, but it is no secret that forecasters everywhere did not anticipate the extent of disinflation in the
U.S. economy in 2003 and, even after the fact, have had trouble explaining what happened. Moreover, the degree to which core inflation picked up in 2004 and 2005 also caught many economists, including this one on the FOMC, by surprise.

Surprises are inevitable; aggregate supply and demand curves shift for reasons that cannot be anticipated. But improvement should be possible in several dimensions. We could identify shocks sooner and get a better understanding of their likely effects on inflation. And we could attempt to narrow the definition of "shock." I suspect that much of what we consider to be exogenous is the working out of endogenous events that we do not understand very well.

Better predictions inevitably begin with improved understanding--both theoretical and empirical. In reviewing some of the advances of the past thirty-five years for this talk, I was struck by the degree to which so much of the work on rigidities and expectations seemed to be trying to find an elegant rationale at the level of the firm and the worker for the observed dynamic properties of aggregate price measures. This work, while illuminating in many respects, does not seem to have greatly advanced the empirical forecasting of inflation. And, the microeconomic behaviors we describe to justify the empirical specifications of our macroeconomic models often do not coincide very well with what we find when we directly observe the decisionmaking of workers and firms. I think we need to push forward along these microeconomic lines. I have a lengthy list of macroeconomic inflation puzzles whose answers would make me a better policymaker, but, for the most part, the solutions to the puzzles rest on a better understanding of how workers and firms set wages and prices.

Researchers at the ECB and at the euro-area national central banks have made an important contribution in their recent work. I agree with one of the conclusions I understand many of them came to--that is, we especially need to improve our understanding of the determinants of labor compensation. The reduced-form price equations we so often use for inflation prediction bypass direct contact with labor compensation issues. But the labor market is at the foundation of the Friedman-Phelps analysis. Labor is the major element of business cost and as such often occupies a prominent role in policy discussions of inflation prospects, and the unemployment rate often proxies for resource slack more generally. As I have already discussed, unanticipated changes in the natural rate have contributed to forecasting errors over the past two decades. In the past few years, we have had some experience with wage setting under conditions of price stability, and nominal compensation showed greater flexibility than some observers had anticipated. Too often, discussions of wage and compensation determination rely on descriptions of worker demands and expectations that seem drawn from an era of strong unions rather than from the more atomistic labor markets that dominate the U.S. economy these days.

A better understanding of the motivation and dynamics of how compensation is determined between firms and individuals or small groups of workers would help unravel a number of the inflation puzzles I think we face, including those involving productivity growth, globalization, markups, and expectations formation.

 

Changes in Productivity Growth
An important aspect of this story has been that productivity affects prices before it affects wages--that is why we were able to experience low and stable inflation in the latter part of the 1990s with the unemployment rate well below any estimates of its natural level. But is it really true that prices are more responsive to productivity than wages? Why? Should the effects be symmetrical when productivity growth slows? How can we better estimate structural productivity and determine changes in its pace of growth more promptly?

 

Globalization and the Inflation Process
Several observers have argued that increased trade has been an important factor in the downtrend in inflation over the past two decades.6 One channel is said to be through greater competitive pressures and another through increased support for price stability engendered by the competitive environment. Globalization might restrain prices and wages in those sectors in which imports play an increasing role, but how does it hold back the average wage and price level? And, how do we reconcile the sense of greater competitive pressures with record levels of profits--and capital income more generally--in the
United States?

 

The Behavior of Profit Margins or Markups
The Federal Reserve's 1970 conference and much of the work since then has approached the determination of inflation as a two-step process: model both labor costs and the price markup over labor costs. Yet, we find that this approach does not work very well in practice. Years of experience suggest that although profit margins tend to return to their mean, deviations can increase for a time and the eventual return can be slow and very difficult to predict. In the
United States, markups have remained unusually elevated of late, absorbing little of the rise in the cost of energy, import, and materials. Does it matter whether the shock to margins comes from a change in potential supply or aggregate demand? What type of pricing behavior reconciles these outcomes? How are they consistent with the expectation that margins return to means?

 

Inflation Expectations
Measures of inflation expectations are among the variables I watch most closely as I formulate my policy recommendations because I recognize that changing expectations are a principal avenue by which short-term perturbations in price levels are propagated into more persistent changes in inflation rates. Yet our knowledge of the expectations that businesses and workers bring to the process of setting wages and prices is extremely limited. We use proxies--most often surveys of economists, whose projections may be influenced by their knowledge of other economists' projections, and of households, who may or may not understand the question or have a realistic view of what to expect.
Readings from the financial markets are helpful, but they are also muddied by changing premiums for inflation risk and liquidity, and they are not necessarily representative of the attitudes of households or businesses.

Moreover, how expectations are formed remains an area that would benefit from further research. How much do people rely on the immediate past in forming expectations about the future? To what extent are projections from the past modified by what they know about the goals of the central bank or the stage and characteristics of the current economic cycle? How often do expectations get updated, and what types of information are used in the process?

* * *

This is a daunting research agenda, but it should be given a high priority. I appreciate the opportunity to spell it out before an audience that has the skills and the opportunity to address some of these pressing questions.


Footnotes

1.  The views I am expressing today are my own and not necessarily those of my colleagues on the Federal Open Market Committee. John Roberts, of the Board's staff, helped with the preparation of these remarks.  Return to text

2.  Milton Friedman (1968), "The Role of Monetary Policy," American Economic Review, vol. 58 (March), pp. 1-17; Edmund S. Phelps (1968), "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, vol. 76 (July-August, part 2: Issues in Monetary Research), pp. 678-711.  Return to text

3.  The Econometrics of Price Determination (1972), proceedings of a conference sponsored by the Board of Governors of the Federal Reserve System and the Social Science Research Council, October 30-31, 1970 (Washington: Board of Governors of the Federal Reserve System). Return to text

4.  Jeff Fuhrer and George Moore (1995), "Inflation Persistence," Quarterly Journal of Economics, vol. 110 (February), pp. 127- 59. Return to text

5.  The discussion of the forecasting record that follows is largely a matter of conjecture and guesswork. It is hard to pinpoint the cause of any particular forecast error. I am drawing on my own memories of events, as well as those of current members of the Board's staff.  Return to text

6.  Kenneth S. Rogoff (2003), "Globalization and Global Disinflation," in Monetary Policy and Uncertainty: Adapting to a Changing Economy, proceedings of a symposium sponsored by the Federal Reserve Bank of Kansas City, August 28-30 (Kansas City: Federal Reserve Bank of Kansas City), pp. 77-112; Alan Greenspan (2005), "Globalization," speech presented to the Council on Foreign Relations, March 10. Return to text

 

Last update: May 20, 2005 

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2005/06/30 23:31 2005/06/30 23:31

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ICT and Millenium Development Goals

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ICT and Millennium Development Goals
The Business of Hunger
 
By Devinder Sharma
 
It was too late. By the time, Jai Lal, a landless agricultural worker of Bandali village, in Sheopur district of Madhya Pradesh, in the heartland of India, returned to share the good news with his wife - that he finally managed to get a petty job with a shopkeeper - she had succumbed to hunger. A week later, graves were dug for his two children, both unable to continue with the prolonged fight against hunger.
 
Jai Lal's family paid a heavy price for the faulty agricultural policies that are being relentlessly promoted and pushed in the name of economic growth and development. Jai Lal is not the only victim of a development paradigm that turns a blind eye to the resulting human suffering. Travelling around the country, I am no longer shocked at the plight of the rural masses, unknowingly who continue to pay a heavy price for the agrarian policy thrust upon them. What hurts me is to see that even fifty-seven years after Independence, growing hunger and inequalities do not prick the conscious of the nation.
 
There is no other plausible reason that can explain why Jai Lal lost his family. After all, Jai Lal's family died of hunger when more than 45 million tonnes of foodgrains were stacked in the open, much of it rotting for want of adequate storage facilities. This was in early 2003. Two years earlier, the country had a record 65 million tonnes of food surplus, at a time when nearly 320 million - a third of the world's estimated 840 million hungry - looked in disbelief at the mountains of the food stocks that lay decaying in front of their dry eyes.
 
None of the Nobel laureates or distinguished academicians or the chief executive officers of the IT companies, who never get tired of swearing in the name of poverty eradication, even made a passing reference to the criminal apathy exhibited through the shameful paradox of plenty - mountains of food rotting at a time when millions were living in hunger.
 
A report of the Standing Committee of Parliament estimated that the government was spending Rs 62,000 million every year to maintain these food stocks. Mainline economists and agricultural scientists did not even once question the necessity of maintaining the surplus stocks when millions were sleeping with empty stomach. Some parliamentarians even suggested throwing the surplus food in the sea. Instead of feeding the poor, nearly 17 million tonnes from the unmanageable food surplus was diverted for exports in 2002-03, and that too at a price that was actually meant for people living below the poverty line. Another six million tonnes were released for the open trade at the same price.
 
The much-publicised Millennium Development Goals aims to pull out half the world's population living in poverty and hunger by the year 2015. If only India had attempted to feed its 320 million hungry in 2002-03, at least a third of world's hunger could have been taken care of. Refraining from feeding its own people, successive governments took refuge by saying that the cost of feeding the poor would push up the fiscal deficit. On the other hand, between 2000-05, Rs 720,000 million have been invested in the telecom sector. There is no dearth of money when it comes to the sunrise industries. Much of this is however in the name of building a knowledge-led rural economy.
 

Technology Divide
 
Ten years back, while researching for my book "In the Famine Trap" (published by UK Food Group, London) I was travelling in the infamous Kalahandi region of western Orissa. It was during that time some hunger-related deaths were reported from Bolangir district. I drove to the village to meet the families of those who had succumbed to hunger. As I was approaching the dusty village what appalled me was the sight of two huge satellite towers installed right in the heart of the village. Believe it or not, each house in the village had a satellite telephone. The inhabitants of the village didn't have food to eat but were provided with telephones.
 
Satellite towers in a village where people had nothing to eat ! That surely is an ingenious way to bridge the technology divide so as to help the poverty-stricken join the mainline stream of upwardly mobile !!
 
In a country, which alone has one-third of the world's hungry, hunger and starvation no longer evokes compassion and reaction. News of hunger and starvation no longer adorns the front pages of newspapers. Hunger is, in reality, a non-issue. It is something that we must despise, something that we must close our eyes to. After all, the elite should not spoil their morning breakfast looking at pictures of the hungry splashed on the front pages of daily newspapers.
 
Farmers constitute the rural majority. Some pro-liberalisation economists led the assault on farming saying that it is not the poor farmers who needed adequate infrastructure, cheap credit, an assured market, and a remunerative price but the small percentage of rich industrialists, business and trade that needed to be showered with the State exchequer. The result is that while the non-performing assets of the nationalized banks in India grew to Rs 10,100,00 million  -- you cannot call it bank fraud, as it has been performed by the rich -- with many individual industrialists defaulting the banks to the tune of Rs 5000 million, the recovery of outstanding dues from small and marginal farmers continued to be in the range of 85 per cent.
 
It is amusing that a majority of these erring business establishments have already made a foray into the ICT sector. The technology divide or the digital divide surely becomes wider when scarce public resources are first misappropriated and then invested by the same industrial houses with the 'pious' intention of ameliorating poverty.   
 
Take the case of agriculture. In Andhra Pradesh, Karnataka, eastern Uttar Pradesh, Bihar, Tamil Nadu, Maharashtra, Madhya Pradesh and even in the frontline agricultural state of Punjab, thousands of farmers had committed suicides. Reeling under mounting debt, and with the crop harvest lying at the mercy of the private grain trade, thousands took the fatal route to escape the humiliation that comes along with indebtedness. Tens of thousands of others have been known to be selling body organs. A majority of those who survived the ordeal preferred to migrate to the urban centres. Much of the agrarian crisis is because of the terms of trade being heavily loaded against the rural areas - more money is being taken out of the villages than what is being invested.
 
In more recent times, between May to August 2003, hundreds of farmers in Karnataka, in south India, paradoxically the hub of biotechnology industry, have taken the fatal route to escape the spasm of hunger and the growing humiliation that comes along with crop failures. In fact, such is the growing crisis on the farm front, that there is hardly a week when a couple of farmers do not commit suicide in several parts of southern India. Pick up a vernacular newspaper in any region of south India and the chances are that you will find a report of a farmer's suicide. Unable to understand the ground realities, an expert committee in Karnataka has asked the government to send a team of psychiatrists to talk to farmers.
 
At the same time, in the past few months and for that matter a trend that continues from a couple of years, a few educated entrepreneurs in the Karnataka's Capital, Bangalore, have suddenly become the darling of the state exchequer. Many foreign companies most of them unable to operate in the hostile environment against genetically modified crops in Europe, have moved shop to Bangalore. The mice, they say cannot resist the cheese. Foreign investment therefore lures many of the educated young. And invariably, they all come with the promise of higher crop yields, nutritional crops, and with the underlying thrust on eradicating hunger. A majority of these biotechnology units, subsidised heavily from the state funds, merely act as a service centre for the foreign companies.
 
It isn't therefore surprising to see Bangalore hosting five-star conclaves every month or so and that too in the name of fighting hunger. None of the delegates, and I repeat, none of them have ever stepped out of the hotels to even visit and meet the families of those who laid down their lives essentially to sustain flawed policies, including the misplaced emphasis on crop biotechnology. Those talking of hunger and poverty actually have never been ever close to feeling what hunger means. For the educated and the elite, hunger is nothing more than a missed lunch. Biotechnology therefore is a 'technological tool' for them that can help mitigate hunger and malnutrition. But the question that is often missed is: whose hunger and malnutrition they are talking about?
 

Digital Divide
 
At a time when jobless growth proliferates, the government has found an easy way out. Realising the importance of developing an information and knowledge-based rural economy "especially among the ultra poor and socially underprivileged sections of the society," it has embarked upon an ambitious programme to take information communication technology (ICT) to the villages. 
 
Didn't we hear of the woman weaver in remote Tamil Nadu who was able to sell traditional handloom saris at a fabulous price? Haven't we read in the New York Times about the info-kiosks and 'e-Choupal' that Indian Tobacco Company has provided in rural countryside? Don't we know of the government's initiative to encourage farmers to go in for future trading in commodities? We are often told that these opportunities are merely a peep into the enormous potential ICT has in promoting the principles of social inclusion, gender equity and reaching remote areas and remedying regional imbalances. 
 
One such approach is to set up virtual agriculture universities. In Maharashtra, a virtual university for agrarian prosperity has been suggested. Fifty internet kiosks have already been set up as a pilot project in the villages of Baramati and Khed tehsils of Pune district. Like the disbanded 'Training and Visit' (T&V) system of farm extension where each trained farmer was expected to spread the technology to another ten farmers in the village, the virtual university too is embarking upon the same strategy. What is perhaps not known is that despite the backing of the World Bank, the T&V system of agricultural extension had miserably failed in disseminating improved technology. Maharashtra meanwhile has already spent Rs 15 million for the pilot project in 2003-04 and has promised Rs 17.5 million for 2004-05.
 
The new order of empowerment is being hailed as a revolutionary paradigm transformation in the life of the Indian farmer. After all, the 'e-Choupal' project has already benefited over 2.4 million farmers with in six states. In the next ten years, its reach will extend to 100,000 villages and in the process create more than 10 million e-farmers. What will then happen? It will improve the farmers decision making ability, help aggregation of demand by creating a virtual producers cooperative and in the process facilitate access to higher quality farm inputs at lower costs for the farmers.
 
This is more or less what was promised when the country was waking up to the visual medium - the television. The government had then come up with numerous schemes for providing community TV sets in each village with the same aims and objectives. While the TV failed to inspire the farming community to bring about a technological revolution, the fact remains that despite the reach of the visual communication medium, hunger and poverty continued to grow in absolute terms. Who gained in the process were the manufacturers and suppliers of the TV sets.
 
Let us first analyse the motive behind the commodity exchange. At a time when thousands of farmers have committed suicide in the past few years throughout the country, the government's intention of introducing future trading in rice, wheat and other commodities shows the complete bankruptcy in finding alternatives. In India, the average land holding size is 1.47 hectares, and only five to ten percent of the farming population has land holdings exceeding 4 hectares. To expect these farmers, who continue to survive against all odds year after year, to go online and trade seems to be a wild imagination of a stockbroker that has been accepted by apathetic official machinery.
 
It is known that the government is slowly withdrawing from food procurement citing the unwieldy procurement structure and the inefficiency in the system as the main reason. Food procurement however was an essential measure to provide an assured market to the farmers. By withdrawing from food procurement, it is obvious that farmers are being penalised for the inefficiency of the food corporation and various other government agencies, which includes some of the original promoters of the NMCE.
 
At the same time, the government is also withdrawing from providing an assured price to farmers by saying time and again that the minimum support price (MSP) has become the maximum support price. This is a wrong conclusion, and does not hold true. The reality is that the MSP looks higher than the international prices because of the massive agricultural subsidies in the western countries that depress global prices. In the richest trading block - Organisation for Economic Cooperation (OECD) countries - a subsidy of US $ 1 billion is provided every day to agriculture as a result of which the international prices slump.
 
The question is why should the Indian farmers be penalised for the subsidised agriculture in the rich countries? Furthermore, by withdrawing the support prices, the Indian government is only helping the American and European farmers who continue to produce at subsidised prices and then dump the produce in the global markets. The cheap and subsidised commodities that are dumped on the world markets, actually is the key reason for growing rural poverty and loss of livelihoods.
 
Even in America, it is not the farmers who trade at the stock markets. It is the trade, which does that. If only future trading was a viable mechanism to ensure lock in prices of future production or sales, and provide efficient management of price risks through hedging, there was no need for the rich countries to shell out a monumental subsidy for agriculture. If the American farmers, with the level of education and the size of landholdings, do not find future trading to be helpful, it is strange how the Indian government is promoting it as a saviour for the farming community.
 
In reality, future trading is a recipe for sure destruction of the gains achieved after the advent of green revolution. This is a recipe for the elimination of small and marginal farmers, forming 80 per cent of the agricultural workforce, and is meant to pave the way for the smooth entry of the private sector. This is a recipe for further marginalisation of the farming communities. This is a recipe to ensure that India slips back into the dark days of the 'ship-to-mouth' existence.
 
The emergence of 'e-Choupal' is also timed with the withdrawal of safety nets for the farmers. It is coming at a time when the retail sector is fast moving into the rural areas. The real objective of the 'e-Choupals' is to create a direct marketing channel for the promoting company, by what it calls as 'eliminating wasteful intermediation and multiple handling'. It actually aims at harmonising the business pursuits of the promoting company rather than helping the farming community with pro-environment, pro-women and pro-farming systems that lead to sustainable livelihoods.
 
If the retail sector (read supermarkets) is an endeavour for achieving the broader objectives of social and economic development, farmers in the rich and developed countries would not have been driven out of the farm lands. It is a fact that corporate agriculture in collaboration with the retail sector has plundered the natural resource base thereby rendering agriculture unproductive and environmentally-unfriendly. Promoting such a system in India is sure to compound the existing agrarian crisis and lead to some unforeseen socio-economic problems.
 
Setting up a vision for a rural knowledge revolution is certainly not incorrect. But what is needed is a mission that takes advantage of the existing knowledge and wisdom in the rural areas and incorporate strategies that actually help mitigate the existing problems.
Change is not only desirable, but vital. But the time-tested technologies of the past cannot be confined to a dead museum. Take the case of the traditional water harvesting structures. These have been perfected with time, and have incorporated the wisdom of the people who lived in water scare situations. The need is to rebuild these structures, rather than to allow the water tankers mafia to ruin the remarkable traditional system.
 
History tells us that civilisations were nurtured along the rivers, the meandering rivers acting as a lifeline. At the same time the population in the cities drew its food requirements from the adjoining hinterland. The synergy between the cities or towns (call it urban) and the rural areas was therefore economically integrated. This has been gradually dismantled. Instead the entire effort is now to privatise the rivers and lakes, de-link it from the people who protected these water bodies. Similarly, the food supply of the mega cities and urban centres is now being passed into the hands of supermarkets. These highly subsidised retail malls are now moving into the villages.
 
Pushing the farmers and the rural populations into yet another alien 'knowledge' system is unlikely to meet Mahatma Gandhi's dream of a gram swaraj. Mahatma Gandhi realised the strength of the villages and wanted these to be self-reliant. The tragedy is that those who design such massive networks in the name of poor and hungry have actually lost touch with the ground realities. The problems exists somewhere else and we come out with solutions that actually help the corporates garner more profits.
 
It is true that the ICT sector despite massive government funding has only generated not more than 600,000 jobs. In addition, the BPO industry employs some 200,000 people. This is not even a drop in the ocean looking at India's huge crisis in job creation. We are aware that the ICT sector promises to create one million jobs by 2007. It is also a fact that the ICT industry can meet its own obligations from its own resources. The technology is certainly very useful and this writer is not opposed to technology interventions but what has to be immediately checked is the faulty emphasis in promoting the commercial interests of the hardware manufacturers in the name of creating rural livelihoods.
 
It is time to redefine the national priorities. It is time the government first understood the limitations of its own 'knowledge' in grasping the real problems and obstacle in rural development. Talking of steering a job-led growth for the ultra poor with the help of the ICT is like the four blind men trying to figure out the elephant. Jai Lal is one of the millions who constitute the ultra poor. Where is the technology intervention that can help create a livelihood or empower people like him and other under-privileged? And who cares as long as our own livelihood remains protected and is sustained by such glorious statements?? Poverty cannot be removed by providing the poor with mobile phones and knowledge-kiosks whereas hunger cannot be fought by setting up a nationwide network of 'e-Choupals'. If we are honest in fighting hunger and squalor, let us begin by making an effort where it is needed. #
 
Devinder Sharma is an expert on food and trade policy and is based in New Delhi
 

* This article first appeared in "Mainstreaming ICT" a bimonthly produced by One World South Asia. The original article was entitled: "ICT and Rural Livelihoods
Whose livelihoods are we talking about?" (March-April 2005 issue)
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2005/06/30 00:17 2005/06/30 00:17

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