Tuesday, July 29, 2008

The Biggest Issue

By David Brooks

The New York Times

July 29, 2008

Why did the United States become the leading economic power of the 20th century? The best short answer is that a ferocious belief that people have the power to transform their own lives gave Americans an unparalleled commitment to education, hard work and economic freedom.

Between 1870 and 1950, the average American’s level of education rose by 0.8 years per decade. In 1890, the average adult had completed about 8 years of schooling. By 1900, the average American had 8.8 years. By 1910, it was 9.6 years, and by 1960, it was nearly 14 years.

As Claudia Goldin and Lawrence Katz describe in their book, “The Race Between Education and Technology,” America’s educational progress was amazingly steady over those decades, and the U.S. opened up a gigantic global lead. Educational levels were rising across the industrialized world, but the U.S. had at least a 35-year advantage on most of Europe. In 1950, no European country enrolled 30 percent of its older teens in full-time secondary school. In the U.S., 70 percent of older teens were in school.

America’s edge boosted productivity and growth. But the happy era ended around 1970 when America’s educational progress slowed to a crawl. Between 1975 and 1990, educational attainments stagnated completely. Since then, progress has been modest. America’s lead over its economic rivals has been entirely forfeited, with many nations surging ahead in school attainment.

This threatens the country’s long-term prospects. It also widens the gap between rich and poor. Goldin and Katz describe a race between technology and education. The pace of technological change has been surprisingly steady. In periods when educational progress outpaces this change, inequality narrows. The market is flooded with skilled workers, so their wages rise modestly. In periods, like the current one, when educational progress lags behind technological change, inequality widens. The relatively few skilled workers command higher prices, while the many unskilled ones have little bargaining power.

The meticulous research of Goldin and Katz is complemented by a report from James Heckman of the University of Chicago. Using his own research, Heckman also concludes that high school graduation rates peaked in the U.S. in the late 1960s, at about 80 percent. Since then they have declined.

In “Schools, Skills and Synapses,” Heckman probes the sources of that decline. It’s not falling school quality, he argues. Nor is it primarily a shortage of funding or rising college tuition costs. Instead, Heckman directs attention at family environments, which have deteriorated over the past 40 years.

Heckman points out that big gaps in educational attainment are present at age 5. Some children are bathed in an atmosphere that promotes human capital development and, increasingly, more are not. By 5, it is possible to predict, with depressing accuracy, who will complete high school and college and who won’t.

I.Q. matters, but Heckman points to equally important traits that start and then build from those early years: motivation levels, emotional stability, self-control and sociability. He uses common sense to intuit what these traits are, but on this subject economists have a lot to learn from developmental psychologists.

I point to these two research projects because the skills slowdown is the biggest issue facing the country. Rising gas prices are bound to dominate the election because voters are slapped in the face with them every time they visit the pump. But this slow-moving problem, more than any other, will shape the destiny of the nation.

Second, there is a big debate under way over the sources of middle-class economic anxiety. Some populists emphasize the destructive forces of globalization, outsourcing and predatory capitalism. These people say we need radical labor market reforms to give the working class a chance. But the populists are going to have to grapple with the Goldin, Katz and Heckman research, which powerfully buttresses the arguments of those who emphasize human capital policies. It’s not globalization or immigration or computers per se that widen inequality. It’s the skills gap. Boosting educational attainment at the bottom is more promising than trying to reorganize the global economy.

Third, it’s worth noting that both sides of this debate exist within the Democratic Party. The G.O.P. is largely irrelevant. If you look at Barack Obama’s education proposals — especially his emphasis on early childhood — you see that they flow naturally and persuasively from this research. (It probably helps that Obama and Heckman are nearly neighbors in Chicago). McCain’s policies seem largely oblivious to these findings. There’s some vague talk about school choice, but Republicans are inept when talking about human capital policies.

America rose because it got more out of its own people than other nations. That stopped in 1970. Now, other issues grab headlines and campaign attention. But this tectonic plate is still relentlessly and menacingly shifting beneath our feet.

Sunday, July 20, 2008

Generation Gab

By Mike Bierne


July 2, 2008

For those who think media fragmentation and niche marketing have redefined marketing permanently, here's something to chew on.

What if the microscopically splintered youth demo out there right now—recent college grads on down to kids riding the bus to preschool—ends up gelling, melting and solidifying into a uniform power bloc of consumers? And what if, contrary to popular wisdom, they're not self-important, undisciplined individualists riding on digital highs, but a team-playing, risk-averse group that fosters familial bonding? All this would mean that Gen Y actually looks a lot more like, well, AARP. It would mean that the billions of dollars' worth of microtargeted marketing being created right now just could be a . . . waste of time? Then what?

This future vision is, granted, a bit dramatized. But it's the kind that's currently being prophesied—along with many other visions and, notably, corrections to current marketing dogma—by economist, historian, demographer and author Neil Howe.

These days, anybody who was born after 1981 or so gets the benefit, among other things, of a well-worn marketing tag: Gen Y, the Net Generation, the iGeneration, the 9/11 Generation, etc. Howe prefers to call them "millennials." No generation, he argues, is a continuation of the previous one, so Gen Y is an inherent misnomer. The names connote that youth today are Gen X on steroids. They're not. And if you listen to Howe for more than a few minutes, he'll tell you many other things that young consumers are not, often things that brands have been led to believe that they are.

Now is a prophetic time to spend a few minutes with Howe. He has long argued that history is cyclical and, further, that society goes through "turnings," or tectonic shifts in the prevailing cultural mood.If Howe's correct about the cyclical pattern, the fourth turning was due to hit around 2005, and its trigger would be a global terrorism event or an implosion in financial markets that exposes the thinness of private savings and the devaluation of assets. Sound familiar?

What's important for this discussion, however, isn't so much Howe's theories about social crisis—it's not hard to find doomsday prophets these days, nor has it ever been—but how those theories address economic behavior. Howe argues that the generation that comes of age during a crisis—in other words, youthful consumers who are maturing as you read this—is the one that corrects the excesses of those in power and reorders the societal framework.

While it's too early to say whether the War on Terror will be for millennials what World War II was for the G.I. Generation, Howe points out that there's already plenty of evidence that, when it comes to how they consume, millennials resemble seniors far more than Gen Xers.

Howe and longtime co-author William Strauss (who died last December) have published four books about millennials, including Millennials in the Workplace, set for release this fall. From his office in Great Falls, Va., Howe recently spoke at length with Brandweek about what marketers should know about this coveted, and misunderstood, generation of consumers.

Brandweek: Define "millennials" for the marketers who'll be reading this.
Howe: We define millennials as Americans born since the early 1980s. Since we may now be in another generation, we'll say 1982 until sometime recently. We have to wait for some more history to pass before we can define their youngest birth-year boundary. We define a generation as a group of people with certain attitudes and behaviors in common that are different from the generation before it.

BW: Much of what's been said and written about millennials—including, at times, in the pages of our magazine—is negative. They're conceited; they have no loyalty, etc. Why do you think this generation gets such a bad rap?
NH: Every generation has a tendency to focus on what is disappointing about young kids. It's a little bit of the self-congratulatory nature of older generations and an unwillingness to change and adapt to a new set of kids who are behaving differently. It's amazing to me to see Xers in the workplace look disparagingly at entry-level millennials. It goes to show it's tough for any new generation.There also are other things going on. First with the media: If it bleeds, it leads; so people don't focus on the good news. Second, our tolerance for bad behavior is declining faster than the bad behavior itself.

BW: In her book Generation Me, psychologist Jean Twenge contended that college students today were more narcissistic than both boomers and Gen Xers were when they were in school. How does that square with your argument that millennials have more in common with their grandparents' affinity for team building and community?
NH: When you look at a generation, you look at a broad range of indicators: behavior, culture, opinion surveys, how they interact with other generations, what they think of institutions, how they behave within those institutions. So you can't just look at one survey instrument.Also, when you're talking about selfishness or self-oriented behavior, what usually comes to mind from the word "narcissism" is this dysfunctional, self-oriented behavior. But look at this generation. They're making longer-term plans than Xers. This does not indicate the impulsive nature that we associate with self-oriented behavior. You find their risk-taking is down, which is consistent with long-range planning and a desire to not disappoint their parents or their friends. We find a huge increase in team teaching, team grading, community service, service learning—a whole range of activities in which they are acting in team-like ways.And look at how millennials are changing information technology. Boomers individuated by creating the personal computer. Then Gen X was creative on the Internet by going wherever they wanted under any avatar they wanted without being tracked. Where are millennials taking information technology? Instant messaging, chat rooms, texting and, above all, social networking. It's a return to community, but in virtual space. It's surprising how they are recreating community within the context of a new technology.

BW: When marketers try to figure out how to monetize social networks, it's a case of an older generation attempting to understand the mores of a younger one. It's like Hollywood creating movies and TV shows for young kids, though what they're really making is entertainment for what they think kids should be like. Does this have any resonance with your findings?
NH: We came out with a book called Millennials in the Pop Culture and we've consulted with the largest media companies: Viacom, Time Warner and so forth. One problem we identified is the typical culture creator. He contributes to the mismatch [between product and consumer] and is one reason why the pop-culture business often goes through cycles where young people don't buy stuff. People creating pop culture are in their early 30s. That's Gen X. In phase-of-life terms, these people are least likely to have daily contact with teenagers. They're too old to have them as siblings. They're too young to have them as children. Boomers in their 50s have more daily contact with 20-year-olds than Xers do.

BW: Marketers are grappling with media fragmentation and the demand for customizable products, both of which suggest that, right now, individualism is king. Yet you and Strauss have written that, when the next societal crisis arises, it'll most likely be the millennials who respond with personal sacrifice and by building public consensus. What do marketers need to understand better when it comes to the socializing traits and grouping habits of the millennial generation?

NH: It's easy for millennials to express themselves today, but it's done within the context of a generation that enjoys being with each other and enjoys customization as a novel way of forming friendships and forming groups. The social-networking phenomenon is taking place within the context of this incredibly vast and intense and unremitting social immersion experience. This is the most connected generation in world history.The overwhelming, dominant purpose of social network sites is to further intensify the close social networks millennials have with their own lives in school, work or wherever they are. It's important to keep that in mind, because when Xers think about the amount of time millennials spend online, they think of it in Xer ways—how they're doing strange new things and going outside the box. That clearly is not what millennials are doing. Even what they're doing with music is in a social context; they're customizing music to share with others.

BW: Negative stereotypes notwithstanding, we've all heard much about how environmental responsibility, ethics and social consciousness are resonating with young consumers. But are these messages going to strike a chord with millennials as they incur huge college debts and inherit a greater tax burden from previous generations?
NH: Those messages already have struck a chord. Community service has almost become a norm at colleges and high schools. When Gen Xers were that age, it was a form of punishment.We also see an enormous increase in voter participation. The all-time low in the 18-29-year-old vote rate in a presidential election was 1996. Only 35% voted, and that was the last year that that age bracket was entirely filled by Generation X. In 2000, it went up to 42%. In 2004, it went up to 52%. We think in 2008 it could be over 60%. We even think that you will see people in their mid 20s voting as much or more than people in their mid 30s.One other indicator is millennials want to work for companies that do something for the community. The idea of teamwork is not just [to be] with your friends; it's the whole community. That's why you engage in community service; that is why you vote and that's why you want the company you work for to serve the larger community.

BW: If millennials have a propensity to be more community-minded and involved in social causes, does that also mean they'll defer starting careers and families? If so, their peak earning years would start much later in life.
NH: I don't see that. Millennials don't want to keep life on hold while they pursue community work. They want to take part in community-spirited communities while they are pursuing other activities in their lives. They want balanced lives.

BW: Would it behoove a brand to somehow get this sense of community building into their marketing message, then?
NH: Absolutely, along with a positive, upbeat message. Look at the Obama phenomenon on college campuses. He's an interesting millennial indicator. He makes a big deal about being positive, bridging gaps and transcending baby boomer politics. Baby boomers are the parents of many of those college students, and I'm sure Hillary [Clinton] reminds them about what they don't like about politics.The other thing to remember is that millennials think they're special, which is why they accept being sheltered by laws that make Xers uncomfortable [for example, government wiretapping without a court-issued warrant]. An Xer might say: The government thinks I'm vulnerable and can't take care of myself. A millennial would say: I'm special, and government wants to protect me. These themes ought to be part of what marketers are doing.

BW: If we take all these themes in the aggregate, do they suggest anything about millennials'behavior as consumers?
NH: I think that millennials are capable of regenerating the whole notion of the big brand. The idea of the big brand went into decline with the Gen Xers and certainly during the late boomer period. Gen X was a generation that didn't even want to be thought of as a generation, and it had a lot of little niches. There was never a Top 40 group of songs everyone listened to, and the generation is spread out in terms of wealth. They were cynical toward anything that was big, and this gave rise to niche and viral marketing. The whole concept of the Long Tail is perfectly designed for Gen X.With millennials you're returning to the fatter portion of the bell curve. This is a generation that wants to feel that they do have a center of gravity. So you'll see the emergence of huge brands with this generation. Look at [what happened with] Harry Potter. Think of the idea of the big brand as being a dimension of the return to community. On these points of always being positive and believing in big brands, what generation does that remind us of?

BW: The GIs?
NH: Absolutely. They had strong brand loyalty and an almost pathological positivism. "Somewhere Over the Rainbow;" John Kennedy's "let's get this country moving again" and Ronald Reagan's [now-famous 1984 reelection-campaign TV ad] "Morning in America." Those ideas drove boomers crazy. The one thing they remember about GIs is they were always positive, and it's interesting how we see certain elements of this same temperament in the junior sentiment coming today.

BW: Which brands do you see as poised to take advantage of this return to community?
NH: I don't like to talk about specific brands. I can talk about the attributes they should have. They should have a dimension that everyone identifies as a product or service that helps us as a national community in ways beyond what it provides the private buyer. Look at the wiki economy: people are getting together to provide value without payment. They are providing information to assist each other.The kind of brand that will be associated with a positive outlook and role that youth can play in the community will be popular. When you ask millennials what their favorite activity should be, it's helping other kids. That's logical. If kids are so special, then helping the community [becomes a matter of] helping other kids.Millennial brands also will portray kids who are smart and achieving. The whole idea of smartness is coming back. With Xers, that was not true, [especially] when you recall movies like Wayne's World and Bill and Ted's Excellent Adventure. Now, that image has shifted up through people in their 30s with advertisements. Gen X playfully toyed with being dumb. Look at the "for Dummies" books and the Idiot's Guide titles. Millennials won't play with being dumb; they like calling each other smart.Disney is hugely successful with its TV shows and movies in attracting millennials. "High School Musical" was the top selling music CD during 2006. It's a musical where teens are talking about team work and positiveness and being special. A lot of Xers see that movie, and they just can't believe it. You see the same themes in the world of Harry Potter.

BW: Does what you're saying suggest that cause-based marketing should also be a bigger part of the picture for brands?
NH: Yes, but here's the difference. For boomers, cause marketing means being symbolically aligned with an issue. Boomers have always been focused on raising awareness and getting people to reprioritize their objectives in life. We see so many of these boomer commercials. Even oil companies want to save the world and make us think philosophically. That's not the kind of cause marketing that resonates with millennials. They want actual programs that make real changes in people's daily lives. Boomers do stuff that reorients the way people think and deal with the symbolism of issues. They'll talk about being one world and think more about poor people. Millennials are much more motivated by a plan to mobilize people on the Web to buy mosquito nets and get them into the hands where they can actually save lives.

BW: Lots of marketers are trying to figure out how to monetize the Web. Won't that idea repulse your average millennial?
NH: The Xers respect that, but they also expect an ad to be on the seatback tray in a plane. The Xer is always in the marketplace. Millennials don't think of themselves that way. We've seen that in their attitude toward work. They want longer-term jobs with larger institutions or institutions that can take care of them for the long term

BW: Speaking of work, where do you come down on the issue of millennials' supposed lack of loyalty to companies?
NH: One misnomer people have about millennials is they like to change jobs all the time. What they really want is a perfect job where they can do a lot of different things but can stay with an employer who can give them everything they need and provide continuity and security for the long term. They change jobs because they find the employer is not offering that, so they leave. So, even more employers offer short-term benefits. It's a vicious cycle.

BW: If teamwork and community are the millennials' strengths, what are their weaknesses? Anything that brand managers should be wary of?
NH: Weaknesses in the millennial generation will become more apparent as they become older and take over the institutions of this country. One of the traits that faculty at college campuses is talking about is risk-aversion. If you're a journalist and you're interviewing millennials, one of the things they'll do is go to their friends or IM their friends to find out what they think. It's almost as if millennials want to answer as a group, and not as individuals.It's also very hard for them to enter into an adversarial relationship as peers. For instance, it's very hard to get freshman in a college class to debate each other. It was easy for boomers to do that. We could debate each other at the drop of a hat. But millennials' team ethic, which has huge positives, could be a problem for them down the road.

Friday, July 18, 2008

Israel’s Swap Deal With Hizballah – Reflections

By Yoram Ettinger

Straight From The Jerusalem Cloakroom

July 18, 2008

1. Released terrorists, Hate-Education and the Real Middle East. The released terrorists are the product of Hate-Education, which has been the manufacturing-line of homicide bombers. Israeli and Western tolerance of Hate-Education perpetuates terrorism and war. Leaders who promote Hate-Education should be boycotted by western democracies. The positive/enthusiastic reaction – to the released terrorists - by Abu Mazen, Hamas, Lebanon, Syria, Iran and most of the Arab Middle East, constitutes Hate-Education. It represents their most authentic values and strategy in general, and their attitude toward the Jewish State in particular. It represents the unbridgeable gap of values between western democracies and Middle Eastern tyrannies, including the gap in the definition of “peace” and “compliance with agreements.”

2. Leadership. Prime Minister Golda Meir did not put herself in the shoes of a mother. Prime Minister Golda Meir sustained herself in the shoes of a leader. Prime Minister Golda Meir explained her rejection of a PLO-proposed swap (70 Palestinian terrorists for the 11 Israeli athletes during the Munich 1972 Olympic Games): “I shall never accept a proposition, which would transform Jews all over the world into prospective hostages in the hands of Palestinian terrorists!” Being a leader, Golda subordinated her own peace-of-mind to national security interests. Golda was aware that a leader – just like a judge - should disqualify himself if he were involved emotionally/personally in a court case…

3. Leadership VS Followership. Failed leaders follow – rather than shape – public opinion polls. Failed leaders succumb to domestic and external pressure, temptation, emotions.

4. Long-Term VS Short-Term. Leaders do not sacrifice long-term values and strategy on the altar of short-term emotional-diplomatic-political convenience and false-sense of security. Leaders ponder the potential impact of presently-released terrorists upon the escalation of future terrorism.

5. Learn from – don’t repeat – past mistakes. Precedents document rise in terrorism and bloodshed following each Israeli swap of terrorists (for live or dead Israelis), as highlighted by the 1985 swap of 1,500 Palestinian terrorists for 3 Israeli soldiers, which supplied many of the “generals” and “foot soldiers” to the 1987-1992 wave of Palestinian terrorism (1st Intifadah).

6. Terrorists Swap – No Virtue. The willingness to swap terrorists in exchange for civilians/soldiers may be construed as virtue by some Israelis and westerners, but it is construed as vacillation by Arab regimes. Deterrence and determination are the prerequisites for survival and peace in the Middle East. However, the willingness to swap terrorists is defined by Middle Eastern dictionaries as self-destruct appeasement, undermining deterrence, thus causing a setback to stability, security and peace. It constitutes fuel – and not water – to Middle East turbulence and terrorism. Concessions to terrorists, and submission to pressure, breed more terrorism and pressure.

7. Terrorist Swap – A Derivative of World View. Terrorist swaps reflect a world view, which goes through suspension of disbelief, distancing itself from the Real Middle East, while adhering to “The New Middle East” and/or contending that “There’s no military solution to terrorism,” “We’re tired of fighting and winning,” “The price of winning would be too high to both sides,” “Restraint is strength.” It is a reflection of ideological weakness and detachment from the values of Classic Israel, which enhanced the notion of “Can-Do Mentality” “Willingness to pay any price for liberty” and “The sky is not the limit.”

8. If the 2008 terrorist swap is right, could the Entebbe Operation be wrong?

The Coming Activist Age

By David Brooks

The New York Times

July 18, 2008

We’re entering an era of epic legislation. There are at least five large problems that will compel the federal government to act in gigantic ways over the next few years.

First, there is the erosion of the social contract. Private sector firms are less likely to provide health benefits, producing a desperate need for health care reform. Second, there is the energy shortage. Rising Asian demand strains worldwide supply, threatening industry and consumers, and producing calls for a bold energy initiative. Third, there is the stagnation in human capital. During the 20th century, Americans were better educated than the citizens of any other power. Since 1970, that lead has been forfeited, producing inequality and wage stagnation. To compete, the U.S. will require a series of human capital initiatives.

Fourth, there’s financial market reform. In an intricately connected world, even Republican administrations cannot allow big institutions to fail. If government is going to guarantee against failure, then it is inevitably going to get more involved in regulating how businesses are run. Fifth, there’s infrastructure reform. The U.S. transportation system is in shambles and will require major new projects.

All of this means that the next few years will be an age of government activism. You may think, therefore, that this situation is ripe for Democratic dominance. The Democrats are the natural party of federal vigor. Voters prefer Democratic approaches to issues like health care and education by as much as 25 percentage points.

Yet, historically, periods of great governmental change have often been periods of conservative rule. It’s as if voters understand that they need big changes, but they want those changes planned and enacted by leaders who will restrain the pace of change and prevent radical excess.

Two of the most prominent conservative reformers were Benjamin Disraeli and Theodore Roosevelt. Both reframed the political debate so that it was not change versus the status quo, it was unfamiliar change versus cautious, patriotic change designed to preserve the traditional virtues of the nation.

Disraeli inherited a British Conservative Party that was a political club for the landowning class. He created One Nation Conservatism, a reminder that Britain was one community, with a sense of mutual responsibility across classes. Then, at the pinnacle of his career, he embraced reform, expanding the franchise to the socially conservative working class.

Disraeli saw this change as a way to restore ancient glories. Or, as he put it: “In a progressive country, change is constant; and the great question is not whether you should resist change, which is inevitable, but whether that change should be carried out in deference to the manners, the customs, the laws and traditions of a people, or whether it should be carried out in deference to abstract principles, and arbitrary and general doctrines.”

Like Disraeli, Roosevelt was a romantic nationalist. While the more progressive reformers spoke the international language of modernization, Roosevelt spoke the language of highly charged Americanism.

He believed private property was the basis of American greatness. He built his persona around the classic American icons: the cowboy, fighter and pioneer.

He defended his initiatives as the way to maintain the economic and social order. People had enough change in their lives; they were looking for government that could preserve the way things already were. If the trusts threatened the traditional small businessman, he would take on the trusts. If industrialism threatened the natural landscape, he would become a preservationist.

His formula was like Disraeli’s: political innovation to restore traditional national morality. He had an image of an American hero — thrifty, hard-working, vigorous and righteous — and sought to create a Square Deal for that sort of person. “The true function of the state as it interferes in social life,” Roosevelt wrote, “should be to make the chances of competition more even, not to abolish them.”

John McCain’s challenge is to recreate this model. He will never get as many cheers in Germany as Barack Obama, but for a century his family has embodied American heroism. He will never seem as young and forward-leaning as his opponent, but he did have his values formed in an age that people now look back to with respect.

The high point of his campaign, so far, has been his energy policy, which is comprehensive and bold, but does not try to turn us into a nation of bicyclists. It does not view America’s energy-intense economy as a sign of sinfulness.

If McCain is going to win this election, it will because he can communicate an essential truth — that people in a great and successful nation do not want change for its own sake. But they do realize that it’s only through careful reform that they can preserve what they and their ancestors have so laboriously built.

Friday, July 11, 2008

My Plan to Escape the Grip of Foreign Oil

By T Boone Pickens

The Wall Street Journal

July 9, 2008

One of the benefits of being around a long time is that you get to know a lot about certain things. I'm 80 years old and I've been an oilman for almost 60 years. I've drilled more dry holes and also found more oil than just about anyone in the industry. With all my experience, I've never been as worried about our energy security as I am now. Like many of us, I ignored what was happening. Now our country faces what I believe is the most serious situation since World War II.

The problem, of course, is our growing dependence on foreign oil – it's extreme, it's dangerous, and it threatens the future of our nation.

Let me share a few facts: Each year we import more and more oil. In 1973, the year of the infamous oil embargo, the United States imported about 24% of our oil. In 1990, at the start of the first Gulf War, this had climbed to 42%. Today, we import almost 70% of our oil.

This is a staggering number, particularly for a country that consumes oil the way we do. The U.S. uses nearly a quarter of the world's oil, with just 4% of the population and 3% of the world's reserves. This year, we will spend almost $700 billion on imported oil, which is more than four times the annual cost of our current war in Iraq.

In fact, if we don't do anything about this problem, over the next 10 years we will spend around $10 trillion importing foreign oil. That is $10 trillion leaving the U.S. and going to foreign nations, making it what I certainly believe will be the single largest transfer of wealth in human history.

Why do I believe that our dependence on foreign oil is such a danger to our country? Put simply, our economic engine is now 70% dependent on the energy resources of other countries, their good judgment, and most importantly, their good will toward us. Foreign oil is at the intersection of America's three most important issues: the economy, the environment and our national security. We need an energy plan that maps out how we're going to work our way out of this mess. I think I have such a plan.

Consider this: The world produces about 85 million barrels of oil a day, but global demand now tops 86 million barrels a day. And despite three years of record price increases, world oil production has declined every year since 2005. Meanwhile, the demand for oil will only increase as growing economies in countries like India and China gear up for enhanced oil consumption.

Add to this the fact that in many countries, including China, the government has a great deal of influence over its energy industry, allowing these countries to set strategic direction easily and pay whatever price is needed to secure oil. The U.S. has no similar policy, because we thankfully don't have state-controlled energy companies. But that doesn't mean we can't set goals and develop an energy policy that will overcome our addiction to foreign oil. I have a clear goal in mind with my plan. I want to reduce America's foreign oil imports by more than one-third in the next five to 10 years.

How will we do it? We'll start with wind power. Wind is 100% domestic, it is 100% renewable and it is 100% clean. Did you know that the midsection of this country, that stretch of land that starts in West Texas and reaches all the way up to the border with Canada, is called the "Saudi Arabia of the Wind"? It gets that name because we have the greatest wind reserves in the world. In 2008, the Department of Energy issued a study that stated that the U.S. has the capacity to generate 20% of its electricity supply from wind by 2030. I think we can do this or even more, but we must do it quicker

My plan calls for taking the energy generated by wind and using it to replace a significant percentage of the natural gas that is now being used to fuel our power plants. Today, natural gas accounts for about 22% of our electricity generation in the U.S. We can use new wind capacity to free up the natural gas for use as a transportation fuel. That would displace more than one-third of our foreign oil imports. Natural gas is the only domestic energy of size that can be used to replace oil used for transportation, and it is abundant in the U.S. It is cheap and it is clean. With eight million natural-gas-powered vehicles on the road world-wide, the technology already exists to rapidly build out fleets of trucks, buses and even cars using natural gas as a fuel. Of these eight million vehicles, the U.S. has a paltry 150,000 right now. We can and should do so much more to build our fleet of natural-gas-powered vehicles.

I believe this plan will be the perfect bridge to the future, affording us the time to develop new technologies and a new perspective on our energy use. In addition to the plan I have proposed, I also want to see us explore all avenues and every energy alternative, from more R&D into batteries and fuel cells to development of solar, ethanol and biomass to more conservation. Drilling in the outer continental shelf should be considered as well, as we need to look at all options, recognizing that there is no silver bullet.

I believe my plan can be accomplished within 10 years if this country takes decisive and bold steps immediately. This plan dramatically reduces our dependence on foreign oil and lowers the cost of transportation. It invests in the heartland, creating thousands of new jobs. It substantially reduces America's carbon footprint and uses existing, proven technology. It will be accomplished solely through private investment with no new consumer or corporate taxes or government regulation. It will build a bridge to the future, giving us the time to develop new technologies.

The future begins as soon as Congress and the president act. The government must mandate the formation of wind and solar transmission corridors, and renew the subsidies for economic and alternative energy development in areas where the wind and sun are abundant. I am also calling for a monthly progress report on the reduction in foreign oil imports, as well as a monthly progress report on the state of development of natural gas vehicles in this country.

We have a golden opportunity in this election year to form bipartisan support for this plan. We have the grit and fortitude to shoulder the responsibility of change when our country's future is at stake, as Americans have proven repeatedly throughout this nation's history.

We need action. Now.

Mr. Pickens is CEO of BP Capital.

Thursday, July 10, 2008

2008: A Watershed Election?

By John Steele Gordon

The Wall Street Journal

July 10, 2008

Exciting as presidential elections can be, they don't often change things fundamentally. Now and then, however, they can remake the American political landscape for years to come, and the country enters into a new era. Will 2008 be one of those watershed elections? Perhaps, but not in the way that many people think.

Let's look at a little history.

By 1932, the Republicans had been the dominant party in American politics for more than a generation. Only in 1912, when Theodore Roosevelt split the Republicans, did Democrat Woodrow Wilson capture the White House (with only 41.8% of the popular vote). Four years later, despite a successful first term, the advantages of incumbency, and a world war raging in Europe, Wilson barely won re-election. In 1920, the Republicans won a huge victory and were back in the saddle.

Twelve years later, however, the country was sliding ever deeper into the Great Depression and the Republican president, Herbert Hoover, was perceived as having failed. Dour and beaten down by unprecedented events, he was no match for the ebullient Franklin Roosevelt. Roosevelt had run on a fairly conservative platform (he hammered Hoover for failing to balance the budget, for instance). But once in office, he embarked on what was at the time a radically new program, the New Deal. It didn't end the Depression, but it transformed the country's politics, thanks to Roosevelt's personality and formidable political talents.

For the first time, the federal government came to be regarded as having stewardship of the economy and being responsible for maintaining a social safety net. The Republicans, deeply resentful of finding themselves out of power, were also out of alternative ideas. They offered little but a return to the political past – of a less-regulated economy and the ethic of personal self-responsibility – that the American people wanted no part of. The Democrats became the majority party, a position they would hold for nearly 50 years.

Only when Dwight Eisenhower, a war hero who was not perceived as a threat to the liberal agenda, ran on the Republican ticket in 1952 – and when the Democrats self-destructed in 1968 – was it possible for the Republicans to recapture the White House.

But by the late 1970s, it was the liberals who were out of ideas. The American economy was in a shambles, with high inflation, high unemployment and gas lines. The Democratic president, Jimmy Carter, like Hoover before him, was perceived as being unable to handle the situation. Ronald Reagan, running on an explicit platform of tax cuts and smaller government, beat him handily in the 1980 election.

Like Roosevelt, the optimistic, politically and media-adept Reagan remade the political landscape. The Democrats, now just as resentful as the Republicans in the New Deal era, offered only warmed-over liberalism as an alternative. Walter Mondale, Reagan's opponent in 1984, famously said, "Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did." Mondale lost 49 states. Reagan went on to cut marginal tax rates yet again.

Only when Ross Perot split the Republican vote in 1992 could a Democrat win the White House (with just 43% of the popular vote). Reaganesque lower taxes and deregulation sparked an enormous economic boom that has now lasted, with two brief and shallow recessions, for more than 25 years.

Is the 2008 election likely to be a repeat of 1932 and 1980, remaking the political landscape in the process? That's unlikely. For one thing, while the incumbent is unpopular, he is not running. And the economy, while certainly dicey right now, is a long way from the desperate problems of 1932 or the very serious ones of 1980.

Instead, the election this year is between two very different political personalities. John McCain is a moderate conservative and war hero with a solid political record but limited media skills (he still has trouble using a teleprompter) and no excess of charisma. Barack Obama is a young, very charismatic newcomer with virtually no political record but great oratorical talent who promises profound change.

This is very reminiscent of the election of 1896, when William McKinley ran against William Jennings Bryan. McKinley too was a genuine war hero (distinguished service in the Civil War) who then entered politics. He served several terms in the House and became chairman of the Ways and Means Committee. In 1891 he was elected governor of Ohio.

His opponent's political résumé was a lot thinner, with only two back-bencher terms in the House. But at the Democratic convention of 1896, Bryan electrified the crowd with his "Cross of Gold" speech. It instantly became an American classic and propelled him to the nomination at just 36 years old, by far the youngest man ever nominated by a major party. Like Mr. Obama, Bryan promised a new politics aimed to benefit the common man, not the capitalists.

He launched the country's first whistle-stop campaign, giving more than 500 speeches around the country. And at first it worked. The Dow Jones Industrial Average, which had made its debut on May 26 of that year at 40.94, had lost 30% by August, when it stood at 28.48. But the Republicans fought back, utilizing new advertising techniques, and painted Bryan as someone whose populist ideas would wreck the American economy. The Dow began to recover as McKinley picked up support in northern industrial cities, and among ethnic workers who had been previously Democratic. In the end he won with 51% of the popular vote against 47%.

So 1896 turned out to be a watershed election, alright. By rejecting the candidate who advocated change for the candidate who promised moderate conservatism, it made the Republicans the dominant party until 1932.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).

Tuesday, July 1, 2008

We Can Lower Oil Prices Now

By Martin Feldstein

The Wall Street Journal

July 1, 2008

Although most experts agree that financial speculation was not responsible for the surge in the global prices of food and energy, many people remain puzzled about the source of these remarkable price rises. Economics offers a simple supply-and-demand explanation and reason for optimism about the future of commodity prices. In the case of oil, economics also suggests how policy changes today that affect the future could quickly lower the current price of oil.

We all know that rising incomes in China, India and the Gulf states have increased the demand for oil and many other commodities. But how could the modest, one-year rise of these demands lead to 100% increases in the prices of oil and other commodities? Let's take a look first at perishable agricultural commodities.

In the short run, there is little scope for increasing the supply of corn in response to a global increase in demand. For demand and supply to balance – for the market to clear – the price of corn must rise.

If the demand for corn were very price-sensitive, a relatively small increase in price would reduce global demand by enough to offset the initial rise in demand. However, since demand is actually quite insensitive to price in the short run, it takes a very large price rise to bring global demand into line with supply.

Here is a simplified picture of what happened in the past year. The quantity of corn demanded by high-growth countries rose gradually, increasing eventually by an amount equal to, say, 10% of the previous total global level of corn consumption. Since the supply of corn did not increase, the price had to increase enough to reduce corn consumption in other countries by 10%. If it takes a 10% increase in the price to reduce the quantity of corn demanded in the first year by just 1%, it would take a 100% increase in the price of corn to offset the initial 10% rise in the quantity of corn demanded.

In reality, the picture is complicated by the substitution in both supply and demand among different agricultural commodities, and by the role of the corn ethanol program. But the basic explanation holds: With a very low short-run price sensitivity of demand and little scope to raise supply in the short run, even a relatively small increase in corn demand by the high-growth economies can lead to a very large short-run rise in the price of corn.

Fortunately, the price sensitivity of both demand and supply will increase with time. This implies that the rising demand from China and other countries may eventually be accommodated with a price lower than today's level.

The situation for oil is more complex, but the outcome for prices is potentially more favorable.

Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise.

There are of course considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner's decision – and therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a role. But the fundamental insight is that owners of oil will adjust their production and inventories until the price of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to rise faster, they'll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds.

The relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil.

Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

Of course, a rise in the spot price of oil triggered by a change in expectations about future prices will cause a decline in the current quantity of oil that consumers demand. If current supply and demand were initially in balance, the OPEC countries and other oil producers would respond by reducing sales to bring supply into line with the temporary reduction in demand. A rise in the expected future demand for oil thus causes a current decline in the amount of oil being supplied. This is what happened as the Saudis and others cut supply in 2007.

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

For example, increases in government subsidies to develop technology that will make future cars more efficient, or tighter standards that gradually improve the gas mileage of the stock of cars, would lower the future demand for oil and therefore the price of oil today.

Similarly, increasing the expected future supply of oil would also reduce today's price. That fall in the current price would induce an immediate rise in oil consumption that would be matched by an increase in supply from the OPEC producers and others with some current excess capacity or available inventories.

Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.

Cries in the Dark

By: Niel King Jr.

The Wall Street Journal

June 30, 2008

The oil shock of 1973 came and went. So did the panic after the Iranian revolution six years later, when oil prices shot to record highs. Gone, too, is the brief flurry of fear that followed Iraq's invasion of Kuwait in 1990
After each, voices in Washington that cried out for big changes in U.S. energy policy were slowly drowned out. James Schlesinger, the first U.S. energy secretary, has said for decades that when it comes to energy policy, the U.S. toggles between complacency and panic.

Will it be different this time around?

With oil soaring above $130 a barrel and fears spreading of a long-term supply crunch, a new cadre of energy Cassandras in Washington argues that America faces deep and potentially wrenching challenges that no amount of gas-tax holidays or rhetorical attacks on speculators and big oil producers will help fix.

From the Pentagon to Capitol Hill, some often lonely voices are warning of big shocks to come if the U.S. doesn't wake up. Not all of them point to the same core problem, however. Nor do the proposed solutions dovetail neatly. But they all agree that the main challenge is to overcome the complacency without triggering the panic.

Here is a look at four of these voices:

Mr. Peak Oil

Back in the halcyon days of March 2005, when oil was at $54 a barrel, Rep. Roscoe Bartlett stood on the House floor to give the first of many lonely speeches.

The Maryland Republican -- son of a tenant farmer, holder of 30 patents, trained physiologist, former dairy farmer -- knew the speech would win neither votes nor applause from the commuters and farmers who populate his district. But he had a message to impart: The world has less and less oil to offer, he told the near-empty House chamber. The age of cheap energy is ending. And if the U.S. didn't start adapting, it was in for a shock.

Not much has changed since then, except that the U.S. is now using more oil every day -- about 20 million barrels a day, according to the Energy Department -- and it costs well over double what it did then.

"The tumor has now grown to where it will require even more radical surgery," says the rumpled 82-year-old father of 10, who carpools 100 miles a day in his Prius. He was the first member of Congress to own one, he says.

Rep. Bartlett is Mr. Peak Oil in the U.S. Congress, which also makes him perhaps the loudest energy-shock spokesman on Capitol Hill. Every few weeks, Rep. Bartlett hauls his thick stack of huge charts -- around 30 in all -- over to the House floor for his after-hours lecture for the viewers of C-Span. In the past three years, he has lectured the nation 42 times on how ebbing oil supplies will bring a big jolt to the U.S. economy.

One of his favorite placards shows "The World According to Oil," with every country's size based on its oil holdings. Saudi Arabia is a goliath, while Europe is barely a speck. Another shows how major oil discoveries petered out in the early 1980s, just as consumption resumed its upward tear.

The lectures have earned him a clutch of followers. He now heads a Peak Oil Caucus of like-minded lawmakers -- six Republicans and eight Democrats. They have sponsored a resolution, still stalled in committee, calling for a "Man on the Moon" project to develop new fuels and wean the nation off oil.

Two years ago, Rep. Bartlett got to meet with President Bush in the Oval Office, where he gave a condensed one-on-one version of his peak-oil talk. "He was polite, attentive," Mr. Bartlett says of Mr. Bush. "He said 'Thank you.' "

Mr. Bartlett often stands apart from his fellow Republicans on the energy front. He voted for last year's energy bill, one of just 26 House Republicans to do so, but only after voting against an amendment to open Alaska's Arctic National Wildlife Refuge to oil development -- a top Bush administration objective.

Declarer of Independence

James Woolsey, a Beltway Democrat-turned-Republican, is plotting to go "off-grid" and tools around town in a plug-in hybrid with a bumper sticker that says "Osama Bin Laden Hates This Car."

CIA director under President Clinton and President Jimmy Carter's secretary of the navy, Mr. Woolsey is himself a hybrid: part switchgrass-loving hipster and part national-security hawk who backed the Iraq invasion and considers Saudi Arabia to be a promoter of Islamic extremism.

Mr. Woolsey's mantra, though, is that the U.S. needs to break its dependence on Middle Eastern oil. It's a forlorn quest that goes back decades.

But Mr. Woolsey is convinced that the U.S. can and must break that reliance. And as Sen. John McCain's top energy adviser, he's taking the quest for "energy independence" straight into the presidential campaign.

Mr. Woolsey says he first got "ticked off" over energy when he got stuck in a gas line in 1973 -- "and I'm still ticked off." What also peeves him are critics who snipe at the call for independence without understanding it.

No, the U.S. can't cut itself off from all oil imports or turn itself into an "economic hermit," he says. "But we can destroy oil's monopoly over transportation."

Cars, trucks and planes gobble up nearly seven out of every 10 barrels of oil consumed in the U.S., the Energy Department says. Mr. Woolsey wants to chop that way down.

A frenetic talker with a shiny pate, Mr. Woolsey insists that America's salvation lies mainly in battery-powered cars and alternative fuels. A McCain administration, he says, would assure that all new cars could use any mix of fuels and would push for large tax credits for plug-in hybrids.

At least he practices what he preaches. Beyond his Prius, Mr. Woolsey has photo-voltaic panels on the roof of his Maryland house -- and even on his laptop case. At times, he boasts, he can go down into his basement and see that he is giving power back to the Maryland grid. Next up: a small wind turbine on his roof and a plot of biofuel-worthy camelina in his yard.

Perhaps because of his own mixed political lineage, Mr. Woolsey is known for bringing odd birds together. His Set America Free Coalition, a group dedicated to weaning the U.S. off foreign oil, runs the gamut from conservative evangelical Gary Bauer to prairie liberals like Tom Daschle, the former senator from South Dakota. Like Rep. Bartlett, he also takes some un-Republican positions, such as opposing oil drilling in the Alaskan wildlife refuge.

He has a name for the odd coterie he sees congealing around the energy issue: "tree-huggers, do-gooders, sodbusters and cheap hawks." And he considers himself a part of each.

Wolf in the Hen House

Alexander "Andy" Karsner, the Bush administration's assistant secretary for energy efficiency and renewable energy, is having another typical day.

He has just ducked out of a meeting with a clutch of federal utility
officials. He's off soon to a high-level session on the growing controversy over food vs. fuel. There are meetings later in the day on efforts to boost the nation's wind-power supply. And outside his office at the Energy Department, all along Independence Avenue, truckers miffed over soaring diesel prices are blaring their horns.

"Yeah, burning gas as they honk around town," Mr. Karsner says of the truckers.

Mr. Karsner, a former CEO of energy consulting firm Enercorp., takes a far gloomier view than most within the Energy Department on the challenges the country faces. When he looks over the horizon, he sees slumping oil supplies and soaring demand. "This isn't fusion," he says of the world's reliance on crude. "This is a finite resource."

What drives him, he says, is "the very real future" that his three young daughters face -- a future that he says puts into question "the quality of life and the inheritance of the American dream."

Since he arrived at the DOE in early 2006, Mr. Karsner's main fight has been to push for the quick commercialization of alternative technologies, from solar to biomass and batteries. Despite early opposition within the department, in the past two years he has been the main force behind ramping up the level of grants and loans available to companies bringing new technologies to market.

"Andy is totally focused on action," says Reid Detchon, who runs the energy program at the United Nations Foundation and who otherwise gives the administration an overall "F" for its environmental legacy. "He could have been a place holder," Mr. Detchon says, "but he has just been relentless in pressing a very active agenda for commercialization of renewable technologies."

After just over two years on the job, Mr. Karsner worries that the federal government remains too stodgy to confront what he calls "the asymmetric security threats" posed by the huge amounts of oil the U.S. imports -- and the billions in dollars it ships to the Middle East as payment.

"Every bit of money that goes away is a lost opportunity for money we could have invested here," he says.

Mr. Karsner, who says he will leave government by January, also is realistic about how much more the Bush team can hope to do. "Most of what we are doing right now," he says, "is assuring that our successors will be more successful than we are."

Canary in the Mine

For a man with a disturbing message, Robert Hirsch couldn't be milder. Crisp, perfectly combed, monotone in delivery, the former nuclear engineer reminds one of a retired MIT professor kicking back on his Cape Cod porch.

But Mr. Hirsch has become a prophet of sorts for the country's growing legions of peak-oil converts who know him mainly as the lead author of the 2005 Hirsch Report. The actual title of the 91-page tome, ordered up but then shunted aside by the Energy Department, he says, was "Peaking of World Oil Production: Impacts, Mitigation, & Risk Management."

Jim Slutz, acting deputy assistant secretary for fossil energy, says the study was never meant to represent the views of the DOE and was taken out of context by peak-oil adherents.

The report, the first of its kind commissioned by the federal government, didn't mince words: The U.S. had to move quickly to prepare for an inevitable long-term supply crimp as world oil output begins to slump. "Without timely mitigation, the economic, social, and political costs will be unprecedented," the report concluded. "Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking."

Mr. Hirsch says he has learned a few things since the report came out.

For one, he has revamped his view that the world would hit a sharp peak in production, followed by rapid output declines. Instead, like many in the industry itself, he says world-wide oil production will stick to a sustained plateau -- driving up prices as demand continues to rise. "We have already been on a plateau for sometime," he says.

He also learned that the Bush administration wasn't very keen to hear his gloomy message on long-term oil supplies. "The message came from DOE headquarters that we could work on ramification issues but not on peak oil itself," he said. There are now signs -- among them the bracing views of Mr. Karsner at the DOE -- that the administration is leaning toward a less rosy view of the world's energy outlook.

Mr. Hirsch's career has covered the spectrum from head of fusion research at what was then known as the Atomic Energy Commission to a senior post in the exploration and production department at oil company ARCO, which is now a part of BP PLC.

But he considers his current work as a private consultant equally important. As he pounds on doors around Washington and across the country, he finds that more and more of them are swinging open. He lectured a large group of intelligence officers from around the world this spring. He has traveled several times to New York to sit down with investment-fund managers. He briefed the energy teams of Sens. Hillary Clinton, Barack Obama and John McCain.

"There is no question that serious concern is germinating," he says. "It just hasn't taken root yet and begun to grow."