Economy and The Presidential Elections

It seems that during every presidential election year we hear that jobs and the economy will be pivotal issues. It's commonly assumed that an incumbent president has little to worry about if the economy is good and there are lots of jobs. However, if the opposite holds true, he should prepare for life on the rubber chicken circuit.

I decided to examine this common wisdom to see if it holds true, and to see what it can tell us about the upcoming election between George W. Bush and John Kerry. Since 1948 there have been eight presidential elections that have pitted an encumbent versus a challenger. Out of those eight, I chose to examine six elections. I decided to disregard two elections where the challenger was considered too extreme to be elected: Barry Goldwater in 1964, and George S. McGovern in 1972. Out of the six remaining presidential elections, incumbents won three and challengers won three.

To see what impact jobs and the economy had on the economy, we'll consider two important economic indicators: the growth rate of real GNP (the economy) and the unemployment rate (jobs). We'll compare the two-year vs. the four-year and previous four-year performance of those variables in order to compare how "Jobs & The Economy" performed during the incumbents presidency, and how it performed relative to the previous administration. First we'll look at the performance of "Jobs & The Economy" in the three cases where the incumbent won.

Out of our six presidential elections, we had three where the incumbent won. We'll look at those three, starting with the percentage of the electoral vote each candidate collected.

    1956: Eisenhower 57.4%, Stevenson 42.0%

    Real GNP growth (Economy):
    Two Year: 4.54%
    Four Year: 3.25%
    Previous Administration: 4.95%

    Unemployment Rate (Jobs):
    Two Year: 4.25%
    Four Year: 4.25%
    Previous Administration: 4.36%

    Although Eisenhower won in a landslide, the Economy had actually performed better under the Truman administration than it did during Eisenhower's first term. Real GNP, however, grew at an amazing 7.14% per year in 1955, which certainly helped Eisenhower get reelected.

    1984: Reagan 58.8%, Mondale 40.6%

    Real GNP growth (Economy):
    Two Year: 5.85%
    Four Year: 3.07%
    Previous Administration: 3.28%

    Unemployment Rate (Jobs):
    Two Year: 8.55%
    Four Year: 8.58%
    Previous Administration: 6.56%

    Reagan won in a landslide, which certainly had nothing to do with the unemployment statistics. The economy came out of recession just in time for Reagan's reelection bid, as real GNP grew a robust 7.19% in Reagan's final year of his first term.

    1996: Clinton 49.2%, Dole 40.7%

    Real GNP growth (Economy):
    Two Year: 3.10%
    Four Year: 3.22%
    Previous Administration: 2.14%

    Unemployment Rate (Jobs):
    Two Year: 5.99%
    Four Year: 6.32%
    Previous Administration: 5.60%

    Not quite a landslide, we see quite a different pattern than the other two incumbent victories. Here we see fairly consistent economic growth during Clinton's first term as President, but a consistently improving unemployment rate. It would appear that the economy grew first, then the rate of unemployment decreased, which we would expect since the unemployment rate is a lagging indicator.

If we average out the three incumbent victories, we see the following pattern:

    Incumbent 55.1%, Challenger 41.1%

    Real GNP growth (Economy):
    Two Year: 4.50%
    Four Year: 3.18%
    Previous Administration: 3.46%

    Unemployment Rate (Jobs):
    Two Year: 6.26%
    Four Year: 6.39%
    Previous Administration: 5.51%

It would appear then from this very limited sample that voters are more interested in how the economy has improved during the tenure of the presidency than they are in comparing the performance of the current administration with past administrations.

We'll see if this pattern holds true for the three elections where the incumbent lost.

Real GNP Growth
Clinton's 2nd Term: 4.20%
2001: 0.5%
2002: 2.2%
2003: 3.1%
2004: 4.2% (First quarter) 37 Months Under Bush: 2.10%
Last 15 Months: 3.32%

and secondly, the average unemployment rate:

The Unemployment Rate
Clinton's 2nd Term: 4.40%
2001: 4.76%
2002: 5.78%
2003: 6.00%
2004: 5.63% (First quarter) 37 Months Under Bush: 5.51%
Last 15 Months: 5.92%

We see that both real GNP growth and the unemployment rate have been worse under the Bush administration than they were under Clinton in his second term as President. As we can see from our real GNP growth statistics, the growth rate of real GNP has been rising steadily since the recession at the beginning of decade, whereas the unemployment rate is continuing to get worse. By looking at these trends, we can compare this administration's performance on jobs and the economy to the six we have already seen:

1. Lower Economic Growth than the Previous Administration: This occured in two cases where the incumbent won (Eisenhower, Reagan) and two cases where the incumbent lost (Ford, Bush)
2. Economy Improved In the Last Two Years: This occured in two of the cases where the incumbent won (Eisenhower, Reagan) and none of the cases where the incumbent lost.
3. Higher Unemployment Rate than the Previous Administration: This occured in two of the cases where the incumbent won (Reagan, Clinton) and one case where the incumbent lost (Ford)
4. Higher Unemployment Rate in the Last Two Years: This occured in none of the cases where the incumbent won. In the case of the Eisenhower and Reagan first term administrations, there was almost no difference in the two-year and full-term unemployment rates, so we must be careful not to read too much into this. This did, however, occur in one case where the incumbent lost (Ford).

While it may be popular in some circles to compare the performance of the economy under Bush Sr. to that of Bush Jr., judging by our chart they have little in common. The biggest difference is that Dubya was fortunate enough to have his recession right at the beginning of his presidency, while the senior Bush was not so lucky. The performance of the economy seems to fall somewhere in between the Gerald Ford administration and the first Reagan administration. That, coupled with all the non economic issues such as the war in Iraq, makes it difficult to tell if George W. Bush will end up in the "Incumbents Who Won" or the "Incumbents who Lost" column. As of May 7, 2004, Internet trading site Tradesports.com gives George W. Bush a 60% chance of winning the upcoming election, showing that the betting public is split on the President's chances as well.

Banks in Central Europe

Herbert Stepic could qualify as the grand old man of central European banking, and not just because of his avuncular beard: at Austria’s Raiffeisen Bank (now RBI) he has been the face of its foreign business since the 1970s. RBI’s subsidiaries now range over 16 former communist countries including Russia and last year yielded around €930m ($1.3 billion) in pre-tax profits. He is bullish about the potential for banking in the region, having just bought Polbank, a Polish retail bank, which he says fills “the last gap” in his diversified portfolio.

Only UniCredit of Italy has a comparable spread, if its banks in the Baltic states and Turkey are included. UniCredit calculates that, by assets, it is the biggest regional player. Erste Bank, which is Austrian like RBI, has more concentrated market power. Through its subsidiaries it has around a quarter of the retail markets in the Czech Republic, Slovakia and Romania.

The region is undoubtedly promising. For 2011, RBI predicts GDP growth of 3.9%, more than double the euro area’s 1.8%. Each group insists it is well placed to profit from the upswing. UniCredit points to its exposure to Russia, Turkey and Poland, which it says combine size with low banking-sector volatility. The trio accounts for 57% of the Italian bank’s regional revenues.

A handful of other foreign banks have a presence in one or two central European countries, but they lack a grand regional strategy. Intesa San Paolo of Italy, for example, owns the biggest bank in Serbia and the second-biggest in Croatia and Slovakia. KBC, a Belgian banking and insurance group, owns the biggest bank in the Czech Republic and the second-biggest in Hungary. It is expected to hang on to those but is planning to sell its banking interests in Russia, Serbia and Slovenia.

Two decades after the fall of the Berlin Wall, Erste, RBI and UniCredit are benefiting from their early commitment. Each has been led by a man with a zest for the place. In Austria, Andreas Treichl, still head of Erste, and Mr Stepic at RBI acquired banks early on in neighbouring countries and never looked back. Alessandro Profumo, then head of UniCredit, was early into Poland and later bought Germany’s HypoVereinsbank, which owned Bank Austria Creditanstalt, the market leader.

These men had the foresight, during the global banking crisis, to keep their banks engaged in the region, with a little help from their home governments, the European Commission and the European Bank for Reconstruction and Development. Together they developed a voluntary pact known as the Vienna Initiative, to keep money flowing in the European Union’s eastern states. It is paying dividends today.

There are some clouds. The recoveries in Hungary and Romania may falter and the Polish economy could overheat. Mr Stepic reckons the biggest irritant is bank windfall taxes imposed by Austria and Hungary, based on balance-sheet size. Other countries will follow, perhaps with performance-based levies. But old hands like Mr Stepic seem to relish an obstacle race.

Greece and the Euro

It Was a year ago that the European Union produced its big bazooka to quell the euro area’s sovereign-debt crisis: a €750 billion fund to safeguard the single currency, following within days of the €110 billion bail-out of Greece. It did not work. Ireland has since been bailed out, and a rescue of Portugal is in the works. Greece looks closer than ever to defaulting, or at least to having its debt restructured.

After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers (including Greece's man, George Papaconstantinou, pictured above) in Luxembourg on May 6th was promptly leaked.  Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".

Indeed, the idea of Greece giving up the euro has now generally been accepted as nonsense, but not before another upheaval in the markets (Greece was downgraded again by Standard & Poor's yesterday). The notion of Greece leaving the EU was “stupid”, declared Jean-Claude Juncker, the prime minister of Luxembourg (who presides over the euro area’s group of finance ministers), after hosting the meeting that his officials denied was taking place. Mr Juncker is, after all, the man who argued against transparency in decision-making, saying he was all for "secret, dark debates". He may think this is a sign of seriousness in economic policy, but this weekend he came across as incompetent.

It is possible that the meeting caused such confusion that the ministers felt compelled to rule out one option that  is being discussed more and more openly: restructuring Greek debt because of the country's inability to repay its loans, or even to balance its books, as austerity measures worsen the country’s recession.

So for now, it is the EU’s rescue plan that is being restructured. “We think that Greece does need a further adjustment programme”, said Mr Juncker. The details will be worked out at a meeting of finance ministers next week. The country is in no state to start tapping back into markets next year, as envisaged in its current bail-out plan. So European countries are likely to extend more assistance to Greece.

The options include giving it more time to meet its deficit-reduction targets (its budget deficit was 10.5% of GDP last year, a long way off its 8.1% goal), softening the terms for its current bail-out (by again reducing the interest rate or again stretching out its repayment schedule), issuing new loans, or having the EU buy new Greek bond issues in future. Mr Papaconstantinou suggested this last option was under active discussion. Ireland hopes it, too, will benefit from the rethink on Greece.

Plainly, the crisis requires fresh thinking. But so far the EU remains doggedly on its year-old path. First, do what is necessary, but no more than that, to avert a financial collapse in euro-area member states. And second, play for time in the hope that troubled economies will start to grow out of their difficulties, or at least until Europe’s banking sector strengthens sufficiently to cope with the losses on restructured government debt. Above all, push the problem beyond the political horizon of the euro area's main leaders: the 2012 presidential election in France, and the 2013 parliamentary election in Germany.

Australia could become a model nation to be The next Golden State

Imagine a country of about 25m people, democratic, tolerant, welcoming to immigrants, socially harmonious, politically stable and economically successful; good beaches too. It sounds like California 30 years ago, but it is not: it is Australia today. Yet Australia could become a sort of California—and perhaps a still more successful version of the Golden State.

It already has a successful economy, which unlike California’s has avoided recession since 1991, and a political system that generally serves it well. It is benefiting from a resources bonanza that brings it quantities of money for doing no more than scraping up minerals and shipping them to Asia. It is the most pleasant rich country to live in, reports a survey this week by the OECD. And, since Asia’s appetite for iron ore, coal, natural gas and mutton shows no signs of abating, the bonanza seems set to continue for a while, even if it is downgraded to some lesser form of boom (see article). However, as our special report in this issue makes clear, the country’s economic success owes much less to recent windfalls than to policies applied over the 20 years before 2003. Textbook economics and sound management have truly worked wonders.

A flash in the pan?

Australians must now decide what sort of country they want their children to live in. They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate. California, for many people still the state of the future, may hold some lessons. Its history also includes a gold rush, an energy boom and the development of a thriving farm sector. It went on to reap the economic benefits of an excellent higher-education system and the knowledge industries this spawned. If Australia is to fulfil its promise, it too will have to unlock the full potential of its citizens’ brain power.

Australia cannot, of course, do exactly what California did (eg, create an aerospace industry and send the bill to the Pentagon). Nor would it want to: thanks to its addiction to ballot initiatives, Californian politics is a mess. But it could do more to develop the sort of open, dynamic and creative society that California has epitomised, drawing waves of energetic immigrants not just from other parts of America but from all over the world. Such societies, the ones in which young and enterprising people want to live, cannot be conjured up overnight by a single agent, least of all by government. They are created by the alchemy of artists, entrepreneurs, philanthropists, civic institutions and governments coming together in the right combination at the right moment. And for Australia, economically strong as never before, this is surely such a moment.

What then is needed to get the alchemy going? Though government should not seek to direct the chemistry, it should create the conditions for it. That means ensuring that the economy remains open, flexible and resilient, capable, in other words, of getting through harder times when the boom is over (a sovereign-wealth fund would help). It means maintaining a high rate of immigration (which started to fall two years ago). It means, above all, fostering a sense of self-confidence among the people at large to bring about the mix of civic pride, philanthropy and financial investment that so often underpins the success of places like California.

Many Australians do not seem to appreciate that they live in an unusually successful country. Accustomed to unbroken economic expansion—many are too young to remember recession—they are inclined to complain about house prices, 5% unemployment or the problems that a high exchange rate causes manufacturing and several other industries. Some Australians talk big but actually think small, and politicians may be the worst offenders. They are often reluctant to get out in front in policymaking—on climate change, for instance—preferring to follow what bigger countries do. In the quest for a carbon policy, both the main parties have chopped and changed their minds, and their leaders, leaving voters divided and bemused. There can be little doubt that if America could come to a decision on the topic, Australia would soon follow suit.

Its current political leaders, with notable exceptions, are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture. Little legislation of consequence has been passed since 2003. A labour-market reform introduced by the Liberals was partly repealed by Labor. A proposed tax on the mining companies was badly mishandled (also by Labor), leading to a much feebler one. All attempts at a climate-change bill have failed. The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults. Instead of pointing to the great benefits of immigration—population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years—the two parties pander shamelessly to xenophobic fears about asylum-seekers washing up in boats.

None of this will get Australians to take pride in their achievements and build on them. Better themes for politicians would be their plans to develop first-class universities, nourish the arts, promote urban design and stimulate new industries in anything from alternative energy to desalinating water. All these are under way, but few are surging ahead. Though the country’s best-known building is an opera house, for example, the arts have yet to receive as much official patronage as they deserve. However, the most useful policy to pursue would be education, especially tertiary education. Australia’s universities, like its wine, are decent and dependable, but seldom excellent. Yet educated workers are essential for an economy competitive in services as well as minerals. First, however, Aussies need a bit more self-belief. After that perhaps will come the zest and confidence of an Antipodean California.

Japan's Economy Post Quake

On May 13th Yoshihiro Murai, governor of the tsunami-stricken prefecture of Miyagi, received an angry petition from the bosses of a co-operative that has long controlled some of the richest fishing grounds off the coast of north-eastern Japan. Their slogan: “We won’t let fishermen be turned into salarymen.” They were responding to his proposal that, in return for money to rebuild their shattered livelihoods, they should let private firms fish in Miyagi’s waters. Mr Murai, a former pilot, was undeterred by their protests, noting that with most of them over 60, the industry risked dying out anyway. Later he told The Economist that deregulation of Miyagi’s coastline should serve as a model for reform nationwide. “There’s always pain when there’s revolution,” he said.

That resolve has become more common since the earthquake and tsunami of March 11th and the subsequent nuclear crisis jolted Japanese citizens’ faith in their country and those who run it. The question now is whether the reformist zeal will stop at the rebuilding of Tohoku, the devastated region in the north-east, or go further, to solve the problems of overcapacity, high public debt and deflation that were plaguing Japan long before the disaster.

The speed of the clear-up is raising hopes that the economy will prove resilient after the initial shock. Industrial production plunged by 15.5% between February and March, a far steeper drop than the previous monthly record of 8.6%, in February 2009 not long after Lehman Brothers’ bankruptcy. Figures this week showed that GDP fell at an annual rate of 3.7% in the first quarter compared with the last three months of 2010, pushing the economy technically back into recession. Moreover, the decline in output in late 2010 was 3% rather than the previous estimate of 1.3%. But private economists are forecasting a pick-up in the second half of the year, which would be a big improvement on what happened after Lehman.

Recovery in stricken Tohoku has been quicker than many had expected. Nine out of ten manufacturing firms damaged by the disaster hope to restore output to pre-crisis levels by mid-summer, the government says. After a heroic effort by Renesas Electronics, a quake-damaged chip company whose microcontrollers are vital for running many cars, hard-hit Toyota is now expecting to be back to normal production by the autumn.

Electricity supply in Tokyo, thrown into chaos after the Fukushima Dai-ichi nuclear plant and other generators were knocked out by the quake and tsunami, is also being restored, which will further boost the revival. There have been no blackouts since March 29th. Tokyo Electric Power (TEPCO), the utility that owns the Fukushima plant, expects peak capacity to reach 55-56 gigawatts this summer, enough for a small surplus if it is not too hot.

Beyond Tokyo, doubts linger over possible losses of power during the summer because only 19 of the country’s 54 nuclear reactors are in service. Many of those closed for routine maintenance require approval from local governors to be restarted, but with the Fukushima accident still so fresh in people’s minds, it is touch and go whether they will get it. However, companies and households have shown a willingness to curb demand during peak hours, which the government hopes will ward off blackouts.

Another bright spot is that consumers may be perking up. Although there was a record plunge in confidence in April, the “Golden Week” holiday in early May produced an unexpected flurry of tourism. “It is the first time I have been happy in a traffic jam,” quipped Masaaki Kanno, chief economist at J.P. Morgan in Tokyo.

But if the private sector is putting its back into reconstruction, the public sector is being less heroic. The government has passed a ¥4 trillion ($50 billion) supplementary budget for cleaning up the debris and other urgent tasks. But there is a political tug-of-war over a proposal to spend an extra ¥10 trillion on reconstructing and revitalising Tohoku, a lagging region even before the disaster. That public spending will be vital to ensure a strong rebound in the national economy.

Even if Naoto Kan’s government, which suffers from low poll ratings and divisions in parliament, can prevail on the extra budget, there are doubts about whether his leadership is strong enough to shake the economy out of two decades of low growth and rising debt. On May 17th the prime minister postponed a decision on whether to join talks to form a free-trade area called the Trans-Pacific Partnership. That was aimed at reducing the loss of manufacturing jobs to Asia, which is hollowing out Japan’s industrial base and sapping tax revenues.

Another worry is whether Mr Kan can push through a reform of the fiscal system to help ease strains on the public finances. Polls show that the appetite for raising the consumption tax to help share the burden of reconstruction, which was strong shortly after the crisis, is now waning.

Despite these doubts about the politics of reform, Mr Murai is not alone in calling for a decisive break with the past. Within the Ministry of Economy, Trade and Industry (METI), revised growth plans are being prepared that an official says would enable small power-producers to increase their contribution to the grid, encourage more renewable energy and introduce smart metering to stimulate conservation. Officials believe that a focus on green technologies could give new impetus to Japan’s economy. Some think TEPCO should be put through bankruptcy while at the same time Tokyo’s energy market should be opened to more competition. The government has not gone that far but on May 18th Mr Kan hinted that the monopolistic power of electrical utilities might be reviewed, which could lead to the separation of power generation and distribution.

There is, says one METI official, a change of mood. “Before March 11th the goal of Japan was not that clear. Now it’s much clearer.” At present most efforts are being focused on recovering from the disaster. But there is reason to hope that energy may be directed to finding a new way forward for an economy that grows mainly because of foreign trade, generates insufficient demand at home and has been unable to find a productive use for the oodles of spare cash that sits on private balance-sheets.

There is something awe-inspiring about the Japanese on a mission. During Golden Week holidays this month, thousands of volunteers helped to sift through the muddy wreckage left by the March tsunami. Stricken roads, bullet trains and factories have returned to normal with astonishing speed. In people’s ardour to rebuild, once-taboo ideas are emerging on how to reform and deregulate not just the damaged areas but the country at large. The government urgently needs to develop a sense of mission, too.

The combined power of a quake, tsunami and full-scale nuclear accident has jolted whatever sense of complacency the Japanese had about the resilience of their country. The ham-fisted efforts of Tokyo Electric Power (TEPCO) to stem the crisis at the Fukushima Dai-ichi nuclear-power plant have exposed the company for what it is: an inept monopoly so big it could co-opt or run rings around its regulators. It should be broken up. Meanwhile, the smashed-up fishing fleets and sea-swamped rice paddies in the north-east have prompted discussion on bringing private investment into these heavily protected areas which no longer provide a future for the young. Many are championing the idea of special economic zones in the north-east, which would free the area from the cat’s cradle of rules imposed from Tokyo that hamper free enterprise. All of these are good ideas. But they will wither unless the central government throws its weight squarely behind them.

For much of the crisis, Naoto Kan, the prime minister, has been a sadly withdrawn figure. Yet when he does show leadership, the public responds. His popularity, though low, rose this month after he unexpectedly pressed for the closure of the nuclear-power plant nearest to Tokyo because it sits on a fault line. He has won plaudits for suspending plans to build more nuclear facilities. No doubt he could do more to accelerate an emergency ¥10 trillion ($123 billion) plan for rebuilding damaged parts of the Tohoku region if he were not faced by a “Bring Down Kan” campaign within the opposition and even his own party. But he must get around such pettiness.

Carpe Diet

To do so, Mr Kan needs to craft a message as substantial as the challenges Tohoku faces. And he needs debate on it to ring out beyond the corridors of power. There are a few encouraging signs. As TEPCO’s compensation liabilities mount, Mr Kan is airing the once-unthinkable suggestion that it should be broken up. The government may end up on the hook for many of its liabilities, but a break-up could help spur long-overdue deregulation of the energy sector.

More broadly, Mr Kan should seize the national mood of solidarity with Tohoku to persuade people to accept difficult reforms. Higher taxes will be needed not just to pay for reconstruction in Tohoku but also to help shore up Japan’s overstretched social-security system. The pension-eligible age, now nearly 65, may have to be raised sharply, too.

So far, Mr Kan’s message has been muddy. He has backtracked on an idea to enter talks to create a free-trade area known as the Trans-Pacific Partnership, even though the parts-suppliers in Tohoku that have been damaged in the disaster would benefit from freer trade. He has yet to spell out deregulatory proposals that would encourage private companies to invest, in Tohoku and elsewhere.

His excuse is politics: with a divided Diet, it is tough to be bold. But that ignores his ability to harness public opinion for the cause. Not for years have good ideas flowed so freely in Japan. But such moods don’t last. Miss this moment, Mr Kan, and Japan will rue it for years to come.

Christine Lagarde - A short profile of the woman who wants to lead the IMF

When President Nicolas Sarkozy was mulling over a reshuffle of his government last autumn and thinking of replacing his prime minister, one name that almost never surfaced was that of Christine Lagarde. To outsiders, this might seem surprising. France’s first female finance minister, and its longest-serving since 1974, has made a name in international circles as a widely respected and skilled professional. But there is something about her straight-talking, business-like approach that has never been fully appreciated by the score-settling, rumour-mongering world of French politics. It took her growing reputation abroad to finally win her respect at home.

This mix of Frenchness and internationalism is very much Ms Lagarde’s hallmark, and can be a source of tension. When she stepped off the plane from Chicago, where she was global president of Baker & McKenzie, a law firm, to join the government under President Jacques Chirac in 2005, almost her first public comment was to criticise the rigidity of France’s labour market. The French were horrified; Ms Lagarde carefully rephrased her thoughts, and an early lesson was learned about how far it is possible to bring economically liberal ideas into the French political debate.

Indeed, appointed finance minister in 2007 by Mr Sarkozy, Ms Lagarde has not hesitated to defend what she considers to be in French interests, such as the regulation of hedge funds or an international tax on financial transactions. This leads some commentators to wonder what her real convictions are, and whether she has sacrificed her more market-friendly instincts in order to forge a political career in statist France. Yet she has also quietly got on with some liberalising reforms. While dutifully pushing some of Mr Sarkozy’s dafter ideas abroad, she has also done a fair amount to try to inject more competition into the French economy (such as strengthening the anti-trust watchdog), and to boost public-sector efficiency (such as merging the job-placement and unemployment-benefit agencies).

Ms Lagarde’s main strengths are a mix of hard-working professionalism, an appetite for technical detail, and an ability to get her way with charm rather than bullying. She often seems more at ease at global summits than on the benches of the unruly French National Assembly. It is hard to find anybody who has worked for her in France over the years who has a bad word to say about her. As a teenager, she was a member of the French national synchronised swimming team, and she likes to joke that this taught her not only teamwork and self-discipline, but also how to hold her breath. Her quick wit, in fluent English as well as French, even managed to win over Jon Stewart when she appeared on the Daily Show, bearing a French beret as a gift. In the past she has said that there was “too much testosterone” in high-powered circles, a comment that now looks prescient.

At a news conference on May 25th, Ms Lagarde conceded that being European was not necessarily an asset for a candidate to run the IMF, but hoped that it would not be regarded as a handicap either. Her central role in dealing with the euro-zone debt crises, during which she has been a consistent advocate of bailing out debt-ridden governments, could put her in a potentially awkward position at the fund. More worrying for the French, there is an outstanding legal inquiry hanging over her.

A public prosecutor is investigating whether there is any ground for a full inquiry into a decision Ms Lagarde made as finance minister linked to a long-running damages case brought against the state by Bernard Tapie, a French tycoon. She ruled that it should be taken out of the courts and settled through an arbitration panel. As a result, Mr Tapie was awarded more than €200m ($280m) in damages. Ms Lagarde said today that she has a “clear conscience” over the referral. Her advisers say that she followed procedure, and was acting in taxpayers’ interests, as the court case was costing public money every year that it went unsettled. But the timing, in the wake of the arrest of Dominique Strauss-Kahn, is unfortunate. Right now, the French can ill-afford even the whiff of impropriety.

New ideas about an old problem

 

Grew up in France pitying Kolkata’s poor, based on what she had read in a comic book about Mother Teresa. Abhijit Banerjee grew up in Kolkata envying them: poor kids always had time to play and they routinely beat him at marbles. As economists at the Massachusetts Institute of Technology, both remain fascinated by poverty. In an engrossing new book they draw on some intrepid research and a store of personal anecdotes to illuminate the lives of the 865m people who, at the last count, live on less than $0.99 a day.

The two economists made their names (and remade their discipline) by championing randomised trials. These trials test anti-poverty remedies much as pharmaceutical firms test drugs. One group gets the remedy, another does not. The two groups are chosen at random, so the remedy should be the only systematic difference between them. If the first group does better, the benefit can be attributed to the project and not the many other factors that might otherwise obscure the result.

These trials proved immensely appealing. They promised to sift nuggets of truth from the slurry of received wisdom and wishful thinking that characterises much aid-talk. The hope was that once a trial proved the worth of a project or programme, governments and donors would back it and prescribe it more widely.

The approach has caught on. Another book, “More Than Good Intentions” by Dean Karlan and Jacob Appel of Innovations for Poverty Action is also out this month. But the approach has also attracted criticism. These trials, the critics point out, show whether a drug or remedy works, but not how it works. Even in medicine, a randomised trial can only show whether the average patient benefits; not whether any individual patient will benefit. Human physiology differs from patient to patient, so does the physiology of poverty.

“Poor Economics” should appease some of their critics. It draws on a variety of evidence, not limiting itself to the results of randomised trials, as if they are the only route to truth. And the authors’ interest is not confined to “what works”, but also to how and why it works. Indeed, Ms Duflo and Mr Banerjee, perhaps more than some of their disciples, are able theorists as well as thoroughgoing empiricists.

They are fascinated by the way the poor think and make decisions. Poor people are not stupid, but they can be misinformed or overwhelmed by circumstance, struggling to do what even they recognise is in their best interests. The authors recount (with grudging admiration) how nurses in rural Rajasthan outwitted the two professors’ efforts to stop them skiving off work. They also describe how borrowers in south India exploited a contractual loophole to avoid taking out health insurance, which their microlender insisted they buy for their own good.

The poor, like anyone else, can also succumb to inertia, procrastination and self-sabotage. The authors discovered it was quite normal for poor women in the Indian city of Hyderabad to take out a microloan charging 24% interest only to deposit it in a savings account that paid 4%. This seems mad, except that the obligation to repay the loan ensured the women did not squander the money. Farmers in western Kenya miss out on the benefits of fertiliser because, by the time the planting season arrives they have often spent their earnings from the previous harvest. But farmers far-sighted enough to buy the fertiliser straight after the harvest, when they do have money, do not sell it, despite facing all the same demands on their resources. In other words, farmers cannot save the money to buy fertiliser, but they can save the physical fertiliser itself.

Poverty is often linked in the public mind with dependency. But, as the authors point out, the poor bear more responsibility for their lives than the rich, who coast along, enjoying chlorinated water, drawing a regular salary, paid directly into a bank account, perhaps with contributions to their pension and health care automatically deducted. The rich can indulge their weakness for cigarettes and alcohol without fear of financial ruin. The poor, in contrast, have to watch every cup of sugary tea. Mr Banerjee and Ms Duflo recommend a variety of nudges, props and subsidies that will make it as easy for poor people to make the right decisions as it is already for the rich.

If it is a mistake to equate poverty and dependency, it is equally mistaken to believe the poor will lift themselves up by their bootstraps. The book crosses swords with the business gurus and philanthropists who project their own enthusiasm for Promethean entrepreneurship onto the poor. Yes, the poor are more likely to run their own business than the rest of us. But that is because they have no other choice. When asked, most of them aspire to a government post or a factory job. Developing countries are not full of billions of budding entrepreneurs; they are full of billions of budding salarymen.

The authors also dissent from the “melancholy view” held by some economists, who argue that bad politics will always trump good policy. Why bother figuring out the best way to spend a dollar on education, when $0.87 will be diverted into the pockets of officials? These economists argue that you can’t do anything in a country with bad institutions—and you can’t do much about these bad institutions either. You just have to wait for a revolution.

But Mr Banerjee and Ms Duflo advocate what they call a “quiet revolution”. They insist that things can be improved “at the margin”, which is an economist’s way of saying that things can get better, even if they are very bad. They also make the case that improved policies can contribute to better politics. Once constituents see that good policymaking can make a difference to their lives, they raise their expectations, and demand more.

Spain’s young want jobs

"The markets want reform and voters want a new government" 

A child in the 1964 Disney musical, “Mary Poppins”, is an unlikely hero for today’s angry Spanish youth. But his face features on some of the thousands of posters pinned to the walls of Madrid’s central Puerta del Sol square, where protesters have been camped out for almost two weeks. The reason? He demanded his tuppence back from the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank, and started a run.

As Spain’s ruling Socialists reeled from a ten-percentage-point defeat at the hands of the conservative People’s Party (PP) in municipal and regional elections on May 22nd—the party’s worst-ever result—some found explanations among the tented demonstrators in Madrid and dozens of other Spanish cities. It is not that the protesters—an ill-assorted mix of anti-capitalists, anarchists and pragmatists bothered about corruption and electoral imbalances—changed voters’ minds. It is that they, and people like them, might normally have voted for left-wing parties. On May 22nd the Socialists lost 1.5m, or one in five, of their votes. Yet the communist-led United Left coalition picked up only 210,000. Likewise, Mariano Rajoy, the PP’s leader, focused his party’s election campaign on the economy and jobs, Spain’s two main concerns, but the PP gathered only 560,000 of the spare votes. Its victory was due chiefly to disillusion with the left, not great advances on the right.

Still, this was an historic drubbing. It is best measured by the record number of regional governments and city halls won by the PP. The party will now run between nine and 11 of Spain’s 17 regional governments, and have an important say in several more. The Socialists are left in control of just Extremadura and two regions that did not vote—Andalusia and the Basque country. But all of Andalusia’s provincial capitals, including traditionally Socialist Seville, are now in PP hands.

A general election must be held by the end of next March. José Luis Rodríguez Zapatero, the Socialist prime minister, announced in April that he would not stand again, hoping, probably vainly, to save his party by acting as a lightning-rod for voter fury. Few now doubt that Mr Rajoy, on his third try, will move into the prime minister’s Moncloa Palace. The question is whether he will land the holy grail of Spanish politics: a parliamentary majority. If repeated, the PP’s ten-point lead over the Socialists on May 22nd should do—just. Anything less threatens to leave Mr Rajoy without a mandate for the reforms Spain badly needs.

Mr Zapatero’s popularity has proved inversely proportional to the wisdom of his decision-making. For two years he denied that Spain was in serious financial trouble. His support fell only slightly, despite recession and galloping unemployment. But last May, as contagion spread across the euro zone’s periphery, he executed a U-turn, embracing austerity and, to a lesser degree, reform. His ratings plunged.

Now the Socialists must choose a replacement for him. A bitter fratricidal battle is looming, with calls for an emergency party conference to remove him as secretary-general. If he loses control of his party, Mr Zapatero might be dumped as prime minister, or even have to call an early election, as the PP has urged. A party meeting on May 28th was due to set the course. Alfredo Pérez Rubalcaba, the deputy prime minister, and Carme Chacón, the young defence minister, are the front-runners to replace Mr Zapatero. In policy terms neither represents a huge change.

As his party grows more uneasy, Mr Zapatero is sticking to an austerity path that aims to reduce Spain’s budget deficit from 11.1% of GDP in 2009 to 4.4% by the end of next year. The OECD, a think-tank, says he is on target. The political cost is becoming apparent. But if the Socialists think left-leaning voters abandoned them only because of spending cuts, reduced civil-service pay and pension reform, they should study the demographics of the Puerta del Sol’s unhappy campers.

The protesters are mostly students. “Most live with their parents. Their problem is the lack of a future,” says Ignacio Sánchez-Cuenca of Madrid’s Juan March Foundation, a research body. Spain’s already-startling 21% unemployment rate rises to 45% among the young. Growth, at just 0.8% over the past year, remains sluggish. A decade-long bonanza of private borrowing, followed by a spurt in public borrowing when the crisis struck, has left a heavy debt burden. Discharging it may depress growth for years. The Economist’s May poll of forecasters predicts growth this year of just 0.6%, followed by 1.1% in 2012. That will create few jobs.

Provisional economic figures released earlier in May contain some worrying details. A surprise upturn in public-sector spending—which increased by 1.1% in the first quarter of 2011 after four quarterly declines—raises questions about decentralised Spain’s ability to cut its way to fiscal health. Ángel Laborda of Funcas, a savings-banks body, says regional governments and town halls may have been using this year’s budget to pay costs from 2010. That implies a hidden extra deficit.

Many of these administrations are now in the PP’s hands. Thorough scrutiny should reveal the true state of the books. The PP now has a good chance to show voters how it would run public finances. So far, its record is mixed. The Madrid region, long a PP bastion, has the lowest deficit of Spain’s 17 regions. But PP-governed Murcia is one of the worst performers.

Markets did not celebrate the PP’s win. Bond yields rose and stocks fell, stoking fears that Spain’s attempt to “decouple” itself from the problems of other peripheral euro-zone countries may be in trouble. Mr Rajoy has criticised Mr Zapatero’s pension reform without offering an alternative. If he wants to take control of a country that is not in crisis he must become clearer about his plans for government.

A radical’s idea for fighting graft stirs a debate on Indian democracy

“People are convulsing. This is good,” says a man with a trim, grey beard. Nearby, in the shade of a neem tree, protesters with banners and flags listen as a speaker inveighs against corruption. In a tent, a former assemblyman crouches on a platform and calls for criminals to be barred from public office. An assistant explains that he is only on “indicative” hunger strike today, “but his fast until death will start on April 14th.”

Jantar Mantar, a street in the middle of Delhi, is a favourite spot for activists: Tibetans praying for political freedom, students marching to have a headmaster sacked, minor politicians desperate for attention. Few achieve much. But one of them, Anna Hazare, an ageing rural activist with a hint of Gandhi about him, has just scored a tremendous victory.

He had vowed to fast to death unless the prime minister, Manmohan Singh, agreed to push through parliament a long-stalled plan for a Lokpal, a powerful anti-corruption ombudsman. His previous hunger strikes were ignored. Yet this time, to his own surprise, Mr Hazare barely had time to get hungry. On April 9th, four days in, the government conceded everything, agreeing that activists should supply the chairman and half the members of a committee that will draft a new law, which will in theory produce the Lokpal within just a few months.

The government was wise to capitulate. Mr Hazare had caught the public mood. A Facebook campaign sent celebrities, carpetbaggers and young urbanites eager to be jasmine revolutionaries all flocking to Jantar Mantar. Some fasted beside Mr Hazare. Others marched with candles and placards. Support for Mr Singh’s government promised to waste away even quicker than Mr Hazare.

The fight is not yet over, though. Columnists have lined up to snipe at the “Hazare phenomenon”, hinting that an extra-parliamentary movement is undemocratic by definition. Urban activists, a tiny minority, must not force the hands of politicians picked by hundreds of millions, they intone. Mr Hazare has also said some foolish things: for instance, that ordinary folk are too stupid to understand the value of their vote, giving it away for cash or a new sari. He has also lost some shine after calling for crooked officials to be executed, and praising Gujarat’s hardline Hindu nationalist chief minister, Narendra Modi.

Now the two sides must reconcile their ideas for the anti-corruption body. A longstanding government draft bill for a Lokpal wastes the paper it is written on. It would set up another toothless body, unable to investigate elected officials and under the thumb of public figures who have let corruption flourish for decades. The activists’ ideas are fresher: Nobel laureates, judges, the electoral commission and other notables would pick Lokpal members. It would get powers to start investigations, even of the prime minister, and to suspend elected officials, even cabinet ministers, suspected of corruption.

The disagreement is about power. The activists say corruption will be curbed only when independent officials of high integrity are appointed to wield an effective stick over elected ones. That is unconstitutional, the politicians retort: in a democracy it must be voters, not Nobel laureates, who decide. The politicians are unlikely to back down, especially once a series of state elections is out of the way, in May. Assuming he has the stomach for it, Mr Hazare may well be back in Jantar Mantar this summer.

Why Gold Is Expensive and Continues to Increase In Price

Whether you inherit them from your great grandmother or purchased one from a gold collection in Beverly Hills, gold jewelry and other precious stones seems to bring with them not just beauty, but also a feeling of power and luxury. Gold and other gems are very expensive. The less expensive ones are either a mixture of precious metal along with common ones or some are just complete replicas. It costs a lot to buy gold jewelry, and maybe a life's fortune to buy a significant quantity of gold bars.

Gold is traded in bars, and for commercial use, they are made into coins, jewelry, or smaller bars. Generally, gold tends to be quite soft in its pure form. Thus, other metals are combined with it for strength and durability. But with this in mind, gold still tends to be very expensive.

Mining gold and any other precious metal involves a lot of engineering, science, and research long before that piece of jewelry lands in your hands. While there are places all over the world that has been identified to have gold buried deep in their mountains, research is constantly being done on how to mine the area while keeping up with environmental laws. A lot of engineers constantly work together as well to identify the density of gold or metal constant in an area.

Getting miners or manpower also entails a lot of operational cost. Despite what is being portrayed, shipping the metals and having them insured is also a part of a gold mine's operation. The government and legal compliance will take a huge amount of resources – including time and financial backup. Chemicals are being used to extract them from the mines and this entails costs as well.

Finding gold will take a lot of time. Extracting gold will take an even longer time. Mining companies spend months and up to years mining to finally trading gold. Gold has always been known to have high monetary value. Apart from the rarity, the beauty and purity of gold is taken into consideration when pricing them. Especially colored gems such as blue diamond or pure red rubies, these gems are very rare, thus, ownership and even viewing them is limited to just a select few.

Inflation is another factor that increases the value of gold. Unlike paper money, gold cannot be printed at will. Thus, due to the laws of supply and demand, gold will increase in value versus paper currencies over the course of time. Gold, platinum, and other precious metals, since they are limited in supply, are in essence "real money". There will always be additional demand for gold as well for jewelry, weddings, and other gifts.

There is a constant struggle in the world even during ancient times for the ownership of gold. Gold will always mean money, power and status, three things that seems to be what people always want for themselves. Whether for personal use, for investment, or as a means of livelihood, gold and other precious metals will always be the standard for financial success and power. Even in the years to come, gold will be a treasure everyone will want to have.

Coruption In Indonesian - Slow to shame

Some societies are controlled by guilt, others by shame. Then there’s Indonesia, which is rarely controlled by either. At least among the political elite, there is an insuperable ability to avoid accepting responsibility for one’s actions. While American politicians step down quickly enough over sex or corruption scandals (Europeans even faster), and an Indian railways minister will fall on his sword after a horrific train crash, Indonesian leaders have a long record of refusing to resign no matter how serious the allegations against them, no matter how high the level of public pressure.

In 2000 General Wiranto refused to resign his post as security minister despite accusations that he was responsible for war crimes committed in East Timor the year before, when he had been commander of the armed forces. Two years later the speaker of parliament, Akbar Tanjung, kept on banging the gavel even after he was found guilty of corruption. (Happily for him, the conviction was overturned on appeal.) More recently, a conservative Islamic lawmaker, Arifinto, kept on showing up for work even after being forced to resign: in April he was busted watching pornography on his tablet computer in the middle of a parliamentary session.

Last week however there were signs that shame might yet rear its ugly head. At least among the party brass, if not yet among the wrongdoers themselves. The president’s own Democratic Party sacked its treasurer, Muhammad Nazaruddin, on May 23rd. Mr Nazaruddin was implicated in a scandal involving the construction of athletes’ dormitories for the upcoming South-East Asia Games, to which Indonesia is playing host. On May 20th, the constitutional court’s chief justice reported that Mr Nazaruddin had offered a court official an unsolicited payment of $100,000 last year as a “gift”. Mr Nazaruddin was also accused of using his influence as a party boss and member of parliament to have one of his former business partners thrown in jail. As if for good measure, he stands alleged of raping a young woman last year during the Democrats’ national congress in Bandung.

As the allegations piled up the Democrats, who initially denied that their treasurer had any involvement in the dormitory-corruption scandal, perhaps had little choice but to fire Mr Nazaruddin. After all, Susilo Bambang Yudhoyono won the presidency in 2004 and was re-elected handily in 2009 on a platform of zero tolerance for corruption; Mr Nazaruddin’s scandals were becoming too much to ignore. Mr Yudhoyono’s squeaky-clean image has already taken a scuffing over the past two years. He was seen to have allowed the national police to frame two independent anti-corruption commission officials for bribery amid a power struggle right after his re-election. Mr Yudhoyono came off looking the worse when his cabinet’s leading reformer, the finance minister Sri Mulyani Indrawati, bolted to the World Bank a year ago. Upon her departure Ms Mulyani claimed that members of the powerful Golkar party, led by Aburizal Bakrie—who happens to be Mr Yudhoyono’s chief political ally—hounded her out of the cabinet as part of a selfish attempt to hijack the country’s economy.

For his part, Mr Nazaruddin, possibly in disbelief that he was actually being held to account in South-East Asia’s most corrupt nation, didn’t take his sacking lightly. The next day he lashed out at his own party, claiming that other Democrats, including a cabinet minister, had violated its code of ethics and that they were involved in corruption. Mr Yudhoyono has tried to remain above the fray in all of this. It is an open question whether he can retain any of his good reputation without taking the axe to other members of his party in coming weeks.

Barack Obama mildly pleased some Arabs, annoyed a lot of Israelis and has yet to bring the prospect of Middle East peace any closer

It Was a tricky few days for Barack Obama in his latest bid to please the Arab world in general and, more specifically, to break the logjam between Palestinians and Israelis. By contrast, Israel’s prime minister, Benyamin Netanyahu, after frosty talks in the White House and rapturously received speeches to Congress and to the most powerful of America’s pro-Israel lobbies, must have chuckled at having once again—at least in the short run—fended off an American president seeking to prod him more brusquely than usual down the road to compromise with the Palestinians.

In the end, after much brouhaha and hyperbole, there were no real winners: no sign that negotiations between Israel and the Palestinians would resume; no hint of flexibility from Mr Netanyahu, despite his declared readiness to make “painful compromises” in the interest of peace; no expectation that the Palestinians would talk to Mr Netanyahu under present circumstances; no promises that they would put off their quest for recognition of statehood at the UN General Assembly in September; only tepid praise from the Palestinians for Mr Obama’s statements that antagonised Mr Netanyahu; and, across the Arab world, in European capitals, as well as in doveish circles in Israel itself, general condemnation of the Israeli leader for his cocking a snook at Mr Obama.

In any event Mr Obama’s own speech at the State Department on May 19th was an awkward mixture. Most of it dwelt on the Arab upheavals rather than the Israel-Palestinian tangle. It was the president’s first big statement on the Middle East since his acclaimed speech in Cairo two years ago, when he persuaded many Arabs and Muslims that he was genuinely determined to open a new chapter of friendship after years of toxic mistrust, failed military interventions and stalled efforts to make peace between Israel and Palestine.

This time Mr Obama sought to place America on the side of the reformers, putting democratic values above alliances with dictators. He promised a dollop of cash to help countries such as Tunisia and Egypt along the road to freedom. He reassured the Libyan opposition fighting to overthrow Colonel Muammar Qaddafi that he backed them. He took a swipe at his Bahraini ally, which hosts the American fifth fleet, urging dialogue with protesters rather than repression. He told Yemen’s embattled president to quit. And he asked Syria’s president to “lead that transition [to democracy] or get out of the way.” Mr Obama was notably silent about Saudi Arabia, as though unable to chide so vital an ally for its patent lack of reforming zeal.

But all this was drowned out by what he said about Israel-Palestine, in particular when he told Mr Netanyahu that “the borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps”. The president also advocated first tackling the borders issue and questions of security, such as the demilitarisation of a future Palestinian state, while leaving the hitherto intractable issues of Jerusalem and Palestinian refugees until later. He also said that the recent reconciliation accord between the Palestinians’ two main factions “raises profound and legitimate questions for Israel”, since the radical Islamist movement Hamas has neither disavowed violence nor agreed to recognise Israel. But he left a possibility for the more moderate Fatah faction to persuade Hamas to change its mind.

Mr Obama’s reference to 1967 seemed to catch Mr Netanyahu on the raw. In fact, previous presidents have mediated on the assumption that any agreed border would roughly follow the pre-1967 one. Bill Clinton’s “parameters” of 2000 suggest that a Palestinian state would encompass 94-96% of the West Bank, with additional compensating land swaps of 1-3%. But no American president had explicitly endorsed the 1967 line before.

Mr Obama had barely finished his speech before Mr Netanyahu, about to take off for Washington, issued a furious statement, widely and promptly echoed across the American spectrum. The 1967 border, he said, was “indefensible”; Israel at its narrowest point, pre-1967, was only “nine miles wide”. Moreover, in contrast to Mr Obama’s proposal that Israeli forces withdrew from the West Bank, he insisted they would remain indefinitely in the Jordan Valley, on the eastern border with Jordan.

A few days later, at a conference hosted by the American Israel Public Affairs Committee, better known as AIPAC, Mr Obama sought to soften his 1967 statement. He had not said, he explained, that the border would be the same as before 1967. Because of those swaps, Israel and Palestine would “negotiate a border that is different than the one that existed on June 4th, 1967”. The 1967 line was only a starting point.

Mr Netanyahu later sought to sound a shade more emollient. He would be generous in giving the Palestinians space for a state on the West Bank, though by implication nothing like as ample as suggested by Mr Clinton or even by the Israeli prime minister’s two predecessors. Most of the settlers there and in Jerusalem, whom he numbered at 650,000, would be on the Israeli side of an adjusted border; an indeterminate number of Jewish settlements in “Samaria and Judaea”, his preferred biblical name for the West Bank, would “end up beyond Israel’s borders”—and would therefore, by implication, have to be removed. But Jerusalem would be the undivided capital of Israel, which the Palestinians must recognise as a specifically Jewish state as a precondition for any deal. In other words, if Mr Netanyahu stuck to his verbal guns, a deal with even the most malleable Palestinians, let alone with a unity government including Hamas, would be virtually inconceivable.

Why did Mr Obama risk stirring such bad blood between his administration and Israel’s, to no apparent diplomatic gain and at a time when the pro-Israeli lobby in America, already in pre-election mode, still wields so much clout? Perhaps, in frustration at his failure to advance the peace process, he wanted to put down a marker, warning Mr Netanyahu that he would not tolerate his continuing refusal to give ground on a whole range of issues. Mr Netanyahu’s unwillingness last September to extend a freeze on expanding Jewish settlements in the West Bank prompted the Palestinians to pull out of talks only three weeks after they had resumed, to Mr Obama’s intense chagrin. “He really told him, ‘If you give me nothing to work with, America will keep trying to defend you but it will not be enough,’” says Daniel Levy, an Anglo-Israeli former negotiator who works for the New America Foundation, a peacemaking outfit in Washington, DC.

Rarely has the outlook seemed so bleak. On May 13th Mr Obama’s envoy, George Mitchell, resigned in despair. Some say Mr Obama should still, whatever Mr Netanyahu’s objections, lay out a detailed plan of his own and visit Israel to promote it. Perhaps he should suggest indirect talks to explore fresh negotiating possibilities. But no American president seeking re-election can contemplate putting real pressure on Israel—withholding favours at the UN, for instance, or reducing the supply of arms and aid. As things stand, even those who think Mr Obama’s vision of an Israeli-Palestinian compromise is right fear the president may have picked a fight that, in the short run, he was unlikely to win.

People’s spending choices are a good way to assess levels of hunger

For most people in rich countries hunger is a temporary inconvenience, easily solved by popping out to the shops or raiding the fridge. But chronic hunger is part of everyday life for many people in poorer places. Halving the proportion of people in developing countries who do not get enough to eat is one of the United Nations’ Millennium Development Goals.

Reducing hunger is a complicated task. There is no global shortage of food. Less poverty does not always mean better-nourished people. In India, for example, real incomes rose and the price of food fell between 1980 and 2005. Yet evidence suggests that Indians, even those who were originally eating less than recommended, reduced their calorie consumption in that time. Such findings have long puzzled economists.

A recent paper by two economists, Robert Jensen of the University of California, Los Angeles, and Nolan Miller of the University of Illinois, Urbana-Champaign, suggests that part of the problem may lie in the way governments and international agencies count the hungry. This typically involves fixing a calorie threshold—2,100 calories per day is a common benchmark—and trying to count how many people report eating food that gives them fewer calories than this number. Since calorific needs differ from person to person, a universal number is clearly only a guide. What’s more, concentrating on calories ignores the important role of micronutrients such as minerals and vitamins (see article). But the economists argue that this approach to measuring hunger also does not accord with how people themselves think about it. They propose a new way to use people’s eating choices to tell whether they are hungry.

Hunger is a physically unpleasant experience: it is accompanied by headaches, pain, dizziness, loss of energy and an inability to concentrate. For a hungry person, therefore, the extra utility from more calories is extremely high. The economists argue that the pain caused by hunger will prompt insufficiently nourished people to spend a larger share of their food budget on staples like rice and millet, which are cheap sources of calories. But once people are no longer hungry, they do not need to spend their incremental cash on the cheapest source of calories but can base their choices on things like variety and taste. This means that the share of calories that comes from staples falls progressively once a person is no longer famished; and that an unusually high share of calories coming from staples indicates that a person is hungry.

How high is unusually high? By looking at the prices of various foods, it is possible to work out what share of a person’s calories would come from staples such as rice and wheat if he were trying to fulfil his dietary needs as cheaply as possible. This theoretical “staple calorie share” (SCS) can then be compared with the make-up of a person’s actual diet. Someone who is consuming a significantly higher share of calories from staple foods than predicted is likely to be hungry.

This approach would be far too cumbersome if each person’s SCS varied greatly but things turn out to be considerably simpler. Using accepted dietary guidelines for people of various sizes and ages, and data on food prices for parts of China, the authors find that the share of calories that ought to come from staples varies much less than overall calorific needs. Wide variations in people’s age, sex, physical condition and lifestyle (more exercise, say) mean that some people need as little as 2,112 calories per day, while others may require as many as 3,202 calories. But the authors find that most calculated SCSs remain in a narrow band between 80% and 85% of overall calories. What this suggests is that someone getting less than 80% of his or her calories from a staple is past the point where conquering hunger is the primary motivation driving food purchases.

The economists use this threshold to measure the extent of undernourishment in nine Chinese provinces, where 16,000 individuals in 3,800 households were surveyed several times between 1991 and 2000. The people who were surveyed had to report everything they had eaten or drunk the previous day. The survey data conformed with the basic idea of substitution: the poorest households ate little other than staples. As income rose above a certain level, however, the SCSs dropped. People seemed to move out of the danger zone once their monthly income exceeded 225 yuan ($27 in 2000).

The data show how many people get less than four-fifths of their calories from rice, the main staple in most of the areas studied. Here, the results contradict what the Chinese government’s standard 2,100-calorie-per-day threshold would find. Around 67% of households in the sample were undernourished by the standard measure in 2000, but only 32% got more than 80% of their calories from staples. This is a big difference. Using data on people’s choice of what to eat leads to an estimate of hunger that is about half as large as the estimate using the standard method.

The two measures also give opposing results about long-term trends in hunger. The average household in the sample got richer between 1991 and 2000, but the fraction that consumed less than the mandated daily number of 2,100 calories actually rose, from 53% to 67%. The share of calories coming from staples points in a different direction, however: by this measure, the number of hungry households dropped from 49% to 32% over this period. More recent evidence suggests something similar. A 2008 study found that giving poor Chinese households subsidies on staple cereals failed to lead people to consume more rice or wheat. Instead, they ate more shrimp and meat. Not necessarily the cheapest source of calories, but considerably tastier.