Paul Kraugam

7/28/2019 Paul Kraugam

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Americas Chinese disease (not quite what you think)

Fed chairman are expected to speak in code, so that readingtheir remarks is a bit like watching the famous scene in AnnieHall where the conversation between the lovers is subtitled with what theyre really saying. So when Ben Bernanke saysthis:

Another set of lessons that Asian economies took from thecrisis of the 1990s may be more problematic. Because strongexport markets helped Asia recover from that crisis, and

because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asiascommitment to export-led growth, backed up with largecurrent account surpluses and mounting foreign exchangereserves. In many respects, that model has served Asia well,contributing to the rapid growth rates in the region over thepast decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of

economic growth. However, too great a reliance on externaldemand can also pose problems. In particular, trade surplusesachieved through policies that artificially enhance incentivesfor domestic saving and the production of export goods distortthe mix of domestic industries and the allocation of resources,resulting in an economy that is less able to meet the needs of its own citizens in the longer term.the subtitle reads

HEY, CHINA, STOP ACCUMULATING DOLLARS ITSTIME TO REVALUE YOUR CURRENCY But does the United States dare put pressure on the Chineseto do that? People constantly say that we cant risk it that
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were dependent on China to keep buying our debt. Yet this isall wrong under current circumstances.

How do I know its all wrong? Heres one way to think about

the issue that I havent seen anyone else put forth (if they have, Ill be happy to give credit.)

Right now, were in a situation in which conventionalmonetary policy is hard up against the zero lower bound; rulesof thumb that track past Fed behavior suggest that the short-term interest rate should be -5% or lower. To partially makeup for its lack of traction, the Fed is engaged in massive

quantitative easing a misleading term, but I guess werestuck with it. What it basically means is that the Fed is sellingTreasury bills or their equivalent (interest-paying excess bank reserves are essentially the same thing), while buying otherassets, expanding its balance sheet enormously in the process.

What kinds of other assets? Mortgage-backed securities;securities backed by credit-card debt; longer-termgovernment debt; etc..

One type of asset the Fed has not been buying is foreign short-term securities. But thats not because such purchases would be ineffective. On the contrary, selling domestic short-termdebt and buying its foreign-currency counterpart is theessence of a sterilized foreign-exchange-market intervention, which is a time-honored way of gaining a competitiveadvantage and helping your economy expand.

And some countries have, in fact, made foreign-currency purchases a part of their quantitative easing strategy Switzerland in particular . The only reason the Fed isnt doingthis is that were a big player, and cant be seen to be pursuinga beggar-thy-neighbor strategy.
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But now ask the question: what would the effect be if Chinadecided to sell a chunk of its Treasury bill holdings and putthem in other currencies? The answer is that China would, ineffect, be engaging in quantitative easing on behalf of the Fed. The Chinese would be doing us a favor! (And doing theEuropeans and Japanese a lot of harm.)

Conversely, by continuing to buy dollars, the Chinese are ineffect undermining part of the Feds efforts theyreconducting quantitative diseasing, I guess you could say,hence the title of this post.

The point is that right now the United States has nothing tofear from Chinese threats to diversify out of the dollar. On thecontrary, if the Chinese do decide to start selling dollars, TimGeithner and Ben Bernanke should send them a nice thank- you note.

Bernanke, Blower of Bubbles?By PAUL KRUGMAN

Bubbles can be bad for your financial health and bad for the health of the economy, too.The dot-com bubble of the late 1990s left behind many vacant buildings and many morefailed dreams. When the housing bubble of the next decade burst, the result was the greatesteconomic crisis since the 1930s a crisis from which we have yet to emerge.

So when people talk about bubbles, you should listencarefully and evaluate their claims not scornfully dismiss them, which was the way many self-proclaimedexperts reacted to warnings about housing.

And theres a lot of bubble talk out there right now. Muchof it is about an alleged bond bubble that is supposedly
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keeping bond prices unrealistically high and interest rateswhich move in the opposite direction from bond pricesunrealistically low. But the rising Dow has raised fears

of a stock bubble, too.So do we have a major bond and/or stock bubble? On bonds, Id say definitely not. On stocks, probably not,although Im not as certain.

What is a bubble, anyway? Surprisingly, theres nostandard definition. But Id define it as a situation in whichasset prices appear to be based on implausible orinconsistent views about the future. Dot-com prices in1999 made sense only if you believed that many companies would all turn out to be a Microsoft; housing prices in2006 only made sense if you believed that home pricescould keep rising much faster than buyers incomes for years to come.

Is there anything comparable going on in todays bondmarket? Well, the interest rate on long-term bondsdepends mainly on the expected path of short-terminterest rates, which are controlled by the Federal Reserve. You dont want to buy a 10 -year bond at less than 2percent, the current going rate , if you believe that the Fed will be raising short-term rates to 4 percent or 5 percent inthe not-too-distant future.

But why, exactly, should you believe any such thing? TheFed normally cuts rates when unemployment is high andinflation is low which is the situation today. True, itcant cut rates any further because theyre already nearzero and cant go lower. (Otherwise investors would just sit
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on cash.) But its hard to see why the Fed should raiserates until unemployment falls a lot and/or inflationsurges, and theres no hint in the data that anything like

that is going to happen for years to come. Why, then, all the talk of a bond bubble? Partly it reflectsthe correct observation that interest rates are very low by historical standards. What you need to bear in mind,however, is that the economy is also in especially terribleshape by historical standards once-in-three-generationsterrible. The usual rules about what constitutes a

reasonable level of interest rates dont apply. Theres also, one has to say, an element of wishful thinkinghere. For whatever reason, many people in the financialindustry have developed a deep hatred for Ben Bernanke , the Fed chairman, and everything he does; they want hiseasy-money policies ended, and they also want to see thosepolicies fail in some spectacular fashion. As it turns out,

however, dislike for bearded Princeton professors is not agood basis for investment strategy.

And one should never forget the example of Japan, where bets against government bonds justified by more or lessthe same arguments currently made to justify claims of aU.S. bond bubble ended in grief so often that the wholetrade came to be known as the widow maker . At this

point, Japans debt is well over twice its G.D.P., its budgetdeficit remains large, and the interest rate on 10-year bonds is 0.6 percent. No, thats not a misprint.

O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can
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sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits which are, afterall, what stocks are shares in are more than two-and-a-

half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expectinvestors to move into stocks, driving their prices higher.

All in all, the case for significant bubbles in stocks or,especially, bonds is weak. And that conclusion matters forpolicy as well as investment.

For one important subtext of all the recent bubble rhetoricis the demand that Mr. Bernanke and his colleagues stoptrying to fight mass unemployment, that they must ceaseand desist their efforts to boost the economy or direconsequences will follow. In fact, however, there isnt any case for believing that we face any broad bubble problem,let alone that worrying about hypothetical bubbles shouldtake precedence over the task of getting Americans back to

work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job.

The 1 Percents Solutio n

Economic debates rarely end with a T.K.O. But the great policy debate of recent years

between Keynesians, who advocate sustaining and, indeed, increasing government spendingin a depression, and austerians, who demand immediate spending cuts, comes close atleast in the world of ideas. At this point, the austerian position has imploded; not only haveits predictions about the real world failed completely, but the academic research invoked tosupport that position has turned out to be riddled with errors, omissions and dubiousstatistics.
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Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims

have become fodder for late-night comics?On the first question: the dominance of austerians ininfluential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studiesproviding the alleged intellectual justification for austerity Alberto Alesina and Silvia Ardagna on expansionary

austerity and Carmen Reinhart and Kenneth Rogoff onthe dangerous debt threshold at 90 percent of G.D.P. faced withering criticism almost as soon as they came out.

And the studies did not hold up under scrutiny. By late2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed theirfindings, while many economists raised fundamental

questions about Reinhart-Rogoff long before we knew about the famous Excel error . Meanwhile, real-worldevents stagnation in Ireland, the original poster child forausterity, falling interest rates in the United States, which was supposed to be facing an imminent fiscal crisis quickly made nonsense of austerian predictions.

Yet austerity maintained and even strengthened its grip on

elite opinion. Why?Part of the answer surely lies in the widespread desire tosee economics as a morality play, to make it a tale of excessand its consequences. We lived beyond our means, thestory goes, and now were paying the inevitable price.
http://www.rooseveltinstitute.org/sites/all/files/not_the_time_for_austerity.pdfhttp://www.rooseveltinstitute.org/sites/all/files/not_the_time_for_austerity.pdfhttp://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://www.epi.org/publication/bp271/http://www.epi.org/publication/bp271/http://www.epi.org/publication/bp271/http://www.epi.org/publication/bp271/http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://www.epi.org/publication/bp271/http://www.epi.org/publication/bp271/http://www.epi.org/publication/bp271/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/http://www.rooseveltinstitute.org/sites/all/files/not_the_time_for_austerity.pdf


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Economists can explain ad nauseam that this is wrong,that the reason we have mass unemployment isnt that wespent too much in the past but that were spending too

little now, and that this problem can and should be solved.No matter; many people have a visceral sense that wesinned and must seek redemption through suffering andneither economic argument nor the observation that thepeople now suffering arent at all the same people whosinned during the bubble years makes much of a dent.

But its not just a matter of emotion versus logic. You cant

understand the influence of austerity doctrine withouttalking about class and inequality.

What, after all, do people want from economic policy? Theanswer, it turns out, is that it depends on which people youask a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels andJason Seawright. The paper compares the policy

preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the mostimportant problem we face. And how should the budget

deficit be brought down? The wealthy favor cutting federalspending on health care and Social Security that is,entitlements while the public at large actually wants tosee spending on those programs rise.
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You get the idea: The austerity agenda looks a lot like asimple expression of upper-class preferences, wrapped in afacade of academic rigor. What the top 1 percent wants

becomes what economic science says we must do.Does a continuing depression actually serve the interestsof the wealthy? Thats dou btful, since a booming economy is generally good for almost everyone. What is true,however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices

even as long-term unemployment festers. The 1 percentmay not actually want a weak economy, but theyre doing well enough to indulge their prejudices.

And this makes one wonder how much difference theintellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, wont we just see new

justifications for the same old policies?I hope not; Id like to believe that ideas and evidencematter, at least a bit. Otherwise, what am I doing with my life? But I guess well see just how much cynicism is justified.

Not Enough InflationEver since the financial crisis struck, and the Federal Reserve began printing money in anattempt to contain the damage, there have been dire warnings about inflation and not justfrom the Ron Paul/Glenn Beck types.


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Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become inflation nation. In 2010, the Paris -

based Organization for Economic Cooperation andDevelopment urged the Fed to raise interest rates to headoff inflation risks (even though its own models showed nosuch risk). In 2011, Representative Paul Ryan, then thenewly installed chairman of the House BudgetCommittee, raked Ben Bernanke, the Fed chairman, overthe coals , warning of looming inflation and intoningsolemnly that it was a terrible thing to debase the dollar.

And now, sure enough, the Fed really is worried aboutinflation. You see, its getting too low.

Before I get to the trouble with low i nflation, however, letstalk about what we should have learned so far.

Its not hard to see where inflation fears were comingfrom. In its efforts to prop up the economy, the Fed has bought more than $2 trillion of stuff private debts,housing agency debts, government bonds. It has paid forthese purchases by crediting funds to the reserves of private banks, which isnt exactly printing money, but isclose enough for government work. Here comeshyperinflation!

Or, actually, not. From the beginning, it was or at leastshould have been obvious that the financial crisis hadplunged us into a liquidity trap, a situation in whichmany people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan
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has been in one since the mid- 1990s. And were in onenow.

Economists who had studied such traps a group thatincluded Ben Bernanke and, well, me knew that some of the usual rules of economics are in abeyance as long as thetrap lasts. Budget deficits, for example, dont drive upinterest rates; printing money isnt inflationary ; slashinggovernment spending has really destructive effects onincomes and employment.

The usual suspects dismissed all this analysis; it wasliquidity claptrap , declared Alan Reynolds of the CatoInstitute. But that was four years ago, and the liquidity trappers seem to have been right, after all.

And its worth mentioning another issue on which t heinflation non-worriers have been vindicated: how tomeasure inflation trends. The Fed relies on a measure thatexcludes food and energy prices, which fluctuate widely from month to month. Many commentators ridiculed thisfocus on core inflation, espec ially in early 2011, whenrising food and energy prices briefly sent headlineinflation above 4 percent even as the core stayed low. But,sure enough, inflation came back down.

So all those inflation fears were wrong, and those whofanned those fears proved, in case you were wondering,that their economic doctrine is completely wrong notthat any of them will ever admit such a thing.

And, at this point, inflation at barely above 1 percent by the Feds favored measure is dangerously low.
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Why is low inflation a problem? One answer is that itdiscourages borrowing and spending and encouragessitting on cash. Since our biggest economic problem is an

overall lack of demand, falling inflation makes thatproblem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a mainreason overall demand is too low.

So why is inflation falling? The answer is the economyspersistent weakness, which keeps workers from bargainingfor higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that thisis a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economys weakness.

And this brings us to a broader point: the utter folly of notacting to boost the economy, now.

Whenever anyone talks about the need for more stimulus,monetary and fiscal, to reduce unemployment, theresponse from people who imagine themselves wise isalways that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal withour short- run mess, were turning it into a long -run,chronic economic malaise.

I wrote recently about how, by allowing long-termunemployment to persist, were creating a permanent classof unemployed Americans. The problem of too-low inflation is very different in detail, but similar in itsimplications: here, too, by letting short-run economic
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problems fester were setting ourselves up for a long -run,perhaps permanent, pattern of economic failure.

The point is that we are failing miserably in responding toour economic challenge and we will be paying for thatfailure for many years to come.

DETROIT Dozens of companies from China are puttingdown roots in Detroit, part of the countrys steady pushinto the American auto industry.

Chinese-owned companies are investing in American

businesses and new vehicle technology, selling everythingfrom seat belts to shock absorbers in retail stores, andhiring experienced engineers and designers in an effort tosoak up the talent and expertise of domestic automakersand their suppliers.

While starting with batteries and auto parts, the spread of Chinese business is expected to result eventually in the

sale of Chinese cars in the United States.The Chinese are well behind the Japanese when they hitour shores 30 years ago, said David E. Cole, a founder of the Center for Automotive Research in Ann Arbor, Mich.They lack t he know- how, and theyre coming here to getit.

As businesses sprout up with little fanfare, Chinesecompanies seem to be trying to avoid the type of publicopposition experienced by the Japanese automakersToyota and Honda in the 1980s, when the sudden influx of foreign cars competing head-on with cars from General
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Motors, Ford and Chrysler was perceived as a threat to American jobs.

In contrast to the Japanese, Chinese auto companies areassiduously avoiding the spotlight. Last year, the biggestcarmaker in China, Shanghai AutomotiveIndustries, opened new offices in suburban Detroit withoutany publicity, which is almost unheard-of in an industry that thrives on media coverage.

But Chinas growth in the American auto industry isdrawing notice in Washington. Last year, the Obamaadministration filed a complaint with the World TradeOrganization that Ch inas government was unfairly subsidizing the production of some parts shipped to America. And the countrys inroads into American -made batteries and electric vehicles have drawn scrutiny becausethat sector of the industry has been heavily subsidized by the United States government.

The American industrys overall resurgence has drawn agrowing Chinese population to Detroit, with Chinese-owned suppliers bringing executives from their country and American automakers adding new talent. About50,000 Chinese, many of them engineers and otherprofessionals who work at General Motors and the FordMotor Company, live in the metropolitan area.

Business networks are growing too. The Detroit ChineseBusiness Association boasts a flourishing membership,and counts about 100 Chinese-owned businesses, mostly auto-related, in the region.
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The Ford Chinese Association, with 650 white-collar workers, predominantly from mainland China, has become one of the largest employee groups at the

company. Its president, Raymond Xu, recalled that in1999, when he came to Detroit to attend college, there were very few Chinese in the area.

I think people are going to get more and morecomfortable with it, Mr. Xu said.

Typical of the Chinese expansion are the nondescriptoffices of Changan Automotive in an industrial park in thesuburban city of Plymouth. Changan, a major carmaker inChina, set up a research center to better understand thestructural chassis of a vehicle then hired about 20Detroit engineers, some of whom had been laid off fromDetroits auto companies, to staff the project.

Most of the engineers are very young in China, saidHong Su, the Changan executive heading the Americanfacility. They know how to make vehicles, but they dontknow how to develop them.One of his employees is Alan Wall, 54, a former contract engineer at Chrysler who losthis job during the recession.

It was an opportunity, he said. And those tend to comefrom a company that is trying to expand.

Last year, China exported about $13 billion in automotivegoods to the United States tires, wheels and radios thatare sold as replacement parts according to AlixPartners,a consulting firm.
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But many Chinese suppliers are pursuing direct business with the Detroit car companies, which now get many of their most common parts from low-wage nations like

Mexico. One supplier, Brilliance Auto , an industrial giant with about 500,000 employees in the city of Shenyang innortheast China, is still an underdog in Detroit, trying tocrack an intricate network of suppliers that have longrelationships with G.M. and the other carmakers.

We have been exporting our parts to North America for 15 years for the aftermarket, said Dongbin Chen, a Brilliance

executive, referring to retail sales of replacement parts.Now our biggest opportunity is with G.M. and the other big co mpanies.

Brilliance scored a coup last year by supplying lightweightengine mounts for the new Cadillac ATS sedan made by G.M. in Lansing, Mich., which has whetted the companysappetite for more.

At a United States-China conference held here inNovember, Brilliance displayed a large exhibit showcasinga range of mundane parts including seat belts, steering wheels and shock absorbers that it hopes to export to America.

We have the ability and the capacity to supply these kindsof parts, Mr. Chen said. And I think right now, it is very important for us to be here.

In addition to Chinese companies locating in Detroit, acottage industry of lawyers, accountants and corporateadvisers has grown up to assist them. Their numbers are
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small now, but the impact of the Chinese on the localeconomy is slowly expanding.

Industry analysts are hard-pressed to put a number on theChinese suppliers operating in the United States. Wesimply dont know how many there are, said David Andrea, an official with the Original Equipment Suppliers Association, a trade organization for auto parts makers.

In one of the more prominent deals, the WanxiangGroup bought most of the assets of the battery maker A123Systems, which filed for bankruptcy last year despitereceiving $132 million of $249 million in federal grants to build two factories in Michigan.

Congressional Republicans criticized the deal, saying A123s technology could support military applications inChina. Still, the buyout was approved this year by theCommittee on Foreign Investment in the United States, afederal government panel.

Wanxiang, which has its United States headquarters nearChicago, has acquired several American auto parts andsolar companies in recent years. But it attracted littleattention until it took an interest in A123 Systems.

I wasnt surprised by the negative reaction, said Pin Ni,president of the companys American unit. The reality is we grow here like a small seed into a bigger tree, and wecannot avoid this type of response.

He said that Wanxiang employed several thousand American workers, and kept local management in place atcompanies it had bought. We act, talk and walk like an
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American company, Mr. Ni said. In the end, its all aboutmaking money.

Other Chinese companies are averse to publicity. Shanghai Auto is the largest carmaker in China and has major joint ventures there with G.M. and the German automaker Volkswagen. But when the company opened its new Detroit-area offices last year, even G.M. was surprised.

Since we do not do business with SAIC in the U.S., thereis no connection between G.M. and the SAIC office in theU.S., said Dayna Hart, a G.M. spokeswoman.

The arms-length reaction underscores the sensitivity surrounding Chinas presence in the American industry.Only about 4 percent of Chinese-made light vehicles areexported now, mostly to countries in Africa and the MiddleEast. But the Detroit automakers are bracing for the day when competitive Chinese cars hit the American market.

The Chinese have a lot of money and they are movingfast, said Mr. Cole. Were going to see a lot more of themhere.

The growth in the Chinese professional class has had aripple effect on the broader community, as well, withChinese community groups sponsoring youth soccerleagues, basketball tournaments and musicalperformances at Detroit Tigers games. Oneorganization runs a Chinese soup kitchen every year at alocal homeless shelter.

Frank Chiu was an engineer for an auto supply company when he saw the growing number of Chinese professionals
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entering the industry and saw an opportunity. He left his job to open a Chinese grocery store in Canton, Mich, a bedroom community not far from Ford headquarters.

The timing was very good for this type of business, saidMr. Chiu, whose store features Chinese delicacies likechicken feet, snow fungus and pork uterus.

As customers roamed the store around him, Mr. Chiureflected on how much had changed since he moved fromTaiwan more than 20 years ago. What was it like then?he said. Lonely is the first word that comes to mind.

At Ford, Chinese employees play an integral part in thecompanys expansion in China, where it is building severalnew factories. They also help prepare American executivesfor transfers to China, and play host to Chinese car dealers when they visit Fords headquarters.

On Feb. 14, hundreds of Ford employees celebrated the

Chinese New Year at the stately Dearborn Inn, which wasconceived by Henry Ford in the 1930s as a replica of anearly American village, with guest cottages that copied thehomes of historical figures like Walt Whitman and Patrick Henry.

We definitely see more openness to the Chinese culture,said Mr. Xu, the Ford Chinese Association president. Westarted small here, but we are coming on strong.

If Practice Makes Perfect, Why Dont Companies Practice More?


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In his terrific book Outliers , Malcolm Gladwell writes aboutthe importance of practice and, specifically, the necessity of completing 10,000 hours of practice in a particular field to become proficient. This makes sense to me. Everything I did before starting in business taught me that practice wasessential to achieving success. In school, I had two or threeexams each semester, but I went to class every day. Moreover,I had voluminous amounts of homework each night to refinemy skills in a particular subject. In football, there were 10games in a season, but nearly 100 practices.

Why is it that, in business, no one ever practices?

At my previous company, practice was viewed as anafterthought. Once a yea r, someone would say, Maybe weshould do some training. Heads would nod, and the person who had come up with the idea would arrange for a third-party specialist to come in to conduct training for a particulargroup within the company. Members of that group wouldshuffle into the room, help themselves to the coffee and

bagels, nod politely to the instructor as a lesson was presentedand then shuffle out at the end knowing that they would not be subjected to practice or training again until the next year.Every day was a game, and excellence was expected despitethe utter absence of practice.

I view this as a massive opportunity. If most companies puttheir players on the field without the benefit of practice,surely those that put real emphasis on practice would gain adistinct advantage. Heres what were doing at H.Bloom:

SEED Program

We introduced our SEED Program at the beginning of 2011.The program recruits people who aspire to run their own
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business but know that they need to learn the basics. We bringthese ambitious folks into one of our already-existing marketsand have them rotate through all aspects of the business: buying, production, delivery, account-management, sales andcustomer service. Those who graduate have the opportunity tomove to a different city to open and run a new H.Bloommarket. Today, four of our five markets are run by SEEDgraduates, and we have another three SEED participants inrotation now, hoping for their chance to open and lead a new market.

The SEED Program for market managers has worked so wellthat we are starting a SEED Program for sales people . Ialluded to this possibility in a previous post , and I am happy to report that it is happening. Even more exciting, theambitious person I interviewed in Pittsburgh a few weeks agohas accepted our offer and is moving to New York City to beour first Sales-SEED participant. We expect to start theprogram by the end of May with a group of people who willengage in a three-to-six-month program that consists of daily lead-generation activities, weekly sales training, on-the-ground training in our New York market and monthly classes with members of our executive team. Successful graduates willhave the opportunity to move to a new market and lead oursales efforts there.

H.Bloom University

At the end of last year, we started H.Bloom University . Whilethe SEED Program is focused on training people to take on anew role, H.Bloom University is meant to refine the skills of people in their current roles. We are running two tracks, and afew other tracks are under development:

Sales
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chance to put the new information into practice). We thenschedule a follow-up for each attendee to present their work for that assignment to the group.

Operations and Floral Design Rebekah is developing a program for these two position-types. We expect to start the programs for our operations teammembers and floral designers by the end of the year.

Engineers

Weve engaged with a third party to help arrange customized

training classes for our software engineers. Ill have more todiscuss on this topic after the first sessions are held.

Weve really just gotten started with our efforts. I dont think we do it we ll yet or with the frequency that Id like. But I do believe we have identified an opportunity to build afundamental advantage in our business.

There Is an Algorithm forEverything, Even BrasTHE two and a half miserable hours that Michelle Lam spent in a fitting room, trying on

bras, one fine summer day in 2011 would turn out to be, in her words, a life -changingexperience. After trying on 20 bras to find one that fit, and not particularly w ell at that, sheleft the store feeling naked and intruded upon.

It occurred to me in that fitting room, as I was waiting for

that saleswoman to bring me bras: Wow, this is the worstshopping experience on earth, she said. (My wifeconcurs.) From her frustration that day emerged an ideafor a business called True&Co .
https://trueandco.com/https://trueandco.com/https://trueandco.com/


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The history of e-commerce is marked by start-ups devising ways to sell products that were once thought of asunsuitable for sale online. Shoes were not supposed to be

something customers would buy online, butthen Zappos showed it could be done. The same thing wassaid about eyeglasses, until Warby Parker came along. But bras, which are among the most personal items someonecan buy, represent the Everest of online retail challenges.

Ms. Lams company opened True&Co last year along withtwo co-founders, Dan Dolgin and Aarthi Ramamurthy. The

company, based in San Francisco, is certainly not the firstto sell lingerie online. Older sites include the Web armof Victorias Secret and HerRoom.com , which was foundedin 1998, near the dawn of the Age of E-Commerce.

Professional bra fitters have also moved online. LindaBecker, whose family owns two bra stores in New York,says she sells twice as many bras online today

at LindaTheBraLady.com as she does in her stores. Some of her online customers have previously visited one of hershops and been fitted in person. But new customers taketheir own measurements and work with customer servicerepresentatives on the phone. She says only 10 percent of online orders are returned.

But some customers turn out to be extremely hard to fit

and its hard to tell why, Ms. Becker says. That kind of customer will be impossible to fit online because theproblem is unseen. Theres no way of figuring it out overthe phone.
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True&Cos innovation is to put a batch of bras intocustomers hands so they can choose what fits best. New customers take a quiz modeled on the ones in

Cosmopolitan magazine that Ms. Lam fondly remembersfilling out in high school to collect the informationneeded to fit the bra properly. They are then invited to pick three bras in different styles.

True&Co uses an algorithm to pick two additional bras tosend out, based on what can be discerned from thecustomers choices. So the customer ends up with five bras

to try on at home, with no obligation to buy. Most of thecompanys bras are priced from $45 to $62.

The 15-question quiz asks for the customers band and cupsize and the manufacturer of her current best fitting (and beloved) bra, and works from there to determine how thefit of that favorite bra could be improved. Other quizquestions include: Do your cups runneth over? citing

things like cleavage or underarms or No spills, allgood. The question What is your shape? is followed by these choices: Well-Rounded, Bottom Happy, Taking Sidesand Bottom & Sides.

We have an algorithm that defines 2,000 body types, Ms.Lam said. True&Co does not make customized bras foreach of those 2,000 body types, however, so much of the

taxonomys precision is lost when it must be translatedinto the far fewer combinations of band and cupmeasurements used by bra makers.

True&Co has drawn the attention of some skeptics. Lastmonth, a blogger at Open Source Fashion, Sindhya


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Valloppillil, dismissed the companys bra -fitting algorithmas ridiculous, arguing that a bra must be touched andtried on. She mocked the credulity of True&Co s venture

capital investors in a post titled V.C.s Think My BoobsNeed an Algorithm.

True&Co actually makes no patently ridiculous claimsabout the algorithm, which involves matching a womans body type to a particular bra based partly on consistent variations among manufacturers for a given size and style.One manufacturers 32C may work better for breasts of a

certain shape, for example, even if a woman is used to buying a 34B.

Customers buy an average of two bras from each batch of five. The company says women end up buying more of the bras chosen by the algorithm than the ones they selectthemselves.

But as with shoes and eyeglasses, so too with bras: its l oveat first touch and try, even in the digital age.

Mr. Free Market, Raghuram Rajan, Goes to India

Raghuram Rajan fit in quite comfortably at the University of Chicago.Like other free-marketers, the Indian-born economist and professor at

Chicagos Booth School of Business was inspired by Friedrich Hayek, the Austrian thinker. On the wall of his Hyde Park office, Rajan had anautographed photo of conservative icons Milton and Rose Friedman.Rajan warned of a global economic crash three years before it happened,and his 2010 book on the financial crisis, Fault Lines , got a scathing review
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from Princeton professor and Keynesian guru Paul Krugman, cementingRajans Chicago School credentials. Today Rajans office is in the red sandstone headquarters of IndiasMinistry of Finance, where he has served as chief economic adviser to

the government since last August under the direction of Finance MinisterPalaniappan Chidambaram. Instead of the Friedmans, portraits of two well-known local critics of capitalism, Mahatma Gandhi and JawaharlalNehru, gaze down at him.

Rajans view of Indias problems, as stated in a number of witheringspeeches, is that corrupt politicians, officials, and middlemen havehobbled free markets by monopolizing licenses, government funds,infrastructure pr ojects, and more. Despite India having a ton of billionaires, Rajan says that only 42,000 people report incomes of more


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than $180,000. There are a large number of people who ought to bepaying their taxes who are not, he says, likening Indias business elite toRussian oligarchs. On March 13 he told Indian broadcaster New DelhiTelevision that India is overregulated, and that sick companies dont die

quickly enough.

This candor is what helped get Rajan his current job. As theInternational Monetary Fund s former chief economist, he also lendscredibility to Prime Minister Manmohan Singhs beleagueredgovernment coalition, which has been hammered by a weak economy,corruption scandals, and the recent desertion of a regional party fromthe coalition. Despite the dissimilarities between free-market Chicago

and interventionist India, Rajan says he is not out of place. Im a believer in free markets, but Im not a believer in laissez -faire, he says.There is a distinction. India, he says, is still working out the difference.

Singh, an economist who managed Indias first wave of market -openingreforms in 1991, has presided over quickening inflation and slowinggrowth as prime minister. Rajans solutions, which he laid out in theannual Economic Survey publ ished in February, include cutting thenumber of regulations to reduce opportunities for corruption, tearingdown trade barriers to allow more foreign competition, dismantlinglabor laws that stifle hiring, and overhauling the financial system tomake it more responsive to ordinary customers. An important item onhis agenda is to replace Indias mishmash of state and local taxes with a broad-based tax on goods and services.

Too many of Indias small businesses are stuck in the informal economy, with no access to capital to improve productivity and no protections for

workers. Rajan, who wont comment on Indian media reports that he will be the next central bank governor, says that a second generation of reforms to improve infrastructure, schools, and manufa cturing iscritical to ensuring long- term success. Indias continuing on a rapidgrowth path is not preordained, he wrote in the annual EconomicSurvey.


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Rajiv Biswas, Asia-Pacific chief economist for IHS Global Insight (IHS ), saysRajan and his boss Chidambaram are making progress in reducingsubsidies and improving the business climate for foreign investors. Rajanis definitely one of the brightest, most cogent economists around, says

Glenn Levine, senior economist with Moodys Analytics (MCO) in Sydney.Levine says hes impressed with moves to open closed in dustries likeretail and insurance to foreigners. Subsidy and spending cuts, highertaxes, and asset sales have trimmed the budget deficit from 5.8 percentof gross domestic product last year to a more manageable 5.2 percentthis year. In 2014 the budget deficit is expected to slip to 4.8 percent. Thegovernments handling of its fiscal woes over the last six months has been fantastic, says Levine.

Recent success isnt enough to conquer the cynicism born of decades of mismanagement. Turning that country around strikes me as a tallorder, says Tim Condon, chief Asian economist for ING (ING) inSingapore, who notes India is at risk of stagflation. The confid enceswitch is off. Both Standard & Poors (MHP ) and Fitch Ratings have negativeoutlooks for India amid concern that government spending on the ruralpopulation will wipe out the benefits of deficit-cutting elsewhere. TheBombay Stock Exchanges Sensex is down 2.79 percent for the year, oneof the worst performances in Asia. Although Rajan would be the last to play down Indias challenges, hesays critics need to take the long view. Sometimes India can become adarling and can do no wrong, he says. Then something happens, andthe market tanks, and it s all doom and gloom. But the growth rate overthe last 20 years has been much more stable. The growth has stability which is not reflected in the gyrations of sentiment.

The bottom line: A Chicago School free- marketer is advising Indias government on

reforming the economy. His work may take decades.

From theory to practice
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A WORLD- CLASS economist accepts one of the world s most poisoned chalices. Thatis the most tempting conclusion about the news that the next chief economic adviser tothe government of India will be Raghuram Rajan. He is the author of Fault Lines , asuperb account of the subprime crisis; a professor at the University of Chicago; and aformer bigwig at the IMF. He is also a proponent of liberal reform, something of an

endangered species in Delhi today.The timing is fortunate in one respect: a new finance minister has been appointed andthere has been a reshuffle of some officials, which could herald a bout of better decisionmaking, as my colleague explains . But in other ways it is terrible. GDP growth could slipfurther, to 4-5%, over the next couple of quarters as a bad monsoon bites. Industrialproduction figures for June, released on August 9th, showed a decline of 1.8% . Production of capital goods collapsed. Rohini Malkani, of Citigroup, worries thegovernment will find it harder than ever to hit its borrowing figures and that the risk of acredit downgrade to junk status is rising.The job comes with a palatial office and its own waiting room a true sign of status inIndia. But it does not come with a clear description. Beyond formal duties such as

preparing the government s annual economic survey, the chief adviser s task is todiscuss, analyse and inform; but not to decide. Being at the intersection of politics andeconomics in India is not easy. The previous advisor, Kaushik Basu , who returns toCornell University this month, was in close touch with Manmohan Singh, the primeminister, and had decent access to Sonia Gandhi, the matriarch of the ruling Congressparty. He was also an eloquent advocate of reform. But under the previous financeminister, Pranab Mukherjee, few of his ideas were reflected in decision making.If anything Mr Rajan is even more of a free-market man than Mr Basu. Fault Lines attacks state subsidies of housing finance as well as Wall Street. He has beenvocal about India s troubles. The latest Indian edition of the book contains a postscriptthat criticises cronyism and corruption and notes that self -delusion is the first steptowards disaster for individuals as well as countries. In April Mr Rajan made a bitingspeech in Delhi to an audience that included the prime minister. Mr Rajan also favoursfinancial deregulation, something the Reserve Bank of India (RBI) is nervous about, andworries that the central bank is complicit in high government borrowing , something the RBIdenies.Mr Rajan will have to bite his tongue and polish his political skills. The trick, according toMr Basu, is to win the confidence of politicians across the spectrum and communicateeconomic ideas simply and clearly. Mr Rajan is not a novice at the finer skills of workingthe Indian establishment, having chaired a government-commissioned committee in2009 that looked into financial reform. Nor can he be unaware of the task ahead:although some of that report s recommendations found their way into policy, such as theunique identity scheme, plenty were ignored.

Still, hats off to him for taking the plunge. As his book says of India, there are very realdangers that face our country. The battle lines are laid out. The choice between self interest and public interest is clear. And if all of us join the battle, I have no doubt whowill succeed.
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INDIA S TRAINS MOVE slowly. That gives passengers plenty of time to observe their fellow riders. They are travelling far to visit a hospital, take up a job, enroll at college.Odishan coffee pickers in Karnataka, Assamese students in Kerala and Bihari diamondpolishers in Gujarat all move as freely around their country as Americans hop from stateto state. That mobility should give India an advantage over countries like China that

penalise farmers when they leave their land.Indians are also increasingly well connected. On one 4,200km train ride, through 615stations, your correspondent never once lost his mobile-phone signal. A decade agofew would have cared, since only 9% had a phone of any kind. Now, according tocensus data from last year, 63% of householders have a phone, usually a mobile.Ericsson, a maker of phone handsets, said this month that three-quarters of Indiansnow have access to a mobile.

Special report Aim higher Power shifts

The candidate Express or stopping? On a hiding to something A billion brains Concrete jungles No frills An uphill walk

Sources & acknowledgmentsReprints

Related topics Raghuram Rajan China India

The endless rows of concrete houses with trailing wires seen from the windows tell astory too. The same census showed that of India s 247m households, two -thirds haveelectricity and nearly half TV. A similar number own bicycles, though only 5%, so far,have a car.

According to a new report by PricewaterhouseCoopers, in 2010 some 470m Indianshad incomes between $1,000 and $4,000 a year. The consultancy reckons that thisfigure will rise to 570m within a decade, creating a market worth $1 trillion. The bigIndian firms that are doing best such as Mahindra and Mahindra, a carmaker, HeroMotoCorp, which makes motorbikes, or Hindustan Unilever, which produces smallconsumer goods are those targeting such buyers.

Yet the rosy forecasts were drawn up when the economy was roaring ahead and itseemed that another decade or two of similarly high growth would deliver a big mid-income economy. Now that prospect is in question. The next few years are likely to seemuch slower expansion.

Doubters had long been saying that India s potential rate of growth was bound to belower than, say, China s. They a greed that India could achieve much more than the 3%
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stopper-train growth rate that was the norm before reforms in 1991. But they gavewarning that it could not keep up an express-train speed of close to 10% because itseconomic engine quickly overheats. Recent years have brought high inflation, especiallyin food prices. Roads, ports and railways are overwhelmed, blackouts are common andlabour has become as expensive as in China, even though the Chinese, on average,

are three times richer.The Transport Corporation of India, a logistics firm, reported in May that every one of 17important road routes was clogged. To drive the 1,380km from Delhi to Mumbai, for example, takes an average of nearly three days, an average of just 21km an hour. Thefirm says the delays are getting worse: the road network is growing by 4% a year buttraffic by 11%.

The railways are no better. Raising passenger fares is politically impossible. WhenDinesh Trivedi, then the railways minister, tried it in March, for the first time in nineyears, his party leader forced him out. To subsidise the fares, freight charges keepbeing raised, pushing many goods off the tracks and into overloaded lorries on crowdedroads.

Seen in that light, the slowdown in economic growth to about 5% was almost welcome.We should not try to get back to the highest growth path. India hurts when it is growingat 8.5%, argues Cyrus Guzder, a Parsi businessman in Mumbai. His particular worry isenergy. India has a voracious appetite for energy and minerals, he suggests, but cannotdig, import or shift enough coal to keep the lights on even though there are new power

stations, and in theory quite a lot of capacity.Nor have India s politicians shown much appetite for reforms to improve matters. Oneobvious remedy would be to deregulate the distribution of coal, argues N.K. Singh, anMP from Bihar and economic adviser to the BJP-led government of 1998-2004. Thegovernment could even break up or sell off Coal India, a massive and badly run statemonopoly.


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Congress did free petrol prices in 2010, and over the years the rupee has been allowedto float more freely, but reforms tend to be introduced only little by little. Some scarcegoods are now sold by auction, but only after years of scams. Single-brand retailers,such as IKEA, have been allowed in, and multi-brand ones look set to follow. Butsustained rapid growth would require a slew of big second-round reforms, to include

things like land acquisition, labour laws and tax.Politicians naturally prefer to spend. Congress is fond of entitlement schemes such asNREGA, which promises 100 days of paid work a year for every rural household. That,along with other new welfare measures, is helping some o f India s poorest people, liftingrural incomes and boosting consumer markets, but probably also raising labour costs.

Surjit Bhalla, a Delhi-based economist, points out that spending on welfare to relievepoverty now represents 2.5% of GDP. That is not a huge share, but it is rising fast:during Mr Singh s first government it was just 1.6%. Mr Bhalla worries that this sort of spending does less to help the poor than, say, the creation of productive jobs.

Fiscal policy is generally profligate. Diesel prices went up this month, but the fuelremains massively subsidised, along with kerosene, fertiliser and food.

All this suggests that potential growth is nowhere near double digits but close to whatIndia has today, especially given a weak global economy.

Businessmen, particularly those enjoying buoyant consumer demand, are still cheerful.Sevantilal Shah, the boss of Venus Jewel, a big diamond polisher and producer inSurat, says domestic sales are flourishing. Anand Mahindra, of the Mahindra Group,says he can t imagine anything but an improvement on a dreadful year: I remember that old watch ad, takes a licking, keeps on ticking , that s what I hope we ll say of India

soon.

Compare contrasting GDP and population levelsacross Indias states with our

interactive map and guide

Economists are more cautious. At a meeting in April Raghuram Rajan, an academic andformer chief economist at the IMF who has just taken over as the government s chief economic adviser, inveighed against the paralysis in growth -enhancing reforms and anunholy alliance of some businessmen and politicians that blocks change. He said India had to raise fuel prices rapidly, to be kinder to investors in order to attract capital, andto become paranoid again about generating growth. At the time Mr Rajan had not yet
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been appointed to his new job, but the prime minister was at his side and clapped. Inprivate, most senior officials say something similar.

Sadly Mr Rajan, like his affable and clever predecessor, Kaushik Basu, lacks politicalclout. Mr Basu remains an optimist on the economy, contrasting it with the late 1980swhen the country felt like a warmer outpost of Soviet thinking. He is particularly pleasedthat India has persistently high national savings and investment which in his view canbe sustained, despite some recent slippage. So he reckons that the country will returnto a high growth rate, near 9%, once the current uncertainty and urgent fiscal problemsare dealt with. He puts faith in the expanding young, urban and literate population and innew technology. As for the rotten bits of the economy, the state-run firms, thankfullythey account for only 14% of GDP (against about a third in China).

A hole in the middle Yet optimists need to address another problem: the structure of employment, which isvery different from that in most East and South-East Asians economies. Agriculture stillemploys roughly half of all working Indians, many of whom are much less productivethan they might be. And the service sector already makes up 59% of GDP (see chart 3)and is still growing rapidly. In particular, IT and outsourcing companies such as TCSand HCL are performing well, despite global worries.

The missing middle is industry and manufacturing, of the sort that thrives in China anddrives exports. More factories could provide more jobs for the 13m people that join

India s workforce every year, many still poorly educated. Manufacturing makes up just15% of the economy, much the same as in the 1960s. More than other sectors, itsuffers from India s entrenched bureaucracy and wretched infrastructure. Indian labour costs are high and laws are restrictive. As Chinese wages rise, countries such asBangladesh are well placed to pick up business, but India is not. When firms persuadeunions to allow contract labour to increase flexibility, workers can end up getting paiddifferent rates for the same job. At a Maruti factory near Delhi this summer, that led toclashes which left an HR manager dead.


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Paul Kraugam