Author: Nicole Allan

When Americans think of Canada, they generally envision a mash-up of hockey, poutine, Celine Dion, and universal health care. But now another Canadian feature is getting top billing: its uniquely sound banking system — the soundest in the world according to the World Economic Forum.

As president of the G8 this year, Canada will host the G8 and G20 Summits in June. Speaking at Davos, Prime Minister Stephen Harper announced his intention to encourage fellow countries to follow Canada’s lead in adopting strong, transparent — but “not excessive” — regulation.

Canada is the only G8 country that has not had to bail out its financial sector. Its mortgage default rate is 90 percent below America’s, with no significant difference in the percentage of home ownership. It also has a history of strong-handed financial regulation that depends upon cooperation between banks and the government.

In a tongue-in-cheek look at “what went right in Canada,” the Financial Times’ Chrystia Freeland summarizes this regulatory approach as “lots of quality capital, limits on leverage and a simple and co-ordinated regulatory system that forces bank bosses to take personal responsibility for managing risk.” Though this ethos was decidedly against the grain during the free-market fury of the past two decades — “even communist China accused Canadians of being too cautious about capitalism,” Freeland notes — it is now looking uncannily prescient, if a bit boring.

Freeland quotes our own Michael Kinsley’s conclusion that “Worthwhile Canadian Initiative” was the most boring possible headline in the galaxy. And Matt Winkler, editor-in-chief of Bloomberg News,
adds: “Canadians are like hobbits. They are just not as rapacious as
Americans.”

Heeding conservative Canadian wisdom in an industry recently defined by defiant American recklessness may be a hard pill for some financial personalities to swallow, but then again, Canada isn’t facing a $1.35 trillion deficit.

Tucked into the proposed budget is an overhaul of the farm subsidy and crop insurance program that would save the government nearly $11 billion over ten years. Calls for these cuts have historically been drowned out by the all-powerful agriculture lobby, leading to such spineless legislation as the 2008 Farm Bill. Now a deficit crisis could give farm subsidy reform a shot.

The Obama administration wants to lower the eligibility ceilings for farmers in the program by $250,000. Currently farmers with up to $750,000 in off-farm adjusted gross income and $500,000 in on-farm AGI can receive subsidies.

The administration has also proposed docking the amount of subsidies an individual farmer can collect by 25 percent, from $40,000 to $30,000. These changes would be implemented over the course of three years and would reduce government pay-outs by $2.5 billion.

The FDA has also been renegotiating terms with crop insurers. If successful, these changes could save an additional $8 billion.

Last year, Obama unsuccessfully proposed smaller reductions in subsidies. Legislators opted to incorporate any such changes into a new farm bill, such as the one the House Agriculture Committee is projecting for 2012. This committee, however, is filled with representatives whose districts directly benefit from subsidies. Not surprisingly, both Democratic and Republican senators from the states who received the most in farm subsidies in 2007–Iowa, Illinois, and Texas–voted for the 2008 bill.

This political climate has bred excessive pessimism about Congress’ ability to cut subsidies, but our current deficit crisis could be the perfect opportunity for reform. Since lawmakers on both sides of the aisle oppose subsidy reform, making cuts would be a bipartisan sacrifice of the kind the deficit commission has been tasked with identifying.

UPDATE: Megan responds to an Andrew reader on the stubbornly bipartisan staying power of subsidies: “George Bush I tried to trim back farm subsidies. Bill Clinton ‘ended’
them. Next decade, George Bush II also made a run at killing them
off. Obama’s freeze will founder on the same two problems:  farm
states wield disproportionate, bipartisan power in the Senate, and Americans think that farmers are really, really cute.”

Today President Obama revealed his 2011 budget, which would draw funds from big finance to inject them into small businesses. His bank tax would collect $90 billion over the course of the next
ten years, while small businesses would receive tax credits for hiring
new employees or giving raises. But you can find other winners and losers in the legislation. Here are four of each:

Winners

1) Lower-income families would benefit from stimulus tax breaks that would be extended for another year.

2) Elementary and secondary schools would
receive an extra $3 billion, in line with the administration’s belief that education drives
innovation and competition. College students would benefit from a
$17 billion boost to the Pell grant program.

3) The government would funnel $6 billion of Bush-era tax breaks on oil, gas and coal companies to clean energy
technologies.  Money would also flow to
civilian research and development and regional infrastructure projects,
as well as to new TSA screening technologies.

4) A major chunk of discretionary spending, which excludes entitlements
like Social Security and Medicare, will go to war spending, which will increase by $33 billion this year and $159 billion in 2011.

Losers

1) Wealthy families would up their contributions to federal coffers
as the Bush tax cuts on households making over $250,000 expire, netting
the government nearly $1 trillion in additional revenue.

2) Hedge-fund and private equity employees will supply $24 billion over 10
years by having their fees taxed as income rather than capital gains,
and multinational corporations will pay higher taxes on overseas
earnings.

3) Oil, gas, and coal companies
would cough up $40 billion after the elimination of some Bush-era tax
breaks.

4) Perhaps the biggest non-financial loser in the proposed budget is NASA. While the agency would see an extra $1 billion a year, several of its prize programs would be slashed, including a return to the moon by 2020. NASA supporters have bemoaned the cuts, worrying that this budget would undermine the country’s role in the future of human space flight.

The SEC voted yesterday to encourage companies to disclose climate change-associated risks to their investors. It was a party-line decision, supported by the panel’s three Democrats and opposed by two Republican members. Megan called it “deeply silly … in conditions of radical uncertainty, such disclosures could as easily be misleading as useful.”

But regardless of party politics or the long-term impact of climate change, there are solid business reasons for corporations to get serious about green technology, as President Obama underlined in his State of the Union address.

Obama’s comments hinted at just how far the U.S. has fallen behind the world’s leading innovators in sustainable energy: “The nation that leads the clean energy economy will be the nation that leads the global economy. And America must be that nation.”

Today that nation is China. A recent New Yorker article described how, over the course of a decade, China has morphed from environmentally recalcitrant polluter to environmentally innovative polluter. China still produces more greenhouse gases than any other nation, but it also produces more wind turbines and solar panels. Its newest coal-powered plants are now some of the cleanest and most efficient in the world, thanks to a top-down approach of government incentives and regulations. China strengthened its corporate environmental disclosure standards two years ago for reasons similar to the SEC’s — to allow investors to factor climate realities into their risk assessment.

We may not know the exact impact climate change will have on individual businesses, but we do know that our climate — and our legislative and regulatory systems along with it — is changing. If companies begin to acknowledge these changes, investors will be motivated to seek out innovative approaches to these realities. The result would be the actualization of an Obama talking point that drew applause from both sides of the aisle: More green jobs in the U.S. economy.

In yet another horrifically bad year for the airline industry, Southwest Airlines has risen above the fray again with a fourth-quarter profit — contributing to its 37th straight year in the black. Less expected was a profit from Continental, which ended a string of 8 consecutive quarterly losses.

The airlines said that business travel was slowly beginning to recover, and they have taken steps to hedge against a steep expected climb in oil prices this year.

Continental reported net earnings of $85 million, 60 cents a share. This was especially striking when contrasted with the airline’s $269 million loss a year earlier. Chairman Jeff Smisek told the Financial Times (subscription only link) that a small uptick in business travel had boosted the company’s revenues but that full recovery would be a long time coming.

Although the airline has struggled with the same fickle fuel prices as its competitors, it has figured out a way to navigate the squalls.

Airlines use hedging to control their fuel costs, usually by purchasing a contract that sets a price it will pay for jet fuel in the future. If the market price rises above this set amount, airlines are sitting pretty. If it drops below it, they’re scrambling.

Southwest has played this field relatively successfully over the past ten years. It lost money on the drop in fuel costs in 2008, but was insulated from soaring prices earlier in the year. So far the airline has not had to skimp on customer service like its rivals, who have begun charging for luggage. Southwest did, however, cut capacity 4 percent in 2009 and does not expect to see growth this year.

Anticipating rising fuel prices, Chairman Gary Kelly has decided to amp up his hedging strategy. But frequent flyers beware: he has also announced his intention to raise fares “as aggressively as we dare” until Southwest hits its profit targets, a strategy that will allow other airlines, who usually have to compete with Southwest’s rock-bottom fares, to hike theirs even higher.

Poverty is following the minivans and manicured lawn groomers into American suburbia. Suburban poverty rose 25 percent between 2000 and 2008, according to a new Brookings report, as poor suburban populations grew five times faster than their urban counterparts.

The notion that the poor are moving from cities to suburbs and the wealthy from suburbs to cities is not new. The Atlantic raised the specter of “suburban slums” in 2008 and Richard Florida regularly theorizes on the socioeconomic evolution of cities and suburbs. These new numbers, however, provide data to back up the trend.

Through the course of the decade, Midwestern poverty, in both cities and suburbs, has spiked the most. Not surprisingly, metropolitan auto hubs like Youngstown and Detroit were some of the worst off areas with respective poverty rates of 33.5 and 30.7 percent.

During the “Great Recession” of 2007-2008, the surburbs took the hardest hit in a country whose poor population increased by more than one million, or 3 percent. A primary culprit was that suburban jobs, especially in manufacturing and construction, have been decimated while city jobs have fared relatively better.

Why is this happening? Maybe it’s simply because both rich and poor Americans are looking to flee the cramped cities. Christopher Leinberger has described homeowners’ increasing desire for “the convenience and culture of walkable urban neighborhoods,” a dynamic that makes it more difficult for lower-income residents to stay in gentrifying urban centers. On a slightly different note, Hanna Rosin has investigated how Hope VI housing vouchers have relocated much of America’s poor population from inner cities to outer suburbs.

Whatever the cause, Americans may have to get used to the prospect of poor, jobless suburbs that could be just as intractable as the bombed-out inner cities ever were.

Berkshire Hathaway shareholders will vote Wednesday on a 50-to-1 split of the company’s Class B shares to finance a $26 billion purchase of Burlington Northern railway. Chairman Warren Buffett has described this purchase as an “all-in wager on the economic future of the United States” that, while potentially incurring short-term losses, will benefit Berkshire Hathaway over time. This reasoned, patient approach is trademark Buffett — the kind of investing that has spawned countless imitations. If tomorrow’s vote goes through, as the Wall Street Journal reports it likely will, average investors will no longer have to resort to crude mimicry of Buffett’s strategy–they’ll be able to purchase shares of his company. 

Historically, Berkshire Hathaway shares have been split into Class A, which closed at $97,500 each on Friday, and Class B–known as “Baby Bs”–which closed at $3,247. These lofty prices discouraged small retail investors and the high-frequency traders who can buy and sell millions of shares in a millisecond. A 50-to-1 split of the B shares would drop their price to around $65, enabling an influx of new investors and making the company eligible for inclusion in the S&P 500 index (Berkshire Hathaway is the largest corporation excluded from the index). 

Since Buffett has previously expressed concern that a share split would discourage long-term investing, the Burlington deal must have been attractive enough to change his mind. Opening up Berkshire to a new cadre of investors may puncture the legendary aura surrounding Buffett’s company, but it also exemplifies the pragmatism responsible for creating the aura in the first place. 

A rocky advertising climate might force the International Olympics Committee to delay bidding for media rights to the 2014 and 2016 games. Over the past years, bidding wars have become the norm for broadcasters who want to gain access to the NFL, NCAA, and Olympic markets, and fees have skyrocketed. But now, as traditionally big TV advertisers spend more on the Web and less in general, media companies are reluctant to shell out billions for events that aren’t the advertising jackpots they once were.

NBC Chairman Dick Ebersol announced on Sunday that, due to the escalating cost of media rights, his company will lose money broadcasting next month’s Winter Olympics. The Wall Street Journal reports that some media executives “saw Mr. Ebersol’s comments as a signal to the IOC to lower their expectations in anticipation of bidding for 2014 and 2016,” but the IOC is hoping that if it delays the bidding until next year, the market will have recovered enough to support another hike in fees.

The NCAA is facing a similarly unenthusiastic broadcaster landscape in its quest to strike a new long-term deal for March Madness rights. The league can opt out of its 11-year contract with CBS if it receives a better offer for the tournament rights, though its recent request for proposals has not prompted one. CBS does not expect to make much money, if any, over the next four years of the contract and hopes the NCAA would be willing to expand the tournament or bring in another broadcaster to ease the costs. Compromises like these may be the only way for struggling media companies to stay in the game. If TV advertising is on a more permanent downswing, however, athletic organizations may have to find an alternative to the current bidding system.

The Associated Press is close to winning a fight to get search engines and news aggregators to share the online advertising wealth. The Wall Street Journal reports that the nonprofit newswire is nearing a deal with Yahoo that would impose tighter restrictions on content, and potentially boost the price for news.

These amicable negotiations stand in contrast to similar talks between the AP and Google, which have stalled. Google stopped posting new AP content in December, although it’s not clear which party initiated this brinksmanship. Erik Sherman at BNet reads these developments as proof that “media companies are starting to follow through on their complaints and be willing to walk away, which is, after all, the foundation of any good negotiation strategy.”

The AP and other big media companies have been fuming over search engines’ exploitation, in their words, of news content. Google counters that it drives traffic to news sites, which can easily choose to make their content inaccessible to search engines. News Corp’s Rupert Murdoch, who threatened to take his content off Google and partner exclusively with Microsoft’s Bing in November, this week blocked the UK aggregator NewsNow from indexing newspapers like the Sun and the Times of London.

The AP and Yahoo aren’t commenting on their negotiations–other than the fairly obvious leak to the Journal–but if they do strike a deal it could shift the balance of power between content creators and aggregators.

Heralding the triumph of women in the workforce last week, the Economist reported that women not only make up the majority of professional workers in many countries, but also that they earn nearly 60 percent of university degrees in America and Europe. Reinforcing the case for the Great Recession being a Great “Mancession,” the article cites an unemployment rate of 8.6 percent for women but 11.2 percent for men.


The cover, brandishing Rosie the Riveter and the headline: “We Did It!,” would suggest some kind of victorious finality. But the article admits several big concessions to the majority-female-workforce victory, most notably the pay gap. The average full-time female worker in Britain or the U.S. earns 80 percent as much as her male equivalent, though this gap shrinks if the woman is not a mother. Gender parity in the upper ranks looks equally bleak, with a tiny percentage of women in the boardrooms and C-Suites of Fortune 500 companies.

Over at Forbes, Mark Rice links
the pay gap to research showing a decline in the happiness of American
women. U.S. maternity leave policies–the second-least generous policies
of the 30 OECD nations–are no help, he argues, especially in comparison
to Sweden’s extensive allowances for new parents. This almost-cliché
invocation of Sweden as an ideal state brings us back to what I found to
be the most interesting tidbit in the Economist piece: 

“Sweden is not
quite the paragon that its fans imagine, despite its family-friendly
employment policies. Only 1.5% of senior managers are women, compared
with 11% in America. Three-quarters of Swedish women work in the public
sector; three-quarters of men work in the private sector.”

When rumors of the “mancession” started circulating in September, Atlantic Business’ Derek Thompson theorized
that more men than women were losing their jobs because women happened
to work primarily in sectors that have seen a lot of growth over the
past decade–including during the recession–like health care, education,
and government. Largely male sectors like manufacturing and
construction, on the other hand, have been decimated by the financial
collapse.

Why would the public sector attract more women? The Economist says
“traditionally ‘female’ jobs such as teaching mix well with motherhood
because wages do not rise much with experience and hours are relatively
light.” This might explain why women gravitate toward the public
sector, but it doesn’t justify the trend. As Latoya Peterson at Jezebel
points out,
“Wages not rising generally places severe financial stress on a
household–reduced hours are desired by many parents, but the trade off
(less cash) is not necessarily welcome.” On that note,
mancession-denouncers should remember that not all jobs are equal.
Economix’s Nancy Folbre suggests
that measures of employment equality should take into account the fact
that women are twice as likely as men to work part-time.

As more women earn undergraduate and graduate degrees and begin to
infiltrate traditionally male spheres like science and management, one
would expect their titles and wages to catch up. But as the allure of
public-sector and part-time work reveals, women make professional
choices based on more than just their qualifications.

So yes, it could get worse than working for the legendarily munificent
Swedish government. But I find it hard to believe that three-quarters
of Swedish women would rather stick to the middling public wage track
than join their husbands on the private payroll. Once women no longer
have to choose between professional and reproductive output, I’ll be
more inclined to believe that “we did it.”